I85PREP
⌘ K
ICAB AL Corporate Reporting study materials
ICAB AL Corporate Reporting study resources

ICAB AL Corporate Reporting practice questions

One question at a time. Build your ICAB AL Corporate Reporting understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Corporate Reporting

Under the IASB's Conceptual Framework, which qualitative characteristic is described as the extent to which information represents the economic phenomena it purports to represent?

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

Explanation

Faithful representation is a fundamental qualitative characteristic requiring information to be complete, neutral and free from error so that it depicts the substance of the underlying economic phenomenon. Relevance is the other fundamental characteristic, while comparability and timeliness are enhancing characteristics that improve useful information but cannot substitute for faithfulness.

Question 2Corporate Reporting

A company sells goods on 1 January with a right of return granted for 60 days. Under IFRS 15, how should revenue be recognised at the sale date?

  1. Defer all revenue until the return period expires
  2. Recognise full revenue and a separate provision for returns
  3. Recognise no revenue and treat the transaction as a consignment sale
  4. Recognise revenue only for the amount expected to be retained, treating the rest as a refund liability Correct answer.

Explanation

IFRS 15 requires revenue to be recognised for consideration to which the entity expects to be entitled, so the expected returned portion is not recognised as revenue but as a refund liability, with a corresponding asset for the right to recover goods. Recognising full revenue overstates the transaction price actually expected to be earned.

Question 3Corporate Reporting

Which of the following best describes the objective of general purpose financial reporting according to the Conceptual Framework?

  1. To determine the entity's taxable profit for the period
  2. To report stewardship of management to regulators only
  3. 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 Correct answer.
  4. To enable the entity to comply with local company law

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 relating to providing resources to the entity. Tax and regulatory compliance are separate objectives not forming the basis of general purpose reporting.

Question 4Corporate Reporting

An entity has a defined benefit obligation with a present value of CU1,000 and plan assets with a fair value of CU850 at the reporting date. The net defined benefit liability is CU150. How is this net amount presented in the statement of financial position?

  1. As a reduction of equity
  2. As a current liability only
  3. As a non-current liability only
  4. Split between current and non-current based on expected timing of benefit payments Correct answer.

Explanation

IAS 19 does not prescribe a single classification, but IAS 1 requires a liability to be classified as current when it is due to be settled within twelve months. The net defined benefit liability is therefore split between the portion expected to be settled within twelve months and the remainder classified as non-current.

Question 5Corporate Reporting

Which of the following items is recognised in other comprehensive income rather than profit or loss under IAS 16 for a revalued property, plant and equipment asset?

  1. Impairment loss on the asset
  2. A revaluation decrease that reverses a previous surplus
  3. A revaluation surplus on initial revaluation Correct answer.
  4. Depreciation expense for the year

Explanation

Under IAS 16, an increase in carrying amount on revaluation is recognised in other comprehensive income and accumulated in equity as a revaluation surplus, unless it reverses a previous decrease recognised in profit or loss. Depreciation and impairment losses are recognised in profit or loss.

Question 6Corporate Reporting

Under IFRS 3, how should goodwill arising on a business combination be measured at the acquisition date?

  1. As the fair value of consideration transferred plus the fair value of net assets acquired
  2. As the excess of consideration transferred over the fair value of identifiable net assets acquired Correct answer.
  3. As the book value of net assets acquired
  4. As the fair value of consideration transferred less the carrying amount of net assets acquired

Explanation

IFRS 3 requires goodwill to be measured as the excess of the consideration transferred over the net of the acquisition-date fair values of identifiable assets acquired and liabilities assumed. Using carrying amounts or adding net assets is inconsistent with the acquisition method.

Question 7Corporate Reporting

Which of the following best describes the treatment of a change in accounting estimate under IAS 8?

  1. Treated as a prior period error
  2. Disclosed only in the notes without adjusting the financial statements
  3. Applied prospectively from the date of change Correct answer.
  4. Applied retrospectively by restating comparatives

Explanation

IAS 8 requires the effect of a change in accounting estimate to be recognised prospectively by affecting the current and future periods, because estimates are revised based on new information rather than reflecting an error. Retrospective restatement applies to changes in accounting policy and correction of prior period errors.

Question 8Corporate Reporting

A company leases equipment for five years with annual payments of CU20,000 payable at the end of each year. The interest rate implicit in the lease is 6%. The present value of an annuity of CU1 for five years at 6% is 4.212. What is the initial lease liability recognised by the lessee under IFRS 16?

  1. CU84,240 Correct answer.
  2. CU20,000
  3. CU100,000
  4. CU106,000

Explanation

IFRS 16 requires the lease liability to be measured at the present value of lease payments not paid at the commencement date, discounted using the interest rate implicit in the lease. Multiplying CU20,000 by 4.212 gives CU84,240.

Question 9Corporate Reporting

Under IAS 7, which of the following is classified as a financing activity in the statement of cash flows?

  1. Cash paid to suppliers for inventory
  2. Dividends received from an associate
  3. Proceeds from the sale of property, plant and equipment
  4. Interest paid on borrowings, if treated as a financing cash flow under the entity's policy Correct answer.

Explanation

IAS 7 permits interest paid to be classified as an operating or financing cash flow, provided the choice is applied consistently. Proceeds from disposal of PPE are investing activities, and dividends received are typically operating or investing depending on policy.

Question 10Corporate Reporting

An entity has an investment in an associate over which it exercises significant influence. Under IAS 28, how should the investment be accounted for in the consolidated financial statements?

  1. By full consolidation
  2. At cost less impairment
  3. Using the equity method Correct answer.
  4. At fair value through profit or loss

Explanation

IAS 28 requires investments in associates to be accounted for using the equity method in the consolidated financial statements, recognising the investor's share of the associate's profit or loss and other comprehensive income. Full consolidation applies only to subsidiaries.

Question 11Corporate Reporting

Under IFRS 9, how are transaction costs treated for a financial asset measured at fair value through profit or loss?

  1. Added to the initial carrying amount
  2. Expensed in profit or loss Correct answer.
  3. Deducted from the initial carrying amount
  4. Recognised in other comprehensive income

Explanation

IFRS 9 requires transaction costs that are directly attributable to the acquisition of a financial asset at fair value through profit or loss to be expensed in profit or loss. For financial assets measured at amortised cost, transaction costs are included in the initial measurement.

Question 12Corporate Reporting

A company has a building with a carrying amount of CU500,000. At the reporting date, the recoverable amount is CU450,000. Under IAS 36, what impairment loss should be recognised?

  1. CU50,000 Correct answer.
  2. CU450,000
  3. Nil, because the asset is still in use
  4. CU500,000

Explanation

IAS 36 requires an impairment loss when the carrying amount exceeds the recoverable amount, measured as the difference. Here the loss is CU500,000 less CU450,000, equal to CU50,000.

Question 13Corporate Reporting

Which of the following is the correct treatment of a provision under IAS 37 where the amount of the obligation is uncertain?

  1. Disclose only as a contingent liability
  2. Recognise the best estimate of the expenditure required to settle the obligation Correct answer.
  3. Recognise the maximum possible amount
  4. Recognise no amount until the obligation becomes certain

Explanation

IAS 37 requires a provision to be measured at the best estimate of the expenditure required to settle the present obligation at the reporting date. Recognising the maximum amount or deferring recognition until certainty is reached conflicts with the standard.

Question 14Corporate Reporting

Under IAS 12, how should a deferred tax asset arising from unused tax losses be recognised?

  1. Never recognised
  2. Recognised only to the extent that it is probable that future taxable profit will be available against which the losses can be utilised Correct answer.
  3. Always recognised in full
  4. Recognised only when the losses have been confirmed by the tax authority

Explanation

IAS 12 requires a deferred tax asset for unused tax losses to be recognised only to the extent that it is probable that future taxable profit will be available against which the unused losses can be used. This requires judgement supported by convincing evidence.

Question 15Corporate Reporting

A parent owns 80% of a subsidiary. The subsidiary reports profit after tax of CU100,000 for the year. Under IFRS 10, how is the non-controlling interest's share presented?

  1. As a deduction from the parent's retained earnings
  2. As a contingent liability disclosed in the notes
  3. As a separate line item within equity in the consolidated statement of financial position and within profit allocation Correct answer.
  4. As a liability in the consolidated statement of financial position

Explanation

IFRS 10 requires non-controlling interests to be presented within equity, separately from the equity of the owners of the parent, and to be allocated a share of profit or loss. The NCI share of CU20,000 is presented as an allocation of profit.

Question 16Corporate Reporting

Which of the following best describes the purpose of the statement of changes in equity under IAS 1?

  1. To disclose the fair value of financial instruments
  2. To show the entity's cash inflows and outflows
  3. To present the entity's revenue and expenses for the period
  4. To provide a reconciliation of the opening and closing balances of each component of equity Correct answer.

Explanation

IAS 1 requires a statement of changes in equity that shows a reconciliation between the carrying amount at the beginning and end of the period for each component of equity, including total comprehensive income and transactions with owners. Cash flows and revenue are presented in other statements.

Question 17Corporate Reporting

An entity has a loan payable of CU1,000,000 at 5% interest. At the reporting date, the entity breaches a covenant, making the loan repayable on demand. The lender has agreed, before the reporting date, not to demand repayment for at least twelve months. How should the loan be classified?

  1. Equity
  2. Non-current liability Correct answer.
  3. Contingent liability
  4. Current liability

Explanation

IAS 1 requires a liability to be classified as non-current where the entity has a right, at the reporting date, to defer settlement for at least twelve months. A lender's agreement before the reporting date not to demand repayment gives that right, so the loan is non-current.

Question 18Corporate Reporting

Under IFRS 15, how should an entity allocate the transaction price when a contract contains multiple performance obligations?

  1. On the basis of the relative stand-alone selling prices of each distinct good or service Correct answer.
  2. Based on the cost incurred for each obligation
  3. Based on the order in which obligations are satisfied
  4. Equally between all performance obligations

Explanation

IFRS 15 requires the transaction price to be allocated to each performance obligation in proportion to its stand-alone selling price. Where stand-alone prices are not observable, an appropriate estimation method such as adjusted market assessment or expected cost plus margin is used.

Question 19Corporate Reporting

Under IAS 21, how should an exchange gain or loss on a monetary item forming part of a reporting entity's net investment in a foreign operation be recognised in the consolidated financial statements?

  1. In profit or loss
  2. As an adjustment to the cost of the investment
  3. Directly in retained earnings without recycling
  4. In other comprehensive income and reclassified to profit or loss on disposal of the foreign operation Correct answer.

Explanation

IAS 21 requires exchange differences on monetary items that form part of a reporting entity's net investment in a foreign operation to be recognised in other comprehensive income and accumulated in a separate component of equity, recycled to profit or loss on disposal.

Question 20Corporate Reporting

Which of the following is a key disclosure requirement of IFRS 8 regarding operating segments?

  1. Disclosure of the tax rate applicable to each segment
  2. Disclosure of the fair value of each segment's assets
  3. Disclosure of factors used to identify the entity's reportable segments Correct answer.
  4. Disclosure of the number of employees in each segment

Explanation

IFRS 8 requires disclosure of the factors used to identify the entity's reportable segments, including the basis of organisation, and the types of products and services from which each segment derives revenue. It does not require fair values of segment assets or employee numbers.

Question 21Corporate Reporting

An entity holds a financial asset measured at fair value through other comprehensive income. The asset's fair value increases by CU10,000 during the year. How is the gain recognised under IFRS 9?

  1. As an adjustment to retained earnings
  2. As a deferred tax asset
  3. In other comprehensive income Correct answer.
  4. In profit or loss

Explanation

IFRS 9 requires fair value gains and losses on debt instruments measured at fair value through other comprehensive income to be recognised in other comprehensive income, except for interest revenue, impairment and foreign exchange effects which are recognised in profit or loss.

