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ESAA Final Level Exam study materials
ESAA Final Level Exam study resources

ESAA Final Level Exam practice questions

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Question 1Professionalism, Ethics and Regulatory Compliance

Under the ESAA Code of Conduct, an analyst receives a gift of concert tickets from a broker whose firm is bidding for a mandate. What is the most compliant course of action?

  1. Decline the tickets and record the offer in the gifts register Correct answer.
  2. Accept only if the tickets are below the local tax threshold
  3. Accept the tickets but disclose them in the annual declaration
  4. Accept and share the tickets with the whole team

Explanation

Inducements rules require that gifts capable of influencing business decisions be refused, and that all offers, accepted or declined, be logged so the firm can evidence supervision. Sharing a gift does not remove the conflict of interest, and tax thresholds are irrelevant to conduct standards.

Question 2Professionalism, Ethics and Regulatory Compliance

Which statement best describes the purpose of the ESAA personal dealing policy?

  1. To align staff trading with client interests and avoid misuse of inside information Correct answer.
  2. To prevent staff from owning any securities outside pension arrangements
  3. To guarantee staff a minimum return on their own investments
  4. To shift liability for market losses onto the compliance function

Explanation

Personal dealing rules exist to prevent conflicts of interest and market abuse by ensuring staff do not trade ahead of clients or on confidential information. Pre-clearance, restricted lists and holding periods are the mechanisms used to achieve that.

Question 3Professionalism, Ethics and Regulatory Compliance

A client asks an adviser to recommend a product that the adviser knows is unsuitable for the client's stated objectives but generates a high commission. What does the suitability obligation require?

  1. Recommend it, provided the commission is disclosed in writing
  2. Recommend it only if the client signs a risk acknowledgement
  3. Recommend it but reduce the position size to limit exposure
  4. Refrain from recommending it and offer a suitable alternative Correct answer.

Explanation

Suitability requires recommendations to be consistent with the client's objectives, risk tolerance and circumstances; disclosure of commission does not make an unsuitable product suitable. The adviser must act in the client's best interest and propose an appropriate alternative.

Question 4Professionalism, Ethics and Regulatory Compliance

What is the primary regulatory objective of the ESAA client money rules?

  1. To allow firms to use client cash for short-term liquidity management
  2. To standardise the fee schedules charged to retail clients
  3. To maximise the interest earned for the firm on client balances
  4. To ensure client assets are segregated and returned promptly on failure of the firm Correct answer.

Explanation

Client money protection rests on segregation, trust status and rapid reconciliation so that assets can be identified and returned if the firm fails. Commingling with firm money is the central risk the rules are designed to prevent.

Question 5Professionalism, Ethics and Regulatory Compliance

An ESAA-regulated firm discovers that a employee has been deliberately concealing failed reconciliations. Which escalation step is most appropriate?

  1. Report it to the regulator as required and start an internal investigation Correct answer.
  2. Ask the employee to resign quietly in exchange for a reference
  3. Handle it informally within the team to avoid reputational damage
  4. Wait for the next scheduled regulatory examination to raise it

Explanation

Deliberate concealment of control failures is a reportable breach and may indicate dishonesty, so the firm must notify the regulator within the prescribed timeframe and investigate. Informal handling or quiet exits obstruct supervision and can themselves constitute misconduct.

Question 6Professionalism, Ethics and Regulatory Compliance

Under the ESAA fitness and propriety standard, which matter is most directly relevant to assessing an approved person's honesty?

  1. A prior criminal conviction for fraud Correct answer.
  2. A change of residential address
  3. Membership of a professional association
  4. A history of late submission of internal expense claims

Explanation

Fitness and propriety assessments weigh criminal convictions, especially those involving dishonesty or fraud, because they bear directly on integrity. Administrative lapses and personal details carry little or no weight on their own.

Question 7Professionalism, Ethics and Regulatory Compliance

A firm's marketing team wants to describe a fund as "capital protected" although the protection depends on a third-party guarantee that could lapse. What is the compliant approach?

  1. Use the phrase but print it in smaller font than the returns
  2. Use the phrase if the guarantee currently exists, without further qualification
  3. Remove the claim or qualify it clearly so it is fair, not misleading Correct answer.
  4. Add a footnote only in the full prospectus, not the advertisement

Explanation

Financial promotions must be fair, clear and not misleading, which means a protection claim cannot be made if the protection is conditional or could lapse without prominent qualification. Small print or prospectus-only caveats do not cure a misleading headline claim.

Question 8Professionalism, Ethics and Regulatory Compliance

Which activity constitutes market abuse under the ESAA framework?

  1. Publishing a research report with a disclosed conflict of interest
  2. Rebalancing an index fund in line with its published methodology
  3. Executing a large order across several venues to reduce market impact
  4. Placing orders with no intention to trade in order to move a price Correct answer.

Explanation

Placing orders without intent to execute is spoofing, a form of market manipulation because it creates a false impression of supply or demand. Legitimate order execution and disclosed research do not constitute abuse.

Question 9Professionalism, Ethics and Regulatory Compliance

A client instructs an adviser to execute a transaction that the adviser believes would breach a sanctions restriction. What should the adviser do?

  1. Refuse the instruction and escalate to the compliance function Correct answer.
  2. Execute the trade and note the client's instruction on file
  3. Execute a smaller version of the trade to limit the breach
  4. Execute the trade only after the client confirms in writing

Explanation

Sanctions prohibitions are legal obligations that override client instructions, so the firm must decline and escalate for screening and, where required, regulatory notification. A client's written confirmation cannot authorise a prohibited transaction.

Question 10Professionalism, Ethics and Regulatory Compliance

What does the ESAA 'know your client' requirement primarily oblige a firm to establish?

  1. The client's identity, beneficial ownership and risk profile Correct answer.
  2. The client's political opinions and religious beliefs
  3. The client's preferred method of receiving marketing
  4. The client's employment history for the past decade

Explanation

KYC requires identification and verification of the client and any beneficial owners, together with an understanding of the client's circumstances and risk profile. Sensitive personal attributes unrelated to financial crime risk should not be collected.

Question 11Professionalism, Ethics and Regulatory Compliance

An ESAA firm outsources its trade reporting to a third-party vendor. Who remains responsible for the accuracy and timeliness of the reports?

  1. Responsibility is shared equally between firm and vendor
  2. The regulator, which receives the reports
  3. The firm itself, which retains accountability for the outsourced activity Correct answer.
  4. The vendor alone, since it performs the reporting

Explanation

Outsourcing transfers the operational task but not the regulatory accountability, so the firm must supervise the vendor and remain answerable for reporting quality. Contractual arrangements cannot displace obligations owed to the regulator.

Question 12Professionalism, Ethics and Regulatory Compliance

Which of the following best describes a conflict of interest that must be disclosed under ESAA rules?

  1. A firm uses the same auditor for several years
  2. A firm employs staff who hold professional qualifications
  3. A firm's research team and sales team sit on different floors
  4. A firm earns higher fees from one product it distributes than from an alternative Correct answer.

Explanation

Differential remuneration creates an incentive to recommend one product over another, which is a classic conflict requiring disclosure or management. Physical separation, qualifications and auditor tenure do not by themselves create a disclosable conflict.

Question 13Professionalism, Ethics and Regulatory Compliance

Under the ESAA complaints handling rules, what must a firm do when it receives a written complaint from an eligible complainant?

  1. Resolve it only if the client agrees to withdraw legal rights
  2. Reject it automatically unless the client uses a specific form
  3. Forward it to the product provider and take no further action
  4. Acknowledge it promptly, investigate and respond within the prescribed period Correct answer.

Explanation

Complaint rules require prompt acknowledgement, a fair investigation and a final response within defined timeframes, with referral rights to an ombudsman explained. Firms cannot require clients to waive legal rights as a condition of handling a complaint.

Question 14Professionalism, Ethics and Regulatory Compliance

A portfolio manager wants to allocate a hot initial public offering across client accounts. Which allocation approach is most consistent with ESAA conduct standards?

  1. Allocate according to a pre-defined, documented and consistently applied policy Correct answer.
  2. Allocate to the largest accounts regardless of suitability
  3. Allocate the shares to the manager's own account first
  4. Allocate to the clients who pay the highest fees

Explanation

Fair treatment of clients requires allocation to follow a documented policy applied consistently, with no preferential treatment for staff or fee considerations. Ad hoc or self-interested allocations create conflicts and unfair client outcomes.

Question 15Professionalism, Ethics and Regulatory Compliance

What is the main purpose of the ESAA record-keeping requirement?

  1. To enable the firm and regulator to reconstruct and evidence business activity Correct answer.
  2. To replace the need for internal audit testing
  3. To allow firms to sell client data to third parties
  4. To increase the volume of data stored by firms

Explanation

Record-keeping ensures that transactions, communications and decisions can be reconstructed and audited, supporting supervision and enforcement. It does not substitute for independent testing, nor does it authorise data monetisation.

Question 16Professionalism, Ethics and Regulatory Compliance

An adviser learns from a client, a company director, that an unannounced takeover bid is imminent. What is the adviser's most appropriate action?

  1. Recommend the stock to other clients without giving a reason
  2. Tip off a colleague who trades personally
  3. Buy the target's shares for the firm's proprietary book
  4. Decline to trade and treat the information as inside information Correct answer.

Explanation

Information about an imminent takeover is inside information, so the adviser must not deal or encourage others to deal and should apply the firm's wall-crossing and restricted-list controls. Trading on it, tipping or recommending without basis all constitute market abuse.

Question 17Professionalism, Ethics and Regulatory Compliance

Which statement correctly describes the ESAA requirement for handling client orders?

  1. Client orders may be executed after the firm's own proprietary orders
  2. Orders must always be executed in the sequence most profitable for the firm
  3. Order priority may be sold to the highest-bidding client
  4. Orders may be aggregated only where allocation is fair and documented Correct answer.

Explanation

Order handling rules permit aggregation only when it does not disadvantage clients and the allocation method is fair, documented and applied consistently. Client orders must not be subordinated to the firm's own trading, and priority cannot be sold.

Question 18Professionalism, Ethics and Regulatory Compliance

A firm's anti-money laundering procedures require enhanced due diligence. Which situation most clearly triggers it?

  1. A long-standing domestic client with stable salary payments
  2. A politically exposed person opening an account from a higher-risk jurisdiction Correct answer.
  3. A client who has held an account for twenty years without changes
  4. A retail client opening a savings account in the same town

Explanation

Enhanced due diligence is triggered by higher-risk factors such as politically exposed persons and higher-risk jurisdictions, requiring additional identification, source-of-funds checks and senior approval. Routine domestic clients normally attract standard diligence.

Question 19Professionalism, Ethics and Regulatory Compliance

What does 'best execution' require of an ESAA-regulated firm?

  1. Taking all sufficient steps to obtain the best result for the client considering price, cost, speed and likelihood of execution Correct answer.
  2. Executing only on the venue with the lowest headline commission
  3. Guaranteeing the highest possible price on every trade
  4. Routing all orders to the firm's own trading desk

Explanation

Best execution is a process obligation: the firm must consider price, cost, speed and likelihood of settlement and execution across available venues, then demonstrate that its arrangements deliver the best result. It is not a guarantee of the best possible price.

Question 20Professionalism, Ethics and Regulatory Compliance

A firm changes its complaints procedure and the change disadvantages clients. What governance step should have preceded implementation?

  1. A press release announcing the change
  2. A documented assessment of the impact on clients and approval by the governing body Correct answer.
  3. An increase in the complaints team's budget
  4. A customer satisfaction survey after the change

Explanation

Changes affecting client outcomes require a documented assessment of client impact and approval through the firm's governance, with the governing body accountable for conduct culture. Retrospective surveys do not substitute for prior assessment and approval.

Question 21Professionalism, Ethics and Regulatory Compliance

Which of the following is a core element of an ESAA firm's whistleblowing arrangements?

