CPA CFE Financial Reporting 1 — Questions and Answers
Question 1: Under IFRS, which method is required for reporting cash flows from operating activities when using the indirect method?
- Adjusting net income for non-cash items and changes in working capital (Correct answer)
- Listing all cash receipts and payments individually
- Reporting only net cash from operations as a single line
- Using the equity method of consolidation
Correct answer: Adjusting net income for non-cash items and changes in working capital
The indirect method starts with net income and adjusts for non-cash items (such as depreciation and amortization) and changes in working capital accounts to arrive at cash from operating activities.
Question 2: A company acquires 80% of a subsidiary. Under IFRS 3 Business Combinations, how should non-controlling interest (NCI) be measured at acquisition?
- Only at fair value of net assets acquired
- Either at fair value (full goodwill) or proportionate share of net assets (partial goodwill) (Correct answer)
- Always at book value of the subsidiary's equity
- At the parent's cost of investment less subsidiary retained earnings
Correct answer: Either at fair value (full goodwill) or proportionate share of net assets (partial goodwill)
IFRS 3 permits an accounting policy choice on a transaction-by-transaction basis to measure NCI either at fair value (full goodwill method) or at the NCI's proportionate share of the acquiree's identifiable net assets (partial goodwill method).
Question 3: Which of the following is classified as an investment property under IAS 40?
- A building used as the company's head office
- Land held for long-term capital appreciation (Correct answer)
- A factory used in manufacturing operations
- Owner-occupied property leased to employees at market rent
Correct answer: Land held for long-term capital appreciation
IAS 40 defines investment property as property held to earn rentals or for capital appreciation or both. Land held for long-term capital appreciation meets this definition, whereas owner-occupied property does not.
Question 4: Under IFRS 15 Revenue from Contracts with Customers, when should revenue be recognized?
- When cash is received from the customer
- When the invoice is issued to the customer
- When the entity satisfies a performance obligation by transferring a promised good or service (Correct answer)
- When the contract is signed by both parties
Correct answer: When the entity satisfies a performance obligation by transferring a promised good or service
IFRS 15 requires revenue to be recognized when (or as) the entity satisfies a performance obligation by transferring a promised good or service to a customer, which occurs when the customer obtains control of that asset.
Question 5: A company enters into a lease agreement for office space for 5 years. Under IFRS 16 Leases, how should the lessee account for this lease?
- Expense the lease payments as incurred (operating lease treatment)
- Recognize a right-of-use asset and a corresponding lease liability on the balance sheet (Correct answer)
- Capitalize only if the lease transfers ownership at the end of the term
- Record the lease only in the notes to the financial statements
Correct answer: Recognize a right-of-use asset and a corresponding lease liability on the balance sheet
IFRS 16 requires lessees to recognize a right-of-use asset and a lease liability for virtually all leases (with limited exceptions for short-term leases and leases of low-value assets), eliminating the previous operating/finance lease distinction for lessees.
Question 6: Under IAS 36 Impairment of Assets, what is the recoverable amount of an asset?
- The original cost less accumulated depreciation
- The lower of fair value less costs of disposal and value in use
- The higher of fair value less costs of disposal and value in use (Correct answer)
- The net realizable value of the asset
Correct answer: The higher of fair value less costs of disposal and value in use
IAS 36 defines recoverable amount as the higher of an asset's fair value less costs of disposal and its value in use. An asset is impaired when its carrying amount exceeds its recoverable amount.
CPA CFE Financial Reporting 1
Under IFRS, which method is required for reporting cash flows from operating activities when using the indirect method?