CPA CFE Financial Reporting 3 — Questions and Answers
Question 1: Under IAS 16 Property, Plant and Equipment, which subsequent measurement model allows for upward revaluation of assets?
- Cost model
- Revaluation model (Correct answer)
- Fair value through profit or loss model
- Amortized cost model
Correct answer: Revaluation model
The revaluation model under IAS 16 allows an entity to carry PPE at a revalued amount (fair value at the date of revaluation less subsequent depreciation and impairment). Increases in value are generally recognized in other comprehensive income.
Question 2: A Canadian public company prepares consolidated financial statements. Under which circumstances can a subsidiary be excluded from consolidation under IFRS 10?
- When the subsidiary operates in a different industry
- When the subsidiary is immaterial to the group
- Subsidiaries cannot be excluded; all controlled entities must be consolidated (Correct answer)
- When the subsidiary has a different fiscal year-end
Correct answer: Subsidiaries cannot be excluded; all controlled entities must be consolidated
IFRS 10 requires consolidation of all entities controlled by the parent. There is no exemption based on dissimilar activities or different year-ends. The only exception is when the parent itself qualifies as an investment entity under IFRS 10.
Question 3: Under IAS 38 Intangible Assets, which of the following internally generated items can be recognized as an intangible asset?
- Internally generated goodwill
- Research costs
- Development costs that meet specific recognition criteria (Correct answer)
- Internally generated brands
Correct answer: Development costs that meet specific recognition criteria
IAS 38 prohibits recognition of internally generated goodwill, brands, mastheads, and similar items. Research costs must be expensed. Development costs can be capitalized only when all six specified criteria are met (technical feasibility, intention, ability, probable future benefits, resources, and reliable measurement).
Question 4: What is the primary difference between a joint venture and a joint operation under IFRS 11?
- Joint ventures are always larger than joint operations
- In a joint venture, parties have rights to net assets; in a joint operation, parties have rights to assets and obligations for liabilities (Correct answer)
- Joint operations must be incorporated entities
- There is no difference; the terms are interchangeable
Correct answer: In a joint venture, parties have rights to net assets; in a joint operation, parties have rights to assets and obligations for liabilities
Under IFRS 11, a joint venture gives the parties rights to the net assets of the arrangement (accounted for using the equity method), whereas a joint operation gives the parties rights to the assets and obligations for the liabilities (each party recognizes its share of assets, liabilities, revenues, and expenses).
Question 5: Under IAS 10, which of the following is an adjusting event after the reporting period?
- A major business combination completed after year-end
- Settlement of a court case that confirms a year-end obligation (Correct answer)
- A decline in market value of investments after year-end
- Announcement of a major restructuring plan after year-end
Correct answer: Settlement of a court case that confirms a year-end obligation
An adjusting event provides evidence of conditions that existed at the end of the reporting period. Settlement of a court case confirming a year-end obligation is adjusting because the obligation existed at year-end. The other options are non-adjusting events.
Question 6: Under IAS 21 The Effects of Changes in Foreign Exchange Rates, how are foreign currency monetary items translated at the reporting date?
- At the historical exchange rate
- At the closing (spot) rate at the reporting date (Correct answer)
- At the average rate for the period
- At the forward rate for the next period
Correct answer: At the closing (spot) rate at the reporting date
IAS 21 requires monetary items denominated in a foreign currency to be translated at the closing rate at the reporting date. Non-monetary items measured at historical cost are translated at the rate on the date of the transaction.
CPA CFE Financial Reporting 3
Under IAS 16 Property, Plant and Equipment, which subsequent measurement model allows for upward revaluation of assets?