ACCA AS Financial Reporting (FR) 2

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?

Accepted Answer

£180,000

Answer

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?

Accepted 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

Answer

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?

Accepted Answer

Last In, First Out (LIFO)

Answer

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 LIFO is specifically prohibited by IAS 2 because it often results in inventory being stated at outdated costs that do not reflect recent purchase prices, thereby distorting the financial position.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?

Accepted Answer

Present as either deferred income or a deduction from the carrying amount of the asset

Answer

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?

Accepted Answer

Carrying amount minus the higher of fair value less costs of disposal and value in use

Answer

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.

ACCA Applied Skills Practice Test

ACCA Applied Skills Practice Test

ACCA AS Financial Reporting (FR) 2