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CA ANZ Core 3: FAR study materials
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CA ANZ Core 3: FAR practice questions

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Question 1Conceptual framework and financial reporting environment

Under the IASB Conceptual Framework, what is the primary 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 disclose the fair value of every asset and liability held by an entity at reporting date
  3. To demonstrate management's stewardship by reporting profit measured on a consistent basis
  4. To enable taxation authorities to determine the taxable income of an entity with certainty

Explanation

The Conceptual Framework states the objective 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. Those decisions include buying, selling or holding equity and debt instruments and providing or settling loans. Stewardship is part of that objective but is not stated as the sole objective.

Question 2Conceptual framework and financial reporting environment

Which characteristic makes financial information capable of making a difference in the decisions made by users?

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

Explanation

Relevance is the qualitative characteristic that makes information capable of making a difference in users' decisions. Information is relevant if it has predictive value, confirmatory value, or both. Faithful representation, comparability and timeliness are separate enhancing or fundamental characteristics.

Question 3Conceptual framework and financial reporting environment

A company recognises a provision based on a best estimate of a future outflow. Which fundamental qualitative characteristic is most directly supported when the estimate is described as complete, neutral and free from error?

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

Explanation

Faithful representation requires information to be complete, neutral and free from error. A provision measured on a best estimate can be faithfully represented if the description and measurement reflect the economic substance of the obligation. Relevance concerns decision usefulness rather than the quality of depiction.

Question 4Conceptual framework and financial reporting environment

Applying the Conceptual Framework's definitions, which item best meets the definition of a liability?

  1. An equity instrument issued to shareholders in a prior period
  2. A possible obligation whose existence will be confirmed only by an uncertain future event
  3. A planned future purchase of raw materials approved by the board
  4. A present obligation to transfer cash arising from a past supply contract already received Correct answer.

Explanation

A liability is a present obligation of the entity to transfer an economic resource as a result of past events. The supply contract has already been received, creating a present obligation to pay. A planned future purchase and a mere possible obligation do not meet the definition.

Question 5Conceptual framework and financial reporting environment

Which measurement basis is described in the Conceptual Framework as reflecting the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date?

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

Explanation

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Historical cost reflects the transaction price at acquisition, while value in use is an entity-specific present value.

Question 6Conceptual framework and financial reporting environment

An entity's financial statements are prepared on a going concern basis. Which assumption does this reflect?

  1. The entity will be liquidated within the next reporting period
  2. The entity expects to cease trading after the current reporting cycle
  3. All assets are measured at their liquidation values at each reporting date
  4. The entity will continue in operation for the foreseeable future without intention or need to liquidate Correct answer.

Explanation

The going concern assumption is that the entity will continue in operation for the foreseeable future and has neither the intention nor the need to liquidate or curtail materially the scale of its operations. Where this assumption is not appropriate, financial statements must be prepared on a different basis with disclosure.

Question 7Conceptual framework and financial reporting environment

Which body is responsible for issuing International Financial Reporting Standards?

  1. The International Accounting Standards Board Correct answer.
  2. The IFRS Foundation Trustees
  3. The IFRS Interpretations Committee
  4. The International Federation of Accountants

Explanation

The International Accounting Standards Board, an independent standard-setting body, develops and issues IFRS Standards. The IFRS Foundation Trustees provide governance and oversight but do not issue standards. The Interpretations Committee issues interpretations of existing standards.

Question 8Conceptual framework and financial reporting environment

AASB 101 requires a complete set of financial statements to include a statement of financial position, a statement of profit or loss and other comprehensive income, a statement of changes in equity, a statement of cash flows, and which further component?

  1. A five-year summary of key financial ratios
  2. A directors' remuneration report
  3. Notes comprising material accounting policy information and other explanatory information Correct answer.
  4. A statement of the market value of intangible assets

Explanation

A complete set of financial statements comprises the listed statements plus notes, which include material accounting policy information and other explanatory information. Comparative information for the preceding period is also presented. Additional summaries and remuneration reports are not required components under AASB 101.

Question 9Conceptual framework and financial reporting environment

An entity changes an accounting policy because a new IFRS Standard requires it. How should the change be accounted for, in the absence of specific transitional provisions in that Standard?

  1. Retrospectively by restating comparatives and adjusting opening retained earnings Correct answer.
  2. By disclosing the change only, without adjusting any amounts
  3. By recognising the cumulative effect in profit or loss for the current period
  4. Prospectively from the date of change with no adjustment to opening equity

Explanation

AASB 108 requires a change in accounting policy arising from initial application of a Standard to be applied retrospectively, restating comparative information and adjusting the opening balance of each affected component of equity, unless transitional provisions specify otherwise. Prospective application applies only to specified circumstances such as impracticability.

Question 10Conceptual framework and financial reporting environment

Which of the following is a change in accounting estimate rather than a change in accounting policy?

  1. Revising the useful life of machinery based on new information about its condition Correct answer.
  2. Adopting a new Standard that changes the recognition of revenue
  3. Reclassifying an item from trade receivables to other receivables
  4. Changing the depreciation method for plant from straight-line to reducing balance

Explanation

A change in accounting estimate is an adjustment to the carrying amount of an asset or liability arising from new information or developments, such as a revised useful life. Changes in measurement basis, such as the depreciation method, are changes in accounting policy.

Question 11Conceptual framework and financial reporting environment

An entity discovers a material error in prior period financial statements. Under AASB 108, how should it be corrected?

  1. By adjusting the current period profit or loss only
  2. By restating only the opening balance of retained earnings and no other amounts
  3. By retrospective restatement of the prior period amounts, with disclosure of the nature and effect Correct answer.
  4. By disclosing the error in the notes without changing any amounts

Explanation

Material prior period errors are corrected retrospectively by restating the comparative amounts for the prior period presented and adjusting opening equity where the error predates the earliest period presented. The nature and amount of the correction must be disclosed.

Question 12Conceptual framework and financial reporting environment

Which statement best describes the relationship between the Conceptual Framework and an IFRS Standard where the Standard conflicts with the Framework?

  1. The entity may choose whichever produces the higher reported profit
  2. The Framework overrides the Standard in all cases
  3. The Standard prevails and the entity applies the Standard, with the Framework assisting interpretation Correct answer.
  4. The conflict must be resolved by the IFRS Interpretations Committee before reporting

Explanation

The Conceptual Framework is not a Standard and does not override any specific IFRS Standard. Where a Standard addresses a transaction, the entity applies that Standard, and the Framework assists in interpreting and applying it.

Question 13Conceptual framework and financial reporting environment

An entity recognises a dividend payable to shareholders declared before the reporting date. Which element of the financial statements does the dividend payable represent?

  1. A liability Correct answer.
  2. Income
  3. Equity
  4. An asset

Explanation

Once a dividend is appropriately declared before the reporting date, the entity has a present obligation to transfer resources to shareholders arising from a past event, so it meets the definition of a liability. An unrecognised proposed dividend does not create a present obligation.

Question 14Conceptual framework and financial reporting environment

Which of the following best describes the enhancing qualitative characteristic of comparability?

  1. Information is complete, neutral and free from error
  2. Information is available to decision-makers in time to influence their decisions
  3. Information is classified and presented clearly and concisely
  4. Users can identify and understand similarities in, and differences among, items Correct answer.

Explanation

Comparability enables users to identify and understand similarities in, and differences among, items, and is assisted by consistency of measurement and presentation. Timeliness, understandability and faithful representation describe the other options.

Question 15Conceptual framework and financial reporting environment

An entity has a history of profitable operations and secure financing, but a large loan covenant is breached at reporting date, and the lender has not provided a waiver before the financial statements are authorised for issue. What is the most appropriate conclusion about the going concern basis?

  1. The going concern basis is irrelevant because the financial statements have already been prepared
  2. The going concern basis is always appropriate unless the entity has entered liquidation
  3. The going concern basis remains appropriate because the entity has historically been profitable
  4. The going concern basis may no longer be appropriate, and disclosure and possible change of basis must be considered Correct answer.

Explanation

A covenant breach without a waiver before authorisation may give the lender the right to demand repayment, creating material uncertainty about the entity's ability to continue. Management must assess the significance, disclose the uncertainty, and consider whether the going concern basis remains appropriate.

Question 16Conceptual framework and financial reporting environment

Under AASB 101, when may an entity offset an asset and a liability in the statement of financial position?

  1. Only when a Standard requires or permits offsetting Correct answer.
  2. Whenever the amounts relate to the same counterparty
  3. Only when the amounts are immaterial
  4. Whenever management considers the net amount more informative

Explanation

Assets and liabilities are not offset unless a Standard requires or permits it, such as the offset of deferred tax assets and liabilities under AASB 112. Offsetting obscures the underlying transactions and is not permitted merely because a counterparty is the same.

Question 17Conceptual framework and financial reporting environment

Which of the following statements about the concept of materiality in the Conceptual Framework and AASB 101 is correct?

  1. Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions of primary users Correct answer.
  2. All immaterial information must be disclosed to ensure completeness
  3. Materiality applies only to the statement of profit or loss
  4. Materiality is determined solely by a fixed percentage of total assets

Explanation

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. Materiality is entity-specific and applies to all components of the financial statements, not to a single statement or a fixed threshold.

Question 18Conceptual framework and financial reporting environment

Which of the following is an example of an enhancing qualitative characteristic being applied in practice?

  1. An entity prepares its financial statements six months after the reporting date
  2. An entity reports a gain from the sale of an asset at its gross amount
  3. An entity uses the same inventory costing formula for identical inventory classes across periods Correct answer.
  4. An entity discloses a contingent liability in the notes in the period in which it arises

Explanation

Using the same inventory costing formula for identical inventory classes across periods supports comparability, an enhancing characteristic. Comparability is assisted by consistency in applying accounting policies.

Question 19Conceptual framework and financial reporting environment

An entity prepares its financial statements on a basis that includes a statement of cash flows. Under the Conceptual Framework, which statement about the statement of cash flows is most accurate?

  1. It is a note disclosure that is optional for entities applying IFRS
  2. It replaces the statement of changes in equity when the entity has no equity transactions
  3. It is a primary financial statement that provides information about changes in the entity's economic resources Correct answer.
  4. It is prepared only when the entity reports a net loss

Explanation

A complete set of financial statements includes a statement of cash flows, which provides information about changes in the entity's economic resources and financial structure. It is a primary statement, not an optional note.

Question 20Conceptual framework and financial reporting environment

An entity revalues a class of property, plant and equipment to fair value. Which measurement basis is being applied, and which characteristic of the Conceptual Framework does this illustrate?

  1. Value in use, illustrating relevance
  2. Historical cost, illustrating comparability
  3. Realisable value, illustrating prudence
  4. Fair value, illustrating a current value measurement basis Correct answer.

Explanation

Revaluation to fair value applies a current value measurement basis, specifically fair value, which reflects the price that would be received to sell the asset in an orderly transaction between market participants. Historical cost would reflect the original transaction price less depreciation.

Question 21Presentation of financial statements and disclosure requirements

Under IAS 1, which financial statement is required in addition to the statement of financial position, statement of profit or loss and other comprehensive income, statement of cash flows, and notes?

  1. Statement of comprehensive income only
  2. Directors' report
  3. Statement of changes in equity Correct answer.
  4. Statement of retained earnings only

Explanation

IAS 1 requires a complete set of financial statements to include a statement of changes in equity for the period, alongside the statement of financial position, the statement(s) of profit or loss and OCI, the statement of cash flows and the notes. A statement of retained earnings alone is not a substitute because it omits other equity movements such as share issues and OCI.

Question 22Presentation of financial statements and disclosure requirements

A reporting entity's operating cycle is 18 months. How should it classify a trade receivable expected to be settled 14 months after the reporting date?

  1. As equity, because settlement timing is uncertain
  2. As current, because it is realised within the normal operating cycle Correct answer.
  3. As current, because all trade receivables are current
  4. As non-current, because it exceeds twelve months

Explanation

IAS 1 defines current assets to include assets realised in the normal course of the operating cycle, even where that cycle exceeds twelve months. The twelve-month test is a fallback, not an overriding limit, so a receivable settled within an 18-month operating cycle remains current.

Question 23Presentation of financial statements and disclosure requirements

Which basis of presentation does IAS 1 prescribe for general purpose financial statements, unless another basis better reflects the entity's circumstances?

