IFRS For SMEs 3 — Questions and Answers
Question 1: Under IFRS for SMEs Section 20, how should a lessee classify all leases?
- All leases are classified as operating leases unless finance lease criteria are met
- All leases must be recognized on-balance-sheet as right-of-use assets
- Leases are classified as finance or operating based on the transfer of risks and rewards (Correct answer)
- Only leases exceeding 12 months must be recognized on the balance sheet
Correct answer: Leases are classified as finance or operating based on the transfer of risks and rewards
IFRS for SMEs retains the finance/operating lease distinction based on whether substantially all risks and rewards of ownership transfer to the lessee.
Question 2: When an SME acquires a subsidiary in a business combination, IFRS for SMEs Section 19 requires goodwill to be:
- Amortized over its useful life, with a 10-year cap if life cannot be reliably estimated (Correct answer)
- Tested for impairment annually and never amortized
- Amortized over 40 years as a maximum
- Immediately expensed unless it meets the criteria for an intangible asset
Correct answer: Amortized over its useful life, with a 10-year cap if life cannot be reliably estimated
Section 19 requires goodwill to be amortized over its useful life; if the useful life cannot be estimated reliably, a maximum of 10 years is used.
Question 3: Under IFRS for SMEs, an entity recognizes a provision when which of the following conditions is met?
- A possible obligation exists from a past event and an outflow is more likely than not
- A present obligation exists, an outflow is probable, and a reliable estimate can be made (Correct answer)
- Management has approved a restructuring plan and announced it publicly
- A constructive obligation arises from past practice regardless of probability of outflow
Correct answer: A present obligation exists, an outflow is probable, and a reliable estimate can be made
Consistent with full IFRS, a provision is recognized when a present obligation exists, an outflow of resources is probable, and the amount can be reliably estimated.
Question 4: An SME sells goods with a right of return. Under IFRS for SMEs Section 23, revenue is recognized when:
- Cash is received from the customer
- The goods are shipped and title transfers
- The entity can reliably estimate returns and the other revenue recognition criteria are met (Correct answer)
- The return period expires
Correct answer: The entity can reliably estimate returns and the other revenue recognition criteria are met
Revenue from goods sold with right of return is recognized when the entity can reliably estimate future returns and all other revenue recognition criteria are satisfied.
Question 5: Under IFRS for SMEs, which of the following is NOT a component of other comprehensive income (OCI)?
- Revaluation surplus on property, plant and equipment
- Actuarial gains and losses on defined benefit plans
- Exchange differences on translating foreign operations
- Fair value changes on financial assets at fair value through profit or loss (Correct answer)
Correct answer: Fair value changes on financial assets at fair value through profit or loss
Fair value changes on financial assets measured at fair value through profit or loss are recognized in profit or loss, not in other comprehensive income.
Question 6: Under IFRS for SMEs Section 13, inventories are measured at the lower of cost and:
- Net realizable value (Correct answer)
- Fair value
- Current replacement cost
- Fair value less costs to sell
Correct answer: Net realizable value
Inventories are measured at the lower of cost and net realizable value under Section 13 of IFRS for SMEs.
Question 7: Under IFRS for SMEs, which method of accounting is required for investments in associates?
- Fair value through profit or loss only
- Cost model, equity method, or fair value through profit or loss — entity's choice (Correct answer)
- Equity method only
- Proportionate consolidation
Correct answer: Cost model, equity method, or fair value through profit or loss — entity's choice
Section 14 of IFRS for SMEs allows an entity to measure investments in associates using the cost model, equity method, or fair value through profit or loss.
IFRS For SMEs 3
Under IFRS for SMEs Section 20, how should a lessee classify all leases?