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CPA Canada Core 1 practice questions

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Question 1Financial Reporting

Under IFRS, which framework does an entity apply first when selecting an accounting policy for a transaction for which no specific standard exists?

  1. The accounting policies of the entity's closest competitor in the same industry
  2. The tax basis of the transaction under local income tax legislation
  3. The previously applied ASPE handbook section for private enterprises
  4. The Conceptual Framework, then requirements in IFRS Standards dealing with similar issues Correct answer.

Explanation

IAS 8 requires management to use judgement and refer first to the Conceptual Framework, then to IFRS Standards and Interpretations dealing with similar and related issues. Other sources such as industry practice are permitted only after those are considered. Tax rules and another framework are not authoritative under IFRS.

Question 2Financial Reporting

An entity changes an accounting policy that was not required by a new standard and applies it retrospectively. How is the change reported?

  1. As a change in accounting estimate recognized prospectively in profit or loss
  2. As a prior period adjustment to opening retained earnings with restated comparatives Correct answer.
  3. As a component of other comprehensive income in the current period
  4. As an extraordinary item disclosed only in the notes

Explanation

IAS 8 requires voluntary policy changes to be applied retrospectively, restating comparatives and adjusting the opening balance of each affected component of equity. The cumulative effect is presented as an adjustment to opening retained earnings rather than in current profit or loss.

Question 3Financial Reporting

An entity's inventory cost of $80,000 has a net realizable value of $72,000 at year end. Under IAS 2, what amount is presented for inventory?

  1. $76,000
  2. $72,000 Correct answer.
  3. $68,000
  4. $80,000

Explanation

IAS 2 requires inventory to be measured at the lower of cost and net realizable value. Because NRV of $72,000 is below cost of $80,000, the writedown of $8,000 is recognized and inventory is reported at $72,000.

Question 4Financial Reporting

Which cost is excluded from the cost of property, plant and equipment under IAS 16?

  1. Directly attributable delivery and handling costs
  2. Site preparation costs necessary for installation
  3. Costs of relocating staff to the new facility Correct answer.
  4. Professional fees for legal title transfer

Explanation

IAS 16 lists directly attributable costs such as delivery, site preparation, installation and professional fees as part of cost. Costs of relocating staff or opening a new facility are not necessary to bring the asset to its working condition and are expensed.

Question 5Financial Reporting

An entity uses the revaluation model for a building. The carrying amount is $500,000 and the fair value is $560,000; a prior revaluation decrease of $40,000 was recognized in profit or loss and not yet reversed. How is the increase recognized?

  1. $40,000 in other comprehensive income and $20,000 in profit or loss
  2. $60,000 entirely in other comprehensive income
  3. $60,000 entirely in profit or loss
  4. $40,000 in profit or loss and $20,000 in other comprehensive income Correct answer.

Explanation

IAS 16 requires a revaluation increase to be recognized in OCI, except that it reverses a previous decrease for the same asset that was expensed. The $40,000 prior decrease is reversed through profit or loss, and the remaining $20,000 goes to OCI.

Question 6Financial Reporting

Which subsequent measurement model is permitted for an intangible asset with a finite useful life under IAS 38?

  1. Revaluation model only, regardless of market conditions
  2. Fair value model through profit or loss each period
  3. Cost model only, with no alternative permitted
  4. Cost model or revaluation model, provided an active market exists Correct answer.

Explanation

IAS 38 permits either the cost model or the revaluation model for intangible assets, but the revaluation model requires an active market. Because active markets for intangibles are rare, the cost model is common in practice.

Question 7Financial Reporting

Development costs of $300,000 qualify for capitalization under IAS 38. Amortization begins when the asset is available for use and the useful life is five years with no residual value. What is the amortization expense for the first full year?

  1. $300,000
  2. $30,000
  3. $0
  4. $60,000 Correct answer.

Explanation

Capitalized development costs are amortized over the useful life once the asset is available for use. With a five-year life and no residual value, annual amortization is $300,000 divided by five, or $60,000.

Question 8Financial Reporting

A machine has a carrying amount of $90,000, a remaining useful life of five years, and undiscounted future cash flows of $100,000. Its fair value less costs of disposal is $70,000 and value in use is $75,000. What is the impairment loss under IAS 36?

  1. $0
  2. $30,000
  3. $20,000
  4. $15,000 Correct answer.

Explanation

Recoverable amount is the higher of fair value less costs of disposal ($70,000) and value in use ($75,000), so it is $75,000. The impairment loss is the carrying amount of $90,000 less $75,000, equal to $15,000.

Question 9Financial Reporting

Under IFRS 15, when is revenue from a performance obligation satisfied over time recognized?

  1. Only when the customer makes final payment
  2. When the entity has completed all obligations and issued an invoice
  3. At contract signing when the price is fixed
  4. Progressively, as control of the good or service transfers to the customer Correct answer.

Explanation

IFRS 15 requires revenue to be recognized when control of the promised good or service transfers to the customer. For obligations satisfied over time, revenue is recognized progressively based on progress toward completion.

Question 10Financial Reporting

A contract has a transaction price of $500,000 and total estimated costs of $400,000. At year end costs incurred are $100,000, and the entity measures progress using costs incurred. What revenue is recognized to date?

  1. $125,000 Correct answer.
  2. $100,000
  3. $400,000
  4. $500,000

Explanation

Progress is measured as costs incurred over total estimated costs, or 25%. Revenue recognized to date is 25% of the $500,000 transaction price, equal to $125,000.

Question 11Financial Reporting

Which item meets the IFRS 15 definition of a distinct good or service in a contract with multiple promises?

  1. A good the customer can benefit from on its own and that is separately identifiable in the contract Correct answer.
  2. An administrative task performed by the entity that does not transfer a good or service
  3. Any good delivered separately, regardless of whether the customer can benefit from it alone
  4. A good bundled with another good that is highly integrated and cannot be separated

Explanation

A promised good or service is distinct if the customer can benefit from it on its own or with readily available resources, and it is separately identifiable from other promises. Both criteria must be met to be a separate performance obligation.

Question 12Financial Reporting

An entity sells equipment with a two-year warranty that provides assurance the equipment meets agreed specifications. How is the warranty accounted for under IFRS 15 and IAS 37?

  1. As a separate performance obligation if the customer has the option to purchase it separately; otherwise as a provision under IAS 37 Correct answer.
  2. As a reduction of revenue recognized evenly over the warranty period
  3. Always as a contingent asset disclosed in the notes
  4. Always as a separate performance obligation allocated part of the transaction price

Explanation

An assurance-type warranty is not a separate performance obligation and is accounted for as a provision under IAS 37. A service-type warranty, such as one sold separately, is a distinct service and a separate performance obligation.

Question 13Financial Reporting

Under IAS 37, when should a provision be recognized?

  1. Only when a legal claim has been filed against the entity
  2. When a present obligation exists, an outflow is probable, and the amount can be reliably estimated Correct answer.
  3. When a possible obligation is remote but measurable
  4. Whenever management intends to incur a future expenditure

Explanation

IAS 37 requires a provision when a present obligation from a past event exists, an outflow of resources is probable, and a reliable estimate can be made. If any criterion is not met, no provision is recognized.

Question 14Financial Reporting

A lawsuit is assessed as having a 40% chance the entity will lose and pay $200,000. How is this reported under IAS 37?

  1. As a contingent liability disclosed in the notes, with no provision recognized Correct answer.
  2. As a provision of $200,000
  3. As a contingent asset disclosed in the notes
  4. As a provision of $80,000 based on expected value

Explanation

A provision requires a probable outflow, generally interpreted as more likely than not. A 40% likelihood is below that threshold, so the item is a contingent liability that is disclosed rather than recognized.

