ACCA International Financial Reporting Standards 4 — Questions and Answers
Question 1: Under IAS 12, a deferred tax asset is recognized for deductible temporary differences only when:
- The entity always expects future taxable profits
- It is probable that sufficient future taxable profits will be available against which the deductible temporary difference can be utilized (Correct answer)
- The entity has taxable temporary differences of equal amount
- The tax authority has confirmed the deduction
Correct answer: It is probable that sufficient future taxable profits will be available against which the deductible temporary difference can be utilized
IAS 12 requires a deferred tax asset to be recognized only to the extent it is probable that future taxable profits will be available for utilization.
Question 2: Under IFRS 13, the 'principal market' for measuring fair value is:
- The market with the highest volume and level of activity for the asset or liability (Correct answer)
- The most advantageous market for the reporting entity
- Any active market chosen by management
- The market in which the entity most frequently trades
Correct answer: The market with the highest volume and level of activity for the asset or liability
IFRS 13 defines the principal market as the market with the greatest volume and level of activity, and fair value is measured using the price in that market.
Question 3: IAS 19 requires the net interest on the net defined benefit liability to be calculated using which rate?
- Expected return on plan assets
- Government bond yield
- Discount rate used to measure the defined benefit obligation (high-quality corporate bond rate) (Correct answer)
- Weighted average cost of capital
Correct answer: Discount rate used to measure the defined benefit obligation (high-quality corporate bond rate)
IAS 19 requires both the unwinding of the obligation and the return on plan assets to be calculated using the same discount rate applied to the DBO.
Question 4: Under IAS 28, the equity method requires the investor to recognize its share of the associate's profit or loss:
- Only when dividends are received
- When the associate declares dividends
- In the investor's profit or loss in the period earned by the associate (Correct answer)
- Only on disposal of the investment
Correct answer: In the investor's profit or loss in the period earned by the associate
The equity method records the investor's share of the associate's post-acquisition profit or loss in the investor's income statement each reporting period.
Question 5: Under IFRS 2, share-based payment transactions with employees are measured at:
- Fair value of the goods or services received
- Fair value of the equity instruments granted at grant date (Correct answer)
- Intrinsic value of the options at each reporting date
- Market price of the shares at vesting date
Correct answer: Fair value of the equity instruments granted at grant date
For employee share-based payments, IFRS 2 uses the grant-date fair value of the equity instruments because the fair value of services cannot usually be estimated reliably.
Question 6: Which of the following would trigger reclassification of a financial asset under IFRS 9?
- A significant decline in the credit quality of the asset
- A change in the entity's business model for managing financial assets (Correct answer)
- A change in the fair value of the asset
- An amendment to the contractual cash flows
Correct answer: A change in the entity's business model for managing financial assets
IFRS 9 permits reclassification only when an entity changes its business model for managing financial assets, which is expected to be very infrequent.
Question 7: Under IAS 10, which of the following is an adjusting event after the reporting period?
- A major business combination announced after year-end
- Discovery of fraud or errors that show financial statements were incorrect at year-end (Correct answer)
- A fire destroying a major asset after year-end
- Declaration of dividends after year-end
Correct answer: Discovery of fraud or errors that show financial statements were incorrect at year-end
Adjusting events provide evidence of conditions existing at the reporting date, such as discovering errors or fraud that existed before year-end.
ACCA International Financial Reporting Standards 4
Under IAS 12, a deferred tax asset is recognized for deductible temporary differences only when: