I85PREP
⌘ K
CPA Financial Reporting study materials
CPA Financial Reporting study resources

CPA Financial Reporting practice questions

One question at a time. Build your CPA Financial 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 1The financial reporting environment and conceptual framework

What is the primary objective of general purpose financial reporting according to the IASB Conceptual Framework?

  1. To disclose the fair value of every asset and liability at the reporting date
  2. To confirm that the entity will continue operating for at least twelve months
  3. To supply decision-useful information to capital providers Correct answer.
  4. To report taxable income to the revenue authority in the prescribed format for the year

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. Financial reports are not designed to serve tax authorities, to present a complete fair value balance sheet, or to assure users of continuance.

Question 2The financial reporting environment and conceptual framework

Which group is identified in the Conceptual Framework as the primary users of general purpose financial reports?

  1. Government regulators and statistical agencies
  2. Customers and the general public
  3. Investors, lenders and other creditors Correct answer.
  4. Employees and their trade union representatives

Explanation

The Conceptual Framework identifies existing and potential investors, lenders and other creditors as the primary users because they cannot usually demand information directly and must rely on general purpose financial statements. Other groups may find the reports useful, but they are not the primary user group.

Question 3The financial reporting environment and conceptual framework

Under the going concern assumption, financial statements are normally prepared on the basis that the entity:

  1. will be liquidated within the next reporting period
  2. will be sold to a third party at fair value
  3. will continue operating for the foreseeable future Correct answer.
  4. has guaranteed continuity of operations for five years

Explanation

The going concern assumption presumes the entity will continue in operation for the foreseeable future, so assets and liabilities are recognised on a non-liquidation basis. If management intends or is forced to liquidate, a different basis may be required and that fact must be disclosed.

Question 4The financial reporting environment and conceptual framework

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

  1. when the entity's tax return is filed
  2. in the periods in which they occur Correct answer.
  3. only when cash is received or paid
  4. only at the end of the financial year

Explanation

Accrual accounting recognises transactions and events in the periods in which they occur, regardless of when cash is received or paid, so the effects are reported alongside the underlying activity. Cash basis recognition is not permitted for general purpose financial statements prepared under IFRS.

Question 5The financial reporting environment and conceptual framework

How does the Conceptual Framework define equity?

  1. The sum of share capital, retained earnings and all liabilities
  2. The total amount of cash and cash equivalents held at the reporting date
  3. The fair value of the entity's net assets at acquisition
  4. The residual interest in the assets after deducting liabilities Correct answer.

Explanation

Equity is the residual interest in the assets of the entity after deducting all its liabilities; it is not a separately measurable claim but the arithmetic remainder of assets less liabilities. Components such as share capital and retained earnings are presented within equity.

Question 6The financial reporting environment and conceptual framework

Which body is responsible for issuing International Financial Reporting Standards?

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

Explanation

The International Accounting Standards Board is the standard-setting body of the IFRS Foundation and develops and issues IFRS. The Interpretations Committee supports the Board by developing interpretive guidance, while the Trustees provide oversight and governance.

Question 7The financial reporting environment and conceptual framework

Which enhancing qualitative characteristic enables users with a reasonable knowledge of business to comprehend the information provided?

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

Explanation

Understandability is an enhancing qualitative characteristic: information is classified, characterised and presented clearly and concisely so that users with reasonable business knowledge can comprehend it. Comparability, timeliness and verifiability are separate enhancing characteristics.

Question 8The financial reporting environment and conceptual framework

When an entity's financial statements comply with all applicable IFRS requirements, IAS 1 requires the entity to make:

  1. a note describing the accounting software used to prepare the statements
  2. a statement that the financial statements contain no errors of any kind whatsoever
  3. an explicit and unreserved statement of compliance with IFRS Correct answer.
  4. a statement confirming that an auditor's report is attached to the statements

Explanation

IAS 1 requires an entity whose financial statements comply with IFRS to make an explicit and unreserved statement of such compliance in the notes. A claim of absolute freedom from error, an auditor's report, or a software description does not satisfy this requirement.

Question 9The financial reporting environment and conceptual framework

Information has predictive value when it:

  1. can be compared with information about other entities
  2. is free from material error and bias
  3. can be used to forecast future outcomes Correct answer.
  4. is available to users before it loses its capacity to influence decisions

Explanation

Relevance includes predictive value, confirmatory value, or both. Information has predictive value if it can be used as an input to processes that forecast future outcomes. Freedom from error, timeliness and comparability relate to other qualitative characteristics.

Question 10The financial reporting environment and conceptual framework

A portrayal of financial information is neutral when it is:

  1. free from bias in the selection or presentation of information Correct answer.
  2. prepared using the same policies as the prior period
  3. complete in all respects, including all necessary descriptions
  4. supported by sufficient evidence to allow independent agreement

Explanation

Neutrality means the depiction is free from bias in the selection and presentation of information; it is not slanted to produce a favourable impression. Completeness, verifiability and consistency are distinct aspects of faithful representation or of enhancing characteristics.

Question 11The financial reporting environment and conceptual framework

Information is material if omitting, misstating or obscuring it could:

  1. cause the financial statements to be restated in a later period
  2. change the entity's reported profit by more than five per cent
  3. affect the auditor's opinion on the financial statements
  4. influence the decisions of primary users of the statements Correct answer.

Explanation

Materiality is entity-specific: information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that primary users make from the financial statements. The Conceptual Framework does not prescribe a fixed percentage threshold.

Question 12The financial reporting environment and conceptual framework

Under the Conceptual Framework, an asset is defined as:

  1. a present economic resource controlled by the entity as a result of past events Correct answer.
  2. a resource controlled by the entity as a result of a past transaction and expected to generate cash
  3. any item that appears in the statement of financial position at the reporting date
  4. a legal right owned by the entity that can be sold in an active market

Explanation

An asset is a present economic resource controlled by the entity as a result of past events, where an economic resource is a right that has the potential to produce economic benefits. Legal ownership is not required, and not every item presented in the statement of financial position meets the definition.

Question 13The financial reporting environment and conceptual framework

Which element is defined as decreases in economic benefits in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than distributions to holders of equity claims?

  1. Expenses Correct answer.
  2. Distributions to owners
  3. Losses on remeasuring defined benefit obligations
  4. Liabilities

Explanation

Expenses are decreases in economic benefits during the period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than distributions to holders of equity claims. Losses are a category of expense, and liabilities are present obligations rather than decreases in economic benefits.

Question 14The financial reporting environment and conceptual framework

Under the Conceptual Framework, an item is recognised in the financial statements when recognition:

  1. results in an increase in the entity's reported profit
  2. has been approved by the external auditor
  3. gives relevant information and a faithful representation Correct answer.
  4. is required by the entity's own accounting policy manual and applied consistently

Explanation

Recognition is appropriate when it provides users with relevant information and a faithful representation of the item, and when the benefits of the information justify the cost. Accounting policy manuals, effects on reported profit and audit approval are not recognition criteria.

Question 15The financial reporting environment and conceptual framework

Comparability of financial information is enhanced when an entity:

  1. reports only the current period without comparative figures
  2. changes its accounting policies whenever a more favourable treatment exists
  3. uses fair values for all assets in every reporting period
  4. applies accounting policies consistently and discloses changes clearly Correct answer.

Explanation

Comparability requires like things to be reported alike and unlike things to be reported differently. Applying policies consistently, and disclosing any changes and their effects, allows users to identify similarities and differences across periods and entities.

Question 16The financial reporting environment and conceptual framework

Verifiability means that different knowledgeable and independent observers could:

  1. reach consensus that a depiction is a faithful representation Correct answer.
  2. agree that the financial statements comply with tax legislation
  3. confirm that the entity is a going concern
  4. determine the market price of the entity's shares

Explanation

Verifiability means that knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation. It concerns the support for the depiction rather than tax compliance, continuity or share prices.

Question 17The financial reporting environment and conceptual framework

For an asset, value in use is best described as:

  1. the present value of expected future cash flows from the asset Correct answer.
  2. the amount originally paid to acquire the asset
  3. the cost of replacing the asset with an equivalent one today
  4. the price that would be received to sell the asset in the principal market

Explanation

Value in use is a current value measurement for assets: the present value of the cash flows or other economic benefits the entity expects to derive from using the asset and from its eventual disposal. It is entity-specific, unlike fair value, which is market-based.

Question 18The financial reporting environment and conceptual framework

IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in:

  1. a transaction between related parties under common control
  2. the most favourable market available to the entity at any time
  3. a forced transaction between the entity and a single counterparty
  4. an orderly transaction between market participants Correct answer.

Explanation

IFRS 13 defines fair value as 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. It is a market-based exit price, not a forced or related-party price.

Question 19The financial reporting environment and conceptual framework

Under the financial capital maintenance concept, capital is measured as:

  1. the fair value of the entity's issued equity instruments
  2. net assets measured in financial terms Correct answer.
  3. the total amount of cash invested by the owners
  4. the productive capacity of the entity measured in physical units

Explanation

Under financial capital maintenance, capital is measured in financial terms such as net assets, and profit is the increase in that financial capital during the period, excluding transactions with owners. Physical capital maintenance instead measures capital as productive capacity.

Question 20The financial reporting environment and conceptual framework

Which document does the IASB publish to invite public comment on a proposed new standard before finalising it?

  1. An IFRS Taxonomy update
  2. An exposure draft Correct answer.
  3. A conceptual framework discussion paper
  4. A basis for conclusions

Explanation

An exposure draft is the IASB's consultative document that sets out a proposed standard and invites public comment before the Board finalises the standard. Discussion papers, bases for conclusions and taxonomy updates serve other purposes in the due process.

Question 21The financial reporting environment and conceptual framework

Under the Conceptual Framework, derecognition of an asset normally occurs when:

  1. management decides to reclassify the asset within property, plant and equipment
  2. the asset has been fully depreciated over its useful life
  3. the entity loses control of all or part of the asset Correct answer.
  4. the asset's fair value falls below its carrying amount

Explanation

Derecognition normally occurs when the entity loses control of all or part of the asset, so the item no longer meets the definition of an asset. Impairment, full depreciation or reclassification within the same asset class does not remove control and therefore does not result in derecognition.

Question 22The financial reporting environment and conceptual framework

The 'unit of account' concept in the Conceptual Framework refers to:

  1. the right or group of rights to which recognition and measurement apply Correct answer.
  2. the level at which materiality is assessed for the financial statements as a whole
  3. the currency in which the financial statements are presented
  4. the smallest identifiable component of an entity's inventory

Explanation

The unit of account is the right or group of rights to which the recognition and measurement requirements are applied; selecting it affects how an item is recognised and measured. It is not the presentation currency nor a materiality threshold.

Question 23The financial reporting environment and conceptual framework

Which capital maintenance concept requires that profit be measured only after maintaining the entity's productive capacity?

  1. Financial capital maintenance in nominal monetary units
  2. Financial capital maintenance in units of constant purchasing power
  3. Physical capital maintenance Correct answer.
  4. Historical cost capital maintenance

Explanation

Physical capital maintenance measures capital as the entity's productive capacity, and profit is earned only after that capacity has been maintained. Financial capital maintenance measures capital in monetary terms, either nominal or in units of constant purchasing power.

Question 24The financial reporting environment and conceptual framework

The Conceptual Framework describes prudence as:

  1. the exercise of caution when making judgements under conditions of uncertainty Correct answer.
  2. an enhancing characteristic that improves comparability between entities
  3. the deliberate understatement of assets and overstatement of liabilities
  4. a requirement to recognise all gains before they are realised

Explanation

The Conceptual Framework describes prudence as the exercise of caution when making judgements under conditions of uncertainty, which supports neutrality rather than contradicting it. Deliberate understatement or overstatement is bias and is not prudence.

Question 25The financial reporting environment and conceptual framework

An entity has a present obligation to transfer cash only if a specified future event occurs, and that event has not yet occurred. Under the Conceptual Framework, the obligation is recognised as a liability when:

  1. the counterparty has already demanded payment
  2. the entity has the practical ability to avoid the transfer
  3. the future event is highly probable and the amount can be measured reliably
  4. the obligation has the potential to require a transfer of resources Correct answer.

