Certificate in International Financial Reporting Intangibles, Tax, and Cash Flow 2 — Questions and Answers
Question 1: Under IAS 38, which of the following development costs can be capitalised?
- Costs that meet all six criteria including technical feasibility and intention to complete (Correct answer)
- All development costs once a project begins
- Costs incurred after a product is launched
- Only materials and labour, not overheads
Correct answer: Costs that meet all six criteria including technical feasibility and intention to complete
IAS 38 requires all six development criteria to be met simultaneously before capitalisation is allowed.
Question 2: Under IAS 12, current tax and deferred tax arising from items recognised in OCI should be:
- Recognised in OCI (Correct answer)
- Recognised in profit or loss
- Recognised directly in equity
- Disclosed in the notes only
Correct answer: Recognised in OCI
IAS 12 requires tax to follow the underlying transaction—if the item is in OCI, so is its tax.
Question 3: Under IAS 7, the indirect method of presenting operating cash flows begins with:
- Profit before tax, adjusted for non-cash items and working capital changes (Correct answer)
- Cash receipts from customers
- Net profit after tax
- Total revenues
Correct answer: Profit before tax, adjusted for non-cash items and working capital changes
The indirect method reconciles profit before tax back to operating cash flow by adding back non-cash charges and adjusting for working capital.
Question 4: Under IAS 7, how are dividends paid classified in the cash flow statement?
- Either as financing or operating activities (entity's choice, consistently applied) (Correct answer)
- Always as financing activities
- Always as operating activities
- As investing activities
Correct answer: Either as financing or operating activities (entity's choice, consistently applied)
IAS 7 allows dividends paid to be classified as financing (cost of capital) or operating (ability to pay from operations).
Question 5: Under IAS 38, intangible assets with an indefinite useful life are:
- Not amortised but tested for impairment annually (Correct answer)
- Amortised over 40 years
- Amortised over 20 years
- Written off in the year of acquisition
Correct answer: Not amortised but tested for impairment annually
Indefinite-life intangibles are not amortised; instead they undergo annual impairment testing.
Question 6: Under IAS 12, which of the following temporary differences does NOT give rise to a deferred tax liability?
- Goodwill arising in a business combination (Correct answer)
- Accelerated tax depreciation
- Revaluation surplus on PPE
- Interest receivable taxed on receipt
Correct answer: Goodwill arising in a business combination
IAS 12 specifically prohibits recognising a deferred tax liability on goodwill arising from a business combination.
Certificate in International Financial Reporting Intangibles, Tax, and Cash Flow 2
Under IAS 38, which of the following development costs can be capitalised?