Question 22Corporate Reporting

Under IAS 38, which of the following costs should be capitalised as part of the cost of an internally generated intangible asset during the development phase?

  1. Expenditure on materials and services used in generating the asset Correct answer.
  2. Training costs for staff operating the new asset
  3. Costs incurred before the entity can demonstrate technical feasibility
  4. Advertising costs to promote the new product

Explanation

IAS 38 requires development expenditure to be capitalised once the recognition criteria are met, including costs of materials and services consumed in generating the asset. Research-phase costs, training and advertising are expensed.

Question 23Corporate Reporting

A company issues a convertible bond with a face value of CU1,000,000 at par. The bond carries a coupon of 4% and is convertible into ordinary shares. The fair value of a similar bond without conversion rights is CU900,000. Under IAS 32, how should the instrument be accounted for at initial recognition?

  1. Liability of CU900,000 and equity component of CU100,000 Correct answer.
  2. Liability of CU1,000,000 and equity component of CU100,000
  3. Entirely as equity of CU1,000,000
  4. Entirely as a financial liability of CU1,000,000

Explanation

IAS 32 requires a compound instrument to be split into its liability and equity components. The liability is measured first at the fair value of a similar instrument without the equity component, CU900,000, and the residual CU100,000 is recognised in equity.

Question 24Corporate Reporting

Under IFRS 13, which of the following inputs would be classified as a Level 3 input in the fair value hierarchy?

  1. Unobservable inputs for the asset or liability Correct answer.
  2. Quoted prices for similar assets in an active market
  3. Quoted prices in an active market for identical assets
  4. Observable market data other than quoted prices

Explanation

IFRS 13 classifies unobservable inputs as Level 3 because they reflect the entity's own assumptions about the inputs market participants would use. Level 1 uses quoted prices for identical assets, and Level 2 uses observable inputs other than Level 1 quoted prices.

Question 25Corporate Reporting

An entity has a subsidiary that operates in a hyperinflationary economy. Under IAS 29, how should the subsidiary's financial statements be presented before consolidation?

  1. At historical cost without adjustment
  2. Translated at the closing rate only
  3. Adjusted for fair value changes only
  4. Restated for changes in the general purchasing power of the reporting currency Correct answer.

Explanation

IAS 29 requires financial statements of an entity whose functional currency is the currency of a hyperinflationary economy to be stated in terms of the measuring unit current at the end of the reporting period, restating amounts for changes in purchasing power.

Question 26Corporate Reporting

Under IAS 1, when an entity presents a classified statement of financial position, how is a liability normally presented?

  1. As current only where it is due within three months of the reporting date
  2. As non-current whenever the entity intends to refinance the obligation on a long-term basis
  3. As non-current unless it is expected to be settled within the normal operating cycle
  4. As current unless the entity has an unconditional right to defer settlement for at least twelve months after the reporting period Correct answer.

Explanation

IAS 1 requires a liability to be classified as current unless the entity has a right at the end of the reporting period to defer settlement for at least twelve months after that date. The right must be substantive and must exist at the reporting date, regardless of management's intentions. This default rule drives the whole current/non-current split.

Question 27Corporate Reporting

An entity recognises a provision of CU100,000 in 20X1 and settles the obligation in 20X2 for CU90,000. The settlement was not expected to give rise to a reimbursement. How should the CU10,000 difference be treated in 20X2?

  1. Recognised directly in other comprehensive income
  2. Adjusted against opening retained earnings as a prior period error
  3. Deferred and amortised over the remaining useful life of the related asset
  4. Recognised in profit or loss as a gain when the provision is reversed Correct answer.

Explanation

Under IAS 37, a provision is reviewed at each reporting date and adjusted to the best current estimate. When the obligation is settled for less than the carrying amount, the excess is reversed to profit or loss in the period of settlement. It is not a prior period error because the original estimate was made properly with the information then available.

Question 28Corporate Reporting

An entity acquires a machine for CU200,000 with an estimated residual value of CU20,000 and a useful life of nine years. Using straight-line depreciation, what is the depreciation charge for the first full year?

  1. CU24,444
  2. CU22,222
  3. CU18,000
  4. CU20,000 Correct answer.

Explanation

Depreciation under IAS 16 is allocated over the useful life after deducting the residual value. The depreciable amount is CU200,000 less CU20,000, equal to CU180,000, spread over nine years, giving CU20,000 per year. Residual value is not depreciated because the entity expects to recover it at the end of the asset's life.

Question 29Corporate Reporting

Under IAS 36, how is value in use determined?

  1. As the amount obtainable from sale in an arm's length transaction less costs of disposal
  2. As the higher of fair value less costs of disposal and depreciated historical cost
  3. As the present value of the future cash flows expected from the asset, discounted at a pre-tax rate reflecting current market assessments of the time value of money and asset-specific risks Correct answer.
  4. As the carrying amount of the asset adjusted for any revaluation surplus

Explanation

Value in use is the discounted present value of the future cash flows expected to arise from continuing use and eventual disposal of the asset. IAS 36 requires a pre-tax discount rate that reflects current market time value of money and the risks specific to the asset. Cash flow projections should be based on reasonable and supportable assumptions.

Question 30Corporate Reporting

An entity issues 10,000 ordinary shares with a nominal value of CU1 each at a price of CU5 per share. Issue costs of CU4,000 are incurred. Under IAS 32, how should the issue proceeds and costs be presented?

  1. Share capital of CU50,000 with no separate premium
  2. Share capital of CU10,000 and share premium of CU40,000, with costs expensed
  3. Share capital of CU10,000 and share premium of CU40,000, with costs offset against retained earnings
  4. Share capital of CU10,000 and share premium of CU36,000 Correct answer.

Explanation

Equity instruments are measured at the fair value of consideration received, net of directly attributable transaction costs. The nominal amount of CU10,000 is credited to share capital and the excess of consideration over nominal value, reduced by the CU4,000 costs, is credited to share premium, giving CU36,000. Transaction costs of an equity issue are deducted from equity, not expensed.

Question 31Corporate Reporting

Under IFRS 15, when does an entity recognise revenue from a performance obligation satisfied over time?

  1. When the total contract price becomes fixed and determinable
  2. When the entity's performance creates or enhances an asset the customer controls, or creates an asset with no alternative use and the entity has an enforceable right to payment for performance completed to date Correct answer.
  3. When the contract has been signed and the customer has paid a non-refundable deposit
  4. When the goods have been physically delivered to the customer's premises

Explanation

IFRS 15 requires over-time recognition where one of the specified criteria is met, including customer control of the work in progress or an asset with no alternative use combined with an enforceable right to payment. Progress is then measured using a method that depicts the transfer of control. Absent these criteria, revenue is recognised at a point in time.

Question 32Corporate Reporting

An entity grants 1,000 share options to an employee on 1 January 20X1, vesting after three years of service. The grant-date fair value of each option is CU6. Under IFRS 2, what is the expense for the year ended 31 December 20X1?

  1. CU2,000 Correct answer.
  2. CU1,000
  3. CU6,000
  4. CU0, because the options have not yet vested

Explanation

IFRS 2 requires the total grant-date fair value of equity-settled awards to be recognised over the vesting period. Total fair value is 1,000 options multiplied by CU6, equal to CU6,000, spread over three years of service, giving CU2,000 in 20X1. The expense is recognised as services are rendered, not when the options vest.

Question 33Corporate Reporting

Under IAS 10, which of the following events occurring after the reporting period would require adjustment of the financial statements?

  1. The destruction of a warehouse by fire after the reporting date
  2. A decline in the market value of investments occurring after the reporting date
  3. The announcement of a major business combination after the reporting date
  4. The bankruptcy of a customer whose receivable was outstanding at the reporting date Correct answer.

Explanation

IAS 10 distinguishes adjusting events, which provide evidence of conditions existing at the reporting date, from non-adjusting events. A customer's bankruptcy after the year end typically confirms that the receivable was impaired at the reporting date and therefore requires adjustment. Events that arise from conditions occurring after the reporting date are non-adjusting.

Question 34Corporate Reporting

An entity holds a building it occupies for its own administration. Under IAS 40, when may this property be accounted for as an investment property?

  1. When it is being constructed for use as the entity's head office
  2. When the entity uses it for its own production of goods and services
  3. When it is held for sale in the ordinary course of business
  4. When it is leased to a third party under an operating lease, or when a portion is held to earn rentals while the owner-occupied portion is accounted for separately Correct answer.

Explanation

IAS 40 defines investment property as property held to earn rentals, for capital appreciation, or both. An owner-occupied building is normally property, plant and equipment, but a portion leased out to third parties can qualify as investment property if the portions can be separated reliably. Property held for sale in the ordinary course of business is inventory.

Question 35Corporate Reporting

A company is the defendant in a lawsuit. Its lawyers assess a 60% chance the company will be found liable and, if so, damages will be CU500,000. Under IAS 37, how should this be accounted for?

  1. Recognise no provision unless the likelihood of liability exceeds 90%
  2. Recognise a provision of CU300,000 as the probability-weighted expected value
  3. Disclose a contingent liability only, because the outcome is uncertain
  4. Recognise a provision of CU500,000 because a present obligation with probable outflow is indicated Correct answer.

Explanation

IAS 37 requires a provision where a present obligation exists, an outflow of resources is probable, and a reliable estimate can be made. Probable is generally interpreted as more likely than not, so a 60% likelihood meets the threshold. For a single obligation, the best estimate is the most likely outcome, which is CU500,000.

Question 36Corporate Reporting

Under IAS 19, how is the net defined benefit liability determined?

  1. As the cumulative contributions paid into the plan less benefits paid to date
  2. As the present value of the defined benefit obligation less the fair value of plan assets at the reporting date Correct answer.
  3. As the current service cost for the year adjusted for the discount rate
  4. As the actuarial gain or loss recognised in other comprehensive income for the period

Explanation

IAS 19 measures the net defined benefit liability or asset as the present value of the defined benefit obligation less the fair value of plan assets at the reporting date. Remeasurements, including actuarial gains and losses, are recognised in other comprehensive income. The net amount is presented in the statement of financial position.

Question 37Corporate Reporting

An entity purchases a debt instrument held to collect contractual cash flows that are solely payments of principal and interest. Under IFRS 9, how is the asset classified and measured?

  1. At amortised cost using the effective interest method Correct answer.
  2. At cost less any impairment allowance
  3. At fair value through other comprehensive income with recycling on disposal
  4. At fair value through profit or loss

Explanation

IFRS 9 classifies a financial asset at amortised cost where the business model is to hold assets to collect contractual cash flows and those cash flows are solely payments of principal and interest. The asset is initially measured at fair value plus transaction costs and subsequently at amortised cost using the effective interest method. The expected credit loss model applies to the impairment allowance.

Question 38Corporate Reporting

A lessee enters a five-year lease with annual payments of CU10,000 payable in advance. The incremental borrowing rate is 5%. Which statement best describes the initial measurement under IFRS 16?

  1. The lease liability is the present value of the remaining four payments, because the first payment is made at commencement Correct answer.
  2. The lease liability is the present value of all five payments, because all payments fall within the lease term
  3. The lease liability equals the total undiscounted payments of CU50,000
  4. No lease liability is recognised because the payments are made in advance

Explanation

IFRS 16 measures the lease liability at the present value of lease payments not paid at the commencement date. Where payments are made in advance, the first payment is made at commencement and is excluded from the liability, leaving four payments to discount. The first payment instead reduces the right-of-use asset.

Question 39Corporate Reporting

Under IAS 33, how is diluted earnings per share calculated for a convertible bond that is potentially dilutive?

  1. By adjusting earnings for the after-tax interest saving only, leaving the share count unchanged
  2. By excluding the convertible bond because it is a liability rather than equity
  3. By dividing basic earnings by the maximum number of shares issuable on conversion
  4. By adjusting earnings for the after-tax interest saving and adding the shares that would be issued on conversion to the weighted average number of shares Correct answer.

Explanation

IAS 33 requires diluted EPS to reflect the dilution that would arise if the convertible instrument were converted. Earnings are adjusted for the after-tax interest expense that would be saved, and the denominator is increased by the shares that would be issued. The result is presented only where it is dilutive, that is, where it reduces earnings per share.

Question 40Corporate Reporting

Under IAS 24, which of the following is a related party of an entity?

  1. A trade union representing the entity's employees
  2. A key management personnel member of the entity and his or her close family members Correct answer.
  3. A government department that regulates the entity's industry
  4. A major customer that purchases 30% of the entity's output

Explanation

IAS 24 defines related parties to include key management personnel and their close family members, because they are able to influence decisions affecting the entity. Transactions with them require disclosure even where no amounts are outstanding. Ordinary customers, regulators and employee representatives are not related parties merely by virtue of those relationships.

Question 41Corporate Reporting

An entity changes from the straight-line to the reducing-balance method of depreciation for its plant. Under IAS 8, how should this change be accounted for?

  1. As a change in accounting estimate applied prospectively from the date of change Correct answer.
  2. As a change in accounting policy applied retrospectively with restatement of comparatives
  3. By disclosing the change only, with no adjustment to the current period charge
  4. By adjusting opening retained earnings and restating prior period figures

Explanation

A change in the depreciation method is a change in accounting estimate because it reflects a revised pattern of consumption of the asset's benefits. IAS 8 requires such changes to be applied prospectively, affecting the current and future periods. Prior period figures are not restated.

Question 42Corporate Reporting

A company has taxable profit of CU400,000 for the year. Tax depreciation exceeds accounting depreciation by CU60,000, creating a taxable temporary difference. The tax rate is 25%. What is the deferred tax liability arising and the current tax charge?

  1. Deferred tax liability CU15,000 and current tax CU100,000 Correct answer.
  2. Deferred tax liability CU15,000 and current tax CU85,000
  3. Deferred tax liability CU0 and current tax CU115,000
  4. Deferred tax liability CU10,000 and current tax CU100,000

Explanation

A taxable temporary difference arises where tax depreciation exceeds accounting depreciation, because future taxable amounts will be higher. The deferred tax liability is CU60,000 multiplied by 25%, equal to CU15,000. Current tax is based on taxable profit of CU400,000 at 25%, giving CU100,000.

Question 43Corporate Reporting

Under IFRS 5, when is a non-current asset classified as held for sale?

  1. When the asset has been fully depreciated and is no longer in use
  2. When its carrying amount will be recovered principally through a sale transaction rather than through continuing use, and the sale is highly probable Correct answer.
  3. When management has decided to sell the asset at some future date
  4. When the asset's fair value exceeds its carrying amount

Explanation

IFRS 5 requires the asset to be available for immediate sale in its present condition and the sale to be highly probable, with an active programme to locate a buyer and a completion expected within one year. The asset is then measured at the lower of carrying amount and fair value less costs to sell, and depreciation ceases. Mere intention to sell at an unspecified future date does not meet the criteria.

Question 44Corporate Reporting

An entity has a defined benefit obligation with a present value of CU1,000,000 and plan assets with a fair value of CU1,200,000. The plan has a surplus. Under IAS 19, how should the net defined benefit asset be measured?

  1. At nil, because a surplus cannot be recognised under IAS 19
  2. At the lower of the surplus and the asset ceiling, being the present value of economic benefits available as refunds or reductions in future contributions Correct answer.
  3. At the full surplus of CU200,000 in all circumstances
  4. At the fair value of plan assets without deducting the obligation

Explanation

IAS 19 limits the recognition of a net defined benefit asset to the present value of economic benefits available in the form of refunds from the plan or reductions in future contributions, known as the asset ceiling. The surplus is recognised only to the extent it is recoverable. Any restriction is recognised in other comprehensive income.

Question 45Corporate Reporting

Under the Conceptual Framework, which of the following is a fundamental qualitative characteristic of useful financial information?

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

Explanation

The Conceptual Framework identifies relevance and faithful representation as the two fundamental qualitative characteristics. Comparability, timeliness, verifiability and understandability are enhancing characteristics that increase usefulness but cannot make irrelevant or misrepresented information useful. Relevance exists where information is capable of making a difference in users' decisions.

Question 46Corporate Reporting

An entity's functional currency is the Bangladeshi taka, but its financial statements are presented in US dollars. Under IAS 21, how should assets and liabilities be translated for presentation purposes?

  1. At the average rate for the reporting period
  2. At the closing rate, with exchange differences recognised in profit or loss
  3. At the historical rate prevailing when each item was recognised
  4. At the closing rate at the reporting date, with resulting exchange differences recognised in other comprehensive income Correct answer.

Explanation

Where the presentation currency differs from the functional currency, IAS 21 requires assets and liabilities to be translated at the closing rate and income and expenses at rates at the dates of the transactions, often approximated by an average rate. Resulting exchange differences are recognised in other comprehensive income and accumulated in a separate component of equity.

Question 47Corporate Reporting

Under IFRS 15, a contract with a customer includes a right of return. How should the entity account for the expected returns?

  1. Recognise full revenue and disclose the return policy in the notes only
  2. Recognise revenue net of returns without recognising any asset for the goods expected back
  3. Defer all revenue until the return period expires
  4. Recognise revenue net of expected returns, with a refund liability and a right to recover returned goods recognised as an asset Correct answer.

Explanation

IFRS 15 requires an entity to recognise revenue only to the extent it is highly probable there will not be a significant reversal. Expected returns are therefore deducted from revenue, a refund liability is recognised for the amount expected to be refunded, and a separate asset is recognised for the right to recover returned goods. The asset is measured by reference to the former carrying amount of the goods.

Question 48Corporate Reporting

A company reports profit before tax of CU500,000. It has non-taxable income of CU50,000 and non-deductible expenses of CU30,000. The tax rate is 30%. What is the current tax charge?

  1. CU144,000 Correct answer.
  2. CU156,000
  3. CU150,000
  4. CU135,000

Explanation

Current tax is calculated on taxable profit, which is accounting profit adjusted for items that are not taxable or not deductible. Taxable profit is CU500,000 less CU50,000 plus CU30,000, equal to CU480,000, and tax at 30% is CU144,000. The non-taxable income reduces the charge while non-deductible expenses increase it.

Question 49Corporate Reporting

Under IAS 7, how should interest paid by a financial institution be classified in the statement of cash flows?

  1. Always as a financing cash flow, regardless of the nature of the entity
  2. Always as an investing cash flow
  3. As an operating cash flow, because interest paid is central to the entity's principal revenue-producing activities Correct answer.
  4. As a non-cash item that is excluded from the statement entirely

Explanation

IAS 7 permits interest paid to be classified as operating or financing, but requires consistency. For a financial institution, interest paid forms part of its principal revenue-producing activities and is therefore classified as operating. Interest and dividends received are likewise normally operating for such entities.

Question 50Corporate Reporting

An entity recognises an intangible asset with a finite useful life. Under IAS 38, how should amortisation be determined?

  1. Over a maximum period of five years irrespective of the useful life
  2. Over the asset's useful life using a method reflecting the pattern in which its economic benefits are consumed, with a residual value of zero unless a third party has committed to purchase it Correct answer.
  3. Over the useful life with a residual value equal to expected future sales proceeds
  4. By annual impairment testing only, with no systematic amortisation

Explanation

IAS 38 requires an intangible asset with a finite useful life to be amortised over that life using a method that reflects the pattern of consumption of its benefits. The residual value is assumed to be zero unless there is a commitment by a third party to purchase the asset at the end of its useful life or an active market exists. Indefinite-life intangibles are not amortised but tested annually for impairment.