AAT L4 Financial Statements (Companies) 2 — Questions and Answers
Question 1: The non-controlling interest (NCI) in a consolidated balance sheet represents:
- The parent company's shareholding in the subsidiary
- The portion of the subsidiary's equity not owned by the parent (Correct answer)
- An intercompany loan balance
- The goodwill attributable to the parent only
Correct answer: The portion of the subsidiary's equity not owned by the parent
NCI is the equity interest in a subsidiary not attributable to the parent company — it represents the minority shareholders' share of the subsidiary's net assets.
Question 2: Under FRS 102, development costs are capitalised when:
- The entity has a development department
- Specific criteria are met including technical feasibility, intention to complete, and probability of future economic benefits (Correct answer)
- All development expenditure is always capitalised
- Management decides to capitalise them for competitive reasons
Correct answer: Specific criteria are met including technical feasibility, intention to complete, and probability of future economic benefits
FRS 102 Section 18 permits (and in some cases requires) capitalisation of development costs when specific recognition criteria are met, similar to IAS 38 criteria.
Question 3: Under FRS 102, a finance lease is one in which:
- The lease term is more than one year
- Substantially all risks and rewards of ownership are transferred to the lessee (Correct answer)
- The lessee has an option to purchase the asset
- The lease payments are tax-deductible
Correct answer: Substantially all risks and rewards of ownership are transferred to the lessee
Under FRS 102 Section 20, a finance lease transfers substantially all the risks and rewards incidental to ownership of the underlying asset to the lessee, regardless of whether title ultimately passes.
Question 4: Which of the following is shown as a non-current liability in a company's balance sheet?
- Trade payables due within 12 months
- A bank overdraft
- A 5-year loan from the bank, classified by repayment profile (Correct answer)
- Accruals due within 12 months
Correct answer: A 5-year loan from the bank, classified by repayment profile
A 5-year bank loan's non-current portion (repayable after more than 12 months) is classified as a non-current liability. The portion due within 12 months is reclassified as current.
Question 5: When preparing a statement of cash flows under the indirect method, which of the following is deducted from operating profit?
- Depreciation charges
- An increase in trade payables
- A decrease in trade receivables
- An increase in inventories (Correct answer)
Correct answer: An increase in inventories
An increase in inventories means the business purchased more inventory than it sold — a use of cash. This is deducted from operating profit in the indirect method cash flow statement.
Question 6: Under FRS 102, investment property is measured at:
- Cost only
- Either fair value (with changes through profit or loss) or cost, as an accounting policy choice (Correct answer)
- Replacement cost
- Net realisable value
Correct answer: Either fair value (with changes through profit or loss) or cost, as an accounting policy choice
FRS 102 Section 16 allows investment property to be measured at fair value (gains and losses through profit or loss) or under the cost model (depreciated cost less impairment). The entity chooses a policy and applies it consistently.
AAT L4 Financial Statements (Companies) 2
The non-controlling interest (NCI) in a consolidated balance sheet represents: