F7

Question 1

Do goods purchased (inventory) in a currency different to the functional currency need to be retranslated at the reporting date?

Answer 1

No. Inventory is a non-monetary item and non-monetary items are not re-translated at the reporting date.

Question 2

Where is the taxation on the revaluation of PPE recognised?

Answer 2

The gain on revaluation of PPE is recognised through other comprehensive income and the associated tax is also recognised through other comprehensive.

Question 3

How are variable overheads allocated to an item of inventory?

Answer 3

Variable overheads are allocated based on the actual level of production.

Question 4

How are fixed overheads allocated to the cost of an item of inventory?

Answer 4

Fixed overheads are allocated on the basis of normal/budgeted capacity. This is the capacity that is expected to be achieved based on the average over several years.

Question 5

What are the elements of financial statements ?

Answer 5

Assets
Liabilities
Equity
Income
Expense

Question 6

What is an Asset and Liability ?

Answer 6

Assets:
-present economic resource
-controlled
-past events

Liability:
-present obligation
-Transfer an economic resource
-past event

Question 7

What is Equity , Income and Expense?

Answer 7

Equity: Residual interest in assets less liabilities

Income: -Increase in assets
- reduction in liability
Expense: - reduction in asset

Question 8

What are the tangible non current assets

Answer 8

Plant property and equipment
Borrowing costs
Government grants
Investment property

Question 9

Define an Asset

Answer 9

a present economic resource controlled by an entity as a result of past events.
an economic resource is a right that has the potential to produce economic benefits

Question 10

What is the fulfilment value

Answer 10

this is the present value of the amount of cash of other economic resources that the entity expects to be obligated to transfer to settle the liability

Question 11

How is a lease incentive accounted for within the financial statements?

Answer 11

A lease incentive is deducted from the initial measurement of the asset.

Question 12

Over what period of time should a right-of-use asset be depreciated?

Answer 12

A right-of-use asset is depreciated over the shorter of the lease term and the useful life of the asset

Question 13

What are the limitations of financial statements?

Answer 13

*Historic (prepared to a specific date and published after the reporting date)
*Standardised format
*Limited narrative information
*Based on estimates and judgements
*Different accounting policies limiting comparison on a company y company basis

Question 14

When is a deferred tax liability recognised?

Answer 14

A deferred tax liability it recongised when the carrying value is greater than the tax base.

Question 15

How is the income tax expense figure calculated on the statement of profit or loss?

Answer 15

Current year tax estimate
Prior year under/over provision
Movement in deferred tax balance

Question 16

What figure is shown under current liabilities for tax payable on the statement of financial position?

Answer 16

The tax payable figure is the estimate of tax at the reporting date.

Question 17

How are biological assets measured?

Answer 17

Biological assets are measured at fair value less costs to sell.

Question 18

What is a biological asset?

Answer 18

A biological asset is a living plant or animal.

Question 19

What exchange rate is used to translate monetary assets/liabilities at the reporting date

Answer 19

Monetary assets/liabilities are translated at the reporting date using the closing rate.

Question 20

Where are gains and losses on translation of a monetary item at the reporting date recognised.

Answer 20

Gains/losses on translation of a monetary item are recognised through profit or loss.

Question 21

When can an entity measure a financial asset using amortised cost?

Answer 21

A financial asset can be measured at amortised cost when it fulfills BOTH the business model test and cash flow characteristics test.

Question 22

How are financial liabilities initially measured?

Answer 22

Financial liabilities are initially measured at fair value LESS transaction costs.

Question 23

How are financial assets initially measured

Answer 23

Financial assets are initially measured at fair value PLUS transaction costs, unless held at FVTPL(fair value through profit and loss) where they are recognised immediately through profit or loss.

Question 24

How are financial assets classified?

Answer 24

Fair value through profit or loss (FVTPL)
Fair value through other comprehensive income (FVTOCI)
Amortised cost

Question 25

How is the initial liability calculated in a convertible debt instrument?

Answer 25

The liability is calculated as the present value of the future cash flows, assuming that the debt is a 100% debt instrument, i.e. no conversion option. The cash flows are the annual coupon payments plus the redemption amount. These are then discounted at the rate of interest on similar debt without the conversion option.

Question 26

How should a company account for a government grant?

Answer 26

Recognise in the P&L over the period in which the related expenditure is recognised.

Question 27

What is the formula for EPS?

Answer 27

Profit for the year attributable to the ordinary sharehokders (i.e. and after NCI)

divided by:
Weighted average number of equity shares

multiplied by 100

Question 28

What are the five stages of the revenue recognition model?

Answer 28

Identify the contract.
Identify the performance obligations.
Determine the price.
Allocate the price to the performance obligations.
Recognise revenue as performance obligations are satisfied.

Question 29

What is the accounting for negative goodwill?

Answer 29

Negative goodwill should be credited to the P&L immediately.

Question 30

Should you depreciate PPE and investment properties if held at FV?

Answer 30

PPE – yes
Investment properties – no

Question 31

Define Functional Currency.

Answer 31

Currency of the primary economic environment in which the entity operates.

Question 32

What are the 6 qualitative characteristics of financial information?

Answer 32

Relevance
Faithful representation
Comparability.
Verifiability.
Timeliness.
Understandability

Question 33

Is an increase in the value of closing inventory, when compared with the previous year’s value, added to the financing section of a Statement of Cash Flows, or is it deducted?

Answer 33

Neither! The figure for an increase in the value of closing inventory when compared with the previous year’s figure is not shown in the financing activities section of a Statement of Cash Flows. The figure would be deducted within the operating activities section

Question 34

What are the two alternative methods for the preparation of a Statement of Cash Flows?

Answer 34

The two alternative methods for the preparation of a Statement of Cash Flows are the “direct method” and the “indirect method”
(the indirect method is the only method examined in the FR exam)

Question 35

In a Statement of Cash Flows is the figure for tax paid deducted in arriving at net cash flow from investing activities, or is it added?

Answer 35

Neither! The figure for tax paid is not shown in the investing activities section of a Statement of Cash Flows. The figure would be deducted within the operating activities section.

Question 36

In a Statement of Cash Flows is a profit on disposal of an asset deducted in arriving at cash generated from operations, or is it added?

Answer 36

If a loss on disposal of an asset was made then this would be added in arriving at cash generated from operations.

Question 37

What are the three main sub-divisions in a Statement of Cash Flows?

Answer 37

Operating activities
Investing activities, and
Financing activities

Question 38

What is a “cash equivalent” in the context of a Statement of Cash Flows?

Answer 38

a short-term, highly liquid investments that are readily convertible into known amounts of cash and are subject to an insignificant risk of changes in value. An example being government bonds/guilts.

Question 39

What is meant by the term “window dressing”?

Answer 39

Window dressing is the entering into (or not entering into) a transaction with the intention of distorting the view shown by the financial statements.

Question 40

What is the basis of the calculation for “dividend yield”?

Answer 40

Dividend yield is computed as the cent return per dollar invested – in other words, dividend per share / share price.

Question 41

When an entity has an “interest cover” multiple of 4.5x, would you conclude that the entity is in a strong position?

Answer 41

It is not possible to conclude anything at all from an isolated piece of information! To be able to analyse the ratio, you will need a comparative figure to see if we are in a stronger position. Comparative figures are usually those of the prior year but can be against industry averages or a competitor.

Question 42

Suggest some reasons why the calculated “days’ sales in receivables” has increased from 45 days last year to 52 days this year

Answer 42

• A substantial sale just before the year end
• A result of management strategy to increase credit period offered to customers
• Registration for sales tax this year
• Change in cash / credit sales mix
• Break down in credit control department

Other reasons could equally be a contributory cause and you need to analyse the specific scenario in the question.

Question 43

How is the quick ratio (acid test) calculated?

Answer 43

(current assets - inventory) / current liabilities

Question 44

How is the asset turnover multiple calculated?

Answer 44

revenue / capital employed (equity plus net debt)

Question 45

Having calculated an entity’s ROCE at 13%, what question does this answer?

Answer 45

A calculated ratio in isolation answers NO question. All it can do is raise questions – how, why, when? How has it changed from the previous year? Why is it different from the industry average/competition? When did the change arise? Could it have been at the start or the end of the year?

When answering an analysis question within the constructed response question in section C always use the word ‘because’ to help you explain the movement.

Question 46

What is the full title of the abbreviation “P/E ratio”?

Answer 46

“Price / Earnings ratio” and is an important performance ratio. It allows the user of the accounts to make a more like-for-like comparison of the performance of two different entities.

Question 47

n a diluted earnings per share question with both options and convertible loan stock, the calculated earnings per share after the options had been projected to be taken up was 57 cents per share. After the loan conversion, the earnings per share figure was 57.2 cents per share.

What figure for diluted earnings per share will be disclosed in the financial statements?

Answer 47

The disclosed diluted earnings per share would be 57 cents – the worst position is always shown and anti-dilutive conversions are therefore ignored.

Question 48

What is the appropriate accounting treatment for an adjusting event?

Answer 48

The appropriate accounting treatment for an adjusting event is to ….. adjust the financial statements as though the event had happened before the reporting date. So, if a customer went into liquidation after the reporting date but prior to the accounts being authorised for issue, this would be an adjusting event and the receivable balance would be written off through profit or loss

Question 49

What is the correct double entry to reflect a non-adjusting event?

Answer 49

A non-adjusting event does not have a double entry as we do not need to adjust the accounts. The appropriate accounting treatment is to disclose the matter in the notes to the financial statements, if it is material.

Question 50

What is the definition of a “non-adjusting event”

Answer 50

A non-adjusting event is defined as “any event that occurs after the reporting date but which does not relate to a condition or situation which existed at the reporting date but knowledge of the matter is material for a proper understanding of the financial statements”. A fire, flood or the fall in the value of an investment after the reporting date is an example of a non-adjusting event.

Question 51

What is the definition of an “adjusting event”?

Answer 51

An adjusting event is defined as “any event that occurs after the reporting date and which relates to a condition or situation which did exist at the reporting date or fixes with greater certainty an amount or estimate as at the reporting date”. Common example are where a credit customer goes bankrupt after the reporting date, where there is a sale of inventory at below cost, or the discovery of fraud/error.

Question 52

An adjusting event is defined as “any event that occurs after the reporting date and which relates to a condition or situation which did exist at the reporting date or fixes with greater certainty an amount or estimate as at the reporting date”. Common example are where a credit customer goes bankrupt after the reporting date, where there is a sale of inventory at below cost, or the discovery of fraud/error.

Answer 52

Events after the reporting period are defined as “those events, both favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are authorised for issue.” IAS 10 [3]

Question 53

What is an onerous contract?

Answer 53

An onerous contract is one where the costs under the contract exceed the economic benefits of fulfilling the contract. It essentially gives an entity no chance of an overall inflow of economic benefit and the company must provide for the onerous contract.

Question 54

What is a “constructive obligation” of an entity?

Answer 54

A constructive obligation of an entity is one which is neither legal nor contractual but, because the entity has acted in a consistent manner in the past (a demonstrable pattern of past practice), the entity has raised in the minds of those affected the valid expectation that it will continue to act in that consistent manner.

An example of this would be where a company states on its website that it will clean up any environmental damage, so that even if there is no legal obligation to do so they have created the constructive obligation and must provide for the clean up costs.

Question 55

Details of a contract in its first year are as follows:
* contract value $2,000,000
*costs to date $1,250,000
* 60% complete
* amounts invoiced $1,150,000
* amounts received $1,100,000
* estimated costs to complete $850,000
Revenue is recognised over time and on the basis of percentage complete.

What is the value of costs to be recognised?

Answer 55

Costs to be recognised in this first year of the contract are $1,300,000.

A loss is anticipated overall and must be recognised in full. The loss is $100,000 ($2,000,000 – $1,250,000 – $850,000)

Revenue of $1,200,000 (60% of $2,000,000) is recognised and to recognise a loss of $100,000, costs must be $1,300,000.

Question 56

In the context of financial instruments, what is the definition of a compound instrument?

Answer 56

In the context of financial instruments, a compound instrument is a financial instrument that has the characteristics of both equity and a liability.

In the FR examination, convertible debentures/loan stock will be an example of a compound financial instrument. Split accounting is used to recognise a liability and equity element on initial recognition.

Question 57

Define the term “financial asset”.

Answer 57

financial asset is defined as any asset that is:
* cash
* a contractual right to receive cash or another financial asset from another entity (trade receivable)
* a contractual right to exchange financial assets or liabilities with another entity under conditions that are potentially favourable (favourable forward contract)
* an equity instrument of another entity (investment in shares)

Question 58

What is the underlying assumption for the preparation of financial statements as per The Conceptual Framework?

Answer 58

Going Concern is the underlying assumption.

Question 59

An entity enters into a contract to pay rentals for the use of a short-life asset with a fair value of $10,000, 4 months into the accounting period. Assets of this description are generally depreciated over a two year period. If the entity accounts for depreciation on a month by month basis, what is the correct depreciation charge for this asset?

Answer 59

Short life assets in a lease agreement are NOT depreciated.

Question 60

What three characteristics are required to faithfully represent a transaction?

Answer 60

The three characteristics are complete, neutral and free from bias.

Question 61

What is the definition of a lease?

Answer 61

A lease is where there is the right to obtain substantially all of the benefits of using the asset and direct the use of the asset.

Question 62

At what value should a lease liability be measured?

Answer 62

A lease liability should be measured at the the present value of the minimum lease payments.

Question 63

What is the appropriate accounting treatment for a short-life, leased asset?

Answer 63

The appropriate accounting treatment is to expense the total lease payments over the lease period through profit or loss.

Question 64

• it must be available for immediate sale
• the sale must be highly probable
• management should be committed to the sale
• there is an active programme to find a buyer
• the asset is being actively marketed
• the sale is expected to be completed within 12 months
• it is unlikely that the plan will be changed significantly

Answer 64

Before it may be classified as an asset held for sale, certain conditions must apply.

What are those conditions?

Question 65

What is the appropriate accounting treatment for an asset which has been classified as an “non-current asset held for sale”?

Answer 65

is to measure it initially at the lower of carrying amount and fair value less costs to sell. If it is held under the revaluation model then it must be revalued first according to IAS 16 prior to reclassification.

It should be shown separately on the Statement of Financial Position under current assets and should not be depreciated

Question 66

In the context of asset impairments, what is the limit below which an asset should not be impaired?

Answer 66

In the context of asset impairments, no asset should be impaired to an amount lower than its recoverable amount.

Its recoverable amount is the higher of the value in use and fair value less costs to sell.

Question 67

In the context of asset impairments, what is the definition of a cash generating unit?

Answer 67

In the context of asset impairments, a cash generating unit is defined as:
“the smallest group of identifiable assets which generates cash inflows independently of other assets or groups of assets”

Question 68

In the context of asset impairments, of what is “CGU” the abbreviation?

Answer 68

In the context of asset impairments, “CGU” the abbreviation for a “Cash Generating Unit”.

A CGU is the the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. IAS 36 [6]

Question 69

In the context of asset impairments, what is the definition of “recoverable amount”?

Answer 69

In the context of asset impairments, “recoverable amount” is the higher of “value in use” and “fair value less costs to sell”

Question 70

When considering whether an asset needs to be impaired, the carrying value should be compared with what other value?

Answer 70

When considering whether an asset needs to be impaired, the carrying value should be compared with the recoverable amount of that asset, which is the higher of the value in use and fair value less costs to sell.

Question 71

What is a Key view of conceptual Framework?

Answer 71

The conceptual framework is not an IFRS Accounting Standard and nothing in the framework overrides any IFRS Accounting Standard or any requirement in an IRFS Accounting Standard.

Question 72

What are the two fundamental conceptual framework?

Answer 72

relevance and faithful representation

Question 73

What are the five elements of the financial statement?

Answer 73

Asset
Liabilities
Equity
Income
Expenses

Question 74

What are the five elements of the financial statement?

Answer 74

Asset
Liabilities
Equity
Income
Expenses

Question 75

What are the Advantages of principle based approach ?

Answer 75

(a) A principles-based approach based on a single conceptual framework ensures standards are consistent with each other.
(b) Principles offer a ‘catch all’ scenario.
(c) Principles reduce the need for excessive detail in standards

Question 76

What are the disadvantages of principle based approach ?

Answer 76

(a) Principles can become out of date as practices (eg the current move towards greater use of
‘fair values’) change.
(b) Principles can be overly flexible and subject to manipulation

Question 77

What is the aim of the International Sustainability Standards Board?

Answer 77

To provide investors and other capital market participants with information about the companies’ sustainability-related risks and opportunities, to help them make informed decisions.
This aims to improve the reliability and comparability of reporting by companies on climate and other environmental, social and governance (ESG) matters.

Question 78

Why is there a need for regulatory framework?

Answer 78

1.To act as a central source of reference
2.Designate a system of enforcement to ensure consistency

Question 79

Which of the following bodies is responsible for reviewing new financial reporting issues and issuing guidance on the application of IFRS® Accounting Standards?
a)The International Accounting Standards Board 
b)The IFRS Foundation 
c) The IFRS Interpretations Committee
d) The IFRS Advisory Council

Answer 79

c) The IFRS Interpretations Committee

Question 80

What are some benefits of historical accounting?

Answer 80

1. Amounts used are objective and free from bias
2. It is an easily understood system of valuation
3. Amounts are reliable and can be verified to invoices and document.

Question 81

value in use, historical cost & fair value

Answer 81

Present value of future cash flows, less costs of disposal is value in use.

Costs incurred at the time of acquisition is historical cost.

Open market value of the asset is fair value.

Question 82

Under the current cost measurement basis, what is the definition of the value in use measurement method?

Answer 82

Present value of future cash flows, less costs of disposal.

Question 83

What are the intention of the International Sustainability Standards Board (ISSB)?

Answer 83

To develop standards that result in a high-quality, comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets