AAT L4 Financial Statements (Companies) 3 — Questions and Answers
Question 1: Under FRS 102, a provision is recognised when:
- Management intends to make a payment in the future
- There is a present obligation, an outflow is probable, and a reliable estimate of the amount can be made (Correct answer)
- A contingent liability has been disclosed in the notes
- The company has a history of making similar payments
Correct answer: There is a present obligation, an outflow is probable, and a reliable estimate of the amount can be made
FRS 102 Section 21 requires all three criteria: a present obligation (legal or constructive), a probable outflow of economic resources, and a reliable estimate of the obligation's amount.
Question 2: In consolidated accounts, unrealised profit on intragroup inventory sales is eliminated by:
- Increasing the group's revenue
- Reducing closing inventory and reducing group profit by the unrealised profit amount (Correct answer)
- Adding back the profit to the purchasing company's retained earnings
- Adjusting the goodwill calculation
Correct answer: Reducing closing inventory and reducing group profit by the unrealised profit amount
When one group company sells goods to another at a profit and those goods remain in inventory at year end, the unrealised profit must be eliminated from both group inventory and group profit to prevent overstating the group's results.
Question 3: For a company, the statutory requirement to prepare consolidated (group) financial statements generally applies when:
- The company has any overseas operations
- The company is a parent and the group exceeds the small group exemption thresholds (Correct answer)
- The company has more than 50 employees
- The company's shares are traded on AIM
Correct answer: The company is a parent and the group exceeds the small group exemption thresholds
UK company law (following IFRS/FRS 102) requires a parent company to prepare consolidated accounts unless the group qualifies for the small group exemption (meeting two of: turnover ≤£10.2m, gross assets ≤£5.1m, employees ≤50 — at group level, the higher thresholds apply).
Question 4: Under FRS 102, deferred tax is calculated on:
- Permanent differences between accounting and taxable profit
- Temporary differences between the carrying amount of assets/liabilities and their tax base (Correct answer)
- All depreciation charges
- Only losses carried forward
Correct answer: Temporary differences between the carrying amount of assets/liabilities and their tax base
FRS 102 Section 29 requires deferred tax on temporary differences (timing differences) — differences between accounting carrying values and tax values that will reverse in future periods.
Question 5: Earnings per share (EPS) for a listed UK company is required to be disclosed under:
- FRS 102 for all companies
- FRS 33 only for AIM companies
- IAS 33 for companies whose shares are publicly traded (Correct answer)
- UK GAAP Section 4 for all entities
Correct answer: IAS 33 for companies whose shares are publicly traded
IAS 33 requires EPS disclosure by entities whose ordinary or potential ordinary shares are publicly traded. Listed UK companies applying IFRS (or FRS 101) must disclose basic and diluted EPS.
Question 6: When a parent acquires 80% of a subsidiary, the non-controlling interest (NCI) at acquisition measured at the proportionate share of net assets represents:
- 80% of net assets
- 20% of identifiable net assets at fair value (Correct answer)
- 20% of goodwill
- The fair value of NCI shares at acquisition
Correct answer: 20% of identifiable net assets at fair value
Under the partial goodwill method, NCI is measured as 20% (the minority's proportion) of the fair value of identifiable net assets at the acquisition date — not 20% of goodwill or any other measure.
AAT L4 Financial Statements (Companies) 3
Under FRS 102, a provision is recognised when: