SOCPA Financial Accounting 2 — Questions and Answers
Question 1: How should a Saudi company account for property, plant, and equipment (PPE) under IFRS?
- Expense all asset purchases immediately
- Initially record at cost, then depreciate over useful life using a systematic method, with periodic impairment testing (Correct answer)
- Record at market value every year
- Only record land, not buildings or equipment
Correct answer: Initially record at cost, then depreciate over useful life using a systematic method, with periodic impairment testing
Under IAS 16, PPE is initially measured at cost (purchase price plus directly attributable costs). Subsequently, it is depreciated over its useful life (straight-line, declining balance, or units of production). Companies can use cost model or revaluation model. Impairment testing follows IAS 36.
Question 2: What is an impairment loss under IAS 36?
- A gain on asset disposal
- The amount by which an asset's carrying amount exceeds its recoverable amount (higher of fair value less costs of disposal and value in use) (Correct answer)
- A depreciation charge
- An increase in asset value
Correct answer: The amount by which an asset's carrying amount exceeds its recoverable amount (higher of fair value less costs of disposal and value in use)
Impairment occurs when an asset's carrying amount exceeds its recoverable amount. Recoverable amount = higher of (fair value less costs of disposal) and (value in use/discounted future cash flows). The impairment loss is recognized in profit or loss immediately.
Question 3: Under IFRS 9, how should financial assets be classified by a Saudi company?
- All at historical cost
- Based on business model and contractual cash flow characteristics: amortized cost, FVOCI, or FVTPL (Correct answer)
- Only at fair value
- Classification is optional
Correct answer: Based on business model and contractual cash flow characteristics: amortized cost, FVOCI, or FVTPL
IFRS 9 classifies financial assets into three categories based on the business model test and SPPI (solely payments of principal and interest) test: 1) Amortized Cost (hold to collect), 2) Fair Value through OCI (hold to collect and sell), 3) Fair Value through Profit or Loss (other).
Question 4: What disclosures are required in the notes to financial statements under IFRS?
- No notes are required
- Significant accounting policies, judgments, estimates, risk management, related party transactions, contingencies, and segment information (Correct answer)
- Only the company address
- Only the auditor's name
Correct answer: Significant accounting policies, judgments, estimates, risk management, related party transactions, contingencies, and segment information
Notes to financial statements must include: basis of preparation, significant accounting policies, key judgments and estimates, detailed breakdowns of balance sheet and income statement items, related party disclosures (IAS 24), contingent liabilities, subsequent events, and segment reporting.
Question 5: How is inventory valued under IAS 2 for Saudi companies?
- Always at selling price
- At the lower of cost and net realizable value (NRV) (Correct answer)
- At cost regardless of market conditions
- At replacement cost only
Correct answer: At the lower of cost and net realizable value (NRV)
IAS 2 requires inventory to be measured at the lower of cost (purchase/conversion cost using FIFO or weighted average — LIFO is prohibited under IFRS) and net realizable value (estimated selling price less costs to complete and sell). Write-downs are recorded when NRV falls below cost.
Question 6: What is the statement of cash flows and its three sections under IAS 7?
- Only shows bank balances
- Reports cash movements in three categories: operating activities, investing activities, and financing activities (Correct answer)
- Only shows revenue and expenses
- Shows budgeted vs. actual spending
Correct answer: Reports cash movements in three categories: operating activities, investing activities, and financing activities
IAS 7 requires the cash flow statement to classify cash movements: Operating (cash from core business), Investing (cash for/from long-term assets), and Financing (cash from/to funding sources — debt and equity). Operating can use direct or indirect method.
SOCPA Financial Accounting 2
How should a Saudi company account for property, plant, and equipment (PPE) under IFRS?