Financial Reporting Flashcards

Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, when should a provision be recognized?

Answer: When a present obligation exists, an outflow is probable, and a reliable estimate can be made

IAS 37 requires recognition of a provision when there is a present obligation (legal or constructive) from a past event, it is probable that an outflow of resources will be required, and a reliable estimate of the amount can be made.

Which of the following best describes the concept of 'fair value' under IFRS 13?

Answer: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants

IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price).

A company issues convertible bonds. Under IAS 32, how should the instrument be classified?

Answer: Split into a liability component and an equity component

IAS 32 requires a compound financial instrument like a convertible bond to be split into its liability component (obligation to make cash payments) and equity component (option for the holder to convert into shares). This is known as split accounting.

Under IAS 2 Inventories, which cost formula is NOT permitted under IFRS?

Answer: Last-in, first-out (LIFO)

IFRS (IAS 2) prohibits the use of LIFO as a cost formula for inventories. The permitted methods are FIFO, weighted average cost, and specific identification (for items that are not ordinarily interchangeable).

How should government grants related to assets be presented under IAS 20?

Answer: Either as deferred income or by deducting the grant from the carrying amount of the asset

IAS 20 allows two methods for presenting government grants related to assets: setting up the grant as deferred income recognized over the asset's useful life, or deducting the grant from the carrying amount of the asset.

Under IFRS 9, when should an entity recognize expected credit losses on a financial asset measured at amortized cost?

Answer: At initial recognition, using a 12-month expected credit loss model, moving to lifetime ECL if credit risk increases significantly

IFRS 9 uses a forward-looking expected credit loss model. At initial recognition, 12-month ECL is recognized. If credit risk increases significantly, the entity must recognize lifetime expected credit losses, ensuring earlier recognition of potential losses.