  1. Liquidation basis
  2. Tax basis
  3. Going concern Correct answer.
  4. Historical cost only

Explanation

IAS 1 requires financial statements to be prepared on a going concern basis unless management intends to liquidate or has no realistic alternative but to cease trading. Historical cost is a measurement basis for many items, but it is not the prescribed basis of presentation.

Question 24Presentation of financial statements and disclosure requirements

An entity changes an accounting policy in the current year. Which treatment does IAS 8 require, assuming the change is not a transition provision of a new standard?

  1. Recognise the cumulative effect in other comprehensive income
  2. Disclose the change but make no adjustment
  3. Apply retrospectively and restate comparatives where practicable Correct answer.
  4. Apply prospectively from the date of change

Explanation

IAS 8 requires voluntary changes in accounting policy to be applied retrospectively, adjusting opening equity and restating comparative information as far as practicable. Prospective application is reserved for changes in accounting estimate and for cases where retrospective application is impracticable.

Question 25Presentation of financial statements and disclosure requirements

Under IAS 10, a customer bankruptcy occurring after the reporting date that provides evidence of a receivable's recoverability at year end is treated as which type of event?

  1. An adjusting event requiring recognition Correct answer.
  2. An error requiring prior period restatement
  3. A non-adjusting event requiring only disclosure
  4. An event ignored entirely

Explanation

IAS 10 treats events after the reporting period that provide evidence of conditions existing at the reporting date as adjusting events. A bankruptcy confirming that a receivable was impaired at year end therefore requires the receivable to be written down in the current period statements.

Question 26Presentation of financial statements and disclosure requirements

Which of the following best describes the concept of materiality as set out in IAS 1?

  1. An item is material only if it exceeds five per cent of total assets
  2. Omissions or misstatements are material if they could influence economic decisions of users Correct answer.
  3. Materiality is fixed by the tax authority each year
  4. All immaterial items must be aggregated and disclosed separately

Explanation

IAS 1 defines materiality by reference to whether omissions or misstatements could, individually or collectively, influence the economic decisions of primary users. It is an entity-specific judgement rather than a fixed numerical threshold, although quantitative benchmarks may inform that judgement.

Question 27Presentation of financial statements and disclosure requirements

An entity presents its statement of financial position showing assets and liabilities split into current and non-current. Which additional disclosure does IAS 1 require when a classified presentation is used?

  1. The budget for the following year
  2. The amount expected to be recovered or settled after more than twelve months for each line item Correct answer.
  3. The name of each major customer
  4. A full reconciliation of every asset to fair value

Explanation

When a classified statement of financial position is presented, IAS 1 requires disclosure of the amount expected to be recovered or settled after more than twelve months for each asset and liability line item. This informs users about the timing of expected cash flows.

Question 28Presentation of financial statements and disclosure requirements

Which item must be presented in other comprehensive income rather than in profit or loss under IAS 1?

  1. Interest expense on borrowings
  2. Gains on revaluation of property, plant and equipment Correct answer.
  3. Cost of goods sold
  4. Depreciation of plant and equipment

Explanation

IAS 1 requires items of other comprehensive income to be presented separately, and revaluation surplus gains on property, plant and equipment are recognised in OCI under IAS 16. Depreciation, interest expense and cost of goods sold are recognised in profit or loss.

Question 29Presentation of financial statements and disclosure requirements

An entity reclassifies a financial asset, resulting in a gain previously recognised in OCI being transferred to profit or loss. How is this presented under IAS 1?

  1. As an item not presented anywhere
  2. As a direct adjustment to retained earnings
  3. As a prior period error
  4. As a reclassification adjustment within OCI, with disclosure of the amount Correct answer.

Explanation

IAS 1 requires reclassification adjustments to be presented in the statement of comprehensive income when amounts previously in OCI are reclassified to profit or loss. The nature and amount of the reclassification adjustment must also be disclosed in the notes.

Question 30Presentation of financial statements and disclosure requirements

Which of the following is a required disclosure about share capital under IAS 1?

  1. The personal tax residency of directors
  2. The number of shares authorised and issued, and their par value Correct answer.
  3. The market price of the shares on each reporting date
  4. A list of all shareholders holding fewer than 100 shares

Explanation

IAS 1 requires entities to disclose information about share capital, including the number of shares authorised and issued, and the par value per share or that shares have no par value. This helps users understand the entity's capital structure.

Question 31Presentation of financial statements and disclosure requirements

An entity has a loan payable that is due 20 months after the reporting date, but it breached a covenant at year end and the lender has the right to demand repayment on 30 days' notice. No waiver was obtained before the reporting date. How should the loan be classified?

  1. Current only if the lender has actually demanded repayment
  2. Non-current, because the contractual maturity exceeds twelve months
  3. Current, because the lender can demand repayment within twelve months Correct answer.
  4. Equity, because the covenant breach is unresolved

Explanation

IAS 1 requires a liability to be classified as current when the entity does not have an unconditional right to defer settlement for at least twelve months after the reporting date. A breach giving the lender a demand right removes that unconditional right, so the loan is current even if the lender has not yet demanded payment.

Question 32Presentation of financial statements and disclosure requirements

Under IAS 1, when should an entity present an additional statement of financial position as at the beginning of the earliest comparative period?

  1. Only when it changes its financial year end
  2. When it applies an accounting policy retrospectively or makes a retrospective restatement or reclassification Correct answer.
  3. Whenever total assets increase by more than ten per cent
  4. Only when it issues new shares

Explanation

IAS 1 requires a third statement of financial position at the beginning of the earliest comparative period when an entity applies a retrospective accounting policy change, makes a retrospective restatement, or reclassifies items. This allows users to understand the effect of the adjustment on the opening position.

Question 33Presentation of financial statements and disclosure requirements

Which of the following is an example of a change in accounting estimate rather than a change in accounting policy?

  1. Adopting IFRS 15 for the first time
  2. Revising the useful life of an item of machinery Correct answer.
  3. Switching from cost to revaluation model for a class of assets
  4. Changing the basis of consolidation

Explanation

A change in accounting estimate results from new information or developments, such as reassessing an asset's useful life, and is applied prospectively. Adopting a new standard, changing measurement models, or altering the consolidation basis are changes in accounting policy.

Question 34Presentation of financial statements and disclosure requirements

Under IAS 1, which of the following must be disclosed in the notes regarding judgements made in applying accounting policies?

  1. Only judgements relating to tax
  2. Only judgements approved by the external auditor
  3. Only judgements that result in a material misstatement
  4. Judgements, apart from those involving estimations, that management has made in applying the entity's accounting policies and that have the most significant effect on the amounts recognised Correct answer.

Explanation

IAS 1 requires disclosure of the significant judgements, other than those involving estimation, that management has made in applying accounting policies and that most significantly affect the amounts recognised. This helps users understand how the financial statements have been shaped by management's reasoning.

Question 35Presentation of financial statements and disclosure requirements

An entity has a long-term loan in which it will repay $2 million within the next twelve months under a scheduled instalment arrangement. How should the liability be presented?

  1. The portion due within twelve months is presented as current and the remainder as non-current Correct answer.
  2. The entire loan is presented as current
  3. The entire loan is presented as non-current
  4. The loan is presented as equity until repaid

Explanation

IAS 1 requires liabilities to be split between current and non-current based on the timing of settlement, so instalments due within twelve months are current. The remaining balance, due after twelve months, is presented as non-current.

Question 36Presentation of financial statements and disclosure requirements

Which of the following items is required to be presented in the statement of changes in equity under IAS 1?

  1. A breakdown of revenue by geographical region
  2. A reconciliation of deferred tax balances
  3. The fair value of investment property
  4. Total comprehensive income for the period, showing separately amounts attributable to owners and non-controlling interests Correct answer.

Explanation

IAS 1 requires the statement of changes in equity to present total comprehensive income for the period, with separate disclosure of amounts attributable to owners of the parent and to non-controlling interests. It also shows transactions with owners and changes in each component of equity.

Question 37Presentation of financial statements and disclosure requirements

An entity presents expenses in profit or loss by nature. Which of the following is a required disclosure when this presentation is used?

  1. A breakdown of each expense by function
  2. The name of each supplier
  3. The number of employees by department
  4. Depreciation and amortisation expense, and employee benefits expense, for the period Correct answer.

Explanation

IAS 1 requires that when expenses are presented by nature, the entity discloses specific items including depreciation and amortisation, and employee benefits expense. This provides users with information about the nature and amount of significant expenses.

Question 38Presentation of financial statements and disclosure requirements

Which of the following best describes the treatment of offsetting assets and liabilities under IAS 1?

  1. Offsetting is permitted only when required or permitted by an IFRS Correct answer.
  2. Offsetting is permitted only for tax balances
  3. Offsetting is never permitted
  4. Offsetting is always permitted at management's discretion

Explanation

IAS 1 prohibits the offsetting of assets and liabilities unless required or permitted by an IFRS. Offsetting obscures the gross position of the entity and reduces the information available to users about the underlying transactions.

Question 39Presentation of financial statements and disclosure requirements

An entity recognises a provision for a restructuring plan. Under IAS 37 and IAS 1, which disclosure is required?

  1. A brief description of the nature of the obligation, the expected timing, and an indication of the uncertainty Correct answer.
  2. The exact amount and date of each future payment
  3. The names of employees to be made redundant
  4. The identity of the legal advisers

Explanation

IAS 37 requires disclosure of a brief description of the nature of the obligation, the expected timing of any resulting outflows, and an indication of the uncertainties about the amount or timing. Exact amounts and dates are not required where they would be impractical or prejudicial.

Question 40Presentation of financial statements and disclosure requirements

Which of the following is a required disclosure about the entity's objectives, policies and processes for managing capital under IAS 1?

  1. The dividend history of the entity's competitors
  2. The personal financial targets of the chief executive
  3. A description of what the entity manages as capital and quantitative data about externally imposed capital requirements Correct answer.
  4. The share price of the entity on each month-end

Explanation

IAS 1 requires disclosure of the entity's objectives, policies and processes for managing capital, including a description of what is managed as capital and quantitative data about externally imposed capital requirements. This helps users evaluate the entity's capital management strategy.

Question 41Presentation of financial statements and disclosure requirements

An entity's financial statements are approved for issue on 25 March, and the auditor's report is signed on 10 April. Which date is relevant for assessing events after the reporting period under IAS 10?

  1. The date the financial statements are authorised for issue Correct answer.
  2. The date the annual general meeting is held
  3. The date the financial statements are filed with the regulator
  4. The date the auditor's report is signed

Explanation

IAS 10 defines events after the reporting period as those occurring between the reporting date and the date the financial statements are authorised for issue. The auditor's report date and filing date may occur later and do not extend the relevant period.

Question 42Presentation of financial statements and disclosure requirements

An entity has a history of operating losses and negative operating cash flows. Management prepares the financial statements on a going concern basis. What disclosure does IAS 1 require?

  1. Disclosure of the auditor's opinion in the notes
  2. Disclosure of the material uncertainties that may cast significant doubt on the entity's ability to continue as a going concern Correct answer.
  3. No disclosure because the going concern basis has been applied
  4. Disclosure only if the entity has already ceased trading

Explanation

When management is aware of material uncertainties that may cast significant doubt on the entity's ability to continue as a going concern, IAS 1 requires those uncertainties to be disclosed. Applying the going concern basis does not remove the need to explain the judgements and uncertainties involved.

Question 43Presentation of financial statements and disclosure requirements

Which of the following items must be presented in the statement of financial position as a minimum line item under IAS 1?

  1. Deferred tax liabilities Correct answer.
  2. Cost of sales
  3. Other comprehensive income
  4. Revenue from contracts with customers

Explanation

IAS 1 lists minimum line items for the statement of financial position, including deferred tax liabilities and deferred tax assets. Revenue, cost of sales and other comprehensive income are presented in the statement(s) of profit or loss and OCI, not the statement of financial position.

Question 44Presentation of financial statements and disclosure requirements

An entity presents a single statement of profit or loss and other comprehensive income. Which presentation does IAS 1 permit regarding the allocation of profit or loss and OCI?

  1. Present profit or loss and OCI together, with allocation to non-controlling interests and owners of the parent Correct answer.
  2. Present profit or loss in the notes only
  3. Present OCI in the statement of changes in equity only
  4. Present only total comprehensive income without a profit or loss subtotal

Explanation

IAS 1 permits a single combined statement of profit or loss and other comprehensive income, but requires the allocation of profit or loss and total comprehensive income between non-controlling interests and owners of the parent. A profit or loss subtotal must still be presented.

Question 45Revenue recognition and contracts with customers

Under the five-step model, revenue is recognised when control of the promised good or service transfers to the customer. Which of the following best describes the core principle applied at that point?

  1. The entity recognises revenue when cash is received from the customer
  2. The entity recognises revenue when the goods are physically produced and completed in the factory
  3. The entity recognises revenue when the contract is signed and the parties are legally committed
  4. The entity recognises revenue to depict the transfer of promised goods or services in an amount reflecting the consideration it expects to be entitled to Correct answer.

Explanation

The core principle requires revenue to be recognised to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Recognition therefore follows the transfer of control, not signing, cash receipt or production.

Question 46Revenue recognition and contracts with customers

An entity enters into a contract with a customer that is approved in writing, has clearly identified rights and payment terms, has commercial substance, and for which collection of consideration is probable. How many criteria must a contract meet to be accounted for under the revenue standard?

  1. Three criteria, being offer, acceptance and consideration
  2. Two criteria, being written form and a fixed price
  3. Five criteria, including approval, identifiable rights, payment terms, commercial substance and probable collection Correct answer.
  4. Four criteria, being approval, commercial substance, probable collection and a stated delivery date

Explanation

A contract is accounted for under the revenue model only when all five criteria are met: the parties have approved it and are committed, each party's rights are identifiable, payment terms are identifiable, it has commercial substance, and collection of consideration is probable. If any criterion fails, the arrangement is not a qualifying contract.

Question 47Revenue recognition and contracts with customers

A retailer sells a product with a right of return allowing customers to return unused goods within 30 days for a full refund. On transfer of the goods, how should the retailer account for the expected returns?

  1. Recognise no revenue until the 30-day return period has expired
  2. Recognise full revenue and ignore expected returns until a return actually occurs
  3. Recognise full revenue and a general provision for future marketing costs
  4. Recognise revenue only for goods not expected to be returned, and recognise a refund liability plus a right to recover returned goods asset Correct answer.

Explanation

Where a right of return exists, the entity recognises revenue for the consideration it expects to be entitled to, which excludes amounts expected to be refunded. It also recognises a refund liability and an asset for the right to recover the returned goods, measured by reference to the former carrying amount.

Question 48Revenue recognition and contracts with customers

A software entity licenses its product to a customer for a three-year term. The customer can direct the use of, and obtain substantially all benefits from, the software throughout the term, and the licence is not dependent on ongoing activities of the entity. How should the licence be classified?

  1. A right to use the entity's intellectual property as it exists at the point the licence is granted Correct answer.
  2. A lease of a tangible asset
  3. A financing arrangement repayable in instalments
  4. A right to access the entity's intellectual property over time

Explanation

A licence is a right to use intellectual property as it exists at grant if the customer can direct the use of and obtain benefits from the IP and the entity's ongoing activities do not significantly affect the IP. Such a licence is a point-in-time licence rather than a right to access the IP over time.

Question 49Revenue recognition and contracts with customers

An entity sells equipment for $100,000 plus a two-year maintenance service priced at $20,000. The standalone selling price of the equipment is $96,000 and of the maintenance is $24,000. What amount of the $120,000 transaction price is allocated to the equipment?

  1. $90,000
  2. $100,000
  3. $120,000
  4. $96,000 Correct answer.

Explanation

The transaction price is allocated on a relative standalone selling price basis. Total standalone selling prices are $120,000 ($96,000 + $24,000), so the equipment receives $120,000 × ($96,000 ÷ $120,000) = $96,000.

Question 50Revenue recognition and contracts with customers

A construction entity enters into a fixed-price contract to build a bridge over four years. The customer controls the asset as it is created and the entity's performance creates an asset with no alternative use and an enforceable right to payment for performance to date. How should revenue be recognised?

  1. Only when the customer pays each progress claim
  2. At completion of the bridge, when the customer takes physical delivery
  3. When the contract is signed, for the full contract value
  4. Over time, using a measure of progress such as costs incurred relative to total expected costs Correct answer.

Explanation

Where the customer controls the asset as it is created, or the asset has no alternative use and the entity has an enforceable right to payment, performance obligations are satisfied over time. Revenue is recognised over time using a measure of progress that faithfully depicts the transfer of control.