Certificate in International Financial Reporting (CertIFR) — Questions and Answers

Question 1: Under IAS 21, exchange differences arising on translation of a foreign subsidiary's net assets should be:

Treated as an adjustment to goodwill arising on acquisition
Recognized immediately in profit or loss each period
Deferred indefinitely in equity with no subsequent recycling
Recognized in other comprehensive income and accumulated in a separate translation reserve in equity (Correct answer)

Correct answer: Recognized in other comprehensive income and accumulated in a separate translation reserve in equity

Translation differences on foreign operations are recognized in OCI and accumulated in equity in a foreign currency translation reserve.

Question 2: Under IAS 39/IFRS 9, hedge effectiveness requires a hedge relationship to be:

Based on derivatives only
Perfectly offsetting at all times
Documented at inception, with an economic relationship and no credit risk dominating (Correct answer)
Approved by auditors

Correct answer: Documented at inception, with an economic relationship and no credit risk dominating

IFRS 9 hedge accounting requires formal designation, documentation, an economic relationship, and low credit risk dominance.

Question 3: Company P (functional currency GBP) has a long-term intragroup loan to subsidiary S (functional currency EUR) that is not expected to be settled in the foreseeable future. How are exchange differences on this loan treated in P's individual financial statements?

Deferred until the loan is eventually repaid
Recognized in OCI in P's individual financial statements (Correct answer)
Recognized in profit or loss in P's individual financial statements
Eliminated in P's individual statements as an intragroup balance

Correct answer: Recognized in OCI in P's individual financial statements

In P's individual statements the balance is a monetary item subject to normal IAS 21 treatment — exchange differences go to profit or loss; OCI treatment only applies at the consolidated level when the loan forms part of the net investment.

Question 4: What is the hierarchy for selecting accounting policies under IAS 8 when no specific IFRS standard applies?

Management's preference, then auditors' recommendation
Conceptual Framework first, then other IFRSs
Local GAAP, then Conceptual Framework
IFRSs dealing with similar issues, then Conceptual Framework (Correct answer)

Correct answer: IFRSs dealing with similar issues, then Conceptual Framework

IAS 8 requires management to look at IFRSs for analogous situations, then the Conceptual Framework.

Question 5: Under IAS 19, which component of defined benefit cost is recognised in profit or loss?

Past service cost only
Remeasurements only
Current service cost and net interest cost (Correct answer)
Actuarial gains and losses only

Correct answer: Current service cost and net interest cost

Service cost (including past service cost) and net interest cost are recognised in profit or loss under IAS 19.

Question 6: Under IAS 21, when a parent disposes of a foreign operation, the cumulative exchange differences held in the translation reserve relating to that operation are:

Written off directly against retained earnings on disposal
Retained permanently in the translation reserve with no further action
Reclassified from equity to profit or loss (recycled) as part of the gain or loss on disposal (Correct answer)
Reversed back to the original assets and liabilities disposed of

Correct answer: Reclassified from equity to profit or loss (recycled) as part of the gain or loss on disposal

On disposal of a foreign operation, the cumulative translation differences are recycled from OCI to profit or loss as part of the gain or loss recognized on disposal.

Question 7: Under IFRS 9, the effective interest rate (EIR) method spreads:

Only interest income to each period
Transaction costs and premium/discount over the life of the financial instrument (Correct answer)
Only principal repayments
Fair value changes over the instrument's life

Correct answer: Transaction costs and premium/discount over the life of the financial instrument

The EIR method allocates interest income/expense and amortises transaction costs and any premium or discount over the instrument's life.

Question 8: Under IAS 12, the deferred tax rate used should be:

The statutory rate at the balance sheet date
The current period effective tax rate
The tax rate expected to apply when the temporary difference reverses (Correct answer)
The lowest applicable tax rate

Correct answer: The tax rate expected to apply when the temporary difference reverses

IAS 12 requires use of enacted or substantively enacted rates at the balance sheet date that apply when differences reverse.

Question 9: In consolidated financial statements, exchange differences on a long-term intragroup monetary item that in substance forms part of the parent's net investment in a foreign operation are:

Offset against goodwill arising on acquisition
Recognized in other comprehensive income and held in the translation reserve (Correct answer)
Deferred until settlement and then released to profit or loss
Recognized in profit or loss in the consolidated income statement

Correct answer: Recognized in other comprehensive income and held in the translation reserve

IAS 21 paragraph 32 requires exchange differences on monetary items that form part of the net investment in a foreign operation to be recognized in OCI in the consolidated statements.

Question 10: Under IFRS 15, what is the first step in the five-step revenue recognition model?

Allocate the transaction price
Identify the performance obligations
Determine the transaction price
Identify the contract with the customer (Correct answer)

Correct answer: Identify the contract with the customer

Step 1 is to identify the contract, which must meet specific criteria such as commercial substance and collectability.

Question 11: Under IFRS 9, the Expected Credit Loss (ECL) model applies to which financial instruments?

Only financial assets at FVTPL
All financial instruments including derivatives
Only credit cards and mortgages
Financial assets measured at amortised cost and FVOCI, and loan commitments (Correct answer)

Correct answer: Financial assets measured at amortised cost and FVOCI, and loan commitments

IFRS 9's ECL impairment model applies to debt instruments at amortised cost or FVOCI, and certain off-balance sheet exposures.

Question 12: An entity with a USD functional currency holds a EUR-denominated trade receivable. Between the transaction date and year-end, the EUR strengthens against the USD. Where is the resulting exchange difference recognized?

In other comprehensive income until the receivable is collected
Deferred in equity until settlement
In profit or loss for the period (Correct answer)
Adjusted retrospectively against the original revenue figure

Correct answer: In profit or loss for the period

Under IAS 21, exchange differences on monetary items (such as trade receivables) are recognized in profit or loss in the period they arise.

Question 13: Under IAS 29, why are monetary items NOT restated at the reporting date?

Because monetary items are immaterial in hyperinflationary environments
Because monetary items are excluded from the scope of IAS 29
Because IAS 21 already handles the retranslation of monetary items
Because monetary items are already expressed in the measuring unit current at the reporting date (Correct answer)

Correct answer: Because monetary items are already expressed in the measuring unit current at the reporting date

Monetary items are already expressed in current monetary units at the reporting date and therefore require no restatement under IAS 29.

Question 14: Under IAS 19, a defined benefit obligation is measured using:

The current unit credit method
The accumulated benefit method
The corridor approach
The projected unit credit method (Correct answer)

Correct answer: The projected unit credit method

IAS 19 requires the projected unit credit actuarial method to measure defined benefit obligations.

Question 15: Under IAS 29, which quantitative characteristic most strongly indicates that an economy is hyperinflationary?

The central bank has raised interest rates more than five times in a single year
The cumulative inflation rate over three years approaches or exceeds 100% (Correct answer)
Annual inflation exceeds 5% for two consecutive years
The local currency has depreciated by more than 50% against the USD in one year

Correct answer: The cumulative inflation rate over three years approaches or exceeds 100%

IAS 29 identifies a cumulative inflation rate approaching or exceeding 100% over three years as the key quantitative indicator of hyperinflation.

Certificate in International Financial Reporting (CertIFR)

The ACCA CertIFR is an online, on-demand certificate-level qualification that tests knowledge and application of International Financial Reporting Standards (IFRS), covering topics from the Conceptual Framework and group accounting to financial instruments and foreign currency.

Questions

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