IFRS Standards 3 — Questions and Answers
Question 1: Under IFRS 9, which category of financial assets must be measured at fair value through other comprehensive income (FVOCI) for debt instruments?
- Assets managed on a hold-to-collect-and-sell business model with SPPI cash flows (Correct answer)
- Assets managed on a hold-to-collect business model with SPPI cash flows
- Any debt asset the entity irrevocably designates at initial recognition
- Assets that fail the SPPI test regardless of business model
Correct answer: Assets managed on a hold-to-collect-and-sell business model with SPPI cash flows
Debt instruments held under a hold-to-collect-and-sell business model that pass the SPPI test are mandatorily measured at FVOCI under IFRS 9.
Question 2: IAS 19 requires the net defined benefit liability to be presented on the balance sheet. How is this amount calculated?
- Fair value of plan assets minus present value of defined benefit obligation
- Present value of defined benefit obligation minus fair value of plan assets (Correct answer)
- Current service cost plus past service cost
- Projected benefit obligation minus accumulated benefit obligation
Correct answer: Present value of defined benefit obligation minus fair value of plan assets
The net defined benefit liability equals the present value of the defined benefit obligation minus the fair value of plan assets, which may result in a net asset if assets exceed the obligation.
Question 3: Under IAS 12, a deferred tax liability arises when:
- The tax base of an asset exceeds its carrying amount
- The carrying amount of an asset exceeds its tax base (Correct answer)
- A temporary difference results in lower taxable profit in future periods
- An entity has unused tax losses carried forward
Correct answer: The carrying amount of an asset exceeds its tax base
A deferred tax liability arises when the carrying amount of an asset exceeds its tax base, meaning more tax will be payable in future periods when the asset is recovered.
Question 4: Which of the following describes the 'highly probable' threshold required for cash flow hedge accounting under IFRS 9?
- Greater than 50% probability of occurring
- Significantly more likely than probable (probability well above 50%) (Correct answer)
- Virtually certain to occur
- Reasonably possible to occur
Correct answer: Significantly more likely than probable (probability well above 50%)
Under IFRS 9, 'highly probable' means significantly more likely than probable, generally interpreted as a probability well above 50% — considerably more than merely likely.
Question 5: IAS 41 Agriculture requires biological assets to be measured at:
- Historical cost less accumulated depreciation
- Fair value less costs to sell, unless fair value cannot be measured reliably (Correct answer)
- Net realizable value
- Replacement cost
Correct answer: Fair value less costs to sell, unless fair value cannot be measured reliably
IAS 41 requires biological assets to be measured at fair value less costs to sell at each reporting date, with changes recognized in profit or loss.
Question 6: Under IFRS 5, an asset classified as held for sale should be measured at:
- Carrying amount only
- Fair value less costs to sell only
- Lower of carrying amount and fair value less costs to sell (Correct answer)
- Higher of carrying amount and fair value less costs to sell
Correct answer: Lower of carrying amount and fair value less costs to sell
IFRS 5 requires a non-current asset held for sale to be measured at the lower of its carrying amount and fair value less costs to sell.
Question 7: IAS 23 Borrowing Costs requires capitalization of borrowing costs when they are directly attributable to the acquisition, construction, or production of a:
- Any non-current asset
- Qualifying asset (Correct answer)
- Asset held for sale
- Financial instrument
Correct answer: Qualifying asset
IAS 23 mandates capitalization of directly attributable borrowing costs for qualifying assets — those that take a substantial period of time to be ready for their intended use or sale.
IFRS Standards 3
Under IFRS 9, which category of financial assets must be measured at fair value through other comprehensive income (FVOCI) for debt instruments?