  1. Publishing the names of whistleblowers internally
  2. Limiting reports to financial matters only
  3. Requiring staff to report concerns first to their line manager only
  4. Providing protected channels and prohibiting retaliation against reporters Correct answer.

Explanation

Effective whistleblowing arrangements offer multiple protected channels, including bypassing a line manager where that person is implicated, and explicitly prohibit retaliation. Confidentiality of reporters is essential to encourage disclosure.

Question 22Professionalism, Ethics and Regulatory Compliance

An ESAA firm wants to launch a product aimed at retail investors with limited knowledge. Which approach best meets the product governance rules?

  1. Rely on distributors to determine suitability entirely
  2. Design the product for the mass market without defining a target market
  3. Launch first and gather client feedback afterwards
  4. Identify a target market and test the product against its needs before launch Correct answer.

Explanation

Product governance requires manufacturers to define a target market, assess risks and test the product against that market's needs before launch, then review it periodically. Leaving suitability entirely to distributors ignores manufacturer responsibilities.

Question 23Professionalism, Ethics and Regulatory Compliance

A firm's compliance officer is asked to approve a transaction that would breach a position limit. What is the appropriate response?

  1. Approve it temporarily and report the breach next year
  2. Refuse approval and ensure the breach is prevented and reported as required Correct answer.
  3. Approve it and offset the excess with a fictitious hedge
  4. Approve it because compliance has discretion over limits

Explanation

Position limits are regulatory constraints; compliance cannot waive them, and breaches must be prevented or, if they occur, identified and reported promptly. Fabricating offsetting positions would itself be a serious integrity breach.

Question 24Professionalism, Ethics and Regulatory Compliance

Which behaviour best demonstrates the ESAA principle of integrity in a client relationship?

  1. Withholding a conflict because the client did not ask
  2. Being transparent about risks, costs and any conflicts Correct answer.
  3. Presenting only the potential gains of an investment
  4. Overstating the firm's regulatory status to build confidence

Explanation

Integrity requires honest, balanced communication of risks, costs and conflicts so the client can make an informed decision. Selective disclosure, concealment and misrepresentation of regulatory status are all misleading.

Question 25Professionalism, Ethics and Regulatory Compliance

A firm discovers a pricing error that has disadvantaged several clients. What is the most appropriate remedial response?

  1. Refund only clients who complain within a week
  2. Offset the losses against future fees without telling clients
  3. Correct the process silently and hope no client notices
  4. Notify affected clients, remediate losses and record the incident for root-cause review Correct answer.

Explanation

When a firm causes client detriment it must act promptly to put clients back in the position they should have been in, notify them and conduct a root-cause review to prevent recurrence. Silent correction or complaint-driven refunds leave affected clients uncompensated.

Question 26Professionalism, Ethics and Regulatory Compliance

Under the ESAA regulatory framework, which arrangement best satisfies a firm's obligation to keep client money segregated?

  1. Holding client funds in the firm's own operating account but tracking each client balance in a separate ledger
  2. Pooling client funds with firm working capital while reconciling the combined balance daily
  3. Placing client funds in a designated client money account at an approved bank, separate from firm assets Correct answer.
  4. Depositing client funds with an affiliate of the firm under a written intra-group treasury agreement

Explanation

Client money rules require funds to be held in accounts clearly designated as client accounts with an approved institution, so that they remain identifiable and protected from the firm's own creditors in an insolvency. Internal ledgers or intra-group arrangements do not achieve that legal separation.

Question 27Professionalism, Ethics and Regulatory Compliance

An ESAA firm's compliance function reports directly to the head of the sales division, who also sets the compliance team's bonus. Which governance weakness does this arrangement most clearly create?

  1. Inadequate resourcing of the compliance function
  2. Independence of the compliance function is compromised Correct answer.
  3. Excessive delegation of compliance monitoring to front-office staff
  4. Insufficient documentation of compliance monitoring activity

Explanation

Compliance must be able to act independently of the business areas it monitors, including in reporting lines and remuneration. When a revenue-generating manager controls compliance pay and reporting, conflicts of interest can suppress adverse findings.

Question 28Professionalism, Ethics and Regulatory Compliance

A regulated firm plans to record client telephone calls to meet ESAA requirements. Which step is most important to complete before recording begins?

  1. Limit recordings to calls with retail clients because business clients are exempt
  2. Obtain individual consent from each counterparty on every call before recording starts
  3. Store recordings on the personal devices of the advisers who made the calls
  4. Notify clients in advance that calls may be recorded and explain how recordings are used and retained Correct answer.

Explanation

Recording obligations are met alongside data protection and transparency duties, so clients must be informed in advance about recording, its purpose, access and retention. Recording without prior notice, or leaving recordings on personal devices, undermines both evidential value and data protection compliance.

Question 29Professionalism, Ethics and Regulatory Compliance

A firm's new product approval committee includes sales, marketing and product design staff but no compliance or risk representative. What is the most significant regulatory concern?

  1. The committee will be unable to set the product's pricing competitively
  2. The committee may approve products without adequate challenge on conduct risk and target market suitability Correct answer.
  3. The committee lacks the authority to hire external legal advisers
  4. The committee's decisions will not be binding on the firm's distributors

Explanation

Product governance requires that approval decisions be challenged from a compliance and risk perspective, including assessment of target market, suitability and foreseeable consumer harm. A committee drawn only from commercial functions risks approving products that maximise sales but breach conduct standards.

Question 30Professionalism, Ethics and Regulatory Compliance

A senior manager delegated oversight of a trading desk to a junior colleague but retained formal responsibility for that desk. A breach occurs on the desk. How should responsibility most appropriately be assessed under ESAA senior manager arrangements?

  1. Responsibility passes automatically to the compliance function once a breach is identified
  2. The junior colleague bears sole responsibility because day-to-day oversight was delegated
  3. Responsibility is shared equally and no individual can be singled out
  4. The senior manager remains accountable for the delegated area unless a reasonable and documented delegation was properly made and monitored Correct answer.

Explanation

Senior manager regimes allow delegation of day-to-day tasks but not of ultimate accountability, unless the delegation was reasonable, documented and actively monitored. The senior manager must be able to show appropriate oversight of the delegated area.

Question 31Financial Accounting and Reporting

Under IFRS, which measurement basis is required for property, plant and equipment after initial recognition if the entity does not use the cost model?

  1. Fair value model with changes recognised in profit or loss
  2. Lower of cost and net realisable value
  3. Revaluation model with changes recognised in other comprehensive income where a revaluation surplus arises Correct answer.
  4. Present value of expected future cash flows

Explanation

IAS 16 permits either the cost model or the revaluation model for property, plant and equipment. Under the revaluation model, an increase is recognised in other comprehensive income and accumulated in equity as a revaluation surplus, unless it reverses a previous deficit. The fair value model with gains in profit or loss is the IAS 40 treatment for investment property, not the IAS 16 treatment.

Question 32Financial Accounting and Reporting

A company sells goods on credit with a right of return that allows customers to return items within 30 days. Under IFRS 15, how should revenue be recognised at the date of sale?

  1. Recognise revenue for the consideration to which the entity expects to be entitled, with a refund liability for expected returns Correct answer.
  2. Recognise the full transaction price and provide no adjustment until returns occur
  3. Defer all revenue and recognise it on a straight-line basis over 30 days
  4. Recognise revenue only when the 30-day return period has expired

Explanation

Where a right of return exists, IFRS 15 requires the entity to recognise revenue for the amount of consideration to which it expects to be entitled, which excludes expected returns. A refund liability is recognised for the obligation to refund, and a return asset with a corresponding adjustment to cost of sales is recognised for the right to recover goods. This reflects the transfer of control only to the extent it is probable.

Question 33Financial Accounting and Reporting

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

  1. To provide information to management for internal cost control decisions
  2. To ensure that the entity's share price reflects intrinsic value
  3. To determine the entity's taxable profit for the period
  4. 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 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 primary users, namely existing and potential investors, lenders and other creditors, in making decisions about providing resources. Those users cannot demand reports tailored to their needs, which is why general purpose statements are prepared. Tax and internal management reporting serve different purposes.