Question 15Financial Reporting

Which condition must be met for a deferred tax asset to be recognized under IAS 12?

  1. It is probable that taxable profit will be available against which the deductible temporary difference can be used Correct answer.
  2. The related asset is measured using the revaluation model
  3. The entity has reported taxable profits in every one of the past five years
  4. The tax authority has formally approved the carryforward

Explanation

IAS 12 recognizes a deferred tax asset only to the extent it is probable that taxable profit will be available to use the deductible temporary difference or unused tax loss. This assessment considers future taxable profits and tax planning opportunities.

Question 16Financial Reporting

An asset has a carrying amount of $100,000 and a tax base of $70,000. The tax rate is 25%. What is the deferred tax consequence?

  1. No deferred tax is recognized
  2. Deferred tax liability of $25,000
  3. Deferred tax asset of $7,500
  4. Deferred tax liability of $7,500 Correct answer.

Explanation

A taxable temporary difference of $30,000 arises because the carrying amount exceeds the tax base. Multiplying by the 25% tax rate gives a deferred tax liability of $7,500.

Question 17Financial Reporting

Under IFRS 16, how does a lessee initially measure a lease liability?

  1. At the initial direct costs incurred by the lessee
  2. At the present value of lease payments not paid at the commencement date, discounted using the interest rate implicit in the lease or the lessee's incremental borrowing rate Correct answer.
  3. At the fair value of the underlying asset at inception
  4. At the total undiscounted lease payments over the lease term

Explanation

IFRS 16 requires the lease liability to be measured at the present value of remaining lease payments, discounted using the rate implicit in the lease or, if not readily determinable, the lessee's incremental borrowing rate. The right-of-use asset is adjusted for initial direct costs, but the liability is not.

Question 18Financial Reporting

A lessee recognizes a right-of-use asset of $200,000 and a lease liability of $200,000 for a five-year lease. Which statement describes the expense pattern in the early years of the lease?

  1. Depreciation is not recognized because the asset is leased
  2. Interest expense on the liability is higher in early years, so total expense is front-loaded compared with straight-line rent Correct answer.
  3. Interest expense increases each year as the liability grows
  4. Total expense is recognized evenly as a single operating lease expense each year

Explanation

Under IFRS 16 the lessee recognizes depreciation of the right-of-use asset on a straight-line basis and interest on the lease liability using the effective interest method. Because interest is highest when the liability is largest, total expense is higher in early years.

Question 19Financial Reporting

Which item is recognized in other comprehensive income rather than profit or loss?

  1. Interest expense on a bank loan
  2. Remeasurement gains and losses on a defined benefit obligation Correct answer.
  3. Depreciation of manufacturing equipment
  4. Impairment loss on trade receivables

Explanation

IAS 19 requires remeasurements of the net defined benefit liability, including actuarial gains and losses, to be recognized in other comprehensive income. They are not subsequently reclassified to profit or loss.

Question 20Financial Reporting

An entity has 1,000 outstanding shares and declares a 10% share dividend (bonus issue). How are earnings per share affected under IAS 33?

  1. The weighted average number of shares is adjusted retroactively as if the bonus issue occurred at the beginning of the earliest period presented Correct answer.
  2. No adjustment is made because no cash was received
  3. The prior period EPS is left unchanged and only the current period is adjusted
  4. The bonus issue is treated as a new issue from the date of declaration

Explanation

IAS 33 treats a bonus issue as if it had occurred at the beginning of the earliest period presented. The weighted average number of ordinary shares for all periods is adjusted retroactively, and prior period EPS is restated.

Question 21Financial Reporting

Which of the following is a related party of an entity under IAS 24?

  1. A government department that collects sales tax from the entity
  2. A member of key management personnel of the entity Correct answer.
  3. A customer that purchases goods on standard credit terms
  4. A trade union representing the entity's production employees

Explanation

IAS 24 defines related parties to include key management personnel, close family members, and entities controlled or significantly influenced by them. Ordinary customers, tax authorities and trade unions are not related parties solely because of those relationships.

