IFRS Strategic Planning and Decision Making 3 — Questions and Answers
Question 1: In strategic planning, management considers the implications of IFRS 15 for long-term contracts. Revenue is recognized when or as the entity satisfies a performance obligation, which is measured using:
- Cash received from the customer
- Invoices issued during the period
- Progress toward complete satisfaction of the obligation (Correct answer)
- The contract price divided equally over contract term
Correct answer: Progress toward complete satisfaction of the obligation
IFRS 15 requires revenue to be recognized based on progress (output or input methods) toward satisfying performance obligations.
Question 2: When a company strategically diversifies into a new country, IAS 12 requires it to recognize a deferred tax liability for taxable temporary differences EXCEPT when:
- The difference relates to goodwill in a business combination (Correct answer)
- The asset is measured at fair value
- The difference is expected to reverse within 12 months
- Tax rates in the new country are below 15%
Correct answer: The difference relates to goodwill in a business combination
IAS 12 prohibits recognition of deferred tax liabilities arising from initial recognition of goodwill in a business combination.
Question 3: For strategic capital allocation decisions, IFRS requires that borrowing costs directly attributable to a qualifying asset be:
- Expensed immediately in the period incurred
- Capitalized as part of the cost of that asset (Correct answer)
- Deferred and amortized over 5 years
- Disclosed only in notes, not recognized
Correct answer: Capitalized as part of the cost of that asset
IAS 23 requires capitalization of borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset.
Question 4: A strategic decision to enter a joint arrangement requires IFRS 11 classification. The key distinction between a joint venture and a joint operation is:
- The number of parties involved
- Whether the parties have rights to net assets versus rights to assets and obligations for liabilities (Correct answer)
- Whether the arrangement is structured through a separate vehicle
- The jurisdiction of the arrangement
Correct answer: Whether the parties have rights to net assets versus rights to assets and obligations for liabilities
IFRS 11 distinguishes joint ventures (rights to net assets) from joint operations (rights to assets and obligations for liabilities).
Question 5: When management's strategic plan indicates significant doubt about an entity's ability to continue as a going concern, IAS 1 requires:
- Immediate liquidation basis accounting
- Disclosure of the uncertainty regardless of management's mitigating plans (Correct answer)
- Restatement of all assets to net realizable value
- Switching to cash basis accounting
Correct answer: Disclosure of the uncertainty regardless of management's mitigating plans
IAS 1 requires disclosure of material uncertainties about going concern even when management believes its plans will resolve the issue.
Question 6: A company's strategic plan involves divesting a business segment. Under IFRS 5, a discontinued operation is presented in profit or loss:
- Within operating profit, separately labeled
- As a single net amount, separate from continuing operations (Correct answer)
- Only in the notes to financial statements
- Net of tax within the gross profit line
Correct answer: As a single net amount, separate from continuing operations
IFRS 5 requires the post-tax profit or loss of discontinued operations to be presented as a single line, separate from continuing operations.
Question 7: For strategic planning purposes, a company compares its IFRS-based return on assets to industry benchmarks. Under IFRS, investment properties are permitted to be measured using:
- Only the cost model
- Only the fair value model
- Either the cost model or the fair value model, with changes in fair value in P&L if fair value model is chosen (Correct answer)
- The lower of cost or net realizable value
Correct answer: Either the cost model or the fair value model, with changes in fair value in P&L if fair value model is chosen
IAS 40 permits entities to choose the cost model or fair value model for investment properties, with fair value changes recognized in profit or loss.
IFRS Strategic Planning and Decision Making 3
In strategic planning, management considers the implications of IFRS 15 for long-term contracts.
Revenue is recognized when or as the entity satisfies a performance obligation, which is measured using: