ACCA AS Financial Reporting (FR) 2 — Questions and Answers
Question 1: A parent company acquired 80% of a subsidiary for £500,000 when the subsidiary's net assets had a fair value of £400,000. Using the proportionate (partial) goodwill method, what is the goodwill arising on acquisition?
- £100,000
- £180,000 (Correct answer)
- £320,000
- £500,000
Correct answer: £180,000
Under the proportionate goodwill method: Goodwill = Consideration paid − Parent's share of fair value of net assets = £500,000 − (80% × £400,000) = £500,000 − £320,000 = £180,000. The proportionate method only recognises the parent's share of goodwill, unlike the full goodwill method which would also attribute goodwill to the NCI.
Question 2: Under IFRS 16 Leases, how should a lessee initially measure the right-of-use asset?
- At the fair value of the underlying asset
- At the present value of future lease payments only
- At cost, comprising the initial measurement of the lease liability plus any lease payments made at or before commencement, initial direct costs, and estimated dismantling costs (Correct answer)
- At the total of undiscounted future lease payments
Correct answer: At cost, comprising the initial measurement of the lease liability plus any lease payments made at or before commencement, initial direct costs, and estimated dismantling costs
IFRS 16.24 requires the right-of-use asset to be measured at cost, which includes: the initial measurement of the lease liability, any lease payments made at or before the commencement date (less incentives received), initial direct costs incurred by the lessee, and an estimate of dismantling/restoration costs.
Question 3: IAS 2 Inventories prohibits which of the following methods of cost valuation?
- First In, First Out (FIFO)
- Weighted average cost
- Last In, First Out (LIFO) (Correct answer)
- Standard cost method
Correct answer: Last In, First Out (LIFO)
IAS 2.25 permits FIFO and weighted average cost as cost formulas. LIFO is specifically prohibited by IAS 2 because it often results in inventory being stated at outdated costs that do not reflect recent purchase prices, thereby distorting the financial position. Standard cost is acceptable if results approximate actual cost.
Question 4: What is the correct treatment of a government grant related to an asset under IAS 20?
- Recognise immediately as revenue in profit or loss
- Present as either deferred income or a deduction from the carrying amount of the asset (Correct answer)
- Record as a direct addition to share capital
- Offset against the entity's tax liability
Correct answer: Present as either deferred income or a deduction from the carrying amount of the asset
IAS 20.24 allows two presentations for grants related to assets: (1) set up as deferred income and recognised in profit or loss on a systematic basis over the useful life of the asset, or (2) deducted from the carrying amount of the asset (net presentation), resulting in lower depreciation charges. Both methods are acceptable.
Question 5: Under IAS 36 Impairment of Assets, how is an impairment loss calculated?
- Fair value less costs of disposal minus value in use
- Carrying amount minus the higher of fair value less costs of disposal and value in use (Correct answer)
- Carrying amount minus fair value
- Historical cost minus net realisable value
Correct answer: Carrying amount minus the higher of fair value less costs of disposal and value in use
An impairment loss is the amount by which the carrying amount exceeds the recoverable amount. Recoverable amount is the higher of fair value less costs of disposal (FVLCD) and value in use (VIU). Using the higher amount ensures the asset is written down only to the best recovery option available to the entity.
Question 6: In a consolidated statement of financial position, how is the non-controlling interest (NCI) measured under the 'full goodwill' method at acquisition?
- NCI's proportionate share of the subsidiary's net assets at book value
- NCI's proportionate share of the subsidiary's identifiable net assets at fair value
- At the NCI's fair value at the date of acquisition (Correct answer)
- At the NCI's share of the subsidiary's share capital only
Correct answer: At the NCI's fair value at the date of acquisition
Under the full goodwill method (IFRS 3), NCI is measured at its fair value at the acquisition date. This means goodwill is calculated on both the parent's and NCI's shares, resulting in 'full' (or 'gross') goodwill. The alternative proportionate method only recognises the parent's share of goodwill.
ACCA AS Financial Reporting (FR) 2
A parent company acquired 80% of a subsidiary for £500,000 when the subsidiary's net assets had a fair value of £400,000.
Using the proportionate (partial) goodwill method, what is the goodwill arising on acquisition?