FCCA FCCA Financial Reporting and Standards 2 — Questions and Answers
Question 1: Which IFRS standard addresses financial instruments, covering classification, measurement, and impairment?
- IFRS 7
- IFRS 9 (Correct answer)
- IFRS 13
- IFRS 16
Correct answer: IFRS 9
IFRS 9 (Financial Instruments) covers the classification and measurement of financial assets and liabilities, as well as the expected credit loss impairment model.
Question 2: Under the IFRS conceptual framework, which qualitative characteristic ensures that financial information represents what it purports to represent?
- Relevance
- Faithful representation (Correct answer)
- Comparability
- Timeliness
Correct answer: Faithful representation
Faithful representation means that financial information is complete, neutral, and free from error, accurately depicting the economic phenomena it describes.
Question 3: A US company reports a deferred tax liability. This arises most commonly due to which situation?
- When tax depreciation exceeds accounting depreciation in the current year (Correct answer)
- When accounting revenue exceeds taxable revenue permanently
- When there are tax losses carried forward
- When interest expense is not deductible for tax purposes
Correct answer: When tax depreciation exceeds accounting depreciation in the current year
A deferred tax liability typically arises when accelerated tax depreciation exceeds book depreciation, creating a temporary difference that will reverse in future periods.
Question 4: Under IFRS, inventory is measured at which amount on the balance sheet?
- The higher of cost or net realizable value
- The lower of cost or net realizable value (Correct answer)
- Always at cost, regardless of market conditions
- Always at net realizable value
Correct answer: The lower of cost or net realizable value
IAS 2 (Inventories) requires inventory to be measured at the lower of cost and net realizable value, applying the conservatism (prudence) principle.
Question 5: Which method of inventory cost flow is NOT permitted under IFRS but IS permitted under US GAAP?
- FIFO (First-In, First-Out)
- Weighted average cost
- LIFO (Last-In, First-Out) (Correct answer)
- Specific identification
Correct answer: LIFO (Last-In, First-Out)
LIFO (Last-In, First-Out) is prohibited under IAS 2 (IFRS) but is an accepted inventory costing method under US GAAP.
Question 6: Under IFRS, how is a contingent liability treated in the financial statements if it is possible but not probable?
- Recognized as a provision on the balance sheet
- Disclosed in the notes but not recognized (Correct answer)
- Recognized as an expense in the income statement
- Ignored completely in financial statements
Correct answer: Disclosed in the notes but not recognized
IAS 37 requires a possible (but not probable) contingent liability to be disclosed in the notes to financial statements, not recognized on the balance sheet.
FCCA FCCA Financial Reporting and Standards 2
Which IFRS standard addresses financial instruments, covering classification, measurement, and impairment?