Explanation

A liability exists when the entity has a present obligation to transfer an economic resource as a result of past events, and the obligation has the potential to require such a transfer. Probability thresholds and reliable measurement are no longer part of the liability definition; they are addressed through recognition and disclosure requirements.

Question 26The financial reporting environment and conceptual framework

According to the Conceptual Framework, what is the objective of general purpose financial reporting?

  1. To present a record of all cash receipts and payments made by the entity during the period so that auditors can verify completeness of income
  2. To provide detailed information about the fair value of every asset and liability held by the reporting entity at the end of the period for tax assessment purposes
  3. To enable an entity's management to demonstrate the accuracy of its internal budgeting and cost-control procedures to external regulators
  4. 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.

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. Those decisions include buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of credit.

Question 27The financial reporting environment and conceptual framework

Which group does the Conceptual Framework identify as the primary users of general purpose financial reports?

  1. Government statistics agencies and taxation authorities
  2. Employees, trade unions and local community groups
  3. Existing and potential investors, lenders and other creditors Correct answer.
  4. Financial analysts and credit rating agencies acting on behalf of shareholders

Explanation

The Conceptual Framework identifies existing and potential investors, lenders and other creditors as the primary users, because they cannot require reporting entities to provide information directly to them and must rely on general purpose financial reports. Other parties, such as regulators, employees and the public, may also find the reports useful but are not the primary user group.

Question 28The financial reporting environment and conceptual framework

Management concludes, after considering all available evidence, that it has neither the intention nor the need to liquidate or to cease trading. On which basis should the financial statements be prepared?

  1. On a liquidation basis, with assets measured at their expected realisable amounts
  2. On a break-up basis, with all liabilities presented as current
  3. On a cash basis, recognising transactions only when cash is received or paid
  4. On a going concern basis, with assets and liabilities measured assuming normal operations Correct answer.

Explanation

IAS 1 requires financial statements to be prepared on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. Where the going concern assumption is appropriate, assets and liabilities are measured on the basis that the entity will realise its assets and settle its liabilities in the normal course of business.

Question 29The financial reporting environment and conceptual framework

Under the accrual basis of accounting described in the Conceptual Framework, the effects of transactions and other events are recognised:

  1. When the entity's tax return for the period is finalised and agreed with the tax authority
  2. At the end of the reporting period, regardless of when the underlying transaction occurred
  3. When they occur, in the periods to which they relate, rather than when cash is received or paid Correct answer.
  4. When cash is received or paid, so that reported profit equals net cash flow for the period

Explanation

Accrual accounting recognises the effects of transactions and other events when they occur, in the periods to which they relate, rather than when cash or cash equivalents are received or paid. This gives users information about an entity's economic resources and claims that is more useful for assessing past and future performance than cash receipts and payments alone.

Question 30The financial reporting environment and conceptual framework

Which pair of qualitative characteristics are the fundamental qualitative characteristics in the Conceptual Framework?

  1. Timeliness and understandability
  2. Comparability and verifiability
  3. Relevance and faithful representation Correct answer.
  4. Prudence and conservatism

Explanation

The Conceptual Framework identifies relevance and faithful representation as the two fundamental qualitative characteristics that make financial information useful. Comparability, verifiability, timeliness and understandability are enhancing characteristics, which cannot make information useful if the information is irrelevant or not faithfully represented.

Question 31The financial reporting environment and conceptual framework

A complete depiction of a financial item under the Conceptual Framework includes:

  1. The legal documentation supporting each transaction, reproduced in full in the notes
  2. Every transaction recorded by the entity during the period, regardless of its size or nature
  3. Only the numerical amounts recognised in the primary financial statements, without any narrative
  4. All information necessary for a user to understand the item, including descriptions and explanations Correct answer.

Explanation

Completeness, a component of faithful representation, requires the depiction to include all information necessary for a user to understand the phenomenon being depicted. That includes descriptions and explanations as well as amounts, and it extends to information about the nature and magnitude of uncertainties.

Question 32The financial reporting environment and conceptual framework

An entity transfers legal title to a building to a bank but retains the risks and rewards of ownership, and the arrangement is in substance a secured borrowing. How should the transaction be accounted for?

  1. As a sale, with a note to the financial statements explaining that the entity continues to use the building
  2. As a secured borrowing, with the building retained in the statement of financial position Correct answer.
  3. As a sale, because legal title has been transferred to the bank, with any gain recognised immediately
  4. By not recording the transaction until the legal position and the economic position coincide

Explanation

The Conceptual Framework requires transactions to be accounted for in accordance with their substance and economic reality, and not merely their legal form. Where the risks and rewards of ownership are retained, the arrangement is a financing transaction, so the building stays on the statement of financial position and a liability is recognised.

Question 33The financial reporting environment and conceptual framework

The cost constraint on useful financial reporting means that:

  1. Financial statements should be prepared at the lowest possible cost to the reporting entity
  2. The cost of providing information must be justified by the benefits of that information Correct answer.
  3. Entities should omit information that is expensive to produce, even where it is material to users
  4. Standard setters must reject any reporting requirement that imposes a cost on preparers

Explanation

The Conceptual Framework states that reporting financial information imposes costs and that those costs must be justified by the benefits of reporting that information. The constraint applies to standard setters when developing requirements and to preparers when deciding how to present and disclose information.

Question 34The financial reporting environment and conceptual framework

Under the Conceptual Framework, a liability is defined as:

  1. A reduction in the entity's equity that arises from distributions made to the owners
  2. A present obligation of the entity to transfer an economic resource as a result of past events Correct answer.
  3. A contractual right to receive cash or another financial asset from a counterparty
  4. A future obligation that the entity expects to settle when it has sufficient funds available

Explanation

A liability is a present obligation of the entity to transfer an economic resource as a result of past events. The definition has three elements: an obligation, the potential to transfer an economic resource, and a past event that created the obligation.

Question 35The financial reporting environment and conceptual framework

Under the Conceptual Framework, equity is defined as:

  1. The residual interest in the assets of the entity after deducting all its liabilities Correct answer.
  2. The total amount of capital contributed by the entity's shareholders since incorporation
  3. The difference between the entity's cash resources and its total borrowings at the year end
  4. The accumulated profits retained by the entity that are available for distribution to owners

Explanation

Equity is the residual interest in the assets of the entity after deducting all its liabilities. It is a residual because it ranks after liabilities, so its measurement depends on the measurement of assets and liabilities.

Question 36The financial reporting environment and conceptual framework

Land was purchased for 500,000 and its current market value at the reporting date is 800,000. Under the historical cost measurement basis, the land is measured at:

  1. 800,000, being the amount that would be received to sell it at the reporting date
  2. 650,000, being the average of its cost and its current market value
  3. 500,000, being the consideration given to acquire it Correct answer.
  4. The higher of cost and current market value, in accordance with the prudence convention

Explanation

Under historical cost, an asset is measured at the value of the costs incurred in acquiring or creating it, adjusted where required for depreciation, amortisation or impairment. Current market value is a current value measurement basis, not historical cost.

Question 37The financial reporting environment and conceptual framework

No IFRS deals specifically with a transaction, and no IFRS deals with similar or related issues. Under IAS 8, the next source of guidance for management to consider is:

  1. The accounting policy the entity has applied in previous periods to economically similar transactions
  2. Established industry practice, provided that practice is widespread among entities in the same sector
  3. The definitions, recognition criteria and measurement concepts in the Conceptual Framework Correct answer.
  4. The most recent pronouncements issued by other standard-setting bodies that use a similar framework

Explanation

IAS 8 requires management to refer first to IFRS requirements dealing with similar and related issues, and then to the definitions, recognition criteria and measurement concepts in the Conceptual Framework. Pronouncements of other standard setters may be considered afterwards, but only where they do not conflict with IFRS sources.

Question 38The financial reporting environment and conceptual framework

What is the role of the IFRS Interpretations Committee?

  1. To provide independent funding for the organisation and to appoint the members of the International Accounting Standards Board
  2. To approve and issue new International Financial Reporting Standards on behalf of the IASB Trustees
  3. To enforce compliance with IFRS in national jurisdictions and to sanction entities that depart from its requirements
  4. To develop narrow-scope interpretations of how IFRS requirements apply to specific fact patterns Correct answer.

Explanation

The IFRS Interpretations Committee works with the IASB to support the consistent application of IFRS by developing narrow-scope interpretations of how requirements apply to particular fact patterns. It addresses application questions that are likely to be widespread and that cannot be resolved through the standard-setting process itself.

Question 39The financial reporting environment and conceptual framework

The Conceptual Framework for Financial Reporting states that its primary purpose is to:

  1. Establish the auditing procedures required to verify the amounts presented in financial statements
  2. Assist the IASB in developing IFRS that are based on consistent concepts Correct answer.
  3. Prescribe the format and content of general purpose financial statements for all reporting entities
  4. Provide a complete set of accounting rules to be applied whenever IFRS is silent on an issue

Explanation

The Conceptual Framework states that its purpose is to assist the IASB in developing Standards based on consistent concepts, to assist preparers in developing consistent accounting policies when no Standard applies, and to assist all parties in understanding and interpreting the Standards. It is a conceptual document rather than a rulebook or a presentation standard.

Question 40The financial reporting environment and conceptual framework

Under the Conceptual Framework, income is defined as:

  1. The excess of the total consideration received from customers over the costs incurred in generating those sales during the period
  2. Cash received from customers during the period, measured net of any discounts and allowances granted to them
  3. Increases in equity arising from transactions with the entity's owners in their capacity as owners, such as share issues
  4. Increases in assets or decreases in liabilities that result in increases in equity, other than contributions from holders of equity claims Correct answer.

Explanation

Income is defined as increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from holders of equity claims. The definition is stated in terms of changes in assets and liabilities, so income is not measured simply by cash received or by the margin on sales.

Question 41Presentation of financial statements and fair value measurement

Under IAS 1, an entity prepares its financial statements on a going concern basis unless:

  1. the entity's current liabilities exceed its current assets at the reporting date
  2. the entity reported a loss for the current period and negative operating cash flows at the reporting date
  3. management intends to liquidate the entity or cease trading, or has no realistic alternative but to do so Correct answer.
  4. the entity breached a bank loan covenant at some point during the reporting period

Explanation

The going concern basis is used unless management intends to liquidate or cease trading, or has no realistic alternative but to do so. Indicators of possible doubt, such as losses, a working capital deficiency or a covenant breach, require management to assess the entity's ability to continue but do not by themselves require a different basis of preparation.

Question 42Presentation of financial statements and fair value measurement

Under IFRS 13, fair value is best described as:

  1. the price paid to acquire an asset or received to assume a liability in the transaction in which the item was originally acquired or assumed
  2. the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date Correct answer.
  3. the amount the entity expects to realise from the asset, based on management's intended use and its own expectations of future cash flows
  4. the price received in a forced sale or liquidation at the measurement date, net of the transaction costs incurred

Explanation

IFRS 13 defines fair value as a market-based exit price in an orderly transaction between market participants at the measurement date. It is not an entity-specific value, not an entry price, and not a distressed price.

Question 43Presentation of financial statements and fair value measurement

Under the IFRS 13 fair value hierarchy, Level 1 inputs are:

  1. quoted prices for similar assets or liabilities in active markets, plus observable corroborating market data
  2. quoted prices for identical assets or liabilities, adjusted to reflect the transaction costs the entity would incur
  3. inputs derived from observable market data, such as yield curves and credit spreads quoted in active markets
  4. unadjusted quoted prices in active markets for identical assets or liabilities the entity can access Correct answer.

Explanation

Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date. No adjustment is made for the size of the holding or for transaction costs.

Question 44Presentation of financial statements and fair value measurement

Under IAS 1, assets and liabilities are offset in the statement of financial position:

  1. whenever the entity holds a legal right of set-off against the same counterparty
  2. whenever offsetting makes the statement of financial position more concise and easier to read
  3. only when offsetting is required or permitted by an IFRS Correct answer.
  4. when the entity expects to settle the amounts net at some future date agreed with the counterparty

Explanation

IAS 1 prohibits offsetting unless it is required or permitted by an IFRS, because offsetting would diminish users' understanding of the transactions and conditions. Measuring an asset net of a valuation allowance, such as a doubtful debt allowance, is not offsetting.

Question 45Presentation of financial statements and fair value measurement

An entity has a bank loan with a contractual maturity 18 months after the reporting date. At the reporting date the entity had breached a covenant, which makes the loan repayable on demand. The lender agreed, two months after the reporting date but before the financial statements were authorised for issue, not to demand repayment. How is the loan classified at the reporting date?

  1. Current, because the entity does not have an unconditional right at the reporting date to defer settlement for at least twelve months Correct answer.
  2. Non-current, because the contractual maturity is more than twelve months after the reporting date
  3. Non-current, because the lender agreed before the financial statements were authorised for issue not to demand repayment
  4. Current only if the entity expects the lender to demand repayment within twelve months of the reporting date

Explanation

Under IAS 1, a liability is current when the entity does not have an unconditional right to defer settlement for at least twelve months after the reporting date. A covenant breach that makes the loan repayable on demand gives the entity no such right, and a waiver obtained only after the reporting date does not change the classification.

Question 46Presentation of financial statements and fair value measurement

Which item is presented in other comprehensive income and will never be reclassified subsequently to profit or loss?

  1. Gains on remeasuring debt instruments measured at fair value through other comprehensive income
  2. Changes in the revaluation surplus relating to property, plant and equipment Correct answer.
  3. The effective portion of gains and losses on cash flow hedges
  4. Exchange differences arising on translating the financial statements of a foreign operation

Explanation

IAS 1 requires items of other comprehensive income to be grouped into those that will and those that will not be reclassified subsequently to profit or loss. A revaluation surplus is never reclassified to profit or loss; it may be transferred directly to retained earnings within equity.

Question 47Presentation of financial statements and fair value measurement

In the statement of changes in equity, total comprehensive income for the period is presented:

  1. showing only the amount attributable to the owners of the parent
  2. showing separately the amounts attributable to owners of the parent and to non-controlling interests Correct answer.
  3. allocated between owners of the parent and non-controlling interests only in the statement of profit or loss
  4. showing only the amount attributable to non-controlling interests

Explanation

IAS 1 requires the statement of changes in equity to show total comprehensive income for the period, with the split between amounts attributable to owners of the parent and to non-controlling interests. The same attribution is required for profit or loss and for each component of other comprehensive income.

Question 48Presentation of financial statements and fair value measurement

Under IFRS 13, the principal market for an asset or liability is:

  1. the market that offers the highest price for the asset or the lowest price for the liability
  2. the most advantageous market, determined after taking into account transaction and transport costs
  3. the market with the greatest volume and level of activity for the asset or liability Correct answer.
  4. the market in which the entity has historically transacted most frequently for that item

Explanation

IFRS 13 presumes that the principal market is the market with the greatest volume and level of activity for the asset or liability. The fair value measurement uses the price in the principal market even if a different market would produce a more favourable price.

Question 49Presentation of financial statements and fair value measurement

An entity owns land used as a car park. Market participants would use the land as a development site, which is physically possible, legally permissible and financially feasible. The entity intends to keep operating the car park. Under IFRS 13, the fair value of the land is:

  1. its highest and best use as a development site, even though the entity intends to keep operating the car park Correct answer.
  2. the lower of the two values, in accordance with the principle of prudence
  3. the average of the values determined for the two possible uses of the land
  4. its current use as a car park, because that is the use to which the entity has already committed the asset

Explanation

Fair value of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use. That use is determined by what is physically possible, legally permissible and financially feasible, regardless of the entity's intended use.

Question 50Presentation of financial statements and fair value measurement

An entity holds a corporate bond for which no quoted price exists. It measures the bond using a matrix pricing model based on observable yields and credit spreads for comparable instruments. In the fair value hierarchy, this measurement is:

  1. Level 1, because all of the inputs are derived from quoted prices in active markets for comparable instruments
  2. Level 2, because the inputs are observable, directly or indirectly, other than quoted prices for the identical instrument Correct answer.
  3. Level 3, because a valuation model rather than a directly quoted price has been used
  4. Level 3, because there is no quoted price available for the identical bond in an active market

Explanation

The fair value hierarchy categorises inputs, not valuation techniques. Observable inputs for comparable instruments, such as yields and spreads, are Level 2 inputs.