Question 34Financial Accounting and Reporting

An entity issues a financial instrument that is contractually obliging it to deliver a fixed number of its own equity shares in exchange for a fixed amount of cash. Under IAS 32, how is this instrument classified?

  1. As an equity instrument only if the shares are already authorised and issued
  2. As a financial liability because the fixed-for-fixed criterion is not met by a fixed number of shares for fixed cash Correct answer.
  3. As an equity instrument because settlement is in the entity's own shares
  4. As a compound instrument split between liability and equity

Explanation

IAS 32 requires a contract to be classified as equity only if it will be settled by the entity receiving or delivering a fixed number of its own equity instruments in exchange for a fixed amount of cash or another financial asset, the fixed-for-fixed condition. A contract to deliver a fixed number of shares for a fixed amount of cash satisfies that condition and is equity, so an obligation to deliver a fixed number of shares for a fixed amount of cash is equity rather than a liability. The classification depends on the substance of the contractual terms.

Question 35Financial Accounting and Reporting

Under IAS 36, when should an impairment test be performed for goodwill acquired in a business combination?

  1. Only at the date of acquisition
  2. Only when there is an indication of impairment
  3. Every reporting period end regardless of indicators, but only for the first two years
  4. Annually, and also whenever there is an indication of impairment Correct answer.

Explanation

IAS 36 requires goodwill and intangible assets with indefinite useful lives to be tested for impairment annually, and additionally whenever there is an indication that the asset may be impaired. The annual test applies regardless of whether indicators exist. Other assets are tested only when indicators are present.

Question 36Financial Accounting and Reporting

An entity uses the revaluation model for a building. The carrying amount is 800,000 and the fair value is 950,000. A revaluation surplus of 100,000 from a prior year remains in equity for this asset. The entity has no prior revaluation deficit. How is the increase recognised?

  1. 100,000 in other comprehensive income and 50,000 in profit or loss
  2. 150,000 in other comprehensive income Correct answer.
  3. 50,000 in other comprehensive income and 100,000 in profit or loss
  4. 150,000 in profit or loss

Explanation

Under IAS 16, an increase on revaluation is recognised in other comprehensive income and accumulated in equity as a revaluation surplus, to the extent it does not reverse a previously recognised deficit in profit or loss. Because there is no prior deficit, the entire 150,000 increase goes to other comprehensive income. The existing surplus balance does not cap the new increase.

Question 37Financial Accounting and Reporting

Which of the following costs should be expensed rather than capitalised as part of the cost of an item of property, plant and equipment?

  1. Costs of conducting business in a new location, including staff training Correct answer.
  2. Costs of site preparation
  3. Professional fees directly attributable to acquisition
  4. Initial delivery and handling costs

Explanation

IAS 16 capitalises costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating as intended, including site preparation, delivery and professional fees. Costs of introducing a new product or conducting business in a new location, including training, are not attributable to the asset and are expensed. They would be incurred regardless of whether the asset was acquired.

Question 38Financial Accounting and Reporting

Under IFRS 9, a financial asset measured at amortised cost is initially recognised at fair value plus transaction costs. Which method is used to calculate the interest revenue subsequently?

  1. Nominal coupon rate applied to the face value
  2. Effective interest method applied to the gross carrying amount Correct answer.
  3. Cash received method based on actual coupon payments
  4. Straight-line amortisation of the discount over the term

Explanation

Under IFRS 9, interest revenue for a financial asset measured at amortised cost is calculated using the effective interest method applied to the gross carrying amount, unless the asset is credit-impaired, in which case the effective interest rate is applied to the amortised cost net of the loss allowance. The effective interest rate discounts estimated future cash flows to the gross carrying amount. This produces a constant periodic rate of return.

Question 39Financial Accounting and Reporting

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

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

Explanation

The Conceptual Framework identifies relevance and faithful representation as the two fundamental qualitative characteristics. Comparability, timeliness, verifiability and understandability are enhancing characteristics that increase the usefulness of information that is already relevant and faithfully represented. Faithful representation means depicting the substance of an economic phenomenon completely, neutrally and free from error.

Question 40Financial Accounting and Reporting

A lessee enters a five-year lease with fixed annual payments of 100,000 payable at the end of each year and no purchase option. The lessee's incremental borrowing rate is 6%. The present value of an annuity of 1 for five years at 6% is 4.2124. What is the initial lease liability?

  1. 450,000
  2. 421,240 Correct answer.
  3. 376,000
  4. 500,000

Explanation

Under IFRS 16, the lease liability is measured at the present value of the lease payments not paid at the commencement date, discounted using the interest rate implicit in the lease or, if not readily determinable, the lessee's incremental borrowing rate. Multiplying 100,000 by the five-year annuity factor of 4.2124 gives 421,240. The undiscounted total of 500,000 overstates the liability because it ignores the time value of money.

Question 41Financial Accounting and Reporting

Under IAS 12, which of the following creates a taxable temporary difference?

  1. Tax losses carried forward
  2. A deductible amount arising from an accrued warranty provision
  3. Development costs capitalised and amortised for accounting but deducted in full for tax when incurred
  4. Interest revenue recognised on an accrual basis but taxed when received Correct answer.

Explanation

A taxable temporary difference arises where the carrying amount of an asset exceeds its tax base, or where the carrying amount of a liability is less than its tax base, and will result in taxable amounts in future periods. Accrual-basis interest recognised in profit before it is taxed has a tax base of nil for the receivable, so the carrying amount exceeds the tax base and a taxable temporary difference arises. Deductible differences arise from provisions and tax losses.

Question 42Financial Accounting and Reporting

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

  1. Applied retrospectively only if the effect is material
  2. Applied retrospectively with restatement of prior periods
  3. Disclosed as a prior period error and corrected in opening retained earnings
  4. Applied prospectively by recognising the effect in the current period and future periods Correct answer.

Explanation

IAS 8 requires changes in accounting estimates to be applied prospectively, by recognising the effect in profit or loss in the period of the change and future periods if the change affects both. Retrospective restatement is reserved for changes in accounting policy and corrections of prior period errors. The distinction matters because estimates reflect new information about circumstances that already existed or are expected to arise.

Question 43Financial Accounting and Reporting

An entity has a defined benefit obligation of 1,200,000 and plan assets with a fair value of 1,050,000 at the reporting date. Actuarial losses of 80,000 arose during the year. Under IAS 19, how are the actuarial losses recognised?

  1. Directly in retained earnings as a prior period adjustment
  2. In profit or loss as part of employee benefit expense
  3. As a reduction of the net defined benefit liability only, with no statement of comprehensive income effect
  4. In other comprehensive income, with no recycling to profit or loss Correct answer.

Explanation

IAS 19 requires remeasurements of the net defined benefit liability, including actuarial gains and losses, to be recognised in other comprehensive income. These remeasurements are not subsequently reclassified to profit or loss; they remain in retained earnings through the statement of comprehensive income. This separates long-term actuarial volatility from the service cost and net interest recognised in profit or loss.

Question 44Financial Accounting and Reporting

Under IFRS 15, a construction contract is accounted for as a single performance obligation satisfied over time. The transaction price is 2,000,000 and costs incurred to date are 600,000 against total estimated costs of 1,500,000. Using the cost-to-cost method, what amount of revenue is recognised to date?

  1. 600,000
  2. 1,500,000
  3. 2,000,000
  4. 800,000 Correct answer.

Explanation

Progress towards complete satisfaction of a performance obligation is measured reliably using the cost-to-cost method as costs incurred divided by total estimated costs. Here 600,000 divided by 1,500,000 gives 40% progress, and 40% of the 2,000,000 transaction price is 800,000 of revenue recognised to date. Recognising costs incurred as revenue confuses cost with consideration.

Question 45Financial Accounting and Reporting

Which of the following items is classified as a financing activity in the statement of cash flows prepared under IAS 7?

  1. Interest received on a short-term investment
  2. Purchase of property, plant and equipment for cash
  3. Proceeds from issuing ordinary shares Correct answer.
  4. Cash paid to suppliers for inventory

Explanation

IAS 7 classifies cash flows into operating, investing and financing activities. Financing activities are those that result in changes in the size and composition of contributed equity and borrowings, so proceeds from issuing shares are a financing inflow. Payments to suppliers are operating, and purchases of property, plant and equipment are investing.

Question 46Financial Accounting and Reporting

An entity holds a portfolio of equity investments that it manages with the objective of selling them in the near term to profit from price movements. Under IFRS 9, how are these investments classified and measured?

  1. At cost less impairment, because fair value is not reliably measurable
  2. At fair value through other comprehensive income, with gains recycled on disposal
  3. At fair value through profit or loss, because they are held for trading Correct answer.
  4. At amortised cost, because returns are contractual

Explanation

Under IFRS 9, financial assets are classified based on the entity's business model and the contractual cash flow characteristics of the asset. Equity investments do not have contractual cash flows that are solely payments of principal and interest, so they cannot be measured at amortised cost. Where they are held for trading, they are measured at fair value through profit or loss.

Question 47Financial Accounting and Reporting

Which of the following statements about the recognition criteria for a provision under IAS 37 is correct?

  1. A provision is recognised whenever a future operating loss is expected
  2. A provision is recognised only when the obligation is legally enforceable and confirmed by a court
  3. A provision is recognised when a present obligation exists, an outflow of resources is probable, and the amount can be reliably estimated Correct answer.
  4. A provision is recognised when management intends to incur expenditure to settle a possible obligation

Explanation

IAS 37 requires recognition of a provision when three conditions are met: a present obligation arising from a past event, a probable outflow of resources embodying economic benefits, and a reliable estimate of the amount. A future operating loss or an intention to incur expenditure does not by itself create a present obligation. Possible obligations that are not probable are disclosed as contingent liabilities rather than recognised.

Question 48Financial Accounting and Reporting

A company acquires 80% of a subsidiary for 900,000. The fair value of the identifiable net assets is 1,000,000. Under IFRS 3, using the proportionate share method for non-controlling interests, what is the amount of goodwill?

  1. 200,000
  2. 180,000
  3. 100,000 Correct answer.
  4. 20,000

Explanation

Under IFRS 3, goodwill is the consideration transferred plus the amount of non-controlling interests minus the net identifiable assets acquired. Using the proportionate share method, non-controlling interests equal 20% of 1,000,000, which is 200,000. Goodwill is therefore 900,000 plus 200,000 minus 1,000,000, equal to 100,000.

Question 49Financial Accounting and Reporting

Under IAS 21, how should an exchange difference arising on a monetary item that forms part of a reporting entity's net investment in a foreign operation be recognised in the consolidated financial statements?

  1. In profit or loss as a foreign exchange gain or loss
  2. As an adjustment to the cost of the investment in the foreign operation
  3. Directly against the foreign currency translation reserve with no reclassification on disposal
  4. In other comprehensive income and reclassified to profit or loss on disposal of the foreign operation Correct answer.

Explanation

IAS 21 requires exchange differences on monetary items that form part of a net investment in a foreign operation to be recognised in other comprehensive income in the consolidated financial statements. On disposal of the foreign operation, the cumulative amount is reclassified from equity to profit or loss as part of the gain or loss on disposal. This treatment aligns the exchange effect with the translation reserve.

Question 50Financial Accounting and Reporting

Which of the following is the correct treatment of a material prior period error identified in the current year under IAS 8?

  1. Corrected retrospectively by restating comparative amounts and adjusting opening retained earnings Correct answer.
  2. Corrected prospectively in the current period's profit or loss
  3. Disclosed only in the notes with no adjustment to the financial statements
  4. Corrected by adjusting the current year's tax expense only

Explanation

IAS 8 requires material prior period errors to be corrected retrospectively. The entity restates the comparative amounts for the prior period presented and adjusts the opening balance of retained earnings, and the nature and amount of the correction are disclosed. Prospective correction would leave previously issued financial statements misstated.