IFRS Interpretations 2 — Questions and Answers
Question 1: Under IFRIC 1, how should changes in decommissioning liabilities affect a company's asset and expense recognition?
- Adjust the cost of the related asset and recalculate depreciation prospectively (Correct answer)
- Recognize the change immediately in profit or loss
- Defer the change and amortize over the remaining useful life
- Recognize in other comprehensive income and reclassify when settled
Correct answer: Adjust the cost of the related asset and recalculate depreciation prospectively
IFRIC 1 requires that changes in decommissioning liabilities adjust the carrying amount of the related asset, with revised depreciation applied prospectively.
Question 2: IFRIC 4 addresses whether an arrangement contains a lease. Which factor is MOST critical in making this determination?
- Whether the arrangement conveys the right to control the use of a specific asset (Correct answer)
- Whether the contract explicitly uses the word 'lease'
- Whether the contract term exceeds 12 months
- Whether the arrangement involves a financial institution as counterparty
Correct answer: Whether the arrangement conveys the right to control the use of a specific asset
IFRIC 4 (now largely superseded by IFRS 16) focused on whether the fulfillment of the arrangement depended on a specific asset and whether the right to control use was conveyed.
Question 3: SIC-10 addresses government assistance. Which of the following does SIC-10 specifically state is NOT government assistance for the purpose of IAS 20?
- Infrastructure provided through improvement of the general transport network (Correct answer)
- Cash grants tied to specific capital expenditures
- Subsidies for employee training programs
- Tax credits linked to qualifying research expenditures
Correct answer: Infrastructure provided through improvement of the general transport network
SIC-10 clarifies that general infrastructure improvements benefiting the entire community do not constitute government assistance under IAS 20.
Question 4: IFRIC 12 applies to service concession arrangements. Who recognizes the infrastructure asset under a concession where the grantor controls the infrastructure?
- The grantor recognizes the asset, not the operator (Correct answer)
- The operator always recognizes the infrastructure as property, plant and equipment
- Both the grantor and operator recognize the asset at 50% each
- Neither party recognizes the asset; it is disclosed only
Correct answer: The grantor recognizes the asset, not the operator
Under IFRIC 12, when the grantor controls the infrastructure, the operator does not recognize it as PP&E but instead recognizes a financial or intangible asset.
Question 5: Under IFRIC 14 (IAS 19 – The Limit on a Defined Benefit Asset), when can an entity recognize a surplus in a defined benefit plan as an asset?
- Only to the extent that it can recover the surplus through refunds or reduced future contributions (Correct answer)
- Always, whenever the fair value of plan assets exceeds the present value of obligations
- Only when the plan trustees have formally approved a refund
- Never; surpluses must always be recognized in other comprehensive income only
Correct answer: Only to the extent that it can recover the surplus through refunds or reduced future contributions
IFRIC 14 limits the defined benefit asset to the present value of economic benefits available as future refunds or reductions in future contributions.
Question 6: IFRIC 16 clarifies hedge accounting for a net investment in a foreign operation. Which instrument qualifies as the hedging instrument?
- A derivative or non-derivative financial liability held anywhere in the group (Correct answer)
- Only derivatives held by the parent entity directly
- Only instruments denominated in the functional currency of the subsidiary
- Equity instruments in the subsidiary itself
Correct answer: A derivative or non-derivative financial liability held anywhere in the group
IFRIC 16 allows any entity within the consolidated group to hold the hedging instrument, provided it is a derivative or non-derivative financial liability.
Question 7: IFRIC 19 addresses the extinguishment of financial liabilities with equity instruments. How should any difference between the carrying amount of the liability and the fair value of equity issued be recognized?
- In profit or loss in the period of extinguishment (Correct answer)
- As a direct adjustment to retained earnings
- Deferred and amortized over 5 years
- In other comprehensive income, recycled on disposal
Correct answer: In profit or loss in the period of extinguishment
IFRIC 19 requires any gain or loss on extinguishing a financial liability by issuing equity to be recognized immediately in profit or loss.
IFRS Interpretations 2
Under IFRIC 1, how should changes in decommissioning liabilities affect a company's asset and expense recognition?