Question 22Financial Reporting

An entity issues 100,000 ordinary shares at $10 each. Issue costs of $30,000 are incurred. How are the issue costs treated under IAS 32?

  1. Added to the share capital account as a separate component
  2. Recognized as an expense in profit or loss immediately
  3. Deducted from equity, reducing the proceeds recorded Correct answer.
  4. Recognized as an intangible asset and amortized

Explanation

IAS 32 requires incremental costs directly attributable to issuing equity instruments to be deducted from equity, net of tax. They are not expensed because they relate to a transaction with owners.

Question 23Financial Reporting

Under IAS 7, which item is classified as a financing activity?

  1. Interest received on a short-term investment
  2. Purchase of property, plant and equipment for cash
  3. Repayment of the principal of a bank loan Correct answer.
  4. Cash received from the sale of goods to customers

Explanation

IAS 7 classifies changes in borrowings as financing activities, including repayment of loan principal. Sales receipts and asset purchases are operating and investing activities respectively.

Question 24Financial Reporting

An entity prepares interim financial statements for the first quarter. Which is required under IAS 34?

  1. A condensed statement of financial position, statement of comprehensive income, statement of changes in equity and statement of cash flows Correct answer.
  2. A statement of financial position and cash flow statement only
  3. A full set of annual financial statements with all annual disclosures repeated
  4. Only a statement of comprehensive income for the quarter

Explanation

IAS 34 requires a condensed set of financial statements including each of the four primary statements, plus selected explanatory notes. It does not require the full annual disclosure set.

Question 25Financial Reporting

An entity has a loan payable of $1,000,000 due in 18 months. After the reporting date but before the financial statements are authorized for issue, the entity refinances the loan on a long-term basis. How is the loan classified at the reporting date under IAS 1?

  1. Current, because the original loan was due within two years
  2. Current, because refinancing occurred after the reporting date regardless of terms
  3. Non-current only if the lender agreed before the reporting date
  4. Non-current, because the entity had a right at the reporting date to defer settlement for at least twelve months after refinancing completed before authorization Correct answer.

Explanation

IAS 1 classification depends on rights that exist at the reporting date, but a refinancing completed before the financial statements are authorized for issue can support non-current classification when the new terms provide a right to defer settlement beyond twelve months.

Question 26Financial Reporting

Under IAS 1, which basis of presentation must an entity use when preparing general purpose financial statements?

  1. Going concern basis, unless management intends to liquidate Correct answer.
  2. Tax basis, to align with the entity's filed returns
  3. Historical cost basis only, with no revaluations permitted
  4. Cash basis, because it best reflects liquidity

Explanation

IAS 1 requires financial statements to be prepared on a going concern basis unless management either intends to liquidate the entity or has no realistic alternative but to do so. When going concern is inappropriate, the statements must be prepared on a different basis and that basis disclosed. The other choices describe measurement or tax conventions that IAS 1 does not impose as the overall presentation basis.

Question 27Financial Reporting

An entity changes an accounting policy that was previously applied, and the change qualifies as voluntary. Under IAS 8, how should the change generally be accounted for?

  1. Retrospectively, but only for items affecting future periods
  2. Retrospectively, with prior period amounts restated and opening retained earnings adjusted Correct answer.
  3. Prospectively, with the effect disclosed only in the notes
  4. Prospectively, with the cumulative effect recognized in profit or loss

Explanation

IAS 8 requires voluntary changes in accounting policy to be applied retrospectively, restating comparative information and adjusting the opening balance of each affected component of equity. Prospective treatment is limited to situations where retrospective application is impracticable or where a transition provision requires it. The cumulative effect is therefore not simply run through current profit or loss.

Question 28Financial Reporting

An entity's inventory cost includes a fixed production overhead allocation based on normal capacity of 10,000 units. Actual output was 7,000 units. Under IAS 2, how is the unallocated overhead treated?

  1. Added to the cost of goods sold only when the inventory is sold
  2. Capitalized in inventory as part of the fixed overhead allocation
  3. Deferred and allocated to future production periods
  4. Recognized as an expense in the period incurred Correct answer.

Explanation

IAS 2 requires fixed production overhead to be allocated based on normal capacity, so amounts relating to abnormally low production are not capitalized. The unallocated overhead arising from idle capacity must be expensed in the period it is incurred. This prevents inventory from carrying costs that do not reflect normal production efficiency.

Question 29Financial Reporting

Which cost may be capitalized as part of the cost of property, plant and equipment under IAS 16?

  1. Costs of conducting business in a new location
  2. Administrative overheads of the purchasing department
  3. Initial delivery and handling costs of the asset Correct answer.
  4. Costs of relocating staff to the new facility

Explanation

IAS 16 includes in the cost of an item of PPE its purchase price, directly attributable costs of bringing the asset to the location and condition for intended use, and initial estimates of dismantling costs. Delivery and handling charges are directly attributable costs. Costs of opening a new facility, relocating staff, or general administration are excluded because they are not necessary to bring the asset to working condition.

Question 30Financial Reporting

A building with a carrying amount of $800,000 is revalued to $950,000. This is the first revaluation, and no prior revaluation surplus exists for the asset. How is the increase recognized under IAS 16?

  1. In profit or loss as a gain on revaluation
  2. As deferred income amortized over the remaining useful life
  3. As a reduction of accumulated depreciation in profit or loss
  4. In other comprehensive income and accumulated in equity as a revaluation surplus Correct answer.

Explanation

Under IAS 16, an increase in carrying amount on revaluation is recognized in other comprehensive income and accumulated in equity under the heading revaluation surplus, unless it reverses a previous revaluation decrease recognized in profit or loss. Because this is the first revaluation, no such reversal applies. The surplus is not amortized or recognized as deferred income.

Question 31Financial Reporting

An entity exchanges an old machine for a new machine from an unrelated party and the exchange has commercial substance. The old machine has a carrying amount of $40,000 and a fair value of $55,000. The new machine has a fair value of $60,000, and the entity pays $5,000 cash. At what amount should the new machine initially be measured under IAS 16?

  1. $55,000
  2. $60,000 Correct answer.
  3. $45,000
  4. $40,000

Explanation

When an exchange of assets has commercial substance, IAS 16 requires the acquired asset to be measured at fair value unless the fair value of neither the asset received nor the asset given up is reliably measurable. Here the new machine's fair value of $60,000 is reliable, so that amount is the initial carrying amount. The $15,000 gain on the old machine is recognized in profit or loss.

Question 32Financial Reporting

Under IAS 36, what is the recoverable amount of an asset?

  1. The undiscounted future cash flows expected from the asset
  2. The higher of fair value less costs of disposal and value in use Correct answer.
  3. The carrying amount less accumulated depreciation
  4. The lower of fair value less costs of disposal and value in use

Explanation

IAS 36 defines recoverable amount as the higher of an asset's fair value less costs of disposal and its value in use. An impairment loss arises when carrying amount exceeds recoverable amount. Using the higher of the two measures reflects that the entity would rationally choose the more advantageous recovery route.

Question 33Financial Reporting

A cash-generating unit has goodwill of $30,000 and other net assets of $120,000. Recoverable amount is $130,000, and the entity has no impairment policy for corporate assets. How is the $20,000 impairment loss allocated under IAS 36?

  1. $20,000 allocated pro rata across all assets including goodwill
  2. $20,000 to goodwill, with the remaining loss allocated to other assets
  3. $20,000 to goodwill only Correct answer.
  4. $20,000 to the other net assets only

Explanation

IAS 36 requires an impairment loss for a cash-generating unit to be allocated first to reduce the carrying amount of any goodwill allocated to the unit. Only after goodwill is reduced to zero are the other assets of the unit reduced pro rata. Because the loss of $20,000 is less than the goodwill of $30,000, the entire loss is charged to goodwill.

Question 34Financial Reporting

Under IAS 38, how should research expenditure be accounted for?

  1. Recognized as an expense when incurred Correct answer.
  2. Deferred until the related project generates revenue
  3. Capitalized and amortized over the expected benefit period
  4. Capitalized if the entity can demonstrate technical feasibility

Explanation

IAS 38 prohibits recognizing research expenditure as an intangible asset and requires it to be expensed when incurred. Capitalization is permitted only for development expenditure that meets all the specified criteria. Technical feasibility is one of those development criteria and does not apply to research.

Question 35Financial Reporting

An entity holds a patent with an indefinite useful life. Under IAS 38, how is the patent treated after initial recognition?

  1. Amortized over 20 years, the legal life of the patent
  2. Not amortized but tested for impairment annually and whenever indicators exist Correct answer.
  3. Carried at cost with no impairment testing until disposal is contemplated
  4. Amortized over the shorter of legal and economic life

Explanation

IAS 38 requires an intangible asset with an indefinite useful life not to be amortized. Instead, it must be tested for impairment annually and whenever there is an indication that it may be impaired, and the useful life must be reviewed each period. Legal life alone does not determine the useful life.

Question 36Financial Reporting

Under IFRS 15, how should an entity account for consideration paid to a customer that is not in exchange for a distinct good or service?

  1. Recognize it as a reduction of revenue unless it is a payment for a distinct good or service Correct answer.
  2. Recognize it as a selling expense in the period paid
  3. Recognize it as a contract asset until the related performance obligation is satisfied
  4. Recognize it as an intangible asset amortized over the contract term

Explanation

IFRS 15 requires consideration payable to a customer to be treated as a reduction of the transaction price, and therefore of revenue, unless it is in exchange for a distinct good or service that the entity receives. The reduction is recognized when the later of the related revenue recognition or the payment occurs. This prevents grossing up revenue and expenses.

Question 37Financial Reporting

A contract includes a right of return for a product sold for $10,000. Based on experience, the entity expects 8% of goods to be returned. Under IFRS 15, how is the expected return reflected at the sale date?

  1. Recognize full revenue of $10,000 and record no liability
  2. Defer all revenue until the return window closes
  3. Recognize revenue of $9,200 and a refund liability of $800 Correct answer.
  4. Recognize revenue of $10,000 and a contingent asset of $800

Explanation

IFRS 15 requires revenue to be recognized only for goods not expected to be returned, with a refund liability recognized for the expected return. The entity also recognizes a right-of-recovery asset for the expected returned goods, measured by reference to their former carrying amount. Recognizing full revenue would overstate the entity's performance obligation satisfied.

Question 38Financial Reporting

Under IFRS 15, which indicator suggests that an entity is acting as a principal rather than an agent in a transaction?

  1. The entity earns a fixed commission per transaction
  2. The entity is primarily responsible for fulfilling the promise to provide the good or service Correct answer.
  3. The entity does not control the good before it is transferred to the customer
  4. The entity's consideration is a fixed percentage of the sales price

Explanation

IFRS 15 lists indicators of control, including primary responsibility for fulfilling the promise, inventory risk, and discretion in setting the price. An entity that is primarily responsible for the promised good or service generally controls it and is therefore a principal recognizing gross revenue. Fixed commissions and percentage-based consideration point toward an agency relationship.

Question 39Financial Reporting

An entity has a provision for restructuring. Under IAS 37, when does a restructuring provision qualify for recognition?

  1. When the board announces an intention to consider restructuring in the next year
  2. When management has approved a detailed plan but has not communicated it to those affected
  3. When the restructuring is expected to improve future profitability
  4. When the entity has a present obligation arising from a detailed formal plan communicated to those affected before the reporting date Correct answer.

Explanation

IAS 37 requires a constructive obligation for restructuring to exist only when there is a detailed formal plan and a valid expectation has been raised in those affected that the entity will carry out the restructuring. Communication before the reporting date is essential. Mere intention or internal approval without communication does not create a present obligation.

Question 40Financial Reporting

An entity is involved in a dispute with a customer and its legal counsel advises that an outflow is possible but not probable. Under IAS 37, how should this be reported?

  1. Recognize a provision for the best estimate of the loss
  2. Recognize a provision only if the amount can be measured reliably
  3. Recognize a contingent asset and disclose it in the notes
  4. Disclose a contingent liability unless the possibility of outflow is remote Correct answer.

Explanation

IAS 37 requires a provision only when an outflow is probable and the amount can be reliably estimated. When the outflow is possible rather than probable, the obligation is a contingent liability that is disclosed unless the possibility of outflow is remote. Recognition is therefore not appropriate in this situation.

Question 41Financial Reporting

An entity issues a financial instrument that is redeemable at the holder's option for a fixed cash amount and pays discretionary dividends. Under IAS 32, how is the instrument classified?

  1. Entirely as equity because dividends are discretionary
  2. As a compound instrument split between liability and equity based on relative fair values
  3. As equity until the holder exercises the redemption option
  4. As a financial liability because the entity has an obligation to deliver cash Correct answer.

Explanation

IAS 32 classifies an instrument as a financial liability when the issuer has an obligation to deliver cash or another financial asset, and a redemption feature at the holder's option creates such an obligation. Discretion over dividends does not override the contractual obligation to redeem. A compound instrument arises only when the instrument contains both a liability and an equity component, such as a convertible bond.

Question 42Financial Reporting

Under IFRS 9, at what amount are most trade receivables initially measured?

  1. Fair value plus transaction costs in all cases
  2. Transaction price, which is generally the fair value of the consideration receivable Correct answer.
  3. Amortized cost determined using the effective interest method
  4. The present value of expected credit losses

Explanation

IFRS 9 requires financial assets, including most trade receivables, to be initially measured at fair value, which for a short-term receivable without a significant financing component is generally the transaction price. Trade receivables without a significant financing component are measured at the transaction price under IFRS 15. Expected credit losses are recognized subsequently as a loss allowance, not as initial measurement.

Question 43Financial Reporting

An entity holds a debt investment measured at amortized cost. Under IFRS 9, which impairment model applies?

  1. Incurred loss model recognizing losses only after default
  2. Fair value model recognizing all changes in profit or loss
  3. Expected credit loss model with a loss allowance updated at each reporting date Correct answer.
  4. Specific identification of losses after a credit event occurs

Explanation

IFRS 9 replaced the incurred loss approach with a forward-looking expected credit loss model. A loss allowance is recognized at an amount equal to 12-month expected credit losses, or lifetime expected credit losses when credit risk has increased significantly. The allowance is remeasured at each reporting date regardless of whether a default has occurred.

Question 44Financial Reporting

An entity has a defined benefit pension plan. Under IAS 19, how is the net defined benefit liability affected by actuarial gains and losses?

  1. Recognized immediately in profit or loss
  2. Deferred and amortized over the average remaining service life
  3. Recognized in other comprehensive income and never reclassified to profit or loss Correct answer.
  4. Recognized in other comprehensive income and recycled to profit or loss on settlement

Explanation

IAS 19 requires remeasurements of the net defined benefit liability, including actuarial gains and losses, to be recognized in other comprehensive income. These amounts are not reclassified to profit or loss in subsequent periods, although they may be transferred within equity. This removes the corridor and deferral approaches previously permitted.

Question 45Financial Reporting

Under IAS 21, an entity's functional currency is the currency of the primary economic environment in which it operates. Which factor is most relevant in determining functional currency?

  1. The currency that mainly influences sales prices for goods and services Correct answer.
  2. The currency in which the parent company reports
  3. The currency preferred by the entity's major lenders
  4. The currency in which the entity's shares are denominated

Explanation

IAS 21 identifies the currency that mainly influences sales prices and the currency of the country whose competitive forces and regulations determine sales prices as primary indicators of functional currency. The currency of financing and the presentation currency are secondary indicators. Share denomination and lender preferences do not determine functional currency.

Question 46Financial Reporting

An entity presents its financial statements in a presentation currency different from its functional currency. Under IAS 21, how are assets and liabilities translated at the reporting date?

  1. At the closing rate at the reporting date Correct answer.
  2. At the historical exchange rate on the transaction date
  3. At the forward rate for the expected settlement date
  4. At the average rate for the reporting period

Explanation

IAS 21 requires assets and liabilities to be translated at the closing rate at the reporting date, while income and expenses are translated at exchange rates at the dates of the transactions, often approximated by an average rate. Exchange differences arising on translation are recognized in other comprehensive income. Using the closing rate ensures the translated statement reflects the reporting date position.

Question 47Financial Reporting

An entity has a taxable temporary difference of $50,000 and a deductible temporary difference of $20,000, both expected to reverse in the same period. The enacted tax rate is 25%. Assuming no other differences, what is the net deferred tax liability?

  1. $12,500
  2. $17,500
  3. $7,500 Correct answer.
  4. $5,000

Explanation

A taxable temporary difference creates a deferred tax liability of $12,500 ($50,000 x 25%), while a deductible temporary difference creates a deferred tax asset of $5,000 ($20,000 x 25%). IAS 12 requires offsetting when the entity has a legally enforceable right to offset current tax and the taxes relate to the same taxation authority. The net deferred tax liability is therefore $7,500.

Question 48Financial Reporting

An entity has an investment property that it measures using the fair value model under IAS 40. How are changes in fair value recognized?

  1. As a deferred gain amortized over the remaining useful life
  2. In other comprehensive income and accumulated in equity
  3. In profit or loss in the period in which they arise Correct answer.
  4. As an adjustment to the cost of the investment property

Explanation

IAS 40 requires an entity using the fair value model to recognize gains or losses from changes in fair value in profit or loss in the period in which they arise. Unlike the revaluation model for property, plant and equipment, no revaluation surplus is created. The property is not depreciated under the fair value model.

Question 49Financial Reporting

An entity incurs geological and geophysical costs in exploring for oil and gas before any reserves are proven. Under IFRS 6, which accounting policy may the entity adopt for these exploration and evaluation expenditures?

  1. Capitalize all such costs as property, plant and equipment
  2. Recognize them as inventory until reserves are proven
  3. Defer them as a contingent asset until commercial production begins
  4. Expense all such costs as incurred, or capitalize them as exploration and evaluation assets Correct answer.

Explanation

IFRS 6 permits an entity to develop an accounting policy specifying which exploration and evaluation expenditures are recognized as assets, and allows either expensing or capitalization as exploration and evaluation assets. Once capitalized, the assets are tested for impairment under IFRS 6 rather than IAS 36. They are not recognized as PPE, inventory, or contingent assets.

Question 50Financial Reporting

Under IAS 10, which event occurring after the reporting date would require adjustment of the financial statements?

  1. A decline in market prices of investments occurring after the reporting date
  2. A major business combination announced after the reporting date
  3. A fire that destroyed a major plant after the reporting date
  4. The bankruptcy of a customer whose receivable existed at the reporting date Correct answer.

Explanation

IAS 10 distinguishes adjusting events, which provide evidence of conditions that existed at the reporting date, from non-adjusting events, which arose after that date. A customer's bankruptcy providing evidence about the recoverability of a receivable that existed at the reporting date is an adjusting event. Business combinations, market declines, and fires occurring after the reporting date are non-adjusting events requiring disclosure if material.