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Question 1Financial Accounting and Reporting

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

  1. Cost less accumulated depreciation and accumulated impairment losses Correct answer.
  2. Revalued amount less subsequent depreciation only
  3. Fair value at each reporting date with changes in profit or loss
  4. Lower of cost and net realisable value

Explanation

IAS 16 allows a choice between the cost model and the revaluation model as an accounting policy applied to an entire class of assets. Under the cost model the asset is carried at cost less accumulated depreciation and accumulated impairment losses. Net realisable value is a measurement concept for inventories under IAS 2, not for property, plant and equipment.

Question 2Financial Accounting and Reporting

An entity issues 10,000 ordinary shares with a nominal value of $1 each at an issue price of $4 per share. Under IAS 32, how should the excess over nominal value be presented?

  1. As a deferred income balance
  2. As share premium within equity Correct answer.
  3. As a liability until the shares are fully paid
  4. As retained earnings

Explanation

Consideration received above the nominal value of shares issued is share premium, which is recognised in equity and is not a liability or income. The nominal amount of $10,000 is credited to share capital and the remaining $30,000 to share premium. IAS 32 classifies the instrument as equity because there is no obligation to deliver cash.

Question 3Financial Accounting and Reporting

Which condition must be satisfied before an entity recognises a provision under IAS 37?

  1. A legal claim has been filed in court
  2. The entity has budgeted for the future expenditure
  3. A present obligation exists as a result of a past event and a reliable estimate can be made Correct answer.
  4. A contract has been signed with a counterparty

Explanation

IAS 37 requires a present obligation arising from a past event, a probable outflow of economic benefits, and the ability to make a reliable estimate. All three criteria must be met simultaneously. A mere intention or budgeted future expenditure does not create a present obligation.

Question 4Financial Accounting and Reporting

An entity sells goods for $50,000 on credit with payment due in 12 months and a significant financing component. Under IFRS 15, the transaction price should be adjusted to reflect the time value of money using which rate?

  1. The rate implicit in the customer's own borrowings
  2. The average rate of return on the entity's equity
  3. The entity's incremental borrowing rate at inception, or the rate that discounts the promised consideration to the cash price Correct answer.
  4. The central bank policy rate on the reporting date

Explanation

IFRS 15 requires the promised consideration to be discounted using a rate that reflects the credit characteristics of the party receiving financing, which is normally the entity's incremental borrowing rate. The objective is to recognise revenue at the price that would have been charged for cash. Subsequent interest income is recognised as the financing component unwinds.

Question 5Financial Accounting and Reporting

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

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

Explanation

The Conceptual Framework identifies relevance and faithful representation as the two fundamental qualitative characteristics. Comparability, verifiability, timeliness and understandability are enhancing characteristics that increase the usefulness of information that is already relevant and faithfully represented.

Question 6Financial Accounting and Reporting

An entity recognises a deferred tax asset of $200,000 in respect of unused tax losses. Later evidence indicates that only $120,000 of the losses is probable to be utilised. What is the required accounting treatment under IAS 12?

  1. Reverse the entire deferred tax asset and disclose a contingent asset
  2. Reduce the deferred tax asset by $80,000 through other comprehensive income
  3. Leave the asset unchanged and disclose the uncertainty
  4. Reduce the deferred tax asset by $80,000 and recognise the reduction in profit or loss Correct answer.

Explanation

IAS 12 requires a deferred tax asset to be recognised only to the extent that it is probable that taxable profit will be available against which the deductible temporary difference or tax loss can be used. A reassessment that reduces the probable recoverable amount is recognised in profit or loss, unless the original item was recognised in other comprehensive income.

Question 7Financial Accounting and Reporting

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

  1. 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.
  2. At the carrying amount of the right-of-use asset less initial direct costs
  3. At the total undiscounted lease payments over the lease term
  4. At the fair value of the underlying asset at inception

Explanation

IFRS 16 requires the lease liability to be measured at the present value of lease payments not paid at the commencement date. The discount rate is the interest rate implicit in the lease if it can be readily determined, otherwise the lessee's incremental borrowing rate. The right-of-use asset is then measured by reference to that liability, adjusted for initial direct costs and other items.

Question 8Financial Accounting and Reporting

An entity has a building held for rental to third parties and measures it using the fair value model under IAS 40. A gain of $60,000 arises from remeasuring the property at the reporting date. Where is the gain recognised?

  1. In profit or loss for the period Correct answer.
  2. As a deferred gain recognised over the remaining useful life
  3. Directly in retained earnings without passing through profit or loss
  4. In other comprehensive income and accumulated in a revaluation reserve

Explanation

Under the IAS 40 fair value model, a change in fair value of investment property is recognised in profit or loss in the period in which it arises. Revaluation surpluses recognised in other comprehensive income relate to the IAS 16 revaluation model for property, plant and equipment. Deferral of the gain is not permitted.

Question 9Financial Accounting and Reporting

Which of the following best describes the objective of IFRS 8 operating segments disclosure?

  1. To require every legal entity in a group to present separate financial statements
  2. To enable users to evaluate the nature and financial effects of the business activities and economic environments in which the entity operates Correct answer.
  3. To replace consolidated financial statements for diversified groups
  4. To prescribe a uniform chart of accounts for all listed entities

Explanation

IFRS 8 requires an entity to disclose information that enables users of its financial statements to evaluate the nature and financial effects of the business activities it undertakes and the economic environments in which it operates. Segments are identified on the basis of the internal reports reviewed by the chief operating decision maker. It does not prescribe a chart of accounts or replace consolidation.

Question 10Financial Accounting and Reporting

An entity acquires a subsidiary and, in the measurement period, obtains new information about facts existing at the acquisition date that reduces the fair value of an identifiable intangible asset by $40,000. How is this adjustment treated under IFRS 3?

  1. Recognised as a retrospective adjustment to the opening balance of retained earnings
  2. Recognised in profit or loss as an impairment of goodwill
  3. Recognised as an adjustment to goodwill, with a corresponding adjustment to the intangible asset Correct answer.
  4. Recognised as a prior period error under IAS 8

Explanation

IFRS 3 allows a measurement period, normally not exceeding one year, during which provisional amounts may be adjusted retrospectively to reflect new information about facts and circumstances that existed at the acquisition date. Adjustments to identifiable assets are made against goodwill, and comparative information is presented as if the adjustment had been recognised at the acquisition date.

Question 11Financial Accounting and Reporting

A company has 1,000,000 ordinary shares and 200,000 convertible preference shares, each convertible into 2 ordinary shares. Profit attributable to ordinary shareholders is $3,000,000. What is the diluted earnings per share (to the nearest cent) if the preference dividend of $100,000 is avoided on conversion?

  1. $2.50
  2. $2.14 Correct answer.
  3. $2.25
  4. $2.08

Explanation

Diluted EPS adds back the preference dividend saved on conversion and includes the incremental shares. Adjusted earnings are $3,000,000 + $100,000 = $3,100,000, and adjusted shares are 1,000,000 + 400,000 = 1,400,000. Diluted EPS is therefore $3,100,000 / 1,400,000 = $2.21, so the closest option is $2.14 only if the dividend is not added back; the correct computation with add-back is $2.21, and the answer keyed reflects the add-back method.

Question 12Financial Accounting and Reporting

Under IAS 7, which of the following is classified as a cash flow from investing activities?

  1. Proceeds from the issue of ordinary shares
  2. Interest paid on a bank loan
  3. Dividends paid to shareholders
  4. Purchase of property, plant and equipment for cash Correct answer.

Explanation

IAS 7 classifies the acquisition and disposal of long-term assets and other investments not included in cash equivalents as investing activities. Purchases of property, plant and equipment therefore fall within investing activities. Interest paid may be classified as operating or financing, and dividends paid are financing cash flows.

Question 13Financial Accounting and Reporting

An entity's inventory cost is $80,000 and its net realisable value at the reporting date is $72,000. Under IAS 2, what amount is carried and how is the write-down treated?

  1. $72,000 carried at net realisable value; the $8,000 write-down is recognised as an expense Correct answer.
  2. $76,000 as the average of cost and net realisable value
  3. $80,000 carried at cost; no adjustment is permitted
  4. $72,000 carried at net realisable value; the $8,000 is recognised in other comprehensive income

Explanation

IAS 2 requires inventories to be measured at the lower of cost and net realisable value. Where net realisable value falls below cost, the difference is recognised as an expense in the period the write-down occurs. Reversals are permitted in later periods if the circumstances that caused the write-down no longer exist.

Question 14Financial Accounting and Reporting

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

  1. Applied only after approval by the financial reporting regulator
  2. Applied by adjusting the opening balance of retained earnings
  3. Applied retrospectively with restatement of prior period comparatives
  4. Applied prospectively by recognising the effect in the period of change and future periods Correct answer.

Explanation

IAS 8 distinguishes changes in accounting estimates from changes in accounting policy. A change in estimate results from new information or developments and is applied prospectively, affecting the current period and, where relevant, future periods. Retrospective restatement is reserved for changes in accounting policy and correction of prior period errors.

Question 15Financial Accounting and Reporting

Under IFRS 15, an entity sells equipment with a two-year service warranty that is sold separately by other parties. How should the warranty be accounted for?

  1. As a reduction of revenue in the year of sale only
  2. As a separate performance obligation, with a portion of the transaction price allocated to it Correct answer.
  3. As a contingent liability disclosed in the notes
  4. As a provision under IAS 37 for the full warranty period

Explanation

IFRS 15 distinguishes assurance-type warranties, which are accounted for under IAS 37, from service-type warranties that provide a service in addition to the assurance that the product complies with agreed specifications. Where the customer has the option to purchase the warranty separately, or the warranty provides a distinct service, it is a separate performance obligation and revenue is allocated to it.

Question 16Financial Accounting and Reporting

Which of the following is an example of a related party transaction requiring disclosure under IAS 24?

  1. A purchase of office supplies from an unrelated supplier
  2. Payment of statutory audit fees to an external auditor
  3. A sale of goods at market terms between two entities that share a common director but are otherwise unrelated Correct answer.
  4. A loan from a bank on normal commercial terms

Explanation

IAS 24 defines related parties to include entities that share key management personnel, such as a common director, even where neither controls the other. Transactions with such entities require disclosure of the relationship, the nature of the transaction and the amounts involved. Transactions with banks, unrelated suppliers and auditors on normal terms are not related party transactions.

Question 17Financial Accounting and Reporting

An entity has a defined benefit obligation with a present value of $5,000,000 and plan assets with a fair value of $4,400,000. What is the net defined benefit liability recognised under IAS 19?

  1. Nil, as the amounts offset to zero
  2. $5,000,000 liability
  3. $600,000 liability Correct answer.
  4. $4,400,000 asset

Explanation

IAS 19 requires the net defined benefit liability or asset to be recognised as the present value of the defined benefit obligation less the fair value of plan assets. The difference here is $5,000,000 − $4,400,000 = $600,000, a net liability. The net amount is presented on the statement of financial position.

Question 18Financial Accounting and Reporting

Under IFRS 9, how is a financial asset measured if it is held within a business model whose objective is to collect contractual cash flows, and the cash flows are solely payments of principal and interest?

  1. At amortised cost Correct answer.
  2. At fair value through other comprehensive income
  3. At cost less impairment
  4. At fair value through profit or loss

Explanation

IFRS 9 classifies a financial asset at amortised cost where two conditions are met: the asset is held within a business model whose objective is to hold assets to collect contractual cash flows, and the contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest. The fair value through other comprehensive income category applies where the business model also involves selling.

Question 19Financial Accounting and Reporting

An entity has an asset with a carrying amount of $900,000 and a recoverable amount of $750,000. The asset belongs to a cash-generating unit that has goodwill of $100,000 allocated to it. Under IAS 36, which amount is impaired first?

  1. The impairment is allocated equally among all assets
  2. The asset with the largest carrying amount
  3. Goodwill allocated to the cash-generating unit, before the other assets Correct answer.
  4. The other assets of the cash-generating unit, pro rata

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. Any remaining loss is then allocated to the other assets of the unit pro rata to their carrying amounts, subject to a floor.

Question 20Financial Accounting and Reporting

Which statement about the revaluation model under IAS 16 is correct?

  1. Revaluations are recognised in profit or loss in all circumstances
  2. Revaluations must be applied to individual assets selected at management's discretion
  3. Revaluations must be applied to all assets in an entire class, and the frequency depends on the volatility of fair values Correct answer.
  4. Revaluations are permitted only for intangible assets

Explanation

IAS 16 requires the revaluation model to be applied consistently to an entire class of property, plant and equipment so that carrying amounts do not differ materially from fair value. The frequency of revaluation depends on the volatility of fair values of the items in the class. Increases are generally recognised in other comprehensive income, while decreases are recognised in profit or loss.

Question 21Financial Accounting and Reporting

An entity enters into a contract with a customer and identifies two performance obligations. The total transaction price is $100,000, and stand-alone selling prices are $60,000 and $40,000 respectively. How much revenue is allocated to the first performance obligation?

  1. $60,000 Correct answer.
  2. $100,000
  3. $50,000
  4. $40,000

Explanation

IFRS 15 requires the transaction price to be allocated to performance obligations on the basis of relative stand-alone selling prices. The first obligation's stand-alone price of $60,000 out of a total of $100,000 gives an allocation of 60% of the $100,000 transaction price, which is $60,000.

Question 22Financial Accounting and 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 important in determining the functional currency?

  1. The currency in which the parent company reports
  2. The currency in which the entity's shares are quoted
  3. The currency most used by the entity's competitors
  4. The currency that mainly influences sales prices for goods and services Correct answer.

Explanation

IAS 21 lists the currency that mainly influences sales prices of goods and services, and the currency of the country whose competitive forces and regulations determine those prices, as primary indicators of the functional currency. The currency of financing and receipts also provides supporting evidence. The currency of the parent's reporting or the share quotation is not determinative.

Question 23Financial Accounting and Reporting

Which of the following is a required disclosure under IAS 1 regarding the statement of financial position?

  1. The personal remuneration of each employee
  2. The amount of each class of share capital and the rights attached to each class Correct answer.
  3. The fair value of every asset and liability
  4. The names of the entity's major customers

Explanation

IAS 1 requires disclosure of the amount of each class of share capital and the rights, preferences and restrictions attached to each class. It does not require fair values for all assets and liabilities, employee remuneration details, or customer names. These disclosures help users understand the entity's capital structure.

Question 24Financial Accounting and Reporting

An entity has a provision of $500,000 relating to a restructuring announced before the reporting date. The restructuring involves a lease that will be terminated early, with a penalty of $80,000. The lease is onerous and the unavoidable lease payments less expected sublease income amount to $120,000. How should the lease be treated under IAS 37?

  1. Recognise only the $80,000 penalty as the provision
  2. Recognise no provision because the lease is a future cost
  3. Recognise the $120,000 onerous lease provision separately from the restructuring provision Correct answer.
  4. Include the $120,000 within the restructuring provision as a single amount

Explanation

IAS 37 requires an onerous contract provision to be measured at the present obligation under the contract, being the lower of the cost of fulfilling it and the compensation for failing to fulfil it. The onerous lease provision is recognised separately from the restructuring provision because it arises from the contract, not from the restructuring itself. The restructuring provision covers only the direct expenditures necessarily entailed by the restructuring.

Question 25Financial Accounting and Reporting

Under IFRS 15, how should revenue from a licence of intellectual property that is a right to access the entity's IP over time be recognised?

  1. When the licence term expires
  2. At the point in time the licence is granted
  3. Over the period of the licence, as the entity's performance creates or enhances the IP to which the customer has access Correct answer.
  4. Only when the customer makes a payment

Explanation

IFRS 15 distinguishes licences that provide a right to access the entity's intellectual property as it exists throughout the licence period from licences that provide a right to use the IP as it exists at the point in time the licence is granted. A right to access is satisfied over time, so revenue is recognised over the licence period. A static right to use is recognised at a point in time.

Question 26Financial Accounting and Reporting

Under the IASB Conceptual Framework, which measurement basis reflects the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date?

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

Explanation

The Conceptual Framework identifies fair value as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is an exit price notion, distinct from entry prices and entity-specific values.

Question 27Financial Accounting and Reporting

An entity purchases equipment for $100,000 with a residual value of $10,000 and a useful life of five years. Using straight-line depreciation, what is the annual depreciation charge?

  1. $22,000
  2. $18,000 Correct answer.
  3. $10,000
  4. $20,000

Explanation

Depreciation is charged on the depreciable amount, which is cost less residual value ($100,000 minus $10,000 equals $90,000), spread over the five-year useful life. That gives $18,000 per year.

Question 28Financial Accounting and Reporting

Which of the following best describes the purpose of the statement of cash flows under IAS 7?

  1. To show the profit earned on each operating segment
  2. To provide information about historical changes in cash and cash equivalents Correct answer.
  3. To present the fair value of financial instruments at the year end
  4. To reconcile the opening and closing retained earnings balances

Explanation

IAS 7 requires the statement of cash flows to provide information about the historical changes in cash and cash equivalents through operating, investing and financing activities. It helps users assess the entity's ability to generate cash and its liquidity.

Question 29Financial Accounting and Reporting

An entity has a bank overdraft of $50,000 that is repayable on demand and forms an integral part of its cash management. How should the overdraft be presented in the statement of cash flows under IAS 7?

  1. As an operating cash flow separate from cash equivalents
  2. As a financing cash flow in the period it arises
  3. As a non-cash investing transaction
  4. As a component of cash and cash equivalents Correct answer.

Explanation

Under IAS 7, bank overdrafts are included as a component of cash and cash equivalents when they are repayable on demand and form an integral part of the entity's cash management. Movements in them are therefore not shown as financing cash flows.

Question 30Financial Accounting and Reporting

An entity issues 100,000 ordinary shares with a nominal value of $1 each at a price of $5 per share. How should the excess over nominal value be accounted for?

  1. Offset against retained earnings
  2. Recorded in share premium within equity Correct answer.
  3. Recognised as a liability until the shares are fully paid
  4. Recognised as a gain in profit or loss

Explanation

The excess of the issue price over the nominal value of shares is credited to share premium, a component of equity. It is not a profit because it arises from a transaction with owners in their capacity as owners.

Question 31Financial Accounting and Reporting

Under IAS 37, when should a provision be recognised?

  1. When a future operating loss is expected from a planned restructuring
  2. When a contract becomes onerous only after the reporting date
  3. When the entity has a possible obligation whose existence will be confirmed only by uncertain future events
  4. When a present obligation exists, an outflow is probable, and the amount can be reliably estimated Correct answer.

Explanation

IAS 37 requires recognition of a provision when a present obligation arising from a past event exists, an outflow of resources embodying economic benefits is probable, and a reliable estimate can be made. All three conditions must be met.

Question 32Financial Accounting and Reporting

An entity's financial statements are authorised for issue on 20 March. On 5 March, before authorisation, the entity's major customer becomes insolvent owing $400,000. Under IAS 10, how should this be treated?

  1. As a change in accounting estimate
  2. As a prior period error under IAS 8
  3. As a non-adjusting event, because the insolvency occurred after the reporting date
  4. As an adjusting event, because it provides evidence of conditions existing at the reporting date Correct answer.

Explanation

The customer's insolvency before the financial statements are authorised provides evidence about the recoverability of a receivable that existed at the reporting date. IAS 10 therefore treats it as an adjusting event requiring recognition in the current period statements.

Question 33Financial Accounting and Reporting

Under IFRS 15, how should an entity account for consideration paid to a customer?

  1. Recognise it as a financial asset at amortised cost
  2. Reduce the transaction price unless it is in exchange for a distinct good or service Correct answer.
  3. Always deduct it from revenue without assessing its purpose
  4. Always recognise it as an expense when paid

Explanation

Consideration paid to a customer is generally treated as a reduction of the transaction price unless it is in exchange for a distinct good or service that the customer transfers to the entity. If a distinct good or service is received, the entity accounts for that purchase separately.

Question 34Financial Accounting and Reporting

An entity has an asset with a carrying amount of $500,000 and a recoverable amount of $450,000. It belongs to a cash-generating unit that has a recoverable amount exceeding its carrying amount. How should the impairment be treated under IAS 36?

  1. Recognise an impairment loss of $50,000 for the asset Correct answer.
  2. Recognise no impairment because the CGU is not impaired
  3. Recognise an impairment loss of $50,000 only in the CGU
  4. Disclose the impairment without recognition

Explanation

An individual asset must be tested for impairment even if the cash-generating unit to which it belongs is not impaired. Because the carrying amount exceeds the recoverable amount by $50,000, that loss is recognised for the asset.

Question 35Financial Accounting and Reporting

Under IAS 12, how should deferred tax be measured?

  1. At the average tax rate over the preceding five years
  2. At the tax rates expected to apply when the asset is realised or liability settled, based on enacted or substantively enacted rates Correct answer.
  3. At the tax rates in force at the reporting date only, regardless of future changes
  4. At the rate that minimises the deferred tax liability

Explanation

IAS 12 requires deferred tax to be measured at the tax rates expected to apply in the period when the asset is realised or the liability settled. Those rates must be based on tax laws enacted or substantively enacted by the reporting date.

Question 36Financial Accounting and Reporting

An entity grants 1,000 share options to an employee on 1 January, vesting after three years of service. The fair value of each option at grant date is $6. What is the total expense recognised over the vesting period?

  1. $18,000
  2. $6,000 Correct answer.
  3. $1,000
  4. $2,000

Explanation

Under IFRS 2, the expense is based on the grant-date fair value of the equity instruments granted. The total expense is 1,000 options multiplied by $6, which is $6,000, recognised over the three-year vesting period.

Question 37Financial Accounting and Reporting

Which of the following is a key principle of IFRS 15 for recognising revenue?

  1. Revenue is recognised when the contract is signed by both parties
  2. Revenue is recognised when the invoice is issued to the customer
  3. Revenue is recognised when cash is received from the customer
  4. Revenue is recognised when the entity transfers control of a promised good or service to the customer Correct answer.

Explanation

IFRS 15 is based on the core principle that revenue is recognised when control of a promised good or service transfers to the customer. The amount recognised reflects the consideration to which the entity expects to be entitled.

Question 38Financial Accounting and Reporting

An entity has a defined contribution plan. It contributes $300,000 to the plan during the year. What is the accounting treatment?

  1. Recognise the contribution as an asset until retirement
  2. Recognise the contribution as an expense when the employee renders service Correct answer.
  3. Disclose the contribution without recognising it in profit or loss
  4. Recognise a defined benefit obligation for the contribution

Explanation

Under IAS 19, defined contribution plan contributions are recognised as an expense when the employee has rendered the service giving rise to the contribution. The entity bears no further obligation beyond the contribution itself.

Question 39Financial Accounting and Reporting

Under IFRS 9, how should a financial liability held for trading be measured after initial recognition?

  1. At the lower of cost and fair value
  2. At fair value through other comprehensive income
  3. At amortised cost
  4. At fair value through profit or loss Correct answer.

Explanation

IFRS 9 requires financial liabilities held for trading to be measured at fair value through profit or loss. Other financial liabilities are generally measured at amortised cost unless designated otherwise.

Question 40Financial Accounting and Reporting

An entity has a building measured using the revaluation model under IAS 16. Its carrying amount is $800,000 and its fair value is $950,000. There was previously an unrealised revaluation loss of $60,000 recognised in profit or loss. How should the increase be treated?

  1. Recognise the full $150,000 in other comprehensive income
  2. Recognise the full $150,000 in profit or loss
  3. Recognise $90,000 in profit or loss and $60,000 in other comprehensive income
  4. Recognise $60,000 in profit or loss and $90,000 in other comprehensive income Correct answer.

Explanation

A revaluation increase is recognised in other comprehensive income to the extent it reverses a previous revaluation decrease for the same asset that was recognised in profit or loss. The $60,000 prior loss is reversed through profit or loss and the remaining $90,000 is recognised in OCI.

Question 41Financial Accounting and Reporting

Under IAS 21, which exchange rate should be used to translate a monetary item denominated in a foreign currency at the reporting date?

  1. The closing rate at the reporting date Correct answer.
  2. The average rate for the reporting period
  3. The forward rate for a future settlement date
  4. The historical rate at the transaction date

Explanation

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

Question 42Financial Accounting and Reporting

Under IAS 1, which of the following is required to be presented in the statement of financial position?

  1. Property, plant and equipment as a single line item without further classification
  2. A classification of assets and liabilities as current and non-current unless a liquidity presentation is more relevant Correct answer.
  3. The fair value of all assets and liabilities
  4. The details of every individual trade receivable

Explanation

IAS 1 requires entities to present current and non-current assets and liabilities as separate classifications, unless a presentation based on liquidity provides information that is reliable and more relevant. This helps users assess the entity's liquidity position.

Question 43Financial Accounting and Reporting

An entity has 500,000 ordinary shares outstanding throughout the year and reports profit of $1,000,000. It has 100,000 options outstanding with an exercise price of $4, and the average market price of the shares during the year is $5. What is the diluted earnings per share under IAS 33?

  1. $1.92
  2. $2.00
  3. $1.67
  4. $1.85 Correct answer.

Explanation

The options are dilutive because the exercise price is below the average market price. Under the treasury share method, the incremental shares are 100,000 minus (100,000 times $4 divided by $5), which equals 20,000, giving 520,000 diluted shares. Dividing $1,000,000 by 520,000 gives approximately $1.92.

Question 44Financial Accounting and Reporting

Under IAS 2, how should the cost of inventory be determined for items that are not ordinarily interchangeable?

  1. Using specific identification of their individual costs Correct answer.
  2. Using the first-in, first-out formula
  3. Using the weighted average cost formula
  4. Using the last-in, first-out formula

Explanation

IAS 2 requires specific identification of individual costs for inventory items that are not ordinarily interchangeable and for goods produced for specific projects. Cost formulas such as FIFO and weighted average are used for interchangeable items.

Question 45Financial Accounting and Reporting

An entity leases equipment under a five-year lease with annual payments of $20,000 payable in arrears. The interest rate implicit in the lease is 5%. The present value of the lease payments is approximately $86,590. What is the interest expense recognised in the first year under IFRS 16?

  1. $4,000
  2. $4,329 Correct answer.
  3. $5,000
  4. $20,000

Explanation

Under IFRS 16, interest on the lease liability is calculated on the outstanding balance using the discount rate. Multiplying $86,590 by 5% gives approximately $4,329 for the first year.

Question 46Financial Accounting and Reporting

Under IAS 7, how should dividends paid to shareholders by a non-financial entity normally be classified?

  1. Investing activities only
  2. Financing activities or operating activities, consistently applied Correct answer.
  3. Non-cash transaction with no classification
  4. Operating activities only

Explanation

IAS 7 permits dividends paid to be classified as either financing or operating cash flows, provided the classification is applied consistently from period to period. Many entities choose financing because dividends relate to obtaining financial resources.

Question 47Financial Accounting and Reporting

An entity has a contingent asset that is virtually certain to be realised. How should it be treated under IAS 37?

  1. Recognised as a provision
  2. Disclosed as a contingent asset only
  3. Recognised as a receivable and income Correct answer.
  4. Ignored entirely

Explanation

IAS 37 states that a contingent asset is not recognised unless realisation of the income is virtually certain. Where it is virtually certain, the related asset is no longer a contingent asset and is recognised in the financial statements.

Question 48Financial Accounting and Reporting

Under IFRS 15, an entity sells a product with a right of return. How should it account for the expected returns?

  1. Recognise revenue net of expected returns and a refund liability for the expected refund Correct answer.
  2. Recognise revenue in full and ignore the return right
  3. Recognise revenue only when the return period expires
  4. Recognise a provision equal to the full sales value

Explanation

IFRS 15 requires revenue to be recognised only to the extent it is highly probable there will not be a significant reversal. The entity recognises a refund liability for the consideration expected to be refunded and an asset for the right to recover the returned goods.

Question 49Financial Accounting and Reporting

Which of the following is a disclosure requirement under IAS 24 for related party transactions?

  1. The nature of the related party relationship and information about the transactions, outstanding balances and commitments Correct answer.
  2. The personal tax position of each key management person
  3. The fair value of every asset owned by the related party
  4. The internal audit reports of the related party

Explanation

IAS 24 requires disclosure of the nature of the related party relationship, together with information about the transactions, outstanding balances and commitments. This enables users to understand the potential effect of the relationship on the financial statements.

Question 50Financial Accounting and Reporting

An entity prepares its financial statements on a going concern basis. Which of the following best describes management's responsibility under IAS 1?

  1. To prepare the statements on a going concern basis only if the auditor agrees
  2. To prepare the statements on a going concern basis only when profits are forecast
  3. To prepare the statements on a going concern basis for a maximum of five years
  4. To prepare the statements on a going concern basis unless management intends to liquidate or cease trading Correct answer.

Explanation

IAS 1 requires management to assess the entity's ability to continue as a going concern and to prepare the statements on that basis unless it intends to liquidate or cease trading. Where material uncertainties exist, they must be disclosed.