Certificate in International Financial Reporting Leases, Provisions, and Employee Benefits 2 — Questions and Answers
Question 1: Under IFRS 16, the lease liability is initially measured at:
- The present value of future lease payments not paid at commencement (Correct answer)
- The sum of undiscounted lease payments
- The fair value of the leased asset
- The nominal value of minimum lease payments
Correct answer: The present value of future lease payments not paid at commencement
IFRS 16 requires discounting future lease payments using the rate implicit in the lease or the incremental borrowing rate.
Question 2: Under IAS 37, how should a provision be measured?
- At the best estimate of the expenditure required to settle the obligation (Correct answer)
- At the maximum possible outflow
- At the minimum possible outflow
- At undiscounted future cash flows
Correct answer: At the best estimate of the expenditure required to settle the obligation
IAS 37 requires provisions to be measured at management's best estimate of the amount needed to settle.
Question 3: Under IAS 37, an onerous contract provision is required when:
- The unavoidable costs of the contract exceed the expected economic benefits (Correct answer)
- A contract has become unprofitable
- A counterparty has defaulted
- Management decides to exit a contract
Correct answer: The unavoidable costs of the contract exceed the expected economic benefits
IAS 37 defines an onerous contract as one where unavoidable costs exceed the benefits receivable.
Question 4: Under IAS 19, the net interest cost on a defined benefit plan is calculated as:
- Net defined benefit liability × discount rate (Correct answer)
- Expected return on plan assets × discount rate
- Current service cost × inflation rate
- Projected benefit obligation × expected return
Correct answer: Net defined benefit liability × discount rate
Net interest is the discount rate applied to the net defined benefit liability (or asset) at the start of the period.
Question 5: Under IFRS 16, a lessor classifies leases as finance or operating based on:
- Whether substantially all the risks and rewards of ownership are transferred to the lessee (Correct answer)
- The length of the lease term
- Whether the asset is specialised
- The lessee's accounting treatment
Correct answer: Whether substantially all the risks and rewards of ownership are transferred to the lessee
Lessors still apply the risks-and-rewards test under IFRS 16 to classify leases.
Question 6: Under IAS 37, a restructuring provision can be recognised only when:
- A detailed formal plan exists and the entity has raised a valid expectation in those affected (Correct answer)
- Management approves the plan internally
- The restructuring is announced to the public
- Costs have actually been incurred
Correct answer: A detailed formal plan exists and the entity has raised a valid expectation in those affected
IAS 37 requires both a detailed formal plan and communication that raises valid expectation before a provision is allowed.
Certificate in International Financial Reporting Leases, Provisions, and Employee Benefits 2
Under IFRS 16, the lease liability is initially measured at: