IFRS Operations and Process Management 3 — Questions and Answers
Question 1: Under IAS 23, which borrowing costs must be capitalized?
- All borrowing costs in the period
- Borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset (Correct answer)
- Only borrowing costs on specific loans
- Borrowing costs exceeding a materiality threshold
Correct answer: Borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset
IAS 23 requires capitalization of borrowing costs directly attributable to a qualifying asset; other borrowing costs are expensed.
Question 2: A food manufacturer classifies raw materials as inventory. If net realizable value (NRV) falls below cost, IAS 2 requires the inventory to be:
- Kept at cost until sold
- Written down to NRV with the loss recognized in profit or loss (Correct answer)
- Written down to NRV with the loss in OCI
- Derecognized from the balance sheet
Correct answer: Written down to NRV with the loss recognized in profit or loss
IAS 2 requires inventory to be measured at the lower of cost and NRV, with any write-down recognized as an expense in profit or loss.
Question 3: Under IFRS 8, an operating segment must be reported separately if its revenue, profit/loss, or assets exceed what threshold of all segments combined?
- 5%
- 10% (Correct answer)
- 15%
- 20%
Correct answer: 10%
IFRS 8 requires separate disclosure of an operating segment that meets any of the 10% quantitative thresholds for revenue, profit or loss, or assets.
Question 4: Under IAS 16, which model allows upward revaluations of property, plant and equipment after initial recognition?
- Cost model
- Revaluation model (Correct answer)
- Fair value through profit or loss model
- Lower of cost or recoverable amount model
Correct answer: Revaluation model
IAS 16's revaluation model permits assets to be carried at fair value less subsequent depreciation and impairment, allowing upward revaluations.
Question 5: A construction company uses input methods to measure progress on a long-term contract under IFRS 15. Which input measure is most commonly used?
- Units delivered
- Costs incurred to date relative to total estimated costs (Correct answer)
- Milestones achieved
- Labor hours completed by management
Correct answer: Costs incurred to date relative to total estimated costs
The costs-incurred input method measures progress as costs incurred to date divided by total expected contract costs, and is the most common input method under IFRS 15.
Question 6: Under IAS 36, which of the following is NOT an external indicator that an asset may be impaired?
- Significant decline in the asset's market value
- Adverse changes in the technological environment
- Physical damage to the asset (Correct answer)
- Increase in market interest rates
Correct answer: Physical damage to the asset
Physical damage to an asset is an internal indicator of impairment under IAS 36, not an external indicator.
Question 7: A company sells goods with a right of return. Under IFRS 15, how should the expected returns be accounted for at the time of sale?
- Revenue recognized in full; returns expensed when they occur
- Revenue recognized only for expected net sales; a refund liability and return asset recognized (Correct answer)
- Revenue deferred until the return period expires
- Revenue reduced by a statistical provision in OCI
Correct answer: Revenue recognized only for expected net sales; a refund liability and return asset recognized
IFRS 15 requires recognition of revenue only for the consideration the entity expects to receive, with a refund liability for expected returns and a separate asset for the right to recover returned goods.
IFRS Operations and Process Management 3
Under IAS 23, which borrowing costs must be capitalized?