Revision Kit for CPA Australia

Revision Kit for CPA Australia ©

BPP Learning Media is dedicated to supporting aspiring business professionals

with top-quality learning material as they study for demanding professional
exams, often whilst working full time. BPP Learning Media’s commitment
to student success is shown by our record of quality, innovation and market
leadership in paper-based and e-learning materials. BPP Learning Media’s study
materials are written by professionally qualified specialists who know from
personal experience the importance of top-quality materials for exam success.

CPA Program

©
Financial Reporting
This Revision Kit is one of a suite of products, for use Targeted at CPA Australia’s exams, it provides:
©

independently or as part of a college course,

CPA Program
• Practice on questions in every syllabus area in the
supporting Financial Reporting. Designed around the
different formats you will encounter
content and structure of the CPA Australia CPA
©

• Comprehensive answers to all questions

Program Study Guide, this Kit helps you focus your
• Advice on revision and exam technique
revision and practise for the exam in a way that
makes the best use of your time.

Financial Reporting
For exams in 2017
Contact us
BPP House
142-144 Uxbridge Road
London W12 8AA
United Kingdom
T 0845 075 1100 (UK)
Revision Kit for New updated
CPA Australia
T +44 (0)20 8740 2211 (Overseas)
E Learningmedia@bpp.com © edition for
bpp.com/learningmedia
exams in 2020
November 2016

CPA Program

Financial Reporting

For exams in 2020

CPPR09(RK)NOV16.indd All Pages 14/12/2016 15:03

REVISION KIT
FOR CPA AUSTRALIA

CPA PROGRAM
FINANCIAL REPORTING
 Fifth edition November 2019 A note about copyright
Dear Customer
ISBN 9781 5097 0298 5
eISBN 9781 5097 0345 6 What does the little © mean and why does it matter?
Your market-leading BPP books, course materials and
British Library Cataloguing-in-Publication Data e-learning materials do not write and update themselves.
A catalogue record for this book People write them: on their own behalf or as employees of
is available from the British Library. an organisation that invests in this activity. Copyright law
protects their livelihoods. It does so by creating rights
Published by over the use of the content.
BPP Learning Media Ltd
BPP House, Aldine Place Breach of copyright is a form of theft – as well as being a
London W12 8AA criminal offence in some jurisdictions, it is potentially a
www.bpp.com/learningmedia serious breach of professional ethics.
With current technology, things might seem a bit hazy but,
Printed in the United Kingdom by basically, without the express permission of BPP Learning
Media:
RICOH UK Limited
Unit 2 • Photocopying our materials is a breach of copyright
Wells Place
Merstham
• Scanning, ripcasting or conversion of our digital
RH1 3LG materials into different file formats, uploading them to
Facebook or emailing them to your friends is a breach
of copyright
Your learning materials, published by BPP Learning
You can, of course, sell your books, in the form in which
Media Ltd, are printed on paper obtained from
you have bought them – once you have finished with them.
traceable sustainable sources.
(Is this fair to your fellow students? We update for a
reason.) But the e-products are sold on a single user
All rights reserved. No part of this publication may be licence basis: we do not supply ‘unlock’ codes to people
reproduced or transmitted in any form or by any who have bought them second-hand.
means or stored in any retrieval system, electronic, And what about outside the UK? BPP Learning Media
mechanical, photocopying, recording or otherwise strives to make our materials available at prices students
without the prior permission of the publisher. can afford by local printing arrangements, pricing policies
and partnerships which are clearly listed on our website. A
BPP Learning Media is grateful to the IASB for tiny minority ignore this and indulge in criminal activity by
permission to reproduce extracts from the illegally photocopying our material or supporting
International Financial Reporting Standards including organisations that do. If they act illegally and unethically in
all International Accounting Standards, SIC and IFRIC one area, can you really trust them?
Interpretations (the Standards). The Standards
together with their accompanying documents are Copyright © IFRS Foundation
issued by: All rights reserved. Reproduction and use rights are strictly
limited. No part of this publication may be translated,
The International Accounting Standards Board (IASB) reprinted or reproduced or utilised in any form either in
30 Cannon Street, London, EC4M 6XH, United whole or in part or by any electronic, mechanical or other
Kingdom. Email: info@ifrs.org Web: www.ifrs.org means, now known or hereafter invented, including
photocopying and recording, or in any information storage
Disclaimer: The IASB, the International Financial and retrieval system, without prior permission in writing
Reporting Standards (IFRS) Foundation, the authors from the IFRS Foundation. Contact the IFRS Foundation
and the publishers do not accept responsibility for any for further details.
loss caused by acting or refraining from acting in
reliance on the material in this publication, whether The IFRS Foundation logo, the IASB logo, the IFRS for
such loss is caused by negligence or otherwise to the SMEs logo, the “Hexagon Device”, “IFRS Foundation”,
maximum extent permitted by law. “eIFRS”, “IAS”, “IASB”, “IFRS for SMEs”, “IASs”, “IFRS”,
“IFRSs”, “International Accounting Standards” and
“International Financial Reporting Standards”, “IFRIC”
©
“SIC” and “IFRS Taxonomy” are Trade Marks of the IFRS
BPP Learning Media Ltd 20120
Foundation.
Further details of the Trade Marks including details of
countries where the Trade Marks are registered or applied
for are available from the Licensor on request.

ii Financial Reporting
Contents

Page
Introduction v
How to use this Revision Kit vi
Learning Objectives viii
Exam technique xv
Computer-based testing (CBT) xvi

Q A

Module 1 The role and importance of financial reporting

Multiple choice questions 3 91
Written response questions 10 94

Module 2 Presentation of financial statements

Multiple choice questions 12 99
Assumed knowledge questions 18 102
Written response questions 21 104

Module 3 Revenue from contracts with customers;

Provisions, contingent liabilities and contingent assets
Multiple choice questions 24 109
Written response questions 33 113

Module 4 Income taxes

Multiple choice questions 35 119
Written response questions 43 123

Module 5 Business combinations and group accounting

Multiple choice questions 45 127
Assumed knowledge questions 56 133
Written response questions 58 134

Module 6 Financial instruments

Multiple choice questions 62 141
Written response questions 71 145

Module 7 Impairment of assets

Multiple choice questions 74 151
Assumed knowledge questions 83 154
Written response questions 85 155

Introduction iii
iv Financial Reporting
Introduction

Welcome to this sixth edition of BPP Learning Media’s Revision Kit for the Financial Reporting part of
CPA Australia's CPA Program.
One of the key criteria for achieving exam success is question practice. There is generally a direct
correlation between candidates who revise all topics and practise exam questions and those who are
successful in their real exams. This Revision Kit gives you ample opportunity for such practice in the run up
to your CPA Program exams.
The Revision Kit is structured to follow the modules of the CPA Program Study Guide, and comprises
banks of multiple choice questions and banks of short-form, written response or case study questions as
appropriate. Suggested solutions to all questions are supplied. All material is fully up to date and consistent
with the 2017 CPA Program Financial Reporting Syllabus.
This Revision Kit is part of a suite of supplementary products published by BPP Learning Media for
candidates studying for the CPA Program exams. Other products include the market-leading BPP Learning
Media Passcards, pocket-sized revision cards summarising the key areas of the syllabus, perfect for revision
on the move. For further information visit www.bpp.com/learningmedia.
We welcome your feedback. If you have any comments about this Revision Kit, or would like to suggest
areas for improvement, please email CPAAustraliaQueries@bpp.com.
Good luck in your CPA Program exams!

BPP LEARNING MEDIA

December 2016

Introduction v
 How to use this Revision Kit

This Revision Kit comprises banks of practice questions of the style that you will encounter in your CPA
Program exam. It is the ideal tool to use during the revision phase of your studies.
All questions in your exam are compulsory so you must revise the whole syllabus. Selective revision will
limit the number of questions you can answer and hence reduce your chances of passing. It is better to go
into the exam knowing a reasonable amount about most of the syllabus rather than concentrating on a few
topics to the exclusion of the rest. You should at all costs avoid falling into the trap of question spotting,
that is trying to predict what are likely to be popular areas for questions, and restricting your revision and
question practice to those.
Practising as many exam-style questions as possible will be the key to passing this exam. You must do
questions under timed conditions and ensure you write full answers to the discussion parts as well as
doing the calculations.
Planning your revision
When you enrol for the semester you should make a plan of how you will manage your studies, taking into
account the volume of work that you need to do and your other commitments, both work and domestic.
Ideally you should aim to complete your study within the time indicated in the target weekly schedule,
provided by CPA Australia, so as to ensure you have sufficient revision time available.
In this time, you should go through your notes to ensure that you are happy with all areas of the syllabus
and practise as many questions as you can. You can do this in different ways, for example:
• revise the subject matter a module at a time and then attempt the questions relating to that module;
or
• revise all the modules and then build an exam out of the questions in this Revision Kit. Review the
exam structure (set out in the Study Guide) and then group together the relevant number of MCQs
and longer questions from different syllabus areas to create a 3-hour and 15-minute exam.
Using the practice questions
All of the CPA Program core segment exams comprise both multiple choice questions (MCQs) and
constructed response questions (i.e. questions requiring longer written answers), but the precise division of
questions varies from segment to segment.
The best approach is to select a question and then allocate to it the time that you would have in the real
exam. All the practice constructed response questions in this Revision Kit have mark allocations, so you can
calculate the amount of time that you should spend on the question.
Each exam is 195 minutes (3 hours and 15 minutes) long.

For one mark you should allocate time as follows:

Segment Time for 1 mark

Ethics and Governance 2.3 minutes
(85 marks available in the exam)
Strategic Management Accounting 2.3 minutes
(85 marks available in the exam)
Financial Reporting 3 minutes
(65 marks available in the exam)
Global Strategy and Leadership 2.4 minutes
(80 marks available in the exam)

vi Financial Reporting
All MCQs in all the exams are worth one mark each, so the table indicates roughly how long you should
allow for each MCQ, both in this Revision Kit and in the real exam. However, this is an approximate guide:
some MCQs are very short and just require a factual response, which you either know or you don’t, while
others are more complex, requiring a series of calculations, which will inevitably take more time.
When attempting a constructed response question, multiply the time per mark by the number of marks, so
for example a 5-mark Financial Reporting question should be allowed:
5 × 3 minutes = 15 minutes.
Using the suggested solutions
Avoid looking at the answer until you have finished a question. It can be very tempting to do so, but unless
you give the question a proper attempt under exam conditions you will not know how you would have
coped with it in the real exam scenario.
When you do look at the answer, compare it with your own and give some thought to why your answer
was different, if it was.
In multiple choice questions if you did not reach the correct answer make sure that you work through
the explanation or workings provided, to see where you went wrong. If you think that you do not
understand the principle involved, go back to your own notes or your CPA Program study materials and
work through and revise the point again, to ensure that you will understand it if it gets tested in the real
exam.
For constructed response or case study questions our suggested solutions are comprehensive, but in
some discursive questions it may be that you have made points that are not included in the suggested
solution that are equally valid. In the real exams you should be given credit for such points.
Assumed knowledge questions (Financial Reporting only)
In some modules of the Financial Reporting Revision Kit you will see Assumed Knowledge questions. Some
parts of the Financial Reporting syllabus build heavily upon your previous studies. We have therefore
included some questions to enable you to practise techniques which you will then need to employ in some
parts of the Financial Reporting exam, although they will not be the subject of questions in their own right.
These questions should enable you to refresh your memory and revise these areas.

Introduction vii
 Learning Objectives

CPA Australia's learning objectives for this Revision Kit are set out below. They are cross-referenced to the
questions in this Revision Kit where they are covered. You can use the table below to identify multiple
choice questions or extended response questions which will develop your approach to answering questions
covering specific areas of the syllabus.
Financial Reporting
General overview
Financial Reporting is designed to provide candidates with financial reporting and business skills that are
applicable in an international professional environment. The subject is based on the International Financial
Reporting Standards (IFRSs) which are issued by the International Accounting Standards Board (IASB). Many
international jurisdictions have adopted or are progressively adopting the IFRSs.
In a competitive international environment, financial reporting provides users with information to formulate
corporate strategies, business plans and leadership initiatives. There is also a common acceptance of IFRSs
for communicating financial information, because they are internationally understood. This reduces the cost
of capital for the international reporting entities.
Financial reporting provides information for corporate leadership. Members of the accounting profession
with financial reporting skills and knowledge provide business advice to board directors, analysts,
shareholders, creditors, colleagues and other stakeholders. Members of the accounting profession who
provide assurance services for financial reports also require a good understanding of the IFRSs. Directors
are also required to state that the financial statements are fairly stated.
Subject aims
The primary aim of Financial Reporting is to provide candidates with globally transferable skills to prepare a
set of general purpose financial statements in different jurisdictions. The subject encourages high-quality
financial reporting and the practice of strong ethical values in the accounting profession.
The secondary aim is to provide:
effective financial analytical skills; and
the ability to comprehend and use a stock-exchange listed entity's financial statements.

Extended Assumed
MCQ Response knowledge
Topics Questions Questions MCQs
LO1. The role and importance of financial
reporting
LO1.1 explain the role and importance of financial
6, 7, 22 2
reporting;
LO1.2 identify the role of a framework in the
development of accounting standards and 5, 9 2
financial reporting;
LO1.3 describe the objective of general purpose
financial statements as identified in the 10, 22
Conceptual Framework;
LO1.4 discuss the constraints on frameworks; 11 2
LO1.5 explain the limitations of general purpose
10, 22
financial statements;

viii Financial Reporting

 Extended Assumed
MCQ Response knowledge
Topics Questions Questions MCQs
LO1.6 describe the underlying assumption and
qualitative characteristics of general purpose
3, 4, 5, 13, 21,
financial statements in accordance with the 1, 4, 5
22, 23, 25
Conceptual Framework and their application
in selected IFRSs;
LO1.7 explain the definitions of the elements of
financial statements and recognition criteria 1, 14, 16, 20 2, 4
adopted by the Conceptual Framework;
LO1.8 explain the role of accounting standards,
specifically IFRSs, in the financial reporting 15 2
process;
LO1.9 explain the application of the standards to the 5, 20, 21, 24,
financial reporting process and apply specific 25, 26, 27, 28, 3
standards; 29, 30
LO1.10 discuss and demonstrate the importance of
professional judgment in the financial reporting 18 5
process;
LO1.11 explain the concept of fair value and its
17, 24 5
importance in measurement;
LO1.12 explain the relationship between cost and fair
12 5
value;
LO1.13 explain the mixed measurement model adopted
2, 12, 25 2, 5
by the Conceptual Framework;
LO1.14 explain the application of relevant criteria to
19
determine the materiality of transactions;
LO1.15 identify appropriate accounting policies; 20, 21, 24, 27,
3
28, 29, 30
LO1.16 explain the role of disclosure in financial
8, 22, 23 5
reporting;
LO1.17 explain the application of relevant criteria to
8
determine whether disclosure is required.
LO2. Presentation of financial statements
LO2.1 explain and apply the requirements of IAS 1 with
respect to a complete set of financial statements
3, 14, 23 2, 6
and in relation to the considerations for the
presentation of financial statements;
LO2.2 outline and explain the requirements of IAS 8 for
the selection of accounting policies and the
6, 22 6
circumstances in which an accounting policy can
be changed;
LO2.3 outline the disclosure requirements of IAS 8 for
5, 6 1
accounting policies;
LO2.4 explain and apply the accounting treatment and
disclosure requirements of IAS 8 in relation to
1, 2, 4, 22 1
changes in accounting policies, and changes in
accounting estimates and errors;

Introduction ix
 Extended Assumed
MCQ Response knowledge
Topics Questions Questions MCQs
LO2.5 explain and discuss the required treatment for
both adjusting and non-adjusting events
8, 10, 11, 12 3, 4
occurring after the reporting period in
accordance with IAS 10;
LO2.6 apply the disclosures required by IAS 10 for
9, 15 3, 4
events occurring after the reporting period.
LO2.7 explain and apply the requirements of IAS 1 with
respect to preparing a statement of profit or
16, 18, 20, 22 2
loss and other comprehensive income (paras
10A, 81A and 81B, and 82-15);
LO2.8 explain and apply the requirements of IAS 1 with
respect to preparing a statement of changes
13, 16, 20, 21 1
in equity (paras 106-110 and Guidance on
implementing IAS 1);
LO2.9 explain and apply the requirements of IAS 1 with
respect to preparing a statement of financial 14, 17, 20, 24 4
position (paras 54-80A);
LO2.10 explain and apply the requirements of IAS 7 with 1, 2, 3, 4, 5,
respect to preparing a statement of cash flows; 7, 19, 25 5 6, 7, 8, 9, 10,
11, 12, 13, 14
LO2.11 discuss how a statement of cash flows can assist
users of the financial statements to assess the
7 6
ability of an entity to generate cash and cash
equivalents.
LO3. Revenue from contracts with customers;
Provisions, contingent liabilities and contingent
assets

LO3.1 understand and explain the purpose and scope

1 3
of IFRS 15;
LO3.2 apply the requirements of IFRS 15, and identify
4 1, 2, 3
the contract(s) with customers;
LO3.3 apply the requirements of IFRS 15, and identify
6 1, 2, 3
the performance obligations in a contract(s);
LO3.4 determine and explain the transaction price of a
5, 8, 9, 10 1, 2, 3
contract;
LO3.5 explain how to allocate the transaction price to
2, 5, 11 2, 3
the performance obligation(s) of the contract;
LO3.6 explain how to recognise revenue when a
12 1, 2, 3
performance obligation is satisfied;
LO3.7 understand, and be able to apply the disclosure
3, 7, 13 2
requirements of IFRS 15;
LO3.8 apply the requirements of IFRS 15 to business 2, 3, 5, 7, 8, 9,
1, 2, 3
scenarios; 10, 11, 12, 14

x Financial Reporting
 Extended Assumed
MCQ Response knowledge
Topics Questions Questions MCQs
LO3.9 understand, and be able to apply, the definitions
of a provision, contingent liability and contingent
18, 21, 26 4, 6, 7
asset, and recognise how they relate to the
Framework;
LO3.10 understand the difference between a provision
16, 24 6
and other forms of liability;
LO3.11 understand, and be able to apply, the recognition 15, 17, 19, 20,
and measurement requirements of IAS 37; 23, 24, 27, 28, 4, 5, 6, 7
31
LO3.12 understand, and be able to apply, the disclosure
21, 22, 25, 29 4, 5, 7
requirements of IAS 37;
LO3.13 analyse and discuss the accounting requirements 15, 17, 19, 24,
4, 5
specific to particular types of provisions. 27, 28, 31
LO4. Income taxes
LO4.1 explain the rationale for the balance sheet
3, 5, 10 2
liability method of accounting for income tax;
LO4.2 explain the terms ‘taxable temporary differences’
2, 5, 7, 20, 25 2
and ‘deductible temporary differences’;
LO4.3 apply the requirements of IAS 12 with respect to 1, 4, 8, 13, 14,
calculating current and deferred tax assets and 15, 16, 17, 21,
1, 2, 3
liabilities; 26, 27, 28, 29,
31, 33
LO4.4 explain how the manner of recovery or
11, 19, 27, 28,
settlement of an asset or liability may affect the 4
32
tax rate and/or the tax base;
LO4.5 apply the requirements of IAS 12 with respect to
applying the tax rates and tax bases that 12, 19, 27, 28,
4
are consistent with the manner of recovery or 32
settlement of an asset or liability;
LO4.6 explain why it is probable that future outflows of
economic benefits are associated with the 9 2
reversal of taxable temporary differences;
LO4.7 apply the probability recognition criterion for
deductible temporary differences, unused tax 1, 15, 18, 23 3
losses and unused tax credits;
LO4.8 apply the requirements of IAS 12 to account for
the recognition and reversal of deferred tax
assets arising from deductible temporary 1, 15, 18, 23 3
differences, unused tax losses and unused
tax credits;
LO4.9 apply the requirements of IAS 12 with respect to
the deferred tax consequences of revaluing 16, 17, 22 3
property, plant and equipment;
LO4.10 apply the requirements of IAS 12 with respect to
financial statement presentation and disclosure 6, 24, 30 1
requirements.

Introduction xi
 Extended Assumed
MCQ Response knowledge
Topics Questions Questions MCQs
LO5. Business combinations and group accounting

LO5.1 identify a business combination, discuss the forms

that it may take and analyse issues relating to 4, 5 7
different business combinations;
LO5.2 discuss and apply the acquisition method to a
business combination, including the IFRS 3
1, 2, 3, 6, 7, 9,
requirements for recognising and measuring 7
15
goodwill or a bargain purchase at the acquisition
date;
LO5.3 explain how purchased goodwill is measured
6, 7, 8 7
subsequent to the acquisition date;
LO5.4 apply the accounting for the deferred taxation
2, 3, 10 7
impact of a business combination;
LO5.5 explain and apply the disclosure requirements of
11
IFRS 3;
LO5.6 explain the concept of control and analyse
specific scenarios to outline how the existence of 12, 13, 14, 28 6
control is determined;
LO5.7 explain and prepare consolidation worksheet
entries where a parent entity has an interest in
15, 16, 19, 20 1, 2
a subsidiary, including the revaluation of assets
subject to depreciation;
LO5.8 explain the rationale for the elimination of intra-
group transactions and prepare consolidation
16, 17, 18, 20, 1, 2, 3, 4, 5,
worksheet entries to eliminate transactions 1, 2, 5
31 7, 8, 9
within the group, including the tax effect of such
transactions;
LO5.9 explain the concept of ‘non-controlling interest’
and prepare a consolidation worksheet that
22, 23 1, 2
includes the appropriate adjustment entries and
allows for non-controlling interests;
LO5.10 explain and apply the disclosure requirements of
both IAS 1 Presentation of Financial Statements for
consolidated financial statements and IFRS 12 21, 22, 24, 30 1 6
Disclosure of Interests in Other Entities for interests
in subsidiaries;
LO5.11 define ‘significant influence’ and explain the
factors that may be used to determine whether 25, 26, 28 4
significant influence exists in specific scenarios;
LO5.12 prepare journal entries to account for the initial
application of the equity method; investee profits
27, 28, 29, 32,
and dividends; and post-acquisition changes in 3
33, 35
other comprehensive income (e.g. from the
revaluation of property, plant and equipment);
LO5.13 undertake consolidation adjustment entries to
28, 29, 32, 33,
implement equity accounting for associates in the 3
35, 36, 37
consolidated financial statements;

xii Financial Reporting

 Extended Assumed
MCQ Response knowledge
Topics Questions Questions MCQs
LO5.14 account for transactions between the associate
27, 29, 31, 36,
and other members of the group using the equity 3
37
method;
LO5.15 explain the disclosure requirements of IFRS 12 in
24 3
relation to interests in associates;
LO5.16 define a joint arrangement and explain the
34, 38 8
accounting requirements of IFRS 11;
LO5.17 explain the disclosure requirements of IFRS 12 in
24
relation to interests in joint arrangements.
LO6. Financial instruments
LO6.1 identify what is a ‘financial instrument’ and
explain the difference between primary and 1, 2, 6, 23, 33 1, 2, 5
derivative financial instruments;
LO6.2 explain and apply the criteria for the recognition
of financial assets and financial liabilities 28 1
associated with financial instruments;
LO6.3 explain and apply the criteria for the
derecognition of financial assets and financial 26, 29, 34 6
liabilities associated with financial instruments;
LO6.4 explain and apply the approach to the
20, 22, 30, 31,
classification and reclassification of financial assets 2, 5
32, 33
and financial liabilities;
LO6.5 explain and apply the approach to the
measurement of financial assets and financial 9, 11, 13, 14,
2, 3
liabilities at initial recognition and subsequent to 27
initial recognition;
LO6.6 apply the requirements for the impairment of
7, 20, 35 4
financial assets measured at amortised cost;
LO6.7 identify the requirements in IFRS 9 for the use of
hedge accounting and apply the hedge 17, 21 7
effectiveness test;
LO6.8 explain and apply the fair value hedge and cash
12, 15, 16, 20 7
flow hedge methods to simple examples;
LO6.9 explain and apply the criteria for the classification
3, 5, 24 5
of financial liabilities versus equity;
LO6.10 explain how compound financial instruments are
to be measured and recognised and apply the
4, 6, 8, 20, 27 3, 5
classification of interest, dividends and gains and
losses in relation to financial instruments;
LO6.11 explain and apply the criteria in IAS 32 for the
18
set-off of financial assets and financial liabilities;
LO6.12 explain the key disclosures required for financial
10, 19, 25 4
instruments under IFRS 7.

Introduction xiii
 Extended Assumed
MCQ Response knowledge
Topics Questions Questions MCQs
LO7. Impairment of assets
LO7.1 explain the key issues in accounting for the
11, 24, 27 1, 5
impairment of assets;
LO7.2 understand the types of assets to which IAS 36
5, 19 3, 4
applies;
LO7.3 identify when an impairment test must be
13, 17, 23 1
undertaken under IAS 36;
LO7.4 explain and apply the requirements of IAS 36 in
relation to:
the calculation of recoverable amount; 2, 3, 4, 8, 10,
2, 3, 5
12, 18, 21, 25
recognising and measuring an impairment loss 2, 3, 4, 8, 10,
2
for an individual asset; 18, 25
the reversals of impairment losses; 7, 9, 15, 22 3
the identification of CGUs; and 16, 28 4, 5
recognising and measuring an impairment loss
1, 2, 4, 6, 26 3, 4, 5
for CGUs and goodwill.
LO7.5 describe the disclosure requirements of IAS 36. 14, 20 2, 5

Exam topic weightings

1 Knowledge and Understanding 33%
2 Apply 33%
3 Analyse and Evaluate 33%
TOTAL 100%

xiv Financial Reporting

Exam technique

Using the right technique in the real exam can make all the difference between success and failure.
Here are a few pointers:
1. At the start of your exam, read through the questions and decide in what order you are going
to attempt them. You have to write your answers in the order set out in the question and answer
booklet or on screen, but you can attempt the questions in any order that you like. The structure of
the exam is provided to you in advance, so make sure that you are aware of it before the exam day.
Some candidates like to attempt the easiest questions first, on the basis that it will enable them to
gain the easiest available marks quickly, and build up their confidence.
Some candidates prefer to attempt the MCQs first, as in most cases they form the bulk of the exam,
but they will cover many aspects of the syllabus and you will find yourself moving rapidly from topic
to topic. So you may prefer to take a look at the constructed response questions and establish the
order in which you would like to attempt those. If you select a question on a topic area about which
you feel confident, and do that first, you will build up your confidence right at the start, which will
help to calm you if you are nervous and set the tone for the rest of the exam. You should decide
what approach is best for you, and then apply that when you are in the exam room.
2. Having established the order in which you are going to do the exam, allocate the remaining time
available to the questions and work out at what time you will need to stop working on one
question or batch of questions and move on to the next. When you reach the end of the allocated
time for the question(s) that you are working on, STOP. It is much easier to gain the
straightforward marks for the next question than to spend a long time working on the previous
question in the hope of gaining one or two final marks.
3. Make sure that you attempt every MCQ. Do not leave any blank. If you run out of time or are
not sure of an answer, you should select the option you think is most suitable. You can come back
to the question later if time permits.
4. Read the question. Read it carefully once, and then read it again to ensure that you have picked
everything up. Make sure that you understand what the question wants you to do, rather than what
you might like the question to be asking you…
5. Answer all parts of the question. Even if you cannot do all of the calculation elements, you will
still be able to gain marks in the discussion parts.
6. Don’t worry if you think that you have made a mistake in a computational part of a constructed
response question. You will not earn the mark for that particular part, but you will still be able to
gain credit for correct application in the later parts of the question, even if you are using the wrong
figure.
7. When starting to read a constructed response question, especially a long case study, read the
requirement first. You will then find yourself considering the requirement as you read the data in
the scenario, helping you to focus on exactly what you have to do.
8. For written response questions, especially longer case studies, plan your answer before you start
to write your response. This will help you to focus on the requirements of the question and to avoid
irrelevance.
9. In written response questions, try to make sure that your answer relates to the specifics of the
question itself. If you are asked to consider the impact of the scenario on someone named in the
question, make sure that you do that, so your answer is as relevant as possible.
10. If you finish the exam with time to spare, use the rest of the time to review your answers and to
make sure that you answered every MCQ.

Introduction xv
 Computer-based testing (CBT)

The exam time for the computer-based test (CBT) is 195 minutes (3 hours 15 minutes).
You can find further information about the locations where CBT is available on the CPA Australia website,
under the heading CPA Program.
There is also a practice test/tutorial on the CPA Australia website so you can familiarise yourself with the
layout of the exams and functionality of the software.
If you are planning to take an exam for the first time using CBT we advise you to familiarise yourself as
much as you can with the process by reading all the available information on the CPA Australia website.

xvi Financial Reporting

Module questions

1
2
Module 1 THE ROLE AND IMPORTANCE OF
FINANCIAL REPORTING

Multiple choice questions

1 Which one of the following can be recognised as an asset in the financial statements in accordance
with the Conceptual Framework?
A $2000 paid to train staff members
B $70 000 research costs that may result in the development of a new product
C a $100 000 contract with a customer to deliver goods at a specified date in the future
D the $2 million transfer fee paid by a rugby club to acquire a player on contract from another
club
2 A property which cost $1 300 000 is measured for reporting purposes at $2 million, which is the
amount of cash (or cash equivalents) that could be obtained by selling the property in an orderly
disposal.
Which measurement basis does this describe?
A current cost
B historical cost
C realisable value
D present value of future cash flows
3 The IASB Conceptual Framework for Financial Reporting (Conceptual Framework) refers to 'faithful
representation' as a fundamental qualitative characteristic.
Which of the following is an example of faithful representation as defined in the Conceptual
Framework?
A the consistent use of accounting estimates when accounting for depreciation
B the classification of expenses as cost of sales, administrative expenses and distribution costs
C the ability to use information on provisions to predict future cash flows of a reporting entity
D the IAS 37 requirement to disclose contingent liabilities in order to provide complete
information
4 Users of Green Co's financial statements can compare the market price used to measure its equity
shareholding in Blue Co, a listed company to that company's quoted share price as at the reporting
date.
Which characteristic of financial information does this reflect?
A timeliness
B verifiability
C comparability
D understandability

Module questions 3
 5 The Conceptual Framework adopts a mixed measurement model whereby a number of measurement
bases are in common use. Which of the following statements is correct?
A IAS 40 Investment Property refers to the measurement of assets at fair value and current cost.
B IAS 36 Impairment of Assets refers to the measurement of assets at current cost and value in
use.
C IAS 16 Property, Plant and Equipment refers to the measurement of assets at historical cost and
fair value.
D IFRS 5 Non-current Assets Held for Sale and Discontinued Operations refers to the measurement
of assets at cost and realisable value.
6 The role of financial reporting is to provide users with information to enable them to make effective
decisions. Which of the following groups of users are general purpose financial reports specifically
prepared for according to the Conceptual Framework?
A lenders, investors and tax authorities
B investors, potential investors and creditors
C employees, tax authorities and shareholders
D shareholders, lenders and government bodies
7 Which of the following statements is true in accordance with the Conceptual Framework?
A Individual primary users have different and possibly conflicting information needs.
B General purpose financial reports are designed to show the value of the reporting entity.
C General purpose financial statements must provide all the information that existing and
potential investors need.
D Focusing on common information needs prevents the reporting entity from including
additional information that might be useful to a particular subset of primary user.
8 Fair presentation is achieved by the application of IFRSs along with additional disclosures when
necessary. Which of the following statements regarding disclosure are true?
A Information must be presented in a manner that provides relevant, reliable, comparable and
understandable information.
B Each IFRS gives specific disclosure requirements, additional disclosures are not required to be
given voluntarily by management.
C Additional disclosures may be given so that management can present information in a way
that delivers the most positive message about an entity's financial position and performance.
D Additional disclosure is only necessary when an entity departs from the requirements of an
IFRS because its application would be misleading and depart from the objectives of the
Conceptual Framework.
9 Which of the following statements is incorrect in relation to the IASB Conceptual Framework for
Financial Reporting?
A It facilitates consistency in financial reporting.
B It is applied by auditors to help them to form their opinion.
C It provides a framework for the formulation of accounting standards.
D In a conflict with an IFRS the requirements of the Conceptual Framework override those of the
IFRS.

4 Financial Reporting
10 Which of the following statements is true of general purpose financial statements?
1 General purpose financial statements meet the specific needs of users including banks and
regulators.
2 General purpose financial statements are designed to help decision-makers make their own
estimates as to an organisation's value.
A 1 only
B 2 only
C both 1 and 2
D neither 1 nor 2
11 Which of the following is NOT a constraint on the concept of a conceptual framework for financial
reporting?
A Its application may only benefit certain groups.
B A framework is time-consuming and costly to develop.
C There is a historical lack of consistency between accounting standards.
D External regulators impose their own desires on reporting requirements.
12 The Conceptual Framework for financial reporting mentions several measurement bases that are used in
financial statements.
Which of the following is NOT an advantage of measurement using historical cost?
A It is reliable.
B It is relevant.
C It is objective.
D It is easy to understand and calculate.
13 The Conceptual Framework states that financial performance is reflected by accrual accounting. Which
of the following requirements from accounting standards reflects this basis of accounting?
A IAS 40 allows investment property to be measured using either the cost or fair value model.
B IAS 17 requires that an asset acquired under a finance lease is recognised in the statement of
financial position.
C IAS 36 requires that an impairment loss is recognised if the carrying amount of an asset
exceeds its recoverable amount.
D IFRS 2 requires that a share-based payment transaction is recognised when the goods or
services which the entity acquires in exchange are received.
14 Which of the following statements about the elements of the financial statements is true?
A Wales Co has paid a dividend of $2 million in the year. This is an expense.
B Ireland has reduced its provision for warranties in the year. This is income.
C Scotland Co has measured its equity based on the company's quoted share price.
D England Co has been quoted $400 000 to replace its leaking roof in the coming year. This is a
liability.
15 Improving communication effectiveness and reducing complexity is a key focus for standard-setting
bodies. Which of the following statements is NOT true?
A The IFRS for SMEs has been introduced to reduce complexity for certain entities. This
simplifies recognition and measurement requirements of full IFRS.
B The IASB is working on a Disclosure Initiative to improve disclosure requirements within
standards and so help users to better understand financial statements.
C IFRS require that the financial statements contain a report on business strategy and other
qualitative information to help users understand the performance of a company.
D Several countries require the use of IFRS by listed entities, so reducing global complexity in
financial reporting. The USA, however, does not permit domestic listed companies to apply
IFRS.

Module questions 5
 16 Ferrara Co has developed several brands which have generated significant revenue for the company
in the past and are expected to continue to generate revenue for the foreseeable future.
In accordance with the IASB Conceptual Framework which of the following statements is correct?
A The brands should not be recognised as intangible assets, because it is impossible to measure
their cost or value reliably.
B The brands should be recognised as intangible assets, because the information is relevant to
the economic decisions of users.
C The brands should be recognised as intangible assets, because they are expected to generate
revenue for the foreseeable future.
D The brands should not be recognised as intangible assets, because they do not meet the
definition of an element of the financial statements.
17 Sunshine Co owns one of a number of identical storage units within a large warehouse. At
31 March 20X6, units of the same size and specification in a new warehouse close by were being
marketed for $280 000, with a discount of 10 per cent available for purchases before the end of
April 20X6. At the end of March the unit next to Sunshine Co's, which had been owned by a
company that went into liquidation, sold for $220 000. Another unit close to Sunshine Co's was sold
for $250 000 after a month of marketing activities.
In accordance with IFRS 13 what is the fair value of Sunshine Co's storage unit?
A $220 000
B $250 000
C $252 000
D $280 000
18 Which of the following statements regarding professional judgment in financial reporting is/are true?
1 Professional judgment may involve making a trade off between relevance and faithful
representation.
2 Accounting standards are not rules-based and therefore professional judgment must be used
when applying their requirements.
3 The Conceptual Framework has been developed in order to eliminate the requirement to use
professional judgment so resulting in increased consistency.
A 2 only
B 3 only
C 1 and 2 only
D 1 and 3 only
19 Which of the following transactions are material to Skipton Co, which has reported net assets of
$1.9 million and profits of $450 000?
1 a loan to a director of $10 000
2 sales to a customer of which represent 25 per cent of total sales
3 share options currently worth $25 000 issued to middle-grade employees
A 2 only
B 1 and 2 only
C 1 and 3 only
D 2 and 3 only

6 Financial Reporting
20 Which of the following is an appropriate accounting policy?
A depreciation of property over a 20-year useful life
B capitalisation of the costs of repainting company headquarters in new corporate colours
C recognition of gains in the fair value of investment property in other comprehensive income
D recognition of an equity settled share-based payment expense when shares are issued to the
counterparty
21 Post Co owns a property that is let out to tenants under operating leases. The property cost
$500 000 on 1 January 20X6 and was assessed to have a 50-year useful life on that date. At
31 December 20X6 its fair value is $630 000.
At acquisition, Post decided to adopt the measurement basis for the property that best reflects the
characteristic of faithful representation.
What amounts are recognised in the financial statements for the year ended 31 December 20X6?
Other comprehensive
Carrying amount of property Profit or loss income
A $490 000 $(10 000) Nil
B $500 000 Nil Nil
C $630 000 $130 000 Nil
D $630 000 $(10 000) $140 000

22 To which of the following user groups are general purpose financial statements the least useful?
A suppliers for the purpose of assessing the solvency of their customer
B investors for the purpose of deciding whether to buy more shares in a company
C the public for the purpose of assessing the impact of a company on the local community
D a bank for assessing the ability of a customer to repay money advanced in the form of a loan
23 An entity must disclose the accounting policies adopted in the preparation of its financial reports.
Which of the qualitative characteristics does this requirement reflect?
A relevance
B verifiability
C comparability
D faithful representation
24 Rain Co adopts the fair value model for its investment properties and the revaluation model for its
property, plant and equipment. Tower A, which is being developed for use as an investment
property had a carrying amount at 1 July 20X5 of $800 000 and a remaining useful life of 40 years. In
June 20X6, Rain Co was offered $960 000 for the property by an interested party. If Rain sold the
property it could buy a similar sized property elsewhere for $940 000.
Which of the following is the correct accounting treatment of Tower A in the year ended
30 June 20X6?
A increase the carrying amount to $940 000 and recognise $140 000 in profit or loss
B increase the carrying amount to $960 000 and recognise $160 000 in profit or loss
C increase the carrying amount to $940 000 and recognise $160 000 in other comprehensive
income
D increase the carrying amount to $960 000 and recognise $180 000 in other comprehensive
income

Module questions 7
 25 Which of the following statements regarding the characteristic of comparability is correct?
A IAS 40 reduces comparability by allowing different measurement models to be applied to
individual investment properties.
B IAS 36 reduces comparability by allowing an entity to choose to use value in use or fair value
less costs to sell as recoverable amount.
C IAS 16 enhances comparability by requiring either the cost or the revaluation model to be
applied to all property, plant and machinery.
D IFRS 2 increases comparability by requiring rewards to employees in the form of share
options to employees to be recognised in profit or loss.
26 In accordance with IAS 19 Employee Benefits which of the following statements is true in respect of
short-term employee benefits?
A A liability for non-vesting compensated absences must never be recognised.
B If a compensated absence is accumulating and vesting, a liability is recognised as the employee
renders services.
C A liability for a compensated absence which is non-accumulating must be remeasured and
recognised at the start of each accounting period.
D Compensated absences that are expected to be settled beyond 12 months after the end of
the reporting period are measured at the undiscounted amount expected to be paid on
settlement.
27 On 8 April 20X6 Balsam Co entered into a cash-settled share-based payment transaction with a
supplier whereby it acquired wood with a fair value of $200 000 in return for a cash payment based
on the market value of Balsam Co shares. Payment will be made on 31 August 20X6 and based on
the fair value of 50 000 shares. The share price was $4.10 per share on 8 April 20X6 and $4.80 at
the year end of 31 July 20X6.
What amounts are reported in Balsam Co's financial statements at the year end 31 July 20X6 in
respect of the transaction?
A an expense of $205 000 and a liability of $205 000
B an expense of $240 000 and a liability of $240 000
C an expense of $200 000 and an equity balance of $200 000
D an expense of $205 000 and an equity balance of $205 000
28 Stanza Co operates a scheme under which certain employees may qualify for long-service leave. In
accordance with IAS 19 Employee Benefits, how should the liability for long-service leave be
measured, assuming that the company does NOT hold any assets specifically to fund long-term
employee benefits?
A at fair value
B at historic cost
C at present value
D at settlement value
29 On 1 July 20X3 an entity granted 10 000 share options to each of its employees in exchange for
services provided in the first six months of the year. The share options can be exercised any time
after 1 January 20X4
The fair value of each option was $12 at 1 July 20X3 and $15 at 31 December 20X3.
What amounts are reported in the financial statements for the year ended 31 December 20X3 in
respect of the share options in accordance with the requirements of IFRS 2 Share-based Payment?
A an expense of $120 000 and a liability balance of $120 000
B an expense of $120 000 and an equity balance of $120 000
C an expense of $150 000 and an equity balance of $150 000
D other comprehensive income of $150 000 and an equity balance of $150 000

8 Financial Reporting
30 Craswall Co has acquired a substantial plot of land. The company's management does not intend to
sell the land or to use it in any way in the near future. Craswall does not own any other similar
properties.
Which of the following statements is correct?
A The land should be measured at fair value and gains and losses on remeasurement should be
recognised in profit or loss.
B The land should be measured at fair value and gains and losses on remeasurement should be
recognised in other comprehensive income.
C The land may be measured either at its historic cost less accumulated depreciation or at its
fair value, in which case gains and losses on remeasurement are recognised in profit or loss.
D The land may be measured either at its historic cost less accumulated depreciation or at its
fair value, in which case gains and losses on remeasurement are recognised in other
comprehensive income.

Module questions 9
 Written response questions – Module 1
Question 1 (4 marks)
In accordance with the Conceptual Framework for financial reporting the fundamental qualitative characteristics
are relevance and faithful representation.
Required:
Explain what is meant by relevance and faithful representation and how they make financial information
useful.
Question 2 (11 marks)
Brighton Co has invested $350 000 in training staff in the year ended 31 October 20X6. The board of
Brighton are keen to recognise this cost as an asset in the statement of financial position, however, the
finance director has advised them that this would be in contravention of the Conceptual Framework.
Required:
Explain the role of financial reporting and what part the Conceptual Framework plays in this.
(3 marks)
Explain how the Conceptual Framework is related to IFRS, referring to specific IFRS. (3 marks)
Discuss constraints that may hinder the application of the Conceptual Framework. (2 marks)
Explain why the staff training costs cannot be recognised as an asset. (3 marks)
Question 3 (4 marks)
The 50 managerial grade staff at Whitequay Co are entitled to a number of benefits as part of their
employment package, including:
membership of a scheme whereby they are granted share options at each year end to reward them
for the completed year of service. The options can be exercised one year later.
a 60-day long service leave after 15 full years' service. For each extra year worked beyond this, the
period of leave is extended by 5 days.
Required:
Apply IAS 19 to explain how Whitequay Co should account for each of the benefits, referring to the
recognition and measurement of related elements of the financial statements.
Question 4 (5 marks)
In the year ended 31 December 20X8, Macduff Co, a drinks manufacturer, sold a vat of maturing whisky to
Rubens Bank for $4.6 million. Macduff has signed a contract agreeing to repurchase the whisky in eight
years' time at a cost of $5.4 million.
In its financial statements, Macduff has accounted for this transaction as a loan of $4.6 million.
Required:
Explain how the accounting treatment adopted by Macduff reflects the fundamental qualitative
characteristics and definition of a liability in the Conceptual Framework.

10 Financial Reporting
Question 5 (11 marks)
Zafira Co operates from offices in a freehold property which it bought on 30 June 20X2 at a cost of
$2 million. The company initially measured the property in accordance with the IAS 16 cost model and
depreciated it over a useful life of 50 years on a straight-line basis.
At 30 September 20X6, the management of Zafira Co decided to revalue the property on the basis that
there has been a surge in the value of commercial property over the last year, and the property is now
worth more than the original $2 million cost.
A chartered surveyor has provided the company with a report stating that the market value of the property
based on use as an office block is $2.4 million. In recent transactions for similar properties, sellers wishing
to achieve a quick sale have accepted offers of 10 per cent less than market value.
Required:
Explain the benefits and disadvantages of using the revaluation model rather than the cost model in
the context of the qualitative characteristics of the Conceptual Framework. (3 marks)
Explain how IAS 16 measurement requirements reflect the measurement bases in the Conceptual
Framework. (2 marks)
Explain how fair value is determined and to what extent professional judgment must be applied in the
determination of the fair value of Zafira's property. (3 marks)
Where a revaluation has taken place in the year, IAS 16 requires disclosure of whether an
independent valuer was involved and the carrying amount that would have been recognised under
the cost model. Discuss why these disclosures are required, referencing the qualitative
characteristics of the Conceptual Framework (3 marks)

Module questions 11
 Module 2 PRESENTATION OF FINANCIAL
STATEMENTS

Multiple choice questions

1 Which of the following constitute a change of accounting policy according to IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors?
A a change in the remaining useful life of an asset
B a change in depreciation method from straight line to reducing balance
C adopting an accounting policy for a new type of transaction not previously dealt with
D a decision to measure property using the revaluation model rather than the cost model
2 In which of the following cases is retrospective restatement or application required in accordance
with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors?
A the correction of errors only
B the correction of errors and changes in accounting estimates
C changes in accounting policy and changes in accounting estimates
D changes in accounting policy and the correction of material errors
3 A complete set of financial statements includes a third statement of financial position at the start of
the earliest period presented in which of the following circumstances?
A The year end date has changed.
B The method of depreciating plant has changed from straight line to reducing balance.
C The reporting entity has started reporting operating segment information in line with IFRS 5.
D Management have changed the measurement model applied to investment properties from
the cost model to the fair value model.
4 As a result of human error, Gale Co overvalued its closing inventory at 31 December 20X6 by
$150 000. This is considered material. Which of the following best describes the correct treatment
of this error by Gale Co in the financial statements for the year ended 31 December 20X8, the year
in which the error was identified?
A reduce the profit for the year ended 31 December 20X8 and the carrying amount of
inventory at 31 December 20X8 by $150 000
B increase the profit for the year ended 31 December 20X8 by $150 000 and reduce the
carrying amount of inventory at 31 December 20X8 by $150 000
C adjust retained earnings brought forward at 1 January 20X7 upwards by $150 000 and restate
reported profits for the year ended 31 December 20X7 downwards by $150 000
D adjust retained earnings brought forward at 1 January 20X7 downwards by $150 000 and
restate reported profits for the year ended 31 December 20X7 upwards by $150 000
5 Which of the following disclosures is only required where a change in accounting policy is voluntary
rather than arising from the initial application of a standard?
A Nature of the change in accounting policy.
B The amount of adjustment for each item presented.
C The amount of the adjustment relating to periods before those presented to the extent
practicable.
D The reasons why applying the new accounting policy provides reliable and more relevant
information.

12 Financial Reporting
6 Which of the following statements is correct?
A There is no requirement for A Co to disclose accounting policies unless they do not conform
to the requirements of IFRS.
B An entity should select its accounting policies by reference to IFRS. If no relevant IFRS exists,
management should apply the requirements of local accounting standards.
C C Co must disclose information about IFRS that have been issued but that are not yet
effective and so have not been applied in the preparation of the financial statements.
D D Co can choose to change the measurement basis applied to property from the revaluation
to the cost model because this will result in information that is more comparable with
information about other non-current assets.
7 Which of the following statements regarding cash flows is incorrect?
A A statement of cash flows allows users to assess the impact of historic cash flows on an
entity's ability to generate future cash flows.
B A dividend received must be reported as an investing cash flow in order that the return on
investment is classified consistently with the payment to acquire the investment.
C If an entity has a net cash outflow from operating activities, this indicates that the entity has
not generated sufficient net cash from operations to cover its income tax and interest
payments.
D Dividends paid may be classified as a financing cash flow because they result from raising funds
through share issues or operating cash flows because they are paid from cash flows generated
by operations.
8 Ex Co identifies the following events after 31 December 20X1, whilst preparing the draft financial
statements to that date.
Which of the following is a non-adjusting event?
A an acquisition of a new subsidiary, completed during February 20X2
B receipt of a material settlement during February 20X2 from the liquidator of a customer
whose account was written off during 20X1
C refusal of planning permission during January 20X2 by a local authority on a parcel of land
bought for its development potential and recorded at fair value in the financial statements at
31 December 20X1
D sale of several material items of inventory during January 20X2 at amounts substantially below
their cost. The customer demanded a reduction in the selling price because there had been
errors in the production process during December 20X1 and the items were found to be
below the usual standard
9 Which of the following best describes the disclosures required by IAS 10?
A the nature and financial effect of both adjusting and non-adjusting events, categorised
separately
B the date of authorisation of the financial statements and the nature and financial effect of non-
adjusting events
C the nature and financial effect of adjusting events and any indication that the reporting entity is
not a going concern as a result of a non-adjusting event
D the date of authorisation of the financial statements and any indication that the reporting
entity is not a going concern as a result of a non-adjusting event

Module questions 13
 10 The financial statements of Dors Co for the year ended 31 December 20X2 were authorised for
issue on 25 May 20X3. The following events occurred after the reporting period.
1 The directors declared a dividend of 25c per ordinary share on 20 February 20X3. Dors Co
has 400 000 $1 ordinary shares in issue.
2 A court case was ongoing at the end of the reporting period. The claim made by a customer
of Dors Co was settled in March 20X3 requiring Dors to pay damages of $150 000. At the
reporting date Dors had recognised a provision of $120 000 based on the best estimate of
the amount that it would be required to pay
What liabilities should be recognised in the financial statements of Dors Co for the year ended
31 December 20X2 in accordance with IAS 10 Events After the Reporting Period?
Dividend Insurance claim
A $Nil $120 000
B $Nil $150 000
C $100 000 $120 000
D $100 000 $150 000
11 The financial statements of Stern Co for the year ended 31 December 20X2 were authorised for
issue on 15 April 20X3. According to IAS 10 Events After the Reporting Period which of the following is
treated as a non-adjusting event in the financial statements for the year ended 31 December 20X2?
A Inventory items held at 31 December 20X2, with an original cost of $40 000, were sold for
$30 000.
B On 2 April 20X3 there was a fire in Stern Co's main warehouse which destroyed 60 per cent
of the total inventory.
C Notice was received on 28 February 20X3 that a major customer had ceased trading due to
prolonged financial difficulties and was unlikely to make further payments.
D It was discovered that a member of the accounts payable team had processed false invoices
through the purchases ledger resulting in payment of $75 000 to her personal bank account.
12 A company's reporting period ends on 30 June 20X2 and the financial statements are authorised for
issue on 31 August 20X2. On 30 July 20X2 a major drop in the price of shares means that the value
of the company's investments has declined by $130 000 since the period end. The fall in value is
material. How should this event be treated in the financial statements for the period ended
30 June 20X2?
A an adjusting event without separate disclosure
B a non-adjusting event without separate disclosure
C an adjusting event with disclosure that a major fall in the price of shares has resulted in a loss
of $130 000
D a non-adjusting event with disclosure that a major fall in the price of shares has resulted in a
loss of $130 000
13 Which one of the following is disclosed in the statement of changes in equity?
A an exceptional item of expense or income
B tax arising on the revaluation of an owner-occupied property
C adjustments made to correct errors relating to periods before those presented
D dividends received from equity investments measured at fair value through other
comprehensive income

14 Financial Reporting
14 Which of the following statements about Trent Co's statement of financial position is true?
A A bank loan due to be repaid in the next three months must be identified as a current liability.
B A property owned by Trent Co and rented to an unrelated company can be presented in the
same line item as the property from which Trent Co operates.
C Trent Co can report inventory as a single line item, with subclassification into finished goods,
work in progress and raw materials provided in the notes to the accounts.
D Trent Co must provide a third statement of financial position at the start of the comparative
period because it has changed an accounting estimate during the financial year.
15 In accordance with IAS 10, which of the following provides the minimum disclosure required in
respect of the acquisition of equity shares in Flood Co by Water Co after the reporting date?
A No disclosure is required.
B An event after the reporting date has resulted in a cash outflow of $800 000.
C After the reporting date, Water Co acquired 80 per cent of the equity share capital in
Flood Co.
D After the reporting date, Water Co acquired 80 per cent of the equity share capital in
Flood Co at a cost of $800 000.
16 Which of the following is statements is correct regarding other comprehensive income?
A Other comprehensive income is transferred to retained earnings in the statement of changes
in equity.
B A reduction in revaluation surplus due to the impairment of a revalued asset is recognised in
profit or loss.
C A revaluation surplus of $4000 gives rise to an additional deferred tax liability of $800. The
net amount of $3200 must be presented in other comprehensive income.
D On the disposal of a foreign subsidiary, an accumulated gain on the translation of the
subsidiary's accounts is reclassified to profit or loss. This is presented as a negative amount in
other comprehensive income in the year of disposal.
17 Oakworth Group's trial balance includes the following amounts at 31 December 20X6:
Share capital $100 000 Investments in associates $140 000
Deferred tax liability $78 000 Retained earnings $975 000
Non-controlling interests $60 000 Revaluation surplus $210 000
Cash flow hedge reserve (gain) $25 000 Financial liabilities $78 000
What amount of equity is reported in Oakworth Group's consolidated statement of financial
position?
A $1 250 000
B $1 285 000
C $1 310 000
D $1 370 000
18 In the year ended 31 December 20X7, Wharfe Co recognises an increase in the fair value of owner-
occupied property of $450 000, giving rise to additional deferred tax of $90 000. It also recognises
an increase in the fair value of investment property by $210 000, giving rise to additional deferred
tax of $42 000.
In accordance with IAS 1, what amount is recognised in profit or loss and in other comprehensive
income in the year ended 31 December 20X7?
Profit or loss Other comprehensive income
A $78 000 $450 000
B $168 000 $360 000
C $360 000 $168 000
D $540 000 $252 000

Module questions 15
 19 The following cash flows arise in Denton Co in the year ended 31 December 20X6:
Cash inflows Cash outflows
Proceeds of share issue $140 000 Redemption of bonds $200 000
Dividends received $12 000 Dividends paid $45 000
Interest received $10 000 Interest paid $20 000
The management of Denton Co wish to minimise the cash outflow reported as arising from financing
activities. What amount is reported?
A $38 000 outflow
B $60 000 outflow
C $105 000 outflow
D $125 000 outflow
20 Which of the following statements is invalid in respect of Grand Co's financial statements for the
year ended 31 December 20X6, assuming that the financial statements were authorised for issue in
April 20X7?
A Grand Co has elected to present its other comprehensive income gross with a single line
representing tax thereon, as permitted by IAS 1.
B Grand Co has elected to present its expenses classified by nature as permitted by IAS 1; it
therefore includes expense categories including cost of sales, administrative expenses and
distribution costs.
C Grand Co was due to repay its bank $100 000 in March 20X7 however negotiated a
refinancing agreement on 23 February 20X7, extending the term by 24 months. Grand
reported the loan as a current liability in accordance with IAS 1.
D In the year, Grand Co identified and corrected a material error that arose four years
previously. In accordance with IAS 1, its statement of changes in equity must therefore
include an adjustment to brought forward retained earnings at 1 January 20X5.
21 Gloucester Co had a balance of $4 000 000 as its total equity at 1 January 20X2. During the year
ended 31 December 20X2 the company:
revalued property with a carrying amount of $750 000 to $1 500 000
issued shares with a nominal value of $400 000 at a premium of $100 000
made a profit of $1 000 000.
On 1 March 20X3 the directors declared an ordinary dividend of $200 000 for the year ended
31 December 20X2.
What is the closing balance on total equity in the statement of changes in equity for the year ended
31 December 20X2?
A $5 250 000
B $6 050 000
C $6 150 000
D $6 250 000
22 Wells Co wishes to change how it prepares its financial statements so that depreciation expense is
classified as cost of sales if it relates to production machinery or facilities, distribution costs if it
relates to delivery vehicles and administrative expenses if it relates to the head office or
administrative functions. Which of the following statements is true?
A This is a change in accounting estimate and is permitted. The change is applied prospectively.
B A change in presentation such as this is not allowed as it results in information that is not
comparable.
C This is a change in accounting policy that results in more relevant information and therefore it
is allowed. Comparatives must be restated.
D IAS 1 mandates the presentation of expenses and therefore Wells Co's failure to present
depreciation expense in accordance with IAS 1 represents an error which is corrected
retrospectively.

16 Financial Reporting
23 In accordance with IAS 1 Presentation of Financial Statements, which of the following statements is
true?
A All financial statements must be prepared on an accruals basis.
B Inappropriate accounting policies can be rectified by disclosure.
C Financial statements must always be prepared on a going concern basis.
D Assets and liabilities should not be offset unless required or permitted by an IFRS.
24 Ansty Co is a company which builds houses. Its normal operating cycle is 18 months and the year
end is 30 June. The company presents assets and liabilities as current and non-current. According to
IAS 1 Presentation of Financial Statements which of the following assets should be classified as 'current
assets' in the statement of financial position at 30 June 20X5?
1 A house constructed by Ansty Co which is expected to be sold in December 20X5
2 A house constructed by Ansty Co which is expected to be sold in July 20X6
A 1 only
B 2 only
C 1 and 2
D neither 1 nor 2
25 The following information has been extracted from Arial Co's draft financial statements for the year
ended 31 December 20X2:
A production machine was acquired at a cost of $95 000.
$120 000 was raised through a share issue.
Tax paid was $45 000.
Cash receipts from customers was $345 000.
Payments to suppliers and employees amounted to $120 000.
A grant of $55 000 was received.
What was net cash flow from operating activities for the year ended 31 December 20X2?
A $140 000
B $180 000
C $235 000
D $250 000

Module questions 17
 Assumed knowledge questions – Module 2
1 The following balances appear in the statement of financial position of Lea Co.
Year ended 31 March
20X5 20X4
$'000 $'000
Property, plant and equipment at 1 250 1 096
carrying amount
Revaluation surplus 240 140
During the year depreciation of $150 000 was charged.
What figure is reported in the statement of cash flows for the year ended 31 March 20X5 for
purchases of property, plant and equipment?
A $96 000
B $154 000
C $204 000
D $304 000
2 The following balances appear in the statement of financial position of Joyce Co.
Year ended 31 October
20X4 20X3
$'000 $'000
Share capital 1 600 1 200
Non-current liabilities:
Long-term borrowings 1 400 2 000
What is the net cash flow relating to financing activities in the statement of cash flows for the year
ended 31 October 20X4?
A $200 000 outflow
B $600 000 outflow
C $400 000 inflow
D $1 000 000 inflow
3 Where do bonus share issues appear in a statement of cash flows?
A They will not appear in a statement of cash flows.
B They will appear under operating profit as receipts.
C They will appear under financing because share capital has increased.
D They will appear as part of investing since they represent an alternative to paying a dividend.
4 A company incurs expenditure on development during the year that is paid for and capitalised.
This expenditure would be shown in a statement of cash flows
A as a cash inflow.
B as a cash outflow.
C nowhere – it would not appear at all.
D as a part of cash flow from operating activities.

18 Financial Reporting
5 Waterloo Co acquired a freehold building for cash, financed in full by issuing for cash 232 000
$1 ordinary shares at a premium of $1 per share.
In its statement of cash flows, how is this transaction presented?
A inflow from financing activities: $464 000
outflow from investing activities: $464 000
B inflow from investing activities: $464 000
outflow from operating activities: $464 000
C inflow from financing activities: $464 000
outflow from operating activities: $464 000
D inflow from operating activities: $464 000
outflow from investing activities: $464 000
6 Information concerning the property, plant and equipment of Ealing Co is detailed in the table below.
During the year property, plant and equipment which had cost $80 000 and which had a net carrying
amount of $30 000 was sold for $20 000. Net cash from operating activities for the year was
$300 000.
Start of year End of year
$ $
Cost 180 000 240 000
Aggregate depreciation 120 000 140 000
Net carrying amount 60 000 100 000
There was no other cash activity. As a result of the above, by how much did cash increase over the
year?
A $180 000
B $240 000
C $260 000
D $320 000
7 In a company's statement of cash flows, a revaluation of property during the year is
A entirely excluded.
B shown as a cash inflow.
C shown under investing activities.
D shown under cash flows from operating activities.
8 The following information relates to the cash flows of Davis Co:
$
Issue of share capital 91 000
Dividends paid 13 000
Decrease in cash for the period 4 900
Purchase of non-current assets 31 000
Cash received from sale of non-current assets 5 400
Taxation paid 30 000
The only missing item is the figure for cash flow from operating activities for the year.
What is this figure?
A inflow $17 500
B inflow $27 300
C outflow $17 500
D outflow $27 300
9 Blacksmith disposes of assets with a net carrying amount of $21 000 for $30 000 during the year. In
the statement of cash flows using the indirect method for that year this will be reflected as
A cash flows from operating activities reconciliation: $9000; Cash inflow: $30 000.
B cash flows from operating activities reconciliation: $21 000; Cash inflow: $30 000.
C cash flows from operating activities reconciliation: $(9000); Cash inflow: $30 000.
D cash flows from operating activities reconciliation: $(21 000); Cash inflow: $30 000.

Module questions 19
 10 What is the net cash inflow from financing given the information in the table? ($300 interest is
included in the loan repayments).
Receipts $ Payments $
Share issue 5 000 Loan repayments 2 200
Loan 9 000 Expense of share issue 500
A $7100
B $11 300
C $11 600
D $12 100
11 Which one of the following needs to be added to profit before tax in order to generate a figure for
net cash from operating activities?
A increase in inventories
B decrease in trade payables
C decrease in trade and other receivables
D proceeds from sale of property, plant and equipment
12 Steel Ltd had the following amounts in its statement of financial position at 30 June 20X1 and
30 June 20X2:
20X2 20X1
$ $
Inventory 15 730 18 240
Receivables 23 900 22 400
Cash at bank 3 700 3 200
Trade payables 16 700 19 600
Profit before tax was $15 000 for the year ended 30 June 20X2 and the depreciation charge for the
year was $4280.
What was the net cash inflow from operations for the year ended 30 June 20X2?
A $12 370
B $13 110
C $17 390
D $21 170
13 In a statement of cash flows, how is a decrease in loan stock presented?
A a cash inflow under financing
B a cash inflow under investing
C a cash outflow under financing
D a cash outflow under investing
14 In a statement of cash flows which of the items below would NOT appear as an outflow of cash?
A the purchase of long-term investments
B the profit or loss expense for depreciation for the year
C the dividends paid to preferred shareholders during the year
D the nominal value of loan notes redeemed at par during the year

20 Financial Reporting
Written response questions – Module 2
Question 1 (5 marks)
Medic Co has produced draft financial statements for the year ended 31 December 20X2. Extracts are as
follows:
Statement of profit or loss and other comprehensive income (extract)
20X2 20X1
$ $
Profit for the year 916 000 890 000

Statement of changes in equity (extract)

Balance at 1 January 20X1 8 386 000
Total comprehensive income for 20X1 890 000
Balance at 1 January 20X2 9 276 000
Total comprehensive income for 20X2 916 000
10 192 000
After these financial statements had been produced it was discovered that $100 000 of research costs had
been capitalised as development expenditure in error at the end of 20X0. To date amortisation costs in
respect of this expenditure of $20 000 had been recognised in 20X1 and 20X2. The error has been
assessed as significant.
Required:
Redraft the extracts from the financial statements correcting the error made in 20X1. (Ignore the
effects of tax.) (3 marks)
Explain what additional disclosures Medic Co must make in respect of the error. (2 marks)
Question 2 (7 marks)
Arlo Co has held all of the shares in Rugby GmbH for a number of years. Rugby operates in Germany and
uses the Euro as its functional currency. For consolidation purposes, the financial statements of Rugby are
translated to dollars at each year end, and exchange differences recognised in other comprehensive income
in line with the requirements of IAS 21. At 31 December 20X7 the cumulative net exchange loss recognised
since acquisition was $612 000. In the year ended 31 December 20X8, the shares in Rugby were disposed
of and a profit on disposal, calculated as the difference between proceeds and the net assets of Rugby on
the disposal date, arose of $4 320 000. On the translation of the financial statements of Rugby as at the date
of its disposal, an exchange gain of $98 000 was calculated.
Required:
Explain what is other comprehensive income and describe the presentation requirements of IAS 1 in
respect of other comprehensive income. (3 marks)
Explain the term 'reclassification adjustment' as used in IAS 1 Presentation of Financial Statements.
(1 mark)
Provide extracts of the consolidated statement of profit or loss and other comprehensive income for
Arlo Group for the year ended 31 December 20X8 showing how amounts related to the disposal of
Rugby are recognised. You should ignore tax. (3 marks)

Module questions 21
 Question 3 (4 marks)
Glover Co has a year end of 30 June 20X2. The following schedule has been prepared by the accountant
with details of a number of events and his proposed treatment of them in the financial statements.

Event Proposed treatment

Notification of the bankruptcy of a customer who Write off of $30 000 debt as it is irrecoverable
owed $25 000 on 30 June 20X2 and who now
owes $30 000. The liquidator has indicated that
the debt will not be recoverable.
Major production plant destroyed by fire on 1 July No adjustment or reference to the issue required
20X2 as the fire took place after the year end
Ordinary dividends declared on 1 August 20X2 in Liability for dividends payable recognised
respect of profits for period ended 30 June 20X2
Discovery of a major fraud on 15 July 20X2 No adjustment required as the fraud was
resulting in losses to the company discovered after the period end

Required:
In each of the instances above apply IAS 10 and explain whether the correct treatment has been proposed
by the accountant and if not, what the treatment should be.
Question 4 (5 marks)
Explain under what circumstances an asset should be classified as a current asset. (2 marks)
Reacher Co has a substantial bank loan outstanding which is due to be repaid on 30 November
20X8. As a result of an ongoing expansion, Reacher intends to negotiate a refinancing of the loan
with the bank, including extending the repayment date to 20Y4. Negotiations with the bank began on
12 September 20X8 and were successfully concluded on 18 October 20X8. Reacher has a year end
of 30 September and expects to authorise its financial statements for issue during January 20X9.
Required:
How is the above information reflected in the financial statements of Reacher Co for the year ended
30 September 20X8? (3 marks)
Question 5 (8 marks)
Tuckey Co, a retailer of sports goods, is preparing its statement of cash flows for the year ended
31 August 20X6. The following information is provided:
Statement of profit or loss and other comprehensive income for the year ended
31 August 20X6
$'000
Revenue 25 600
Cost of sales (14 800)
Gross profit 10 800
Distribution costs (4 300)
Administrative expenses (2 600)
Profit from operations 3 900
Interest (800)
Profit before tax 3 100
Tax (680)
Profit for the year 2 420

22 Financial Reporting
Statement of financial position
X6 X5
$'000 $'000
Property, plant and equipment 13 100 12 250

Current assets
Inventory 1 600 2 100
Trade receivables 2 150 2 380
Prepayments 600 750
Cash 1 080 940
5 430 6 170
Total assets 18 530 18 420

Equity and Reserves

Share capital 5 000 4 000
Retained earnings 3 450 1 530
8 450 5 530
Current liabilities
Accruals 380 400
Trade payables 2 100 1 950
Tax payable 600 540
3 080 2 890
Non-current liabilities
Loan 6 258 9 346
Deferred tax 742 654
7 000 10 000
Total equity, reserves and liabilities 18 530 18 420

1 Depreciation is included within cost categories as follows:

Cost of sales $550 000
Distribution costs $180 000
Administrative expenses $120 000
2 There was a bonus issue of shares of $400 000 during the year, funded by retained earnings.
3 There was no interest accrual at the start or end of the year.
4 Tuckey Co reports dividends paid as a cash flow from financing activities.
Required:
Calculate the cash generated from operations for Tuckey Co for the year ended 31 August 20X6
using the direct method. (3 marks)
Prepare an extract from the statement of cash flows of Tuckey Co for the year ended
31 August 20X6 to show the net cash in/outflow from financing activities. (2 marks)
Explain the usefulness of a historic statement of cash flows when assessing the ability of an entity to
generate cash and cash equivalents in the future. (3 marks)
Question 6 (7 marks)
The management of Eddison Co is concerned that application of a particular paragraph of IAS 19 Employee
Benefits will not result in a fair presentation of the company's pension scheme. The finance manager is
therefore considering departing from the requirements of this paragraph.
Required:
Explain what is meant by 'fair presentation' when applied to financial statements. (2 marks)
Explain how the management of Eddison Co should select accounting policies. (2 marks)
Explain the requirements of IAS 1 in relation to the proposed departure. (3 marks)

Module questions 23
 Module 3 REVENUE FROM CONTRACTS WITH
CUSTOMERS; PROVISIONS, CONTINGENT
LIABILITIES AND CONTINGENT ASSETS

Multiple choice questions

1 Which of the following transactions is NOT within the scope of IFRS 15 Revenue from Contracts with
Customer?
A the sale of a non-controlling equity shareholding owned by a retailer
B the sale of an extended warranty by a manufacturer of electrical goods
C the sale of an investment property owned by a manufacturing company
D an agreement licensing another party to use an anti-virus package created by a software
designer
2 The following transactions were incurred in December 20X5. How much should the company
recognise as revenue for that month?
$
1.12.20X5 Goods provided to a customer on a sale or return basis. The 35 500
customer has confirmed that 50 per cent of these goods were sold
on to a third party during December.
15.12.20X5 Goods sold including servicing fees for 4 months from 10 000
16 December. The fair value of the goods is $10 000 and the fair
value of 4 months' servicing fees is $2500.
31.12.20X5 Goods sold and delivered to customer. The invoiced amount is 30 000
payable in three equal instalments of $10 000 on 1 January,
1 February and 1 March 20X6
An appropriate discount rate, where appropriate is 1 per cent per month. Other than the amounts
payable in instalments all debts have been paid.
A $55 704
B $56 000
C $73 454
D $73 750
3 A construction company entered into a contract on 1 January 20X5 to build a factory on behalf of a
manufacturer. The performance obligation within the contract is determined to be satisfied over
time. The total contract price was $2.8 million. At 31 December 20X5 the contract was certified as
35 per cent complete. Costs incurred during the year were $740 000 and costs to complete are
estimated at $1.4 million. $1 million has been billed to the customer but not yet paid.
What amounts are recognised in respect of this contract in the statement of financial position of the
construction company as at 31 December 20X5?
A a receivable of $1 000 000
B a contract asset of $1 000 000
C a receivable of $1 000 000 and a contract asset of $20 000
D a receivable of $1 000 000 and a contract liability of $20 000

24 Financial Reporting
4 Step 1 of the IFRS 15 five-step model requires the contract with the customer to be identified.
IFRS 15 is applied only if a contract has specific attributes. To which one of the following contracts is
IFRS 15 NOT applied?
A an oral contract with a customer to deliver goods at a specified price with payment on
delivery
B a contract to deliver goods to a customer that entitles the customer to return the goods in
exchange for a full refund
C a contract to receive payment from a corporate customer to invest in continued research and
development. Exactly how the money is spent is at the discretion of the recipient
D a contract with a customer that operates in a region that is suffering severe economic
recession meaning that at the inception of the contract, only 90 per cent of the contract price
is expected to be received from the customer
5 Newmarket's revenue as shown in its draft statement of profit or loss for the year ended
31 December 20X9 is $27 million. This includes:
(i) $8 million for vehicles sold on 31 December 20X9. As part of a new year offer, Newmarket
provided the purchasers of these vehicles with a two-year servicing agreement free of charge.
The standalone selling price of the two-year servicing agreements provided would be
$2 million.
(ii) $4 million collected on behalf of Aintree. Newmarket acts as an agent for Aintree and
receives a 10 per cent commission on all sales, which is included in the $4 million.
What amount of revenue should be recognised in the statement of profit or loss of Newmarket for
the year ended 31 December 20X9? (Ignore the time value of money.)
A $21 400 000
B $21 800 000
C $25 000 000
D $25 400 000
6 In which of the following contracts can a single performance obligation be identified?
A a contract to provide a mobile phone handset and 12 months' network services
B a contract to manufacture and deliver 5 customised machines at regular intervals over a
period of 10 months
C a contract to transfer a software licence and perform a customised installation service in
order that the software interfaces with the customer's existing software applications
D a contract to provide goods to a customer. The seller has historically provided maintenance
services for no additional consideration to this customer, although the written contract does
not include this promise.

Module questions 25
 7 On 25 June 20X9 Cambridge received an order from a new customer, Circus, for products with a
sales value of $900 000. Circus enclosed a deposit with the order of $90 000.
On 30 June Cambridge had not completed credit checks on Circus and had not despatched any
goods. Cambridge is considering the following possible entries for this transaction in its financial
statements for the year ended 30 June 20X9.
1 Create a trade receivable for $810 000.
2 Include $90 000 in revenue for the year.
3 Recognise $90 000 as a contract liability.
4 Include $900 000 in revenue for the year.
5 Do not include anything in revenue for the year.
According to IFRS 15 Revenue from Contracts with Customers, how should Cambridge record this
transaction in its financial statements for the year ended 30 June 20X9?
A 1 and 4
B 2 and 4
C 2 and 5
D 3 and 5
8 Coldwear signed a 12-month contract to sell coats to a fashion retailer on 1 October 20X5. The
contract specified a price of $200 per coat, which would fall to $175 per coat if a minimum of 400
were purchased in the year. During the first six months of the contract, the retailer purchased
150 coats and Coatwear determined that this level of demand would continue into the second half of
the year. In May 20X6, due to a celebrity wearing one of the coats, demand increased considerably, and
the retailer purchased a further 500 coats in total between 1 April 20X6 and 30 September 20X6.
What revenue from the contract should Coldwear recognise in its financial statements for the years
ended 31 March 20X6 and 20X7?
Y/e 31 March 20X6 Y/e 31 March 20X7
A $26 250 $87 500
B $26 250 $83 750
C $30 000 $87 500
D $30 000 $100 000
9 Wood Designs enters into a contract on 1 July 20X5 to make and deliver furniture to a hotel chain
in two years' time, when a new hotel is due for completion. Wood Designs offers its customer the
opportunity to pay $6 000 000 on delivery or $5 144 000 at the inception of the contract on
1 July 20X5. The customer pays the lower amount immediately. The interest rate implicit in the
contract is 8 per cent and Wood Design's incremental borrowing rate is 7 per cent.
What contract liability is recognised in Wood Designs' financial statements in the year ended
30 June 20X6?
A $5 144 000
B $5 504 000
C $5 555 520
D $6 000 000

26 Financial Reporting
10 Company W enters into a contract with Company X to deliver goods with a fair value of $350 000.
The contract stipulates that Company X pays for these goods through the provision of services with
a fair value of $370 000.
Company Y enters into a contract with Company Z to deliver 1 000 scented candles at a unit price
of $20. At the inception of the contract, as incentive, Company Y provides Company Z with a
$500 credit against future contracts for the purchase of scented candles.
What amount of revenue is recognised by Company W and Company Y in respect of these
contracts?
Company W Company Y
A $350 000 $19 500
B $350 000 $20 000
C $370 000 $19 500
D $370 000 $20 000
11 Smeaton Catering Equipment (SCE) enters into a contract with a customer on 18 August 20X5 to
deliver a commercial grade mixer, mincer and blender. The contract price is $2200, payable in
six months. SCE regularly sells the mincer and blender to customers in a bundle, priced at $1200. It
also sells each item individually, priced as follows:
Mixer $1000
Mincer $1100
Blender $900
Smeaton's incremental six-month borrowing rate is 5 per cent.
How much of the $2200 transaction price is allocated to the mixer?
A $698
B $733
C $952
D $1000
12 Fonesell enters into a contract on 1 September 20X5 to conduct telephone marketing activities on
behalf of a customer. The contract has a price of $8 000 and requires Fonesell to contact 10 000
households over a period of six months in order to enquire about buying habits and promote its
customer. The customer is invoiced equal amounts three months and six months after the
commencement of the contract. By Fonesell's year end of 31 December 20X5, it has contacted
3500 of the 10 000 customers.
What amounts does Fonesell recognise in its financial statements in the year ended
31 December 20X5?
A revenue of $4000 and a receivable of $4000
B revenue of $4000 and a contract liability of $4000
C revenue of $2800, a receivable of $4000 and a contract asset of $1200
D revenue of $2800, a receivable of $4000 and a contract liability of $1200
13 Archibald Co has a number of three year contracts with hauliers to provide maintenance and
servicing of vehicles. Revenue from the contracts are recognised over time in accordance with
IFRS 15. Which of the following disclosures is NOT required by IFRS 15 in respect of these
contracts?
A when Archibald Co satisfies its performance obligations in respect of the contracts
B revenue from maintenance and service contracts disaggregated by customer location
C revenue recognised in the period that was included in the opening contract liabilities balance
D the transaction price that is allocated to unsatisfied performance obligations at the reporting
date

Module questions 27
 14 On 1 October 20X5, Dater Co tendered for and won an 18-month contract to provide data
management services to a customer. The contract began on 1 November 20X5. The following costs
have been incurred by Dater Co in the year ended 31 December 20X5 in relation to the contract:
$'000
Production of tender brochure 12
External legal fees in relation to drafting of contract with customer 15
Allocation of staff costs to tendering process 18
Staff hours spent working on the customer's data management 83
The contract is priced in order to recover all costs of obtaining the contract.
What amount is recognised by Dater Co in profit of loss in the year ended 31 December 20X5 in
respect of the contract?
A $83 000
B $98 000
C $101 000
D $110 000
15 In which of the following circumstances is a provision recognised in accordance with IAS 37
Provisions, Contingent Liabilities and Contingent Assets in the financial statements for the year ended
31 December 20X2?
1 An entity is planning to refurbish its head office in February 20X3. It is anticipated that the
refurbishment will cost $200 000.
2 On 15 December the board of an entity decided to close down a division of its business. On
18 December the details were approved by the board and customers were notified. On
20 December redundancy notices were sent to staff.
3 Under new legislation an entity is required to install improved sound proofing in all of its
factories by 31 March 20X3. The entity will be fined if it does not comply with the legislation
by this date. At 31 December 20X2 the entity has not made the required improvements.
A 2 only
B 3 only
C 1 and 3 only
D 2 and 3 only
16 In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets which of the following
is recognised as a provision?
A the costs of a major refit required in three years' time
B electricity owed estimated by reference to the bill for the previous quarter
C an amount for goods received but for which have not been invoiced by the supplier
D the expected costs of meeting warranty claims from customers in relation to sales made
17 Wade Company operates in the mining sector. It markets itself as a sector leader in managing the
environmental impact of mining and has announced publicly that it is committed to supporting the
regeneration of land that is impacted by its activities. In June 20X4, as a result of a fire resulting
from Wade's operations, a fragile ecosystem close to a Wade mine was damaged.
Which of the following statements is true in respect of the financial statements for the year ended
31 July 20X4?
A Wade has no present obligation to make good the damage to the land and should not provide
for associated costs.
B Wade has a contingent liability resulting from a possible obligation and should disclose this in
its financial statements.
C Wade has a legal present obligation to make good the damage to the land and should make a
provision for associated costs.
D Wade has a constructive present obligation to make goods the damage to the land and should
make a provision for associated costs.

28 Financial Reporting
18 In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets which of the following
is the correct treatment for a present obligation arising from past events, the amount of which
cannot be reliably estimated?
A It is disclosed as a contingent asset.
B It is disclosed as a contingent liability.
C No reference is made to the item in the financial statements.
D A liability is recognised based on the limited information available with a note disclosing the
unreliable nature of the estimate.
19 White Company operates an oil rig off Western Australia. As part of its contractual arrangements
with the government, it is required to make good the sea bed when the oil rig ceases to operate
after 10 years. There is a 75 per cent likelihood that the costs of making good the seabed will be
$2.5 million (present value $1.9 million) and a 25 per cent likelihood that they will be $1.8 million
(present value 1.35 million). What amount of provision should White Co make in respect of the legal
obligation?
A $1 762 500
B $1 900 000
C $2 325 000
D $2 500 000
20 In which of the following circumstances is a provision recognised in accordance with IAS 37
Provisions, Contingent Liabilities and Contingent Assets in the financial statements for the year ended
30 September 20X6?
1 the direct costs of a major management restructuring that is due to take place from
1 December 20X6 (the restructuring was announced publicly on 15 September 20X6)
2 warranty costs expected to be incurred in the future as a result of sales in the year ended
30 September 20X7
3 retraining costs to be incurred due to the management restructuring
Reliable estimates of costs can be made in all cases.
A 1 only
B 2 only
C 1 and 3
D 2 and 3
21 IAS 37 deals with accounting for provisions. Which combination of the following options best
describes the effects of IAS 37?
1 to ensure that a provision is always recognised where there is a present obligation arising
from a past event
2 to ensure that adequate disclosure is provided to allow users to understand uncertainty and
subjectivity behind recognised provisions
3 to ensure that the definition of liabilities in the IASB's Conceptual Framework is reflected
4 to ensure that the most prudent possible view of provisions is taken by companies
A 1 and 2
B 1 and 4
C 2 and 3
D 2 and 4

Module questions 29
 22 IAS 37 Provisions, Contingent Liabilities and Contingent Assets sets out disclosure requirements for
provisions when they have been recognised.
In what circumstance is an entity exempt from providing full disclosure?
A when the entity believed that disclosure would result in competitive disadvantage
B if the provision relates to a dispute between the entity and one of its former employees
C if full disclosure would seriously prejudice the position of the entity in a dispute with another
party
D if the entity expects to recover substantially all of any loss through insurance or other form of
reimbursement
23 Mulroon Co, a publishing company, is being sued for $1 000 000 in a libel action in respect of a book
published in January 20X0. On 31 October 20X0, the end of the reporting period, the directors
believed that the claim had a 20 per cent chance of success. On 30 November 20X0, the date the
accounts were approved, the directors believed that the claim had a 30 per cent chance of success.
In the financial statements at 31 October 20X0 what amount should be recognised in respect of this
claim?
A $Nil
B $200 000
C $300 000
D $1 000 000
24 A customer brought a legal action against Jammit Co in June 20X6. Jammit has engaged a legal team
to defend the action. At 31 December 20X6 the legal team advise there is a 60 per cent probability
that Jammit will have to pay damages of $500 000. Legal fees amount to $32 000, half of which has
been paid by Jammit.
What amounts are recognised by Jammit in its statement of financial position at 31 December 20X6?
A a provision of $316 000
B a provision of $516 000
C a provision of $300 000 and accrual of $16 000
D a provision of $500 000 and accrual of $16 000
25 In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, which of the following
statements is true?
A Contingent assets and contingent liabilities are always be disclosed in the financial statements.
B Contingent liabilities are accrued and contingent assets are disclosed in the financial
statements.
C Contingent liabilities are either accrued or disclosed and contingent assets are disclosed in
the financial statements.
D Contingent liabilities are usually disclosed and contingent assets are sometimes disclosed in
the financial statements.
26 In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, if the reporting entity
is presently obliged to transfer economic benefit to another party, the probability of occurrence is
very high but the amount cannot be measured with sufficient reliability, this is a
A provision.
B contingent asset.
C contingent liability.
D probable contingent loss.

30 Financial Reporting
27 D Co prepares its financial statements to 30 September each year. During the year to
30 September 20X2 the engineering division was sued for damages relating to a faulty product it
manufactured. Independent consultants have prepared a report that confirms that the product was
faulty but this was partly due to the failure of a component that was manufactured by C Co. The
damages are estimated at $1 000 000 and the level of contributory negligence of C Co is considered
to be 40 per cent. It is considered probable that D Co will be able to reclaim $400 000 from C Co.
How is this reflected in the financial statements for the year ended 30 September 20X2?
A a provision for the net amount of $600 000
B provision of $1 000 000 and disclosure of the contingent asset
C disclosure of a $1 000 000 contingent liability and disclosure of a $400 000 contingent asset
D provision of $1 000 000 and an asset of $400 000 recognised separately on the statement of
financial position
28 Tube Co manufactures and sells curved screen televisions. Each unit is sold with a one-year
warranty, which entitles customers to repairs free of charge should any defect be identified in a
television. Sales in the year ended 31 December 20X6 amounted to 100 000 units. Based on past
experience, screen repairs will be required within one year of sale for 5 per cent of units sold and
power regulator repairs will be required for 3 per cent of units sold. The average cost of repairing
one unit is:
Screen $75
Power regulator $90
During the year ended 31 December 20X6, Tube Co repaired 250 screens and 300 power
regulators of televisions sold earlier in that year. The provision for warranties at 31 December 20X5
was $475 000.
What amount is recognised in profit or loss in the year ended 31 December 20X6 in respect of the
warranty provision?
A $124 250
B $170 000
C $599 250
D $645 000
29 One of Cumulus Co's customers is claiming compensation for damage caused by faulty goods. The
amount of the claim has been estimated at $1.4 million, but the company's lawyers have advised that
there is only a remote possibility that the company will actually be found liable. Cumulus Co has
disclosed this as a contingent liability. Is this treatment correct?
A No, a contingent liability is not disclosed if the probability of an outflow of economic benefits
is remote.
B No, a provision should be recognised because it is possible to make a reliable estimate of the
amount of the obligation.
C Yes, IAS 37 requires the disclosure of a contingent liability where there is a possible obligation
as a result of a past event.
D No, because IAS 37 exempts entities from disclosing any information where disclosure could
seriously prejudice the position of the entity in a dispute with other parties.

Module questions 31
 30 A company sells items of kitchen equipment. The company undertakes to repair any items which
break down or fail to operate correctly free of charge if they are reported within 12 months of the
date of sale. Management estimates that if minor repairs to all items sold were necessary, these
repairs would cost $100 000 each year. If major repairs to all items sold were necessary, the cost to
the company would be $500 000 each year. Past experience indicates that 85 per cent of items sold
will not need to be repaired, 10 per cent of items sold will need minor repairs and 5 per cent of
items sold will need major repairs.
In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, what amount should
the company recognise as a provision for the estimated annual cost of repairing items?
A $Nil
B $35 000
C $250 000
D $500 000
31 Shortly before the year end, a company discovers that it has an obligation to rectify a serious fault in
a factory building that it has constructed for a customer. The work will take place early in the
following financial year and the cost of rectifying the fault is uncertain, although estimates are
available. According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, what is the most
appropriate way of treating the obligation in the financial statements for the current year?
A The company should recognise a provision, measured on the basis of the worst possible
outcome.
B The company should recognise a provision, measured on the basis of the individual most likely
outcome.
C The company should disclose a contingent liability because it is impossible to arrive at a
reliable estimate.
D The company should recognise a provision, measured on the basis of a weighted average of all
possible outcomes.

32 Financial Reporting
Written response questions – Module 3
Question 1 (4 marks)
Dennis operates in the telecommunications industry. Dennis sells 'call cards' for use with mobile phones at
a price of $21 each. These call cards are activated when sold and give customers credit to make phone calls;
any unused credit expires six months from the date of purchase. There is an average unused call credit of
$3 per card after six months. This is non-refundable.. Dennis is preparing financial statements for the year
ended 30 November 20X8.
Required:
Explain how Dennis should account for the recognition of revenue from sale of the call cards to customers
in the financial statements for the year ended 30 November 20X8.
Question 2 (7 marks)
Jenkins, an international hotel group, issues vouchers to customers when they stay in its hotels. The
vouchers entitle the customers to a $40 discount on a subsequent room booking within three months of
their stay. Historical experience has shown that only one in five vouchers are redeemed by the customer.
At the company's year-end of 31 May 20X8, it is estimated that there are vouchers worth $20 million which
are eligible for discount. The income from room sales for the year is $300 million and Jenkins is unsure how
to report the income from room sales in the financial statements.
Required:
Apply IFRS 15 in order to explain how Jenkins should account for the income from room sales in the
financial statements for the year ended 31 May 20X8. (4 marks)
Explain how Jenkins may apply the disclosure requirements of IFRS 15. (3 marks)
Question 3 (14 marks)
Tang enters into a contract on 1 December 20X4 to construct a printing machine on a customer's premises
for a promised consideration of $1 500 000 with a bonus of $100 000 if the machine is completed within
24 months. At the inception of the contract, Tang correctly accounts for the promised bundle of goods and
services as a single performance obligation in accordance with IFRS 15. At the inception of the contract,
Tang expects the costs to be $800 000 and concludes that it is highly probable that a significant reversal in
the amount of cumulative revenue recognised will occur. Completion of the printing machine is highly
susceptible to factors outside of Tang's influence, mainly issues with the supply of components.
At 30 November 20X5, Tang has satisfied 65 per cent of its performance obligation on the basis of costs
incurred to date and concludes that the variable consideration is still constrained in accordance with IFRS
15. However, on 4 December 20X5, the contract is modified with the result that the fixed consideration
and expected costs increase by $110 000 and $60 000 respectively. The time allowable for achieving the
bonus is extended by six months with the result that Tang concludes that it is highly probable that the
bonus will be achieved. Tang has an accounting year end of 30 November.
Required:
Discuss the objective of IFRS 15. (2 marks)
Discuss the criteria that must be met for a contract with a customer to fall within the scope of
IFRS 15. (3 marks)
Discuss the four remaining steps that lead to revenue recognition after a contract has been identified
as falling within the scope of IFRS 15. (5 marks)
Apply IFRS 15 to Tang's contract, explaining how it should be accounted for up to
4 December 20X5. (4 marks)

Module questions 33
 Question 4 (6 marks)
Singh Co has a year end of 31 December 20X2. On 20 December 20X2 management minuted a decision to
close a loss making division of its manufacturing business. On the same day, the main features of the plan
were announced to the press and employees including details of possible redundancies. The costs of closure
have been estimated as follows:
$'000
Lease termination costs (payable in accordance with lease agreement) 16 000
Employee redundancy costs 12 000
Future operating losses 5 000
Retraining costs of staff transferred to other parts of the business 4 000
37 000

The closure began on 15 January 20X3 and is expected to be completed by the end of March 20X3.
Required:
Explain Singh Co's obligation in relation to the closure of the loss making division, making reference
to the Conceptual Framework and IAS 37. (2 marks)
Calculate the provision for restructuring costs in the financial statements as at 31 December 20X2.
Your answer should include an explanation of any costs which have not been included in the
provision. (2 marks)
Explain the qualitative disclosures required in respect of the provision for restructuring costs.
(1 mark)
Explain how your answer would differ if the announcement of the closure had been made on
2 January 20X3. (1 mark)
Question 5 (5 marks)
Doll Electrical Co manufactures computer products which it sells through a network of retail stores.
During the year ended 31 December 20X3 the company sold 450 000 appliances which carry a 12-month
guarantee. Information from previous years has indicated that on average 10 per cent of these items are
returned for repair or replacement as a result of being faulty under the terms of the guarantee. Three
quarters can be repaired for $50 whilst the remainder have to be replaced at a cost of $200 per item. At
1 January 20X3 there was an opening provision of $3 000 000 in respect of the warranty and during the
year costs of $2 900 000 were incurred.
Required:
IAS 37 Provisions, Contingent Liabilities and Contingent Assets provides guidance on the measurement of
a provision. Explain how this guidance is applied to Doll Electrical's warranty provision. (2 marks)
Apply IAS 37 to calculate the warranty provision to be recognised by Doll Electrical at
31 December 20X3. (2 marks)
Discuss how the movement on the warranty provision is disclosed in the notes to the financial
statements. (1 mark)
Question 6 (5 marks)
Explain the difference between a liability, a provision and a contingent liability, providing an example of each.
Question 7 (5 marks)
Davies Co operates 25 passenger buses on a number of routes. New legislation requires that seatbelts are
fitted to all seats on buses by 31 August 20X7. The penalty for failing to do so by the deadline is $5000 per
bus. At Davies Co's year end of 31 December 20X6 it has not fitted any seatbelts to its vehicles.
Required:
Apply IAS 37 in order to determine whether Davies Co should recognise a provision or disclose a
contingent liability at 31 December 20X6. (2 marks)
Apply IAS 37 in order to determine whether Davies Co should recognise a provision or disclose a
contingent liability at 31 December 20X7, assuming that it has still not fitted the seatbelts at this
date. (3 marks)

34 Financial Reporting
Module 4 INCOME TAXES

Multiple choice questions

1 A company incurs losses of $54 000 in the year ended 31 December 20X4. A deferred tax asset was
carried forward at that date for the losses in full as they were expected to be fully utilised against
profits of the next two years. In the year ended 31 December 20X5 profits of $20 000 were made
and it was estimated that a further $22 000 of profit would be made in the year ended
31 December 20X6 at which point the losses would expire. The applicable deferred tax rate is
30 per cent.
What is the tax charge to profit or loss in the year ended 31 December 20X5?
A $6600
B $9600
C $10 200
D $16 200
2 Which of the following will NOT give rise to a taxable temporary difference?
A receipt of a non-taxable government grant
B accelerated depreciation of a machine for tax purposes
C prepaid expenses that benefitted from tax relief when paid
D capitalised development costs that were fully relieved for tax purposes when paid
3 Which of the following statements best describes the outcome of the balance sheet liability method
of accounting for income tax?
A The method ensures that a liability is recognised for all future tax amounts for which an
outflow of economic benefits is probable.
B The method ensures that a liability is recognised for all future tax amounts that an entity has
an obligation to pay as at the reporting date.
C The method results in the recognition of the future tax consequences of the future recovery
of the carrying amount of items in the statement of financial position.
D The method ensures that a deferred tax asset is recognised is respect of all liabilities
recognised in the statement of financial position at the reporting date.
4 Jay Co has an accounting profit for the year ended 31 December 20X6 of $540 000. This includes a
depreciation charge of $76 000 and non-taxable income from government grants of $100 000. Tax
allowable depreciation is $50 000. Jay Co was required to pay tax instalments in the year ended
31 December 20X6 based on estimates of taxable profit for the year. Instalments amounting to
$50 000 were paid. The tax rate is 30 per cent and the company applies the balance sheet liability
method of tax effect accounting.
What is the liability for current tax as at 31 December 20X6?
A $89 800
B $139 800
C $149 800
D $199 800

Module questions 35
 5 Which of the following best describes a temporary difference when applying the balance sheet
liability method of accounting for deferred tax?
A amounts that will be taxable or deductible in future periods
B the amount that will be deductible for tax purposes when the carrying amount of an asset is
recovered
C the difference between the amount attributed to an asset or liability for tax purposes and its
carrying amount
D differences between taxable profit and accounting profit that originate in one period and
reverse in another
6 Alabama Co has calculated a net deferred tax liability at 30 September 20X6 of $390 000. $65 000 of
this relates to deductible temporary differences related to a warranty provision. The period of cover
provided by Alabama Co under warranty is one year from the date of sale. Alabama Co operates in
one tax jurisdiction and has a right of set off.
How should Alabama Co present this information in its statement of financial position?
Due within one year Due in more than one year
A Deferred tax liability $65 000 Deferred tax liability $325 000
B Deferred tax asset $65 000 Deferred tax liability $455 000
C – Deferred tax liability $390 000
D – Deferred tax asset $65 000
Deferred tax liability $455 000
7 Assets have a carrying amount of $450 000 and a tax base of $360 000. Which of the following best
describes the resulting temporary difference of $90 000?
A an amount of income tax recoverable in future periods
B an amount of income tax payable in future periods when the carrying amount of the assets is
recovered
C a difference that will result in taxable amounts in future periods when the carrying amount of
the assets is recovered
D a difference that will result in amounts that benefit from tax relief in future periods when the
carrying amount of the assets is recovered
8 A company makes profits of $16 000 000 in the year ended 31 March 20X6. The carrying amount of
non-current assets at this date is $10 500 000 after allowing $2 000 000 depreciation. The tax
written down value of non-current assets is $9 000 000. The tax allowances for the year on
non-current assets total $3 500 000 and the tax rate is 30 per cent. The liability for deferred
taxation at 31 March 20X5 was $370 000.
What is the total charge to profit or loss for tax assuming that the company uses the balance sheet
liability method of tax effect accounting?
A current tax $4 350 000; deferred tax $80 000
B current tax $4 350 000; deferred tax $450 000
C current tax $5 250 000; deferred tax $80 000
D current tax $5 250 000; deferred tax $450 000
9 Which of the following provides an example of an outflow of economic benefits associated with the
reversal of a taxable temporary differences?
A receipt of $300 accrued interest receivable which is taxed on a cash basis
B payment of $500 accrued expenses that are allowable for tax purposes on a cash basis
C receipt of $6000 owed by credit customers; revenue is taxed when recognised as income
D payment of $900 accrued expenses that were allowable for tax purposes when recognised as
an expense for accounting purposes

36 Financial Reporting
10 Which of the following correctly describes deferred tax?
A an accounting device
B tax which has been avoided
C tax due back from the tax authority
D tax which will not be paid until the following period
11 Taxco Co bought a machine on 1 October 20X2 for $600 000. The machine attracted writing down
tax allowances at 25 per cent on the reducing balance. Annual depreciation was 10 per cent of cost
using the straight-line method. The company applies the balance sheet liability method of tax effect
accounting.
Assuming a rate of income tax of 30 per cent, what is the deferred tax balance as at
30 September 20X5?
A $42 750
B $50 063
C $142 500
D $166 875
12 Vex Co has an asset with a carrying amount of $15 000 and a tax base of $9000. If the asset were
sold, a tax rate of 25 per cent would apply; a tax rate of 30 per cent applies to other income
streams.
What would be the deferred tax liability if the company expected to retain the asset and recover its
carrying amount through use?
A $1500
B $1800
C $2250
D $2700
13 Medical Research Co capitalised research and development expenditure of $56 800 for the year
ended 31 December 20X1 and $72 200 for the following year. It is preparing its accounts for the
year ended 31 December 20X2. It decided to start amortising development expenditure in 20X2 and
has recognised $20 000 in profit or loss as an amortisation expense. None of the expenditure
incurred would be considered capital in nature by the tax authorities and therefore research and
development expenditure is allowable for tax purposes when incurred.
Tax rate is 30 per cent and the company applies the balance sheet liability method of tax effect
accounting.
What will be the company's deferred tax liability as at 31 December 20X2?
A $6000
B $14 400
C $15 660
D $32 700
14 As at 31 October 20X2 Bogart Co has tangible non-current assets with a net carrying amount of
$960 000 and a tax written down value of $600 000.
The tax rate is 30 per cent, and is not expected to change. Bogart wishes to discount any provisions
and liabilities wherever allowed to do so by IAS/IFRS and has prepared the following schedule:
Government Post tax Discount factor Discount factor Discount factor
bonds maturing yield T1 T2 T3
20X3 4% 0.962 0.925 0.889
20X4 5% 0.952 0.907 0.864
20X5 6% 0.943 0.890 0.840
What is the liability for deferred tax on 31 October 20X2?
A $95 610
B $96 792
C $98 102
D $108 000

Module questions 37
 15 Ranger Co makes tax losses of $260 000 in the year ended 31 December 20X6. Tax legislation
allows for the carry back of losses for one year, with remaining losses carried forward indefinitely.
Ranger has elected to carry $74 000 of the loss back to use in the year ended 31 December 20X5.
As a result of continuing poor trading conditions, losses are expected to be reported by Ranger Co
in at least the next two years. At 31 December 20X6 taxable temporary differences of Ranger Co
were calculated as $188 000. The company's tax rate is 25 per cent.
What deferred tax balance is recognised by Ranger Co at 31 December 20X6?
A a deferred tax asset of $18 000
B a deferred tax asset of $46 500
C a deferred tax liability of $500
D a deferred tax liability of $44 500
16 A company purchased a property for $340 000 on 1 January 20X1. On 31 December 20X8 the
property had a net carrying amount of $240 000 and was revalued to $600 000. The tax rate is at
30 per cent and in the tax jurisdiction concerned, the tax base is not altered in response to a
revaluation.
What additional deferred tax liability and other comprehensive income arise as a result of the
revaluation?
Deferred tax liability Other comprehensive income
A $78 000 $252 000
B $78 000 $360 000
C $108 000 $252 000
D $108 000 $360 000
17 An entity acquired a property on 1 January 20X7 for $3 000 000. The useful life of the property is
20 years. This is also the period over which tax depreciation is charged. On 31 December 20X8, the
property was revalued to $4 320 000. The tax base remained unaltered. The rate of tax is
30 per cent.
What is the correct journal entry to record the deferred tax liability at 31 December 20X8
(in $000)?
Debit Credit
$ $
A Other comprehensive income 396
Deferred tax liability 396
B Deferred tax expense 396
Deferred tax liability 396
C Other comprehensive income 486
Deferred tax liability 486
D Deferred tax expense 486
Deferred tax liability 486

38 Financial Reporting
18 An entity made a taxable loss of $9 400 000 in the year ended 31 December 20X2 due to a one-off
reorganisation charge. Prior to this the entity had made taxable profits. The entity's taxable profits
are as follows:
$'000
Year ended
31 December 20X1 1000
31 December 20X3 (estimate) 2000
31 December 20X4 (estimate) 2400
The tax rate is 30 per cent.
Assuming that tax legislation allows the entity to carry back losses for one financial year, and then
carry them forward indefinitely what is the deferred tax balance in respect of tax losses in the
statement of financial position at 31 December 20X2 in accordance with IAS 12 Income Taxes?
A $1 320 000
B $1 620 000
C $2 520 000
D $2 820 000
19 Randall Co owns a property which cost $300 000 and has a carrying amount of $210 000. The tax
written down value of the property is $190 000. For the purposes of calculating capital gains tax the
cost base of the property is $325 000.
Which of the following statements is true if the carrying amount of the property is expected to be
recovered through a sale for $360 000?
A there is a taxable temporary difference of $20 000
B there is a deductible temporary difference is $5000
C there is a taxable temporary difference of $115 000
D there is a deductible temporary difference is $115 000
20 The financial statements of Bryan Co include an amount for interest receivable of $10 000. The
related interest revenue will be taxed on a cash basis. What is the tax base of the interest receivable
and what temporary difference arises?
A a tax base of $10 000 and no resulting temporary difference
B a tax base of $Nil and a taxable temporary difference of $10 000
C a tax base of $Nil and a deductible temporary difference of $10 000
D a tax base of $10 000 and a taxable temporary difference of $10 000
21 The financial statements of Grey Co include trade receivables with a carrying amount of $250 000.
The related revenue has already been recognised in taxable profit. The tax rate is 30 per cent. The
tax base of the trade receivables and the associated deferred tax balance are:
Tax base Deferred tax asset Deferred tax liability
A Nil Nil Nil
B Nil Nil $75 000
C $250 000 Nil Nil
D $250 000 $75 000 Nil
22 Development Co purchased a piece of land on 1 January 20X2. On 31 December 20X4 the land was
revalued resulting in a credit to the revaluation reserve. The tax rate is 30 per cent.
When the balance sheet liability method of tax effect accounting is applied the debit entry required
to record the tax effect relating to the land revaluation is recorded in which account?
A deferred tax asset account
B deferred tax liability account
C deferred tax expense account
D other comprehensive income account

Module questions 39
 23 Audley Co began operating on 1 January 20X2. The company incurred a tax loss for the year ended
31 December 20X2 of $210 000. There were deductible temporary differences of $60 000 but no
taxable temporary differences. The directors have assessed that it is probable that future taxable
profits will be available against which any unused tax losses can be set.
The tax rate is 30 per cent.
Assuming that Audley Co uses the balance sheet liability method of tax effect accounting which of
the following statements is correct on 31 December 20X2?
A Audley Co should not recognise a deferred tax asset or liability.
B Audley Co should recognise a deferred tax asset of $18 000 only.
C Audley Co should recognise a deferred tax asset of $63 000 in respect of the tax loss and a
deferred tax asset of $18 000 in respect of the deductible temporary differences.
D Audley Co should recognise a deferred tax asset of $63 000 in respect of the tax loss and a
deferred tax liability of $18 000 in respect of the deductible temporary differences.
24 Which of the following statements regarding the disclosure of deferred tax is NOT true?
A The deferred tax charge for the year must be disclosed in the statement of profit or loss.
B Deferred tax balances must be disclosed as non-current in the statement of financial position.
C A statement of financial position may include both a deferred tax asset and a deferred tax
liability.
D The amount of deductible temporary differences that are not recognised as a deferred tax
asset must be disclosed in the notes to the accounts.
25 A company's liabilities include sales revenue received in advance with a carrying amount of $600. The
revenue was taxed when it was received.
According to IAS 12 Income Taxes, which of the following statements is correct?
A The tax base of the liability is nil and there is a taxable temporary difference of $600.
B The tax base of the liability is $600 and there is a taxable temporary difference of $600.
C The tax base of the liability is nil and there is a deductible temporary difference of $600.
D The tax base of the liability is $600 and there is a deductible temporary difference of $600.
26 A company's current assets include interest receivable of $70. Interest receivable is taxed on a cash
basis. The tax rate is 20 per cent.
According to IAS 12 Income Taxes, which of the following statements is correct?
A The tax base of the receivable is nil and there is a deferred tax asset of $14.
B The tax base of the receivable is $70 and there is a deferred tax asset of $14.
C The tax base of the receivable is nil and there is a deferred tax liability of $14.
D The tax base of the receivable is $70 and there is a deferred tax liability of $14.
27 Which of the following statements is/are true?
1 When determining which tax rate to apply to calculate a deferred tax amount relating to a
revalued non-depreciable asset, the manner of recovery is always assumed to be through sale.
2 The tax rate applicable to calculate deferred tax is that which is currently applicable in the
jurisdiction in which an entity operates.
A 1 only
B 2 only
C both 1 and 2
D neither 1 nor 2

40 Financial Reporting
28 Moffat Co owns an asset with an original cost of $600 000, which is revalued to $900 000 at
31 December 20X6, with no equivalent adjustment made for tax purposes. Prior to the revaluation,
the asset had a carrying amount of $450 000. Tax allowances given to 31 December 20X6 are
$200 000. When an asset is sold at a profit, the country in which Moffat Co operates does not tax
sales proceeds in excess of cost but it does include cumulative tax allowances in taxable income. The
tax rate is 20 per cent.
What amount of deferred tax liability is recognised in respect of the asset at 31 December 20X6?
A $10 000
B $40 000
C $90 000
D $100 000
29 At the end of the reporting period Hass Co had the following assets in its statement of financial
position:
A machine which had originally cost $150 000 with related accumulated depreciation of
$50 000. Accumulated tax depreciation was $100 000.
Trade receivables with a carrying amount of $60 000. This amount is net of an allowance for
doubtful receivables of $40 000. The related sales revenue has already been included in
taxable profit. Doubtful debts are not deductible for tax purposes until the debt is written off.
The tax rate is 30 per cent.
Applying the balance sheet liability method of tax effect accounting, these items will give rise to:
A A net deferred tax asset of $3000
B A net deferred tax liability of $3000
C A net deferred tax asset of $27 000
D A net deferred tax liability of $27 000
30 Adcock Co carries out research and development projects. Development expenditure is capitalised
as an intangible asset and amortised over the periods in which it is expected to give rise to economic
benefits. At 1 January 20X1, the net carrying amount of the development cost asset was $110 000.
At 31 December 20X1, the net carrying amount of the development cost asset was $180 000.
Development expenditure is deductible for tax purposes in the period in which it is paid.
The tax rate is 30 per cent. Adcock Co applies the balance sheet liability method of tax effect
accounting in accordance with the requirements of IAS 12 Income Taxes.
What information about this type of temporary difference must be disclosed in the financial
statements for the year ended 31 December 20X1 in accordance with IAS 12?
A A deferred tax liability of $54 000 is recognised in respect of the temporary difference related
to research and development expenditure. An associated expense of $21 000 is recognised in
profit or loss.
B A deferred tax liability of $54 000 is recognised in respect of the temporary difference related
to research and development expenditure. An associated expense of $54 000 is recognised in
profit or loss.
C A deferred tax liability of $54 000 is recognised in respect of the temporary difference related
to research and development expenditure. This arises because development costs are
capitalised for accounting purposes and expensed for tax purposes.
D A deferred tax expense of $54 000 is recognised in respect of the temporary difference
related to research and development expenditure. This arises because development costs are
capitalised for accounting purposes and expensed for tax purposes.

Module questions 41
 31 Ryan Co is finalising its financial statements for the year ended 31 December 20X2. During
November 20X2, the government announced that the rate of income tax would be reduced from 30
to 25 per cent with effect from 1 January 20X3. Although this change to the tax rate is virtually
certain to be enacted, the legislation has not yet been passed.
At 1 January 20X2 the company had aggregate taxable temporary differences of $160 000 and at
31 December 20X2 it had aggregate taxable temporary differences of $240 000. There were no
deductible temporary differences.
In accordance with the requirements of IAS 12 Income Taxes, what is the deferred tax expense to be
recognised in profit or loss for the year ended 31 December 20X2?
A $12 000
B $20 000
C $24 000
D $60 000
32 On 31 December 20X3 Laskey Co owns a building with a cost of $250 000 and a carrying amount of
$200 000. On that date the company revalued the building to $375 000. Immediately before the
revaluation, the tax written down value of the building was $175 000. The capital gains tax cost base
was $300 000. These amounts are not adjusted as a result of the revaluation.
The tax rate is 30 per cent. Laskey Co does not intend to sell the building in the foreseeable future.
When the balance sheet liability method of tax effect accounting is applied, the journal entry to
record the tax effect relating to the revaluation on 31 December 20X3 is:
Debit Credit
$ $
A Deferred tax expense 52 500
Deferred tax liability 52 500
B Other comprehensive income 52 500
Deferred tax liability 52 500
C Deferred tax expense 67 500
Deferred tax liability 67 500
D Other comprehensive income 67 500
Deferred tax liability 67 500
33 Clyro Co had a taxable profit of $250 000 for the year ended 31 December 20X4 and the total tax
expense for that year was $65 000. At 31 December 20X4 the company had a deferred tax liability
of $30 000.
The tax rate is 30 per cent.
Which of the following statements is correct?
A The deferred tax liability at 1 January 20X4 was $20 000.
B The deferred tax liability at 1 January 20X4 was $40 000.
C The current tax liability at 31 December 20X4 is $65 000.
D The deferred tax expense for the year ended 31 December 20X4 is $30 000.

42 Financial Reporting
Written response questions – Module 4
Question 1 (3 marks)
Warne Co purchased an item of heavy industrial machinery for $90 000 on 1 October 20X2. It had an
estimated useful life of ten years and a residual value of $5000. Plant and machinery is depreciated on a
straight-line basis. The tax authorities do not allow depreciation as a deductible expense. Instead, tax relief
is granted based on an allowable deduction of 30 per cent of the cost of the asset in the year in which the
asset is acquired followed thereafter by an annual allowable deduction of 15 per cent calculated on a
reducing balance basis. The applicable rate of income tax throughout is 30 per cent.
Required:
In respect of the above item of machinery, prepare extracts from the financial statements of Warne Co for
the year ended 30 September 20X5 showing the impact of deferred tax.
Question 2 (8 marks)
Explain the purpose of recognising deferred tax and consider whether this is consistent with the
going concern assumption identified by the IASB's Conceptual Framework. (3 marks)
Explain the balance sheet liability method of accounting for deferred tax. (2 marks)
Lord Co has an asset with a carrying amount of $800 and a tax base of $500. It also has a liability
with a carrying amount of $700 and a tax base of nil. Explain why these result in a deferred tax
liability and deferred tax asset respectively. (3 marks)
Question 3 (10 marks)
Extracts from the statement of financial position of Angel Co at 31 December 20X2 are as follows:
Assets $
Property, plant and equipment at net carrying amount 80 000
Current asset investments 20 000
Inventory 60 000
Accounts receivable (net) 40 000
Cash 30 000
230 000
Liabilities
Trade payables 95 000
Accrued expenses 2 500
Interest revenue 8 000
Employee benefits liability 40 000
145 500
The following points are relevant:
1 The tax written down value of the property, plant and equipment at 31 December 20X2 was
$70 000.
2 The current asset investments are a portfolio of readily marketable government securities. They are
recorded in the statement of financial position at their fair value with any gain or loss being
recognised in profit or loss. Any gains or losses are taxed when the investments are sold. To date
the accumulated unrealised gain is $5000.
3 Trade receivables are net of $5000 irrecoverable debts which have been written off and an
allowance for doubtful debts of $15 000. This allowance has increased by $3000 as compared to last
year. For tax purposes deductions can only be claimed for irrecoverable debts written off. The
amounts allowed for in respect of doubtful debts are expected to be deductible in future.
4 The expenses related to the accrued expenses will be deducted for tax purposes on a cash basis.
5 The interest revenue represents interest received in advance. This has been taxed on a cash basis.

Module questions 43
 6 The employee benefits liability increases with additional employee expenses and decreases when the
liability is paid. A tax deduction is received when employee benefits are paid.
At 1 January 20X2 Angel Co had an opening net deferred tax asset of $15 500. The applicable tax rate is
30 per cent.
Required:
Prepare a deferred tax worksheet for Angel Co for the year ended 31 December 20X2. (4 marks)
Show the journal required to account for the deferred tax adjustment at 31 December 20X2.
(1 mark)
Angel Co has recognised a net deferred tax asset. Explain the IAS 12 requirements in relation to the
recognition of deferred tax assets. (2 marks)
Explain how your answer would differ if Angel Co applied the revaluation model to owner-occupied
property and had revalued the carrying amount of property, plant and equipment from $80 000 to
$100 000 at 31 December 20X2. (3 marks)
Question 4 (5 marks)
Rombald Co operates in a jurisdiction where the corporate income tax rate is 20 per cent and corporate
capital gains tax rate is 30 per cent. Tax allowances are given to investment properties at a rate of
4 per cent on cost per annum and to industrial buildings at a rate of 10 per cent on cost per annum. On the
sale of properties, any tax allowances given are recovered by the tax authorities and the difference between
proceeds and the original cost of the property is treated as a capital gain or loss. Revaluation of properties
does not affect taxable profits.
Rombald owns two properties as follows:
1 A manufacturing plant which it uses as its operating base. This property cost $15 million and at
31 March 20X4 had a carrying amount of $12 million and a tax written down value of $9 million. On
this date it was decided to revalue the property to $16 million to reflect fair value. Rombald intends
to operate from the property for the foreseeable future.
2 Land bought for $10 million and revalued to $11.5 million on 31 March 20X4. Tax allowances are not
provided on land. Rombald currently holds the land for its own use, although it may be sold in the
future.
Required:
What deferred tax amount is recognised in the statement of financial position at 31 March 20X4 in respect
of the two properties? You should indicate within your answer where the related deferred tax charge or
credit is recognised.

44 Financial Reporting
Module 5 BUSINESS COMBINATIONS AND GROUP
ACCOUNTING

Multiple choice questions

1 Snell Co purchased 100 per cent of a software business for a cost of $1 000 000. The book value of
the assets acquired and fair values (where these were different) were as follows.
Book value Fair value
$'000 $'000
Plant and equipment 350
Trademarks 29 45
Purchased goodwill 60
Inventories 290 310
The tax base of the assets is the same as their book value or fair value where relevant.
In accordance with IFRS 3 what is the goodwill arising on this purchase?
A $235 000
B $271 000
C $295 000
D $340 000
2 On 1 January 20X2 Big Co purchased 100 per cent of the equity shares in Small Co for $2 000 000.
At that date the fair values of the identifiable net assets were as follows:
$'000
Plant and equipment 1 300
Inventory 425
Trade receivables 100
Trade payables and loans 500
The tax base of the above assets and liabilities was equal to their fair value.
Small Co disclosed a contingent liability with a fair value of $150 000 in its financial statements. The
liability was contingent as it was not probable that an outflow of resources would occur. Tax relief
will be given on the $150 000 as and when it is paid. The tax rate is 30 per cent.
What amount is recognised for goodwill at 1 January 20X2?
A $(220 000)
B $675 000
C $780 000
D $825 000

Module questions 45
 3 Layla Co purchased 100 per cent of the equity shares in Lamina Co on 31 March 20X8 for
$1 500 000. The statement of financial position of Lamina Co on 31 March 20X8 disclosed the
following.
$
Goodwill 100 000
Patents 130 000
Property, plant and equipment 680 000
Current assets 800 000
Current liabilities (400 000)
1 310 000

The fair value of the property, plant and equipment of Lamina Co amounted to $710 000 on the date
of purchase (tax base $690 000). In respect of all the other items book value is equal to fair value
and the tax base. The tax rate is 30 per cent.
What is the goodwill arising on the purchase of Lamina Co?
A $190 000
B $260 000
C $266 000
D $280 000
4 Which of the following is NOT a business combination within the scope of IFRS 3?
A Company W is merged into Company X.
B Company T and Company U transfer their net assets to a newly formed entity, Company V.
C An unincorporated entity transfers its net assets to a company in exchange for consideration.
D The shareholders of Company Y and Company Z sell the shares of Company Z to Company Y.
5 To which of the following transactions should acquisition accounting be applied?
1 the purchase of the net assets of the food retail division of a conglomerate company
2 the purchase of equity shares in another entity that results in the acquiree having significant
influence
3 the purchase of the property, plant and equipment of Company Y by Company Z on the
liquidation of Company Y
4 the transfer of the shares in Company V and Company W by their respective shareholders to
a new company, Company X, in return for shares in Company X
A 1 and 2
B 1 and 4
C 2 and 3
D 3 and 4
6 Jenny Co acquired 80 per cent of the equity share capital of Smith Co on 1 October 20X3. The
consideration given was $2 000 000 in cash and 400 000 $1 equity shares of Jenny Co. On
1 October 20X3 the market value of each of Jenny Co's shares was 300 cents and the fair value of
Smith Co's net tangible assets was $2 000 000. The non-controlling interest was measured at the
proportionate share of the acquirer's net assets. Due to poor trading conditions the goodwill arising
on the acquisition of Smith Co, goodwill was determined to be impaired by 25 per cent by the
reporting date of 31 March 20X4.
What is the amount of goodwill reported in Jenny Co's consolidated accounts at 31 March 20X4?
A $Nil
B $300 000
C $900 000
D $1 200 000

46 Financial Reporting
7 On 1 July 20X5 Mole Co acquired 80 per cent of Ratty Co's $200 000 ordinary share capital for
$400 000, incurring transaction costs of $15 000. At that date Ratty Co's shares were trading at
$2.25. At the acquisition date Ratty Co had retained earnings of $185 000 and the book values of the
net assets were approximately equal to fair value, with the exception of one building which had a fair
value of $80 000 in excess of its carrying amount. The remaining useful life of the building was 10
years at the acquisition date. It is the policy of the Mole Group to measure the non-controlling
interest at full (fair) value, for which the share price at acquisition is the best estimate.
What amount is recognised in profit or loss by the Mole Group in the year ended 31 June 20X6 as a
result of the application of the acquisition accounting requirements of IFRS 3?
A $13 000
B $28 000
C $35 000
D $43 000
8 Rainbow Co acquired a controlling interest in Cloud Co on 1 August 20X4, recognising goodwill of
$210 000 on acquisition. The benefit of the goodwill was expected to last for 10 years from the
acquisition date, however increased competition mean that goodwill was determined to be impaired
by 15 per cent at 31 July 20X6.
What amount is recognised in profit or loss in the year ended 31 July 20X6 in respect of goodwill?
A $21 000
B $28 350
C $31 500
D $46 200
9 Amber Co acquired 80 per cent of the voting shares in Jade Co on 1 January 20X5. At that date Jade
Co issued share capital of 100 000 equity shares. The consideration for the share issue was 25 000
$1 shares in Amber Co.
On 1 January 20X5, Amber Co's shares had a fair value of $3.20 each and Jade Co's shares had a fair
value of $1.80 each. Amber Co paid legal fees of $10 000 in respect of the acquisition.
According to IFRS 3 Business Combinations, what is the amount of the consideration transferred?
A $80 000
B $90 000
C $144 000
D $154 000
10 Snow Co acquired 100 per cent of the equity shares of Flake Co in 20X7. At the acquisition date the
carrying amount of net assets in Snow Co's financial statements included a deferred tax liability of
$75 500. At the acquisition date, fair value adjustments were made to increase the carrying amount
of Flake's plant and equipment by $70 000 and decrease the carrying amount of a warranty provision
by $20 000. Warranty costs are given tax relief when paid.
Assuming that the tax rate is 20 per cent, what is the adjusted deferred tax liability of Flake Co at
the acquisition date for consolidation purposes?
A $57 500
B $65 500
C $85 500
D $93 500
11 Which accounting standard relevant to group accounting specifically requires disclosures that enable
users to evaluate the financial effects of adjustments recognised in the current reporting period that
relate to acquisitions that occurred in the current or previous reporting periods?
A IFRS 3
B IFRS 10
C IFRS 11
D IFRS 12

Module questions 47
 12 In accordance with IFRS 10 Consolidated Financial Statements in which of the following situations does
the investor have power over its investee?
1 Company Apple holds 40 per cent of the voting shares in Company Banana and has an option
to acquire a further 20 per cent of the voting shares at any time without restriction.
2 Company Cherry holds 25 per cent of the voting shares in Company Damson and has a
contractual right to make decisions about Company Damson's core profit-making operations.
A 1 only
B 2 only
C both 1 and 2
D neither 1 nor 2
13 Feldspar Co owns 45 per cent of the voting rights in Mineral Co. Eleven other investors each hold 5
per cent of the voting rights in Mineral Co. Under a shareholder agreement, Feldspar Co has the
right to appoint, reassign and remove five out of the six members of the management of Mineral Co.
This shareholder agreement cannot be changed without a 90 per cent majority vote of the
shareholders. To date, Feldspar Co has never exercised its right to appoint, reassign or remove
management.
Based only on the information above, is Feldspar Co likely to control Mineral Co, according to
IFRS 10 Consolidated Financial Statements?
A no, because Feldspar Co does not have a majority of the voting rights in Mineral Co
B no, because Feldspar Co does not actually exercise power over the management of
Mineral Co
C yes, because the shareholder agreement gives Feldspar Co the power to direct the relevant
activities of Mineral Co
D yes, because Feldspar Co has the largest percentage of the voting rights; no other investor
even has the 20 per cent holding necessary to give significant influence
14 Dorstone Co has over 100 shareholders and holds several equity investments in other companies,
some of them substantial. The business of Dorstone Co is to provide investment management
services to its shareholders. It acquires funds from its shareholders to provide them with investment
income (dividends and interest) and capital appreciation of their investment.
Dorstone Co holds 51 per cent of the voting shares in another entity, Ragstone Co. According to
IFRS 10 Consolidated Financial Statements, how should Dorstone Co account for its investment in
Ragstone Co?
A It should consolidate the assets, liabilities, income and expenses of Ragstone Co on a line-by-
line basis.
B It should measure the investment in Ragstone Co at fair value and recognise changes in fair
value in profit or loss.
C It should measure the investment in Ragstone Co at fair value and recognise changes in fair
value in other comprehensive income.
D It should measure the investment in Ragstone Co at cost plus 51 per cent of the
post-acquisition retained earnings and should include 51 per cent of post-acquisition profits in
profit or loss.

48 Financial Reporting
15 Bingley Co acquired a 75 per cent interest in the $250 000 equity share capital of Shipley Co on
1 August 20X6, paying consideration of $980 000 and incurring acquisition costs of $25 000. The net
assets of Shipley Co at the acquisition date had a carrying amount of $1.1 million and the fair value of
land was $150 000 in excess of its book value. The non-controlling interest is measured as a
proportion of the fair value of Shipley Co's net assets.
What journal is required to recognise the acquisition of Shipley Co in the consolidated financial
statements, assuming that Bingley Co has correctly recognised its investment?
A $ $
Debit Goodwill 67 500
Debit Share capital 250 000
Debit Reserves 850 000
Debit Business Combination reserve 150 000
Credit Non-controlling interest 312 500
Credit Investment in Shipley Co 1 005 000
B $ $
Debit Goodwill 42 500
Debit Share capital 250 000
Debit Reserves 850 000
Debit Business Combination reserve 150 000
Credit Non-controlling interest 312 500
Credit Investment in Shipley Co 980 000
C $ $
Debit Goodwill 42 500
Debit Share capital 250 000
Debit Reserves 850 000
Debit Business Combination reserve 150 000
Credit Non-controlling interest 312 500
Credit Cash/Bank 980 000
D $ $
Debit Goodwill 67 500
Debit Share capital 250 000
Debit Reserves 850 000
Debit Business Combination reserve 150 000
Credit Non-controlling interest 312 500
Credit Investment in Shipley Co 980 000
Credit Cash/Bank 25 000
16 Trench Co holds a 90 per cent equity investment in Hill Co and has done for a number of years. In
the year ended 31 December 20X6, Hill Co sold goods to Trench Co for $450 000, charging a mark
up of 25 per cent. At the year end, a quarter of these goods were still in Trench's warehouse. In the
individual financial statements of Trench Co, cost of sales is reported as $1 950 000 and in the
individual financial statements of Hill Co, it is reported as $1 340 000.
What is consolidated cost of sales in the year ended 31 December 20X6?
A $2 817 500
B $2 862 500
C $2 868 125
D $3 020 000

Module questions 49
 17 Which of the following statements are true?
1 The consolidated statement of profit or loss and other comprehensive income should include
dividends paid by subsidiaries to the parent company.
2 The consolidated statement of profit or loss and other comprehensive income should not
include dividends paid by subsidiaries to the parent company.
3 The parent company should not include its share of dividends received from subsidiaries in its
individual company statement of profit or loss and other comprehensive income.
4 The parent company should include its share of dividends received from subsidiaries in its
individual company statement of profit or loss and other comprehensive income.
A 1 and 3 only
B 1 and 4 only
C 2 and 3 only
D 2 and 4 only
18 Company X transfers an asset which originally cost of $10 000 to its wholly owned subsidiary
Company Y in 20X1. The transfer price was $13 000. Both companies charge straight-line
depreciation at 10 per cent per annum. A full year's charge is made in the year of acquisition and
none in the year of disposal. Company X had owned the asset for five years prior to the period in
which the asset was transferred.
Ignoring the effects of deferred tax what is the net adjustment required to group profit in 20X1?
A $300
B $1300
C $7700
D $8000
19 On 1 January 20X2 Bubble Co purchased 100 per cent of the equity shares in Squeak Co. At that
date it was considered that plant owned by Squeak with a net carrying amount (book value) of
$120 000 had a fair value of $150 000. Squeak Co and Bubble Co both estimate the remaining useful
life of the plant to be six years (residual value $Nil) and use the straight-line method of depreciation.
The tax rate is 30 per cent.
Which of the following is the correct journal for the consolidation adjustment in respect of
depreciation at 31 December 20X2?
$ $
A Debit Depreciation expense 5 000
Credit Accumulated depreciation 5 000
Debit Deferred tax liability 1 500
Credit Goodwill 1 500
B Debit Depreciation expense 5 000
Credit Accumulated depreciation 5 000
Debit Deferred tax liability 1 500
Credit Income tax expense 1 500
C Debit Depreciation expense 25 000
Credit Accumulated depreciation 25 000
Debit Deferred tax liability 7 500
Credit Goodwill 7 500
D Debit Depreciation expense 25 000
Credit Accumulated depreciation 25 000
Debit Deferred tax liability 7 500
Credit Income tax expense 7 500

50 Financial Reporting
20 On 1 September 20X2 a parent sold inventory with a cost of $60 000 to a subsidiary for $80 000. At
the period end of 31 December 20X2 all of the inventory transferred was held by the subsidiary.
The tax rate is 30 per cent.
Which of the following journals represent the correct entries that would be required in the
consolidation worksheet?
$ $
A Debit Sales 80 000
Debit Income tax expense 6 000
Credit Cost of sales 60 000
Credit Deferred tax liability 6 000
Credit Inventory 20 000
B Debit Cost of sales 80 000
Debit Deferred tax asset 6 000
Credit Sales 60 000
Credit Income tax expense 6 000
Credit Inventory 20 000
C Debit Sales 80 000
Debit Deferred tax asset 6 000
Credit Cost of sales 60 000
Credit Income tax expense 6 000
Credit Inventory 20 000
D Debit Cost of sales 80 000
Debit Income tax expense 6 000
Credit Sales 60 000
Credit Deferred tax liability 6 000
Credit Inventory 20 000
21 Which of the following statements concerning the presentation of non-controlling interest in the
consolidated statement of profit or loss and other comprehensive income is correct?
A Only profits attributable to the group appear in the consolidated statement of profit or loss
and other comprehensive income.
B The non-controlling interest share of profit after tax is separately disclosed as a line item
above the group profit before tax for the period.
C Total profit or loss for the year is allocated between profit or loss attributable to owners of
the parent and profit or loss attributable to non-controlling interests.
D The non-controlling interest share of profit after tax is shown as a line item and deducted
from total profit for the period, so that the last line in the consolidated statement of profit or
loss and other comprehensive income is profit or loss attributable to the group.
22 Which of the following statements is correct?
A Non-controlling interests are presented in the statement of financial position, within liabilities.
B The non-controlling interest in net assets may be measured at its fair value at the reporting
date.
C If a subsidiary sells an asset to its parent company, the non-controlling interest in profit is
adjusted for any unrealised profit.
D The carrying amount of the non-controlling interest is adjusted for its share of any unrealised
profit made on intercompany sales.

Module questions 51
 23 Talbot Co purchased 80 per cent of the equity share capital of Perkins Co on 1 January 20X2. On
31 December 20X2 Perkins Co sold an item of non-depreciable plant with a net carrying amount of
$120 000 to Talbot Co for $150 000. The profit for the year in the financial statements of
Perkins Co at 31 December 20X2 was $2 000 000. The tax rate is 30 per cent.
What is the non-controlling interest in consolidated profit?
A $394 000
B $395 800
C $1 970 000
D $1 979 000
24 IFRS 12 prescribes the disclosure requirements in respect of investments in subsidiaries, associates
and joint arrangements. Which of the following disclosures is NOT required by IFRS 12 in
consolidated financial statements?
A significant judgements and assumptions in determining that one entity has control of another
B details of each material associate, including its name and the principal location of its business
C the nature and extent of significant restrictions on the ability of a joint venture to pay a
dividend to an investor
D an explanation of the nature of intragroup transactions and amounts of any eliminated
unrealised profits at the reporting date
25 In which of the following situations does the investing company have significant influence over its
investee?
1 An investor company holds 18 per cent of the shares in Company Y and has a representative
on the board of Company Y. More than half of Company Y's sales are made to the investor
company.
2 An investor company holds 40 per cent of the equity shares in Company Z. It has not sent a
representative to the board meeting of Company Z since acquiring the shares. The remaining
60 per cent of shares are held in equal part by four unrelated entities.
A 1 only
B 2 only
C both 1 and 2
D neither 1 nor 2
26 The share capital of Summer Co at 31 December 20X1 was 50 000 000 ordinary shares. This is
analysed as follows: Class 'A' ordinary shares: 30 million shares issued at $30 000 000; Class 'B'
ordinary shares: 20 million shares issued at $20 000 000.
Each 'A' share carries one vote whereas each 'B' share carries two votes. Winter Co acquires the
following interest in Summer Co on 31 December 20X1:
Class 'A' $1 ordinary shares: $16 000 000; Class 'B' $1 ordinary shares: $9 000 000
Winter Co has other subsidiaries and must produce consolidated financial statements.
Which of the following options correctly describes the accounting treatment of the investment in
Summer Co in the consolidated financial statements?
A Summer is accounted for as an associate.
B Summer is accounted for as a 50 per cent owned subsidiary.
C Summer is accounted for as a subsidiary with a non-controlling interest of 51.5 per cent.
D As the value of shares held in Summer equals 50 per cent by issued value of Summer share
capital, the investment is not accounted for as an associate or a subsidiary.

52 Financial Reporting
27 Fudge Co holds an 80 per cent interest in the equity share capital of Vanilla Co, and a 30 per cent
interest in the equity share capital of Chocolate Co. During the year Fudge Co sold goods to
Chocolate Co for $80 000.
Extracts from the financial statements are as follows:
Fudge Vanilla Chocolate
$ $ $
Revenue 500 000 300 000 100 000
What amount is reported as revenue in the consolidated statement of profit or loss?
A $770 000
B $800 000
C $830 000
D $900 000
28 Denny Co is an investing entity which prepares consolidated financial statements. It has an
investment in the equity share capital of Edwin Co.
Which of the following statements referring to this situation is true?
A If Denny Co controls the operating and financial policies of Edwin Co, then Edwin Co cannot
be an associate of Denny Co.
B If Denny Co owns more than 20 per cent but less than 50 per cent of the equity shares in
Edwin Co, then Edwin Co is definitely an associate of Denny Co.
C If Edwin Co is an associate of Denny Co, then any amounts payable by Edwin Co to Denny
Co are eliminated when preparing the consolidated statement of financial position.
D If Edwin Co is an associate of Denny Co the consolidated statement of profit or loss and
other comprehensive income includes the group share of Edwin Co's other comprehensive
income.
29 South Group, in addition to its other holdings, acquired a 35 per cent stake in the $100 000 share
capital of Soldier Co for $50 000. This was acquired four years ago when Soldier Co's retained
earnings were $22 000. At the year end of 31 December 20X1 Soldier Co paid a dividend of $6000
that South Group has not accounted for yet. The reserves of South Group and Soldier Co at
31 December 20X1 are $300 000 and $90 000 respectively.
What are the consolidated retained earnings of South Group at 31 December 20X1?
A $323 800
B $325 900
C $329 800
D $333 600
30 In accordance with IAS 1 Presentation of Financial Statements which of the following does a parent
company have to disclose as a line item in the consolidated statement of profit or loss in respect of
its associates?
A share of revenue
B share of profit after tax
C share of interest payable
D share of profit before tax
31 Boot Co has a 66 per cent holding in Shoe Co and a 25 per cent holding in Sandal Co. Boot Co sold
goods with a value of $15 000 to each of Shoe Co and Sandal Co. Boot Co had revenue of $88 000
and the other two companies $20 000 each in the year.
What is consolidated revenue?
A $83 000
B $86 200
C $93 000
D $98 000

Module questions 53
 32 Maximus Group acquired 25 per cent of Brooks Co on 1 February 20X4. In the years ended
31 January 20X5 and 20X6, Brooks Co reported profits of $540 000 and $620 000. When preparing
the financial statements for the year ended 31 January 20X6, what consolidation adjustment is
required to reflect Brooks Co's profits?
$'000 $'000
A Debit Investment in associate 290
Credit Group retained earnings 290
B Debit Investment in associate 290
Credit Share of profit or loss of associate (SPL) 290
C Debit Investment in associate 290
Credit Share of profit or loss of associate (SPL) 155
Credit Group retained earnings 135
D Debit Group retained earnings 290
Credit Investment in associate 135
Credit Share of profit or loss of associate (SPL) 155
33 Spiral Group acquired 40 per cent of Ribbon Co on 1 October 20X6 at a cost of $1 400 000. At this
date the fair value of Ribbon Co's net assets was $20 000 higher than book value due to undervalued
inventory. During the year ended 30 September 20X7, Ribbon Co reported profits after tax of
$230 000 and other comprehensive income of $80 000. All inventory held by Ribbon Co at the
acquisition date was sold during the year and the company paid a dividend of $100 000.
What is the carrying amount of the investment in Ribbon Co in the consolidated statement of
financial position of Spiral at 30 September 20X7?
A $1 476 000
B $1 484 000
C $1 516 000
D $1 524 000
34 Monty Co acquired 30 per cent of the share capital of Tiger Co for $75 000 on 1 July 20X8. This
resulted in Monty Co having joint control over Tiger Co. During the year to 30 June 20X9 Tiger Co
made a profit after tax of $270 000 and paid a dividend of $50 000.
What amount will appear in the consolidated statement of financial position of Monty Co at
30 June 20X9 in respect of its investment in Tiger Co?
A $75 000
B $81 000
C $141 000
D $156 000
35 Pear Co holds a 40 per cent investment in an associate, Apple Co. At 1 April an investment in
associate balance of $60 000 is recognised in the consolidated statement of financial position. In the
year ended 31 March 20X3 the associate incurred a loss of $200 000. In the year ended 31 March
20X4 the associate made a profit of $100 000.
What amount is recognised as investment in associate in the consolidated statement of financial
position?
31 March 20X3 31 March 20X4
A $(20 000) $40 000
B $(20 000) $20 000
C $Nil $20 000
D $80 000 $40 000

54 Financial Reporting
36 Pine Co has a 30 per cent investment in an associate, Acorn Co. During the period ended 30 June
20X2 Acorn Co sold goods costing $120 000 to Pine Co for $150 000. All the inventory transferred
is held by Pine Co at 30 June 20X2. The profit for the period in the financial statements of Acorn Co
is $250 000. The tax rate is 30 per cent.
In accordance with IAS 28 Investments in Associates and Joint Ventures what amount is reported in the
consolidated statement of profit or loss in the year ended 30 June 20X2 as 'share of profit or loss of
associate'?
A $54 000
B $66 000
C $68 700
D $75 000
37 Beeston Co has a subsidiary and also owns 40 per cent of the equity shares in Attenborough Co.
During the year ended 31 December 20X2 Beeston Co sold inventory costing $25 000 to
Attenborough Co for $30 000. At 31 December 20X2 all this inventory was still held by
Attenborough Co. The tax rate is 30 per cent.
Which of the following represents the adjustment that is made in the consolidation worksheet?
$ $
A Debit Share of profit or loss of associate 1 400
Credit Investment in associate 1 400
B Debit Share of profit or loss of associate 3 500
Credit Investment in associate 3 500
C Debit Share of profit or loss of associate 2 000
Debit Deferred tax 600
Credit Investment in associate 2 000
Credit Income tax expense 600
D Debit Cost of sales 2 000
Debit Deferred tax 600
Credit Inventory 2 000
Credit Income tax expense 600
38 White Co holds 50 per cent of the equity shares in Black Co. The remaining shares are held equally
by Pink Co and Red Co. A contract between White , Pink and Red stipulates that a 75 per cent
majority is required in a vote to make decisions about the relevant activities of Black Co.
Which of the following statements best describes the relationship between White Co and Black Co?
A Black Co is not an associate of White Co because there is no evidence of significant influence.
B Black Co is jointly controlled by White Co, Red Co and Pink Co because these parties are
bound by a contractual arrangement.
C White Co controls Black Co because it has the greatest shareholding in Black Co and no
decision can be passed without White's consent.
D White Co does not jointly control Black Co because it could achieve the necessary
75 per cent majority of votes by joining with either Red Co or Pink Co.

Module questions 55
 Assumed knowledge questions – Module 5
1 Olione Co owns 100 per cent of the equity share capital of its subsidiary, Cornet Co. During the
year, Olione Co sold goods to Cornet Co for $2400 representing cost plus 20 per cent. At the
period end three quarters of the goods were still in inventory.
What is the unrealised profit for the purposes of consolidation?
A $300
B $360
C $400
D $480
2 Genesis Co is the sole subsidiary of Exodus Co. The cost of sales figures for 20X6 for Exodus Co
and Genesis Co were $15 000 000 and $12 000 000 respectively. During 20X6 Exodus Co sold
goods which had cost $3 000 000 to Genesis Co for $4 000 000. Genesis Co has not yet sold any of
these goods.
What is the consolidated cost of sales figures for 20X6?
A $23 000 000
B $24 000 000
C $26 000 000
D $27 000 000
3 Grape Co is a wholly owned subsidiary of Orange Co. Inventory in the individual statements of
financial position at the period end is reported as:
$
Orange Co 120 000
Grape Co 60 000
Sales by Orange Co to Grape Co during the year were invoiced at $45 000 which included a profit to
Orange Co of 25 per cent on cost. Two thirds of these goods were in inventory at the period end.
At what amount is inventory reported in the consolidated statement of financial position?
A $171 000
B $172 500
C $174 000
D $180 000
4 Wind Co owns 80 per cent of its subsidiary, Rain Co. In December 20X1 Rain Co sells inventory
costing $100 000 to Wind Co for $120 000. Draft consolidated profit attributable to the group for
the year 20X1, before adjustments for unrealised profit, was $150 000. 25 per cent of the inventory
remains unsold by Wind Co at 31 December 20X1.
Ignoring deferred tax what is the correct consolidated profit attributable to the group for 20X1?
A $130 000
B $134 000
C $145 000
D $146 000
5 At the year end H Co has $90 000 of inventory. Its 80 per cent owned subsidiary, S Co, has $50 000
of inventory. There are goods in transit from S Co to H Co with a value of $5000. This amount does
not include any unrealised profit.
What is the carrying amount of inventory in the consolidated statement of financial position?
A $90 000
B $135 000
C $140 000
D $145 000

56 Financial Reporting
6 Which of the following balances appears in a consolidated statement of financial position?
A investment in subsidiary
B subsidiary share capital
C loans to the subsidiary from the parent
D the parent company's bank balance $50 000 and the subsidiary company's bank overdraft
$50 000
7 On 31 December 20X0 H Co has a non-current asset that cost $94 000 and was depreciated by
three years out of its life of 10 years. On 1 January 20X1 it was sold to H Co's 75 per cent owned
subsidiary for $96 000. The subsidiary decided the non-current asset had a remaining life of
eight years.
At 31 December 20X1 what adjustment is made to non-current assets in the consolidated statement
of financial position?
A $18 200
B $27 600
C $30 000
D $39 600
8 A parent company sells inventory costing $119 000 at a mark-up of 11 per cent to a wholly owned
subsidiary. At the end of the reporting period half of this inventory remains unsold.
Ignoring deferred tax which one of the following is the required consolidation adjustment?
A increase group inventory by $59 500 as half of the inventory remains unsold
B no adjustment is needed because intra-group trading cancels on consolidation
C reduce group inventory by $119 000 as the sale was not made to a third party
D reduce group inventory by $6545 and reduce group profits by $6545 to eliminate the
unrealised profit in inventory
9 Time Co acquired an 80 per cent stake in the equity share capital of Watch Co on 1 February 20X1.
On acquisition, fair value adjustments increased the value of Watch's inventory by $19 000. None of
this had been sold by 31 December 20X1 when group accounts were being prepared. In addition, in
March 20X1, Watch Co sold Time Co $47 000 of goods. All of these goods had been sold by
Time Co by 31 December 20X1. Time Co had cost of sales for the year ended 31 December 20X1
of $300 000 and Watch Co $240 000.
What is group cost of sales for the year ending 31 December 20X1?
A $473 000
B $492 000
C $493 000
D $520 000

Module questions 57
 Written response questions – Module 5
Question 1 (7 marks)
Pickle Co purchased 80 per cent of Sauce Co on 1 January 20X2. On 31 December 20X2 Sauce sold an
item of plant with a net carrying amount of $40 000 to Pickle Co for $36 000. On the date of transfer the
asset is estimated by Pickle Co to have a useful life of four years and a zero residual value. Both Pickle Co
and Sauce Co depreciate plant on a straight-line basis.
The following figures were extracted from the consolidation worksheet for the financial year ended
31 December 20X3:
Sauce Co
$
Profit for the year 200 000
Opening retained earnings 120 000
Closing retained earnings 320 000
The issued share capital of Sauce Co is $100 000 of ordinary share capital. The tax rate is 30 per cent.
Required:
Prepare the consolidation worksheet journal entries in respect of the transfer of plant for the year
ended 31 December 20X3. (3 marks)
Calculate the non-controlling interest in consolidated profit for the year ended 31 December 20X3.
(1 mark)
Calculate the non-controlling interest in the statement of financial position at 31 December 20X3.
(1 mark)
Explain how the non-controlling interest is presented in consolidated financial statements in
accordance with IAS 1. (2 marks)
Question 2 (5 marks)
Polly Co purchased 75 per cent of Sally Co a number of years ago when the retained earnings of Sally Co
were $75 000. At 1 January 20X2 inventory of Sally Co included goods purchased from Polly Co for
$10 000 which had originally cost Polly Co $8000. During the year half of these goods were sold to parties
external to the group. On 1 December 20X2 Sally Co sold goods which had cost $12 000 to Polly Co for
$15 000. All of these items remained in inventory at 31 December 20X2. Extracts from the financial
statements of Polly Co and Sally Co at 31 December 20X2 show the following information:
Polly Co Sally Co
$ $
Opening retained earnings 1 200 000 400 000
Retained profit for the year 500 000 150 000
1 700 000 550 000
The tax rate is 30 per cent.
Required:
Calculate the consolidated deferred tax balance as at 31 December 20X2. (2 marks)
Calculate the non-controlling interest in the profit for the year. (1 mark)
Calculate the parent equity interest in consolidated retained earnings at 31 December 20X2.
(2 marks)

58 Financial Reporting
Question 3 (7 marks)
Poplar Co acquired 40 per cent of the ordinary share capital of Ash Co on 1 January 20X2 for $1 250 000.
At that date the fair value of the net assets of Ash Co was $1 150 000. Retained earnings at that date were
$425 000. The following events relating to the year ended 31 December 20X2 are relevant:
The financial statements of Ash Co show a profit for the period of $200 000.
Ash Co paid dividends of $20 000 during the period.
Poplar Co sold goods costing $40 000 to Ash Co for $50 000. Half of the goods remained in
inventory at 31 December 20X2.
The tax rate is 30 per cent. Extracts from the draft financial statements of Poplar Co including its
subsidiaries are as follows:
Extract from consolidated statement of profit or loss
$
Profit before tax 12 500 000
Income tax expense (3 500 000)
Profit for the year 9 000 000
Extract from consolidated statement of financial position
$
Equity and liabilities 45 000 000
Investment in Ash 1 250 000
Other assets 43 750 000
45 000 000
Required:
Describe the treatment of goodwill when applying equity accounting. (1 mark)
Prepare extracts from the consolidated financial statements showing the correct treatment of
Ash Co. (4 marks)
Explain the disclosure requirements of IFRS 12 that must be applied by Poplar Co in relation to its
interest in Ash Co. (2 marks)
Question 4 (3 marks)
Explain the concept behind the equity method of accounting for an associate. Your answer should refer to
significant influence and how it is established.
Question 5 (4 marks)
Purple Co has a subsidiary, Scarlet Co and an associate, Amber Co. The following shows extracts from the
individual financial statements of each company at 30 June 20X2:
Purple Scarlet Amber
Trade receivables: $ $ $
Other 200 000 50 000 25 000
Due from Scarlet 20 000
Due from Amber 10 000
230 000
Trade payables:
Other 500 000 75 000 15 000
Due to Purple 20 000 10 000
95 000 25 000
Required:
Calculate the figures for consolidated trade receivables and consolidated trade payables as at
30 June 20X2 and provide the required journal entry for inclusion in the consolidation worksheet.
(2 marks)
Explain why the intra-group balances of Scarlet and Amber are treated differently from each other
on consolidation. (2 marks)

Module questions 59
 Question 6 (6 marks)
Peartree Co owns 48 per cent of the ordinary share capital of Gorse Co, providing it with the right to receive
variable dividends. Peartree Co also nominates the majority of individuals that are approved as directors of
Gorse Co, due to Peartree Co's presence at shareholder meetings. The other investors in Gorse