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Question 1Preparation of single-entity financial statements under IFRS

Under IAS 1 Presentation of Financial Statements, which of the following is a required component of a complete set of financial statements for a single entity?

  1. A directors' remuneration report.
  2. A statement of cash flows for the period. Correct answer.
  3. A statement of value added for the period.
  4. A five-year summary of key financial ratios.

Explanation

IAS 1 paragraph 10 requires a complete set of financial statements to include a statement of financial position, a statement of profit or loss and other comprehensive income, a statement of changes in equity, a statement of cash flows and notes. A value added statement, remuneration report and five-year summary are not components required by IAS 1.

Question 2Preparation of single-entity financial statements under IFRS

A trade receivable is expected to be collected 14 months after the reporting date, within the entity's normal 18-month operating cycle. Under IAS 1, how should the receivable be classified in the statement of financial position?

  1. As non-current, unless the customer has confirmed the collection date in writing.
  2. As non-current, because collection is not due within twelve months.
  3. As current, because it is realised within the normal operating cycle. Correct answer.
  4. As current only if it is discounted to present value.

Explanation

IAS 1 classifies an asset as current when the entity expects to realise it within its normal operating cycle, even if that cycle exceeds twelve months. A trade receivable collected within that operating cycle is therefore current; the twelve-month criterion is an additional rather than overriding test.

Question 3Preparation of single-entity financial statements under IFRS

Under IAS 7, which of the following cash flows is classified as an investing activity in a single entity's statement of cash flows?

  1. Cash received from customers for credit sales.
  2. Cash paid to repay the principal of a bank loan.
  3. Cash paid to employees as wages and salaries.
  4. Cash paid to acquire a patent. Correct answer.

Explanation

IAS 7 classifies cash paid to acquire long-term intangible assets such as patents as investing activities because they are acquisitions of non-current assets. Customer receipts and wage payments are operating activities, while repayment of loan principal is a financing activity.

Question 4Preparation of single-entity financial statements under IFRS

On 1 January 20X1 an entity acquired a building for 1,000,000 with a 20-year useful life and no residual value. It uses straight-line depreciation. On 31 December 20X3, after recording depreciation, the building was revalued to 1,200,000 with a remaining useful life of 10 years. Ignoring tax, what amount is transferred from revaluation surplus to retained earnings for the year ended 31 December 20X4?

  1. 70,000 Correct answer.
  2. 50,000
  3. 35,000
  4. 120,000

Explanation

At 31 December 20X3 the carrying amount before revaluation was 850,000, so the revaluation surplus was 350,000. Depreciation for 20X4 is 120,000 on the revalued amount, compared with 50,000 on original cost, so the excess of 70,000 is transferred from revaluation surplus to retained earnings.

Question 5Preparation of single-entity financial statements under IFRS

A cash-generating unit has goodwill of 100,000, property, plant and equipment of 500,000 and an intangible asset of 300,000. Its recoverable amount is 700,000. No corporate assets are allocated. Under IAS 36, what is the carrying amount of the property, plant and equipment after the impairment loss is allocated?

  1. 400,000
  2. 437,500 Correct answer.
  3. 500,000
  4. 450,000

Explanation

Total impairment is 900,000 less 700,000, or 200,000. IAS 36 allocates the loss first to goodwill (100,000) and then pro rata to the other assets: remaining loss 100,000 multiplied by 500,000/800,000 equals 62,500, leaving property, plant and equipment at 437,500.

Question 6Preparation of single-entity financial statements under IFRS

An entity incurs 200,000 on research and 300,000 on development of a new product. All six IAS 38 development criteria are met only after the 300,000 development expenditure has been incurred, and the criteria remain met thereafter. What amount should be capitalised as an intangible asset?

  1. 300,000 Correct answer.
  2. 500,000
  3. Nil
  4. 200,000

Explanation

IAS 38 requires research expenditure to be expensed as incurred. Development expenditure is capitalised only after all six recognition criteria are met, so the 300,000 incurred once the criteria are satisfied is capitalised.

Question 7Preparation of single-entity financial statements under IFRS

Under IFRS 15, a single performance obligation is satisfied over time when which of the following criteria is met?

  1. The customer simultaneously receives and consumes the benefits as the entity performs. Correct answer.
  2. The contract gives the customer a right of return for defective goods.
  3. The customer obtains control only when the entity receives final payment.
  4. The entity transfers control of the product only when delivery is completed.

Explanation

IFRS 15 requires revenue to be recognised over time when one of three criteria is met, including that the customer simultaneously receives and consumes the benefits as the entity performs. Delivery, payment and a right of return do not by themselves create over-time recognition.

Question 8Preparation of single-entity financial statements under IFRS

An entity has a large population of similar warranty claims. It estimates that 30% will cost 100,000 each, 50% will cost 300,000 each and 20% will cost 500,000 each. Under IAS 37, what is the best estimate of the provision for the population?

  1. 100,000
  2. 300,000
  3. 500,000
  4. 280,000 Correct answer.

Explanation

For a large population of similar obligations, IAS 37 uses the expected value method, weighting all possible outcomes by their probabilities. The calculation is (30% multiplied by 100,000) plus (50% multiplied by 300,000) plus (20% multiplied by 500,000), giving 280,000.

Question 9Preparation of single-entity financial statements under IFRS

At 31 December 20X5, land carried at 1,200,000 has a tax base of 800,000. The difference arose solely from an upward revaluation recognised in other comprehensive income. The entity expects to recover the land by sale and a 20% tax rate applies to capital gains on sale. Under IAS 12, what deferred tax is recognised and where?

  1. 120,000 deferred tax liability in other comprehensive income.
  2. 80,000 deferred tax liability in profit or loss.
  3. 120,000 deferred tax liability in profit or loss.
  4. 80,000 deferred tax liability in other comprehensive income. Correct answer.

Explanation

The taxable temporary difference is 400,000 and, because recovery is expected through sale, it is measured using the 20% capital gains rate, giving 80,000. IAS 12 requires deferred tax on the revaluation to be recognised in other comprehensive income, matching the gain.

Question 10Preparation of single-entity financial statements under IFRS

At 31 December 20X4, a machine was impaired to 600,000. At 31 December 20X5, its recoverable amount is 850,000. If no impairment had been recognised, the carrying amount at 31 December 20X5 would have been 720,000. Under IAS 36, what reversal of impairment loss is recognised in profit or loss?

  1. 120,000
  2. 600,000
  3. 250,000 Correct answer.
  4. 720,000

Explanation

The reversal is limited to what the carrying amount would have been without the earlier impairment, so the asset cannot be written up above 720,000. The recognised reversal is therefore 720,000 less 600,000, or 120,000; the excess over that ceiling is not recognised.

Question 11Preparation of single-entity financial statements under IFRS

Under IAS 1, an entity may offset assets and liabilities in its statement of financial position only when:

  1. the entity has a legally enforceable right of set-off and intends to settle the balances net.
  2. the offset improves comparability with other entities in the same industry.
  3. an IFRS requires or permits the offset. Correct answer.
  4. both amounts are current and are owed to the same counterparty.

Explanation

IAS 1 requires assets and liabilities to be presented separately unless offsetting is required or permitted by an IFRS. A legal right of set-off and an intention to settle net are relevant to offsetting financial instruments under IAS 32, but they do not override the general IAS 1 presentation rule.

Question 12Preparation of single-entity financial statements under IFRS

An entity has a payable of FC 100,000 that is still unpaid at the reporting date. The exchange rate was FC1 = 1.20 at the transaction date and FC1 = 1.35 at the reporting date. Under IAS 21, the payable is translated for the year-end financial statements at:

  1. the transaction-date rate, giving a carrying amount of 120,000.
  2. the closing rate, giving a carrying amount of 135,000. Correct answer.
  3. the average rate for the reporting period.
  4. the forward rate for settlement in 12 months.

Explanation

IAS 21 requires foreign currency monetary items to be translated at the closing rate at the reporting date. The resulting exchange difference is recognised in profit or loss in the period in which it arises.

Question 13Preparation of single-entity financial statements under IFRS

Which of the following events occurring after the reporting date is an adjusting event under IAS 10?

  1. A dividend declared by the board in January on profits earned in the prior year.
  2. A fire that destroyed a major warehouse in January, before the financial statements were authorised for issue.
  3. A customer's bankruptcy in January that confirms a receivable was impaired at the reporting date. Correct answer.
  4. A decline in the market value of investments in February, after the reporting date.

Explanation

IAS 10 requires adjustment when an event after the reporting date provides evidence of conditions that existed at the reporting date. A customer bankruptcy that confirms an impairment already present at year-end is an adjusting event. Events that arise after the reporting date, such as a fire or a market decline, are non-adjusting.

Question 14Preparation of single-entity financial statements under IFRS

At 31 December 20X5 an entity holds inventory costing 500,000. It expects to sell the inventory for 520,000 and to incur selling costs of 30,000. Under IAS 2, the inventory is carried at:

  1. 500,000, because selling costs are ignored when comparing cost and net realisable value.
  2. 520,000, because inventory is measured at expected selling price.
  3. 500,000, because the inventory is carried at cost under the cost model.
  4. 490,000, because net realisable value is below cost. Correct answer.

