IFA Financial Reporting & Accounting Standards 3 — Questions and Answers
Question 1: Under IAS 16, subsequent expenditure on property, plant and equipment is capitalized only if it:
- Exceeds a materiality threshold set by management
- Increases the future economic benefits beyond the originally assessed standard (Correct answer)
- Is incurred in the first year of the asset's life
- Is approved by the board of directors
Correct answer: Increases the future economic benefits beyond the originally assessed standard
IAS 16 requires capitalization of subsequent costs only when they enhance the asset's future economic benefits beyond the originally assessed standard of performance.
Question 2: Which concept requires that financial statements present a faithful representation of economic events, including recognizing economic substance over legal form?
- Prudence
- Substance over form (Correct answer)
- Materiality
- Comparability
Correct answer: Substance over form
Substance over form requires transactions to be accounted for according to their economic reality rather than their strict legal form.
Question 3: Under IFRS 16, a lessee must recognize at the commencement of a lease:
- Only a lease liability
- Only a right-of-use asset
- Both a right-of-use asset and a lease liability (Correct answer)
- An operating expense for the full lease term
Correct answer: Both a right-of-use asset and a lease liability
IFRS 16 requires lessees to recognize both a right-of-use asset and a corresponding lease liability at the commencement date for most leases.
Question 4: The going concern assumption in financial reporting means that:
- The business will be profitable in the next period
- The entity will continue in operation for the foreseeable future (Correct answer)
- Assets will be sold at market value
- Management is satisfied with current performance
Correct answer: The entity will continue in operation for the foreseeable future
The going concern assumption presumes the entity will continue operating for the foreseeable future and does not need to liquidate or curtail operations.
Question 5: Under IAS 21, a foreign currency transaction is initially recorded at:
- The year-end closing rate
- The spot exchange rate at the transaction date (Correct answer)
- An average rate for the prior year
- The forward exchange rate at year-end
Correct answer: The spot exchange rate at the transaction date
IAS 21 requires foreign currency transactions to be initially recorded using the spot exchange rate at the date of the transaction.
Question 6: In a statement of cash flows, dividends paid by a company may be classified as:
- Operating activities only
- Investing activities only
- Either operating or financing activities under IAS 7 (Correct answer)
- Extraordinary items
Correct answer: Either operating or financing activities under IAS 7
IAS 7 permits dividends paid to be classified as either financing activities or operating activities, as long as the classification is applied consistently.
Question 7: Under FRS 102 (UK GAAP), intangible assets acquired in a business combination are recognized separately from goodwill only if they:
- Have a finite useful life
- Are separable or arise from contractual/legal rights (Correct answer)
- Were previously capitalized by the acquiree
- Have a fair value exceeding £10,000
Correct answer: Are separable or arise from contractual/legal rights
FRS 102 requires separate recognition of intangibles from goodwill only when they are separable or arise from contractual or legal rights.
IFA Financial Reporting & Accounting Standards 3
Under IAS 16, subsequent expenditure on property, plant and equipment is capitalized only if it: