CPA CFE Financial Reporting 4 — Questions and Answers
Question 1: Under IFRS, when a company changes an accounting policy, how is the change generally applied?
- Prospectively only, with no adjustment to prior periods
- Retrospectively, by restating prior period comparatives as if the new policy had always been applied (Correct answer)
- By recognizing the cumulative effect in current period other comprehensive income
- By disclosing the change in notes only without any adjustment
Correct answer: Retrospectively, by restating prior period comparatives as if the new policy had always been applied
IAS 8 requires changes in accounting policy to be applied retrospectively, adjusting the opening balances and restating comparatives as if the new policy had always been in effect, unless it is impracticable to do so.
Question 2: A company holds a financial asset classified as fair value through other comprehensive income (FVOCI) under IFRS 9. Where are unrealized gains and losses recognized?
- In profit or loss for the period
- In other comprehensive income, with recycling to profit or loss on derecognition for debt instruments (Correct answer)
- Directly in retained earnings
- They are not recognized until the asset is sold
Correct answer: In other comprehensive income, with recycling to profit or loss on derecognition for debt instruments
For FVOCI debt instruments, unrealized gains and losses are recognized in OCI and recycled to profit or loss on derecognition. For FVOCI equity instruments (irrevocable election), gains and losses remain in OCI permanently and are never recycled.
Question 3: Under IAS 12 Income Taxes, what gives rise to a deferred tax liability?
- Taxable temporary differences where the carrying amount exceeds the tax base (Correct answer)
- Deductible temporary differences where the tax base exceeds the carrying amount
- Permanent differences between accounting and tax treatment
- Tax losses carried forward
Correct answer: Taxable temporary differences where the carrying amount exceeds the tax base
A deferred tax liability arises from taxable temporary differences, which occur when the carrying amount of an asset exceeds its tax base (or the carrying amount of a liability is less than its tax base), resulting in future taxable amounts.
Question 4: Under IAS 23 Borrowing Costs, which borrowing costs must be capitalized?
- All borrowing costs regardless of their purpose
- Borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset (Correct answer)
- Only borrowing costs on loans from related parties
- Borrowing costs are never capitalized; they must always be expensed
Correct answer: Borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset
IAS 23 requires capitalization of borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset. A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale.
Question 5: A company has a defined benefit pension plan. Under IAS 19, what is included in the net defined benefit liability on the balance sheet?
- Only the present value of the defined benefit obligation
- The present value of the defined benefit obligation minus the fair value of plan assets (Correct answer)
- The projected future pension payments without discounting
- The total contributions made to the plan to date
Correct answer: The present value of the defined benefit obligation minus the fair value of plan assets
Under IAS 19, the net defined benefit liability (or asset) is the present value of the defined benefit obligation less the fair value of plan assets. If plan assets exceed the obligation, a net asset is recognized (subject to an asset ceiling test).
Question 6: Which level of the IFRS 13 fair value hierarchy uses unobservable inputs?
- Level 1
- Level 2
- Level 3 (Correct answer)
- All levels use unobservable inputs
Correct answer: Level 3
Level 3 inputs are unobservable inputs for the asset or liability, used when observable market data is not available. Level 1 uses quoted prices in active markets, and Level 2 uses observable inputs other than quoted prices.
CPA CFE Financial Reporting 4
Under IFRS, when a company changes an accounting policy, how is the change generally applied?