Explanation

IAS 2 measures inventory at the lower of cost and net realisable value. Net realisable value is the estimated selling price less the estimated costs necessary to make the sale, so it is 520,000 less 30,000, or 490,000. Because this is below cost of 500,000, the inventory is written down to 490,000.

Question 15Preparation of single-entity financial statements under IFRS

On 1 January 20X5 an entity enters a five-year lease with annual payments of 100,000 payable in arrears. The incremental borrowing rate is 5% and the present value of the lease payments is 432,950. The entity pays initial direct costs of 10,000 and receives a lease incentive of 5,000. Under IFRS 16, the right-of-use asset at commencement is:

  1. 432,950.
  2. 437,950. Correct answer.
  3. 442,950.
  4. 447,950.

Explanation

Under IFRS 16, the right-of-use asset initially comprises the lease liability plus initial direct costs, less lease incentives received. The lease liability is 432,950, so the asset is 432,950 plus 10,000 minus 5,000, equal to 437,950.

Question 16Preparation of single-entity financial statements under IFRS

Under IAS 19, remeasurements of the net defined benefit liability arising from changes in actuarial assumptions are recognised in:

  1. the statement of financial position only, with no effect on equity or profit or loss.
  2. other comprehensive income, with no later reclassification to profit or loss. Correct answer.
  3. profit or loss as part of employee benefit expense.
  4. retained earnings directly, bypassing other comprehensive income.

Explanation

IAS 19 recognises remeasurements of the net defined benefit liability in other comprehensive income. These remeasurements include actuarial gains and losses and are not reclassified to profit or loss in later periods.

Question 17Preparation of single-entity financial statements under IFRS

At 31 December 20X5 a lender has a loan receivable of 1,000,000. Since initial recognition, the borrower's credit risk has increased significantly, but the loan is not credit-impaired. Under IFRS 9, the loss allowance is measured at:

  1. the full carrying amount, because significant increase in credit risk triggers derecognition.
  2. 12-month expected credit losses, because the loan is not credit-impaired.
  3. zero, until a payment default occurs.
  4. lifetime expected credit losses, due to the significant increase in credit risk. Correct answer.

Explanation

IFRS 9 requires a loss allowance equal to lifetime expected credit losses once credit risk has increased significantly since initial recognition, even if the asset is not yet credit-impaired. A 12-month expected credit loss allowance applies only when there has not been a significant increase in credit risk.

Question 18Preparation of single-entity financial statements under IFRS

In 20X5 an entity discovered that a material depreciation error had understated 20X4 expenses. The 20X4 financial statements were authorised for issue before the discovery. Under IAS 8, the entity should:

  1. adjust only the 20X5 comparative figures, leaving opening retained earnings unchanged.
  2. recognise the correction in 20X5 profit or loss as a change in estimate.
  3. restate 20X4 comparatives and adjust opening retained earnings. Correct answer.
  4. disclose the error but make no adjustment because the prior statements were authorised.

Explanation

IAS 8 requires material prior period errors to be corrected retrospectively. The entity restates the comparative amounts for 20X4 and adjusts the opening balance of retained earnings for the cumulative effect.

Question 19Preparation of single-entity financial statements under IFRS

At 31 December 20X5 an entity recognises a provision of 300,000 that is deductible for tax only when paid. The tax rate is 25%. Taxable profit of 200,000 is probable when the provision reverses, and no other temporary differences exist. Under IAS 12, the deferred tax asset recognised is:

  1. 0, because provisions never create deferred tax.
  2. 50,000. Correct answer.
  3. 25,000.
  4. 75,000.

Explanation

The provision creates a deductible temporary difference of 300,000, but IAS 12 recognises a deferred tax asset only to the extent that taxable profit will be available when the deduction reverses. Limiting the deductible difference to the probable 200,000 gives a deferred tax asset of 200,000 multiplied by 25%, or 50,000.

Question 20Preparation of single-entity financial statements under IFRS

At 31 December 20X5 an entity breached a long-term loan covenant, making the loan payable on demand. On 15 January 20X6, before the financial statements were authorised for issue, the lender waived its right to demand repayment for 18 months from the reporting date. Under IAS 1, which statement correctly applies the classification requirements at 31 December 20X5?

  1. The loan is non-current because the waiver was obtained before the financial statements were authorised for issue.
  2. The loan is current because the waiver was obtained after the reporting date. Correct answer.
  3. The loan is current because the covenant breach is an adjusting event under IAS 10.
  4. The loan is non-current because the waiver period exceeds 12 months from the date of the waiver.

Explanation

IAS 1 classifies a loan as current when a covenant breach at or before the reporting date makes it payable on demand, unless the lender agreed by the end of the reporting period to a grace period of at least 12 months after that date. A waiver obtained after the reporting date does not change the classification at the reporting date.

Question 21Preparation of single-entity financial statements under IFRS

An entity uses the revaluation model under IAS 16 for its factory. A revaluation at the reporting date increases the factory's carrying amount by 250,000. There was no previous revaluation decrease or impairment loss relating to this asset. How should the increase be recognised?

  1. In other comprehensive income and accumulated in equity as a revaluation surplus. Correct answer.
  2. In profit or loss as a gain on revaluation.
  3. As deferred income in the statement of financial position, released over the remaining useful life.
  4. Directly in retained earnings, bypassing other comprehensive income.

Explanation

IAS 16.39 requires an increase on revaluation to be recognised in other comprehensive income and accumulated in equity as a revaluation surplus. The surplus is not a profit or loss item and is transferred to retained earnings only as the asset is used or derecognised.

Question 22Preparation of single-entity financial statements under IFRS

Under IAS 7 Statement of Cash Flows, how may an entity present interest paid in its single-entity statement of cash flows?

  1. As an investing cash flow or as a financing cash flow, applied consistently.
  2. Only as an operating cash flow.
  3. As an operating cash flow or as a financing cash flow, applied consistently. Correct answer.
  4. Only as a financing cash flow.

Explanation

IAS 7 permits interest paid to be classified as either an operating cash flow or a financing cash flow, provided the choice is applied consistently from period to period. The classification adopted must be disclosed.

Question 23Preparation of single-entity financial statements under IFRS

On 1 July 20X5 an entity classified a machine as held for sale. At that date its carrying amount was 800,000, its fair value was 760,000 and costs to sell were 20,000. The machine was still held for sale at 31 December 20X5 and there was no further change in fair value less costs to sell. The entity had been depreciating the machine at 10,000 per month. What is the carrying amount of the machine at 31 December 20X5?

  1. 760,000
  2. 790,000
  3. 800,000
  4. 740,000 Correct answer.

Explanation

IFRS 5 measures a non-current asset held for sale at the lower of its carrying amount and fair value less costs to sell, which is 760,000 minus 20,000, equal to 740,000. Depreciation ceases while the asset is classified as held for sale, so the carrying amount remains 740,000 at 31 December 20X5.

Question 24Preparation of single-entity financial statements under IFRS

At 31 December 20X5 an entity recognised an impairment loss of 150,000 on the goodwill allocated to a cash-generating unit. At 31 December 20X6 the recoverable amount of the unit has increased and management believes the goodwill's value has recovered. Under IAS 36, what is the required treatment?

  1. Reverse the loss through other comprehensive income to the extent of the recovery.
  2. Reverse the loss to the extent that the recoverable amount exceeds the carrying amount, limited to the original loss.
  3. Do not reverse the impairment loss, even though the recoverable amount has increased. Correct answer.
  4. Reverse the loss only if the increase arises from a change in market interest rates.

Explanation

IAS 36.124 prohibits reversal of an impairment loss recognised for goodwill in a later period. Reversals are permitted for other assets in a cash-generating unit, subject to the ceiling in IAS 36.117, but never for goodwill.

Question 25Preparation of single-entity financial statements under IFRS

An entity enters a contract with a fixed fee of 1,000,000 and a bonus of 200,000 payable if the project is completed by a specified date. Based on its experience, the entity concludes it is highly probable that completing the project by that date will not result in a significant reversal of revenue. How should the transaction price be determined at contract inception under IFRS 15?

  1. Include half of the bonus, giving a transaction price of 1,100,000.
  2. Include the 200,000 bonus, giving a transaction price of 1,200,000. Correct answer.
  3. Include the bonus only when the customer has paid it, giving 1,000,000 until receipt.
  4. Exclude the bonus entirely until the completion date is reached, giving 1,000,000.

Explanation

IFRS 15 includes variable consideration in the transaction price to the extent that it is highly probable that a significant reversal will not occur. Because that condition is met, the bonus forms part of the 1,200,000 transaction price.

Question 26Preparation of single-entity financial statements under IFRS

At 31 December 20X5 an entity has unused tax losses of 500,000 that can be carried forward for five years. Taxable profit in 20X5 was nil and there are no taxable temporary differences. Management has prepared a budget showing that sufficient future taxable profit is probable within the carry-forward period. The tax rate is 25%. Under IAS 12, how should the entity account for the tax losses at 31 December 20X5?

  1. Recognise a deferred tax asset of 125,000. Correct answer.
  2. Recognise a deferred tax asset of 125,000 only if the losses arose from a discontinued operation.
  3. Recognise no deferred tax asset until the tax losses are actually used.
  4. Recognise a current tax asset of 125,000 and no deferred tax asset.

Explanation

IAS 12.34 recognises a deferred tax asset for unused tax losses only to the extent that future taxable profit will be available against which the losses can be used. With probable future taxable profit, the asset is 500,000 multiplied by 25%, equal to 125,000.

Question 27Preparation of single-entity financial statements under IFRS

During 20X5 an entity changed the estimated useful life of a machine from 10 years to 8 years because of increased usage. The machine was purchased at the start of 20X3. Under IAS 8, how should this change be accounted for?

  1. By adjusting the opening balance of retained earnings without changing future depreciation.
  2. Retrospectively, by restating prior periods as a change in accounting policy.
  3. Prospectively, by depreciating the remaining carrying amount over the revised remaining useful life. Correct answer.
  4. By recognising the entire remaining carrying amount as an expense in 20X5.

Explanation

IAS 8.36 treats a change in the estimated useful life as a change in accounting estimate, applied prospectively from the date of change. The remaining carrying amount is depreciated over the revised remaining useful life.

Question 28Preparation of single-entity financial statements under IFRS

An entity recognises a provision of 400,000 for environmental clean-up. It has a right to recover 300,000 from an insurer under a contract. The insurer has confirmed in writing that it will pay, and the entity has received the amount before the financial statements are authorised for issue. Under IAS 37, how should the reimbursement be presented?

  1. Offset the reimbursement against the provision and present a net provision of 100,000 in the statement of financial position.
  2. Recognise a separate asset of 300,000, retain the provision at 400,000 and show a net expense of 100,000. Correct answer.
  3. Treat the reimbursement as a contingent asset and disclose it in the notes without recognising an asset.
  4. Recognise a separate asset of 300,000, reduce the provision to 100,000 and present a single net expense.

Explanation

IAS 37.53 requires a reimbursement to be recognised as a separate asset only when it is virtually certain to be received, and it must not exceed the provision. Offsetting against the provision in the statement of financial position is not permitted, although the expense and reimbursement may be presented net in profit or loss.

Question 29Preparation of single-entity financial statements under IFRS

At 31 December 20X5 an entity's defined benefit plan has a present value of the defined benefit obligation of 4,600,000 and a fair value of plan assets of 5,000,000. There is no minimum funding requirement. The present value of future refunds from the plan and reductions in future contributions is 150,000. Under IAS 19, what amount is recognised as a net defined benefit asset at 31 December 20X5?

  1. 150,000 Correct answer.
  2. 250,000
  3. 0
  4. 400,000

Explanation

IAS 19.64 measures a net defined benefit asset at the lower of the surplus and the asset ceiling, which is the present value of economic benefits available as refunds or reductions in future contributions. The surplus is 400,000 but the ceiling is 150,000, so a net asset of 150,000 is recognised.

Question 30Preparation of single-entity financial statements under IFRS

An entity had 1,000,000 ordinary shares in issue throughout the period to 30 September 20X5. On 1 October 20X5 it made a rights issue of one new share for every four held at an exercise price of 2.00, when the market price immediately before the issue was 2.50. Profit for 20X5 was 2,200,000. What is basic earnings per share for 20X5, to the nearest cent?

  1. 2.20
  2. 1.76
  3. 2.01 Correct answer.
  4. 1.91

Explanation

The rights issue contains a bonus element because the exercise price of 2.00 is below the market price of 2.50. The theoretical ex-rights price is (4 x 2.50 + 1 x 2.00) / 5 = 2.40, giving an adjustment factor of 2.50 / 2.40 = 1.0417. Weighted average shares are 1,000,000 x 1.0417 x 9/12 plus 1,250,000 x 3/12, equal to 1,093,750, and earnings per share is 2,200,000 / 1,093,750 = 2.01.

Question 31Preparation of single-entity financial statements under IFRS

An entity prepares its annual financial statements in accordance with IFRS Accounting Standards and concludes that they give a fair presentation. Under IAS 1, what must the entity include in the notes?

  1. An explicit and unreserved statement that the financial statements comply with IFRS Accounting Standards. Correct answer.
  2. A statement that IFRS Accounting Standards were followed except where their application would be immaterial.
  3. A description of every IFRS requirement applied, with no aggregation of similar items.
  4. A confirmation by the external auditor that the financial statements are free from material misstatement.

Explanation

IAS 1 requires an entity whose financial statements comply with IFRS Accounting Standards to make an explicit and unreserved statement of that compliance in the notes. Compliance cannot be qualified by materiality or by omitting requirements that are judged inconvenient. The auditor's opinion is separate and does not replace this statement.

Question 32Preparation of single-entity financial statements under IFRS

At 31 December 20X5 an entity has a trade payable of 90,000 that arose from the purchase of inventory. The payable is due to be settled on 30 June 20X6. The entity's normal operating cycle is nine months. How should the payable be classified in the statement of financial position at 31 December 20X5?

  1. Non-current, because trade payables are always classified by reference to the operating cycle.
  2. Current, because it is due to be settled within twelve months after the reporting period. Correct answer.
  3. Current, only if the entity expects to settle it before the end of the operating cycle.
  4. Non-current, because the normal operating cycle is shorter than twelve months.

Explanation

IAS 1 classifies a liability as current when it is due to be settled within twelve months after the reporting period, among other criteria. The payable is due on 30 June 20X6, which is within twelve months of 31 December 20X5. The length of the operating cycle does not override that separate criterion.

Question 33Preparation of single-entity financial statements under IFRS

Under IAS 7 Statement of Cash Flows, how may dividends paid be classified in the statement of cash flows of a single entity?

  1. Only as an investing cash flow, because they represent a return on shareholders' investment.
  2. As either an operating cash flow or a financing cash flow, applied consistently from period to period. Correct answer.
  3. Only as an operating cash flow, because dividends relate to profit for the period.
  4. As a non-cash item, with no presentation in the statement of cash flows.

Explanation

IAS 7 requires dividends paid to be disclosed separately and classified consistently as either operating or financing cash flows. They are not classified as investing because they are a cost of obtaining financial resources rather than a return on an investment. The chosen classification must be applied consistently.

Question 34Preparation of single-entity financial statements under IFRS

An entity's financial statements for the year ended 31 December 20X5 were authorised for issue on 15 March 20X6. On 10 February 20X6 the entity declared a dividend of 200,000 based on profits for 20X5. No obligation to pay a dividend existed at 31 December 20X5. How should the dividend be treated in the 20X5 financial statements?

  1. Recognise a liability of 200,000 at 31 December 20X5 and a corresponding reduction in retained earnings.
  2. Do not recognise a liability, but adjust the 20X5 comparative retained earnings for the dividend.
  3. Do not recognise a liability; disclose the dividend in the notes to the financial statements. Correct answer.
  4. Recognise a liability of 200,000 at 31 December 20X5 and a corresponding dividend expense in profit or loss.

Explanation

IAS 10 treats dividends declared after the reporting date as non-adjusting events because no present obligation existed at the reporting date. The liability is not recognised in the year-end statement of financial position. IAS 1 requires the dividend to be disclosed in the notes so users understand the subsequent event.

Question 35Preparation of single-entity financial statements under IFRS

At 31 December 20X5 an entity is party to a non-cancellable contract to purchase 10,000 units of a component at 50 per unit. The units are not needed because customer demand has collapsed. The entity cannot cancel the contract and has no alternative use for the components. The unavoidable costs of meeting the contract are 500,000, and the economic benefits expected from the contract are 350,000. No inventory has been delivered. Under IAS 37, what amount should the entity recognise?

  1. No provision, because no goods have been delivered.
  2. An inventory asset of 350,000 and a provision of 150,000.
  3. A provision of 150,000. Correct answer.
  4. A provision of 500,000.

Explanation

IAS 37 requires an onerous contract provision when unavoidable costs exceed the economic benefits expected under the contract. The provision is measured at the best estimate of the unavoidable cost, here 500,000 less expected benefits of 350,000, giving 150,000. No inventory asset is recognised before the entity obtains control of the components.

Question 36Preparation of single-entity financial statements under IFRS

During 20X5 an entity incurred 120,000 on research into a new compound and 300,000 on development of the compound after all IAS 38 development capitalisation criteria were met. The project is expected to generate future economic benefits. How should the entity account for the 420,000 in its 20X5 single-entity financial statements?

  1. Expense 120,000 and recognise an intangible asset of 300,000. Correct answer.
  2. Expense 420,000 in profit or loss.
  3. Recognise an intangible asset of 420,000.
  4. Expense 300,000 and recognise an intangible asset of 120,000.

Explanation

IAS 38 requires research expenditure to be expensed as incurred because no intangible asset can be demonstrated at that stage. Development expenditure is capitalised only after all the recognition criteria are met. Therefore 120,000 is expensed and 300,000 is recognised as an intangible asset.

Question 37Preparation of single-entity financial statements under IFRS

At 31 December 20X4 an entity recognised an impairment loss of 80,000 on a machine because of a decline in its market. The machine is measured using the cost model. At 31 December 20X5 indicators show the impairment has reversed, and the recoverable amount is 60,000 above the machine's carrying amount. What is the required accounting treatment under IAS 36?

  1. Recognise a reversal in profit or loss, limited to the carrying amount that would have been determined had no impairment been recognised. Correct answer.
  2. Do not reverse the impairment because reversals are prohibited for machinery.
  3. Recognise a reversal in profit or loss of the full 60,000 regardless of the asset's depreciated historical cost.
  4. Recognise the reversal in other comprehensive income.

Explanation

IAS 36 requires an entity to assess at each reporting date whether an impairment loss recognised in prior periods may have reversed. For an asset other than goodwill, the reversal is recognised in profit or loss, but it cannot increase the carrying amount above the depreciated historical carrying amount that would have applied without the original impairment.

Question 38Preparation of single-entity financial statements under IFRS

For the year ended 31 December 20X5 an entity reports accounting profit before tax of 1,000,000. This includes a non-deductible fine of 100,000 and exempt income of 50,000. The enacted tax rate is 25% and there are no other temporary differences. What is the current tax expense for 20X5?

  1. 262,500 Correct answer.
  2. 287,500
  3. 237,500
  4. 250,000

Explanation

Current tax is based on taxable profit, not accounting profit. The non-deductible fine is added back and the exempt income is deducted, giving taxable profit of 1,050,000. At 25%, current tax expense is 262,500.

Question 39Preparation of single-entity financial statements under IFRS

In 20X5 an entity voluntarily changed its accounting policy for a class of property from the cost model to the revaluation model permitted by IAS 16. The effect is material and can be measured reliably for prior periods. Under IAS 8, how should the change be accounted for in the 20X5 single-entity financial statements?

  1. By recognising the cumulative revaluation surplus in profit or loss for 20X5.
  2. Prospectively, with the revaluation surplus recognised only from 1 January 20X5.
  3. By treating the change as a change in accounting estimate and applying it to future periods.
  4. Retrospectively, adjusting opening retained earnings and comparative information for prior periods. Correct answer.

Explanation

A change from the cost model to the revaluation model is a voluntary change in accounting policy. IAS 8 requires such a change to be applied retrospectively, with opening retained earnings and comparative information restated, unless a transitional provision applies. The revaluation surplus is not recognised only prospectively.

Question 40Preparation of single-entity financial statements under IFRS

Under IAS 7, bank borrowings repayable on demand that form an integral part of an entity's cash management and fluctuate between positive and negative balances are treated as:

  1. A non-cash financing activity disclosed only in the notes.
  2. Financing cash flows when the balance is negative and operating cash flows when positive.
  3. An overdraft that must always be presented as a current liability outside cash equivalents.
  4. A component of cash and cash equivalents. Correct answer.

Explanation

IAS 7 states that bank borrowings are generally financing cash flows, but overdrafts repayable on demand that are integral to cash management are included in cash and cash equivalents. The balance must fluctuate between positive and overdrawn positions as part of that cash management. They are therefore not presented as financing cash flows.

Question 41Group financial statements and business combinations

Under IFRS 10, an investor controls an investee when it has which combination of elements?

  1. Power over the investee, exposure to variable returns and a link between the two Correct answer.
  2. A majority of voting rights and a contractual right to approve the annual budget
  3. Ownership of more than half of the equity shares and representation on the board
  4. The right to appoint the chief executive officer and receive a fixed management fee

Explanation

Control under IFRS 10 has three elements: power over the investee, exposure to variable returns, and the ability to use that power to affect the returns. Voting rights are only one possible source of power and do not by themselves establish control.

Question 42Group financial statements and business combinations

An investor holds 25% of the voting shares of an investee and appoints two of its seven directors. Under IAS 28, how should the investor treat the holding?

  1. As an associate, because significant influence is presumed at 20% or more unless rebutted Correct answer.
  2. As a joint venture, because board representation creates joint control
  3. As a subsidiary, because 25% is a substantial voting interest
  4. As a financial asset at fair value through profit or loss, because 25% is below 50%

Explanation

IAS 28 presumes significant influence when an investor holds 20% or more of the voting rights unless it can be clearly demonstrated that this is not the case. Board representation supports the existence of significant influence, so the holding is an associate.

Question 43Group financial statements and business combinations

Two parties establish a separate legal entity in which each has a 50% ownership interest. The contractual arrangement gives the parties rights to the entity's net assets and requires unanimous consent for relevant decisions. How is the arrangement classified?

  1. A joint venture, because the parties share net assets Correct answer.
  2. A joint operation, because the entity is jointly controlled
  3. An associate of each party, because neither party controls the entity
  4. A subsidiary of both parties, because each holds 50%

Explanation

IFRS 11 classifies a joint arrangement by the parties' rights and obligations. Where a separate vehicle gives the parties rights to its net assets, the arrangement is a joint venture and is accounted for using the equity method.

Question 44Group financial statements and business combinations

Parent acquires 80% of Subsidiary for cash consideration of CU800. At the acquisition date, the fair value of Subsidiary's identifiable net assets is CU900 and the fair value of the non-controlling interest is CU200. Parent measures NCI at fair value. What is goodwill?

  1. CU100 Correct answer.
  2. CU180
  3. CU80
  4. CU280

Explanation

Goodwill under the full goodwill method is consideration of CU800 plus the fair value of NCI of CU200 less identifiable net assets of CU900, giving CU100. Measuring NCI at its proportionate share would instead give goodwill of CU80.

Question 45Group financial statements and business combinations

Parent owns 75% of Subsidiary. During the year Subsidiary sold goods to Parent for CU500, earning a profit of CU100. At year-end, 40% of those goods remained in Parent's inventory. What amount of unrealized profit is eliminated from consolidated profit, and how is it allocated?

  1. CU40 is eliminated; CU10 is charged against NCI and CU30 against owners of Parent Correct answer.
  2. CU60 is eliminated; CU15 is charged against NCI and CU45 against owners of Parent
  3. CU100 is eliminated; CU25 is charged against NCI and CU75 against owners of Parent
  4. CU40 is eliminated; the whole amount is charged against owners of Parent

Explanation

Only the profit on goods still held by the group is unrealised, so the elimination is CU100 multiplied by 40%, or CU40. Because the sale is upstream, the elimination is shared with NCI in the ratio of ownership interests, giving CU10 to NCI and CU30 to the parent.

Question 46Group financial statements and business combinations

Parent sold equipment to its 90%-owned Subsidiary for CU300 on 1 January. The equipment had a carrying amount of CU240 and a remaining useful life of five years. Both companies apply straight-line depreciation with no residual value. What adjustment is required in the consolidated financial statements for the year of sale?

  1. Decrease profit by CU48 Correct answer.
  2. Decrease profit by CU60 with no depreciation adjustment
  3. Decrease profit by CU12 because the gain is realized on sale
  4. Increase profit by CU60 and increase depreciation by CU12

Explanation

The consolidation removes the CU60 profit on the sale and adjusts depreciation for the excess of CU12 per year based on the inflated cost. The net effect is a decrease in consolidated profit of CU48 in the year of sale.

Question 47Group financial statements and business combinations

Investor holds 30% of Associate and exercises significant influence. Associate reports profit after tax of CU200 and pays dividends of CU50 during the year. Investor's carrying amount for the investment at the start of the year was CU1,000. What is the carrying amount at year-end under the equity method?

  1. CU1,060
  2. CU1,035
  3. CU1,045 Correct answer.
  4. CU1,000

Explanation

The investor recognises its share of the associate's profit of CU60 and reduces the carrying amount by its share of dividends of CU15. The carrying amount is therefore CU1,000 plus CU60 less CU15, or CU1,045.

Question 48Group financial statements and business combinations

On acquisition, Parent recognises a CU100 fair value uplift on Subsidiary's land. The land's tax base remains unchanged and the tax rate is 25%. The uplift is not recognised in Subsidiary's own accounts. What is the effect on the consolidated goodwill calculation?

  1. Goodwill decreases by CU25 because a deferred tax asset arises
  2. Goodwill increases by CU100 because deferred tax is ignored
  3. Goodwill increases by CU25 because a deferred tax liability arises Correct answer.
  4. Goodwill is unaffected because the uplift is already in fair value

Explanation

The fair value uplift creates a taxable temporary difference because the land's tax base is unchanged. IAS 12 requires a deferred tax liability of CU25, which reduces identifiable net assets and therefore increases goodwill by CU25.

Question 49Group financial statements and business combinations

Investor held a 30% associate interest with a carrying amount of CU250. On 1 July it acquired a further 40% for CU400, obtaining control. At that date the previously held 30% had a fair value of CU300, the identifiable net assets of the investee had a fair value of CU800, and the NCI was measured at its proportionate share of net assets. What is goodwill arising on the business combination?

  1. CU100
  2. CU240
  3. CU200
  4. CU140 Correct answer.

Explanation

Goodwill is consideration of CU400 plus the fair value of the previously held interest of CU300 plus NCI of CU240 less net assets of CU800, giving CU140. The CU50 remeasurement gain on the old interest is recognised in profit or loss and does not form part of goodwill.

Question 50Group financial statements and business combinations

Parent owns 80% of Subsidiary. It sells a 50% interest for CU600, retaining a 30% interest with a fair value of CU360. At the date of disposal, Subsidiary's identifiable net assets are CU700, goodwill is CU100 and the NCI is CU140. What gain or loss on loss of control is recognised in consolidated profit or loss?

  1. Loss of CU40
  2. Gain of CU300 Correct answer.
  3. Gain of CU440
  4. Gain of CU160

Explanation

The gain equals proceeds of CU600 plus the fair value of the retained interest of CU360 less the derecognised net assets of CU700, goodwill of CU100 and NCI of CU140, giving CU300. The retained 30% interest is remeasured to fair value when control is lost.