ACA Accounting (IFRS/UK GAAP) 3 — Questions and Answers
Question 1: IAS 38 permits capitalisation of development costs when:
- Management intends to complete the asset and it is technically feasible (Correct answer)
- Research costs exceed development costs
- The project is in its early exploratory phase
- All research and development costs are always expensed
Correct answer: Management intends to complete the asset and it is technically feasible
IAS 38 allows development costs to be capitalised only when six specific criteria are met, including technical feasibility, intention to complete, ability to use or sell, and probable future economic benefits.
Question 2: Under IFRS, deferred tax is calculated using which method?
- Income statement liability method
- Partial provision method
- Balance sheet liability method (Correct answer)
- Timing difference method
Correct answer: Balance sheet liability method
IAS 12 requires the balance sheet liability method (temporary difference approach), comparing the carrying amount of assets and liabilities to their tax base.
Question 3: Which depreciation method allocates a higher charge in the earlier years of an asset's life?
- Straight-line method
- Units of production method
- Reducing balance method (Correct answer)
- Sum of digits method
Correct answer: Reducing balance method
The reducing balance method applies a fixed percentage to the reducing carrying amount, resulting in higher depreciation charges in earlier years and lower charges later.
Question 4: Under IAS 21, the functional currency of an entity is:
- The currency of the country where the parent company is incorporated
- The currency of the primary economic environment in which the entity operates (Correct answer)
- Always the same as the presentation currency
- The currency in which the entity's shares are listed
Correct answer: The currency of the primary economic environment in which the entity operates
IAS 21 defines functional currency as the currency of the primary economic environment in which the entity operates, based on factors such as the currency influencing sales prices and costs.
Question 5: Under IAS 23, borrowing costs that are directly attributable to the acquisition of a qualifying asset must be:
- Expensed immediately
- Capitalised as part of the cost of the asset (Correct answer)
- Disclosed only in the notes
- Treated as a prepayment
Correct answer: Capitalised as part of the cost of the asset
IAS 23 requires borrowing costs directly attributable to a qualifying asset to be capitalised as part of its cost; all other borrowing costs are expensed.
Question 6: The going concern basis of accounting assumes that:
- The entity will be liquidated within 12 months
- The entity will continue in operational existence for the foreseeable future (Correct answer)
- All assets will be sold at market value
- The entity is currently profitable
Correct answer: The entity will continue in operational existence for the foreseeable future
The going concern assumption means the entity is expected to continue trading for the foreseeable future and has neither the need nor intention to liquidate or curtail operations materially.
ACA Accounting (IFRS/UK GAAP) 3
IAS 38 permits capitalisation of development costs when: