M2 Record & Process Transactions

Question 1

Assets should be recognised when:

Answer 1

Assets should be recognised when: (1) it is probable that future economic benefits will flow to the entity, and (2) the asset can be measured reliably. On the other hand, a liability is recognised when: (1) it is probable that the settlement of a present obligation will result in an outflow of economic benefits, and (2) that outflow can, once again, be measured reliably.

Question 2

An item meets the definition of an element in accordance with the conceptual framework for financial reporting. Which of the following criteria must be met for the item to be recognised in the financial statements?

(1) It is probable that any future economic benefit associated with the item will flow to or from the entity.
(2) The item has a cost or value that can be measured with reliability
(3) The item is controlled by the reporting entity.

Answer 2

1 & 2

As per the framework, an item is recognised when it results from past events from which future economic benefits are expected to flow in or out of the entity, and when the value of the item can be reliably measured.

Question 3

What is the objective of financial statements according to the framework?

Answer 3

The key goal of financial statements is to ensure that users of financial statements receive information which is good enough to enable them to make sensible economic decisions.

To provide information about the financial position, performance, and changes in financial position of an entity that is useful to a wide range of users in making economic decisions

Question 4

According to the IFRS Conceptual Framework, which of the following does not relate to liabilities:

Answer 4

expectation of future economic benefits

The point ‘expectation of future economic benefits’ is a characteristic of an asset, not a liability. The rest of the options relate to liabilites.

Question 5

Income is defined as:

Answer 5

increases in economic benefits during the accounting period

Income is defined as increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from equity participants.

Question 6

Which body develops International Financial Reporting Standards?

Answer 6

IASB

The International Accounting Standards Board (IASB) has sole responsibility for issuing International Financial Reporting Standards (IFRS)

Question 7

The following are possible methods of measuring assets and liabilities other than historical cost:

1. Current cost
2. Realisable value
3. Present value
4. Replacement cost

According to the IASB’s Conceptual Framework for Financial Reporting which of the measurement bases above can be used by an entity for measuring assets and liabilities shown in its statement of financial position?

Answer 7

1,2&3

The Framework identifies four measurement bases, historical cost, current cost, realisable value and present value

Question 8

Which of the following are qualitative characteristics of financial statements according to the Framework?

1. Verifiability.
2. Timeliness.
3. Understandability.
4. Comparability.

Answer 8

All of the above

Verifiability ,timeliness, understandability and comparability are all qualitative characteristics of financial information as per the Framework

Question 9

Goals of the Conceptual Framework?

Answer 9

To help the IASB in increasing the number of alternative accounting treatments permitted by IFRS
To help auditors form an opinion on whether financial statements conform with IFRS
To provide information to all parties who may be interested in the work of the IASB

Question 10

Duties of the IFRS Interpretations Committee?

Answer 10

To provide guidance on financial reporting issues not specifically addressed in the IFRSs
To interpret the application of International Financial Reporting Standards

The IFRS Interpretations Committee issues guidance on accounting topics, where divergent interpretations of the standards exist or where there are new issues which are not specifically dealt with in the standards. However, before any of the interpretations issued by the IFRS IC become binding, they first need to be approved by the IASB.

Question 11

The standard that deals with requirements or permission of fair value measurement for assets or liabilities is:

Answer 11

IAS 16, IAS 40, IAS 41, and IFRS 9 all deal with requirements or permission of fair value measurement for assets or liabilities. IFRS 13 does not deal with them, instead it provides a set of rules which must be applied for fair value measurement.

Question 12

According to IFRS 13 – Fair value measurement, which of the following inputs in fair value measurements of an asset or liability will have LEAST preference?

Answer 12

Unobservable inputs

Unobservable inputs are included in the level 3 inputs category and are least preferred by the standard. Unadjusted quoted prices from active markets are included in level 1 and are considered the most objective to measure assets or liabilities being measured at fair value. Quoted prices from non-active markets and observable data other than quoted prices both belong to the level 2 category and are preferred over unobservable data (i.e., level 3).

Question 13

IFRS 13 – Fair value measurement focuses on:

Answer 13

Comparability and consistency

IFRS 13 provides rules to measure assets or liabilities on fair value. The aim of the standard is to ensure consistency and comparability of fair value measurements used across different lines within the statement of financial position. Understandability, accuracy, and neutrality can be achieved by achieving consistency and comparability (both of which are the primary focus of the standard).

Question 14

An orderly transaction is a transaction that assumes:

Answer 14

Involvement of participants who are not forced to transact
Adequate exposure to the market

An orderly transaction is a transaction where both the listed features are present, i.e., adequate exposure, as well as the involvement of participants who are not forced to carry out the transaction.

Question 15

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date is called:

Answer 15

Fair Value

Selling price or revenue do not deal with transfer of a liability. Fair value is defined by IFRS 13 as the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction.

Question 16

What is the basic premise of IFRS 10?

Answer 16

A company, which controls one or more other entities, is required present consolidated financial statements

The basic premise of IFRS 10 is that a company which controls one or more other entities is required present consolidated financial statements.

Question 17

What is required to determine that an investor exercise control over an investee?

Answer 17

Exposure, or rights, to variable returns from its involvement with the investee
The ability to use its power over the investee to affect a number of the investor’s returns
Power over the investee

Accordingly, an investor is deemed to exercise control over an investee if and only if that investor has all of the following: - Power over the investee, - Exposure, or rights, to variable returns from its involvement with the investee, and - The ability to use its power over the investee to affect a number of the investor’s returns

Question 18

What should occur if a member of the group uses accounting policies which differ from those adopted for the purposes of preparing consolidated financial statements?

Answer 18

Appropriate adjustments are required to ensure conformity with the policies followed by the group

If a member of the group uses accounting policies which differ from those adopted for the purposes of preparing consolidated financial statements, appropriate adjustments are required to ensure conformity with the policies followed by the group.

Question 19

What should occur if a subsidiary has different reporting period than parent company?

Answer 19

Additional financial information as of the same date as the financial statements of the parent, unless it is impracticable to so

IFRS 10 states that if the end of the reporting period of the parent is different from that of a subsidiary, the subsidiary must prepare, for consolidation purposes, additional financial information as of the same date as the financial statements of the parent, unless it is impracticable to do so.

Question 20

Should consolidation statements be prepared as if those entities were, in fact, a single business?

Answer 20

Yes, as the single economic unit concept

Although the parent and its subsidiaries remain legally separate, the consolidated financial statements of the group which they constitute must be prepared as if those entities were, in fact, a single business. This perspective on reporting the activities of a group is referred to as the single economic unit concept.

Question 21

If the parent entity itself is a partially-owned subsidiary of another entity, it may not prepare consolidated financial statements if:

Answer 21

All of its remaining owners do not object to its intention not to present consolidated financial statements

IFRS 10 states that a parent entity may choose not to prepare consolidated financial statements if the parent itself is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and all of its remaining owners have been informed about, and do not object to its intention not to present consolidated financial statements.

Question 22

A non-current asset, or disposal group, classified as held for sale should be measured at the lower of its carrying amount and:

Answer 22

Fair value less costs to sell

An asset or disposal group that is “held for sale” should be classified at the lower of its carrying amount and fair value less costs to sell (also known as “net realisable value”).

Question 23

One of the circumstances when an individual subsidiary may actually be excluded from consolidated financial statements is:

Answer 23

When this is an immaterial subsidiary

The specific subsidiary may be deemed immaterial. An immaterial subsidiary would not require inclusion in the group’s consolidated financial statements.

Question 24

Which of the following should not be disclosed by the parent who wishes to take advantage of the IFRS 10 exemption from preparing consolidated financial statements?

Answer 24

A list of all significant transactions made by its subsidiaries, joint ventures and associates

A parent who wishes to take advantage of the IFRS 10 exemption from preparing consolidated financial statements cannot conceal the fact that it exercises control over other entities, and is, in fact, required to disclose the following information in its separate financial statements: - The fact that the exemption from consolidation has been used, and the name and principal place of business of the company whose IFRS-compliant consolidated financial statements have been produced for public use; - A list of its significant investments in subsidiaries, joint ventures and associates; - A description of the method used to account for the above investments in its separate financial statements.

Question 25

One of the conditions which allow not to prepare consolidated financial statements states that parent’s debt or equity instruments, i.e. its bonds or shares, are not traded in a:

Answer 25

Public market

Parent’s bonds or shares should not be traded on a public market, where public market is to be understood broadly to mean a domestic or foreign stock exchange or an over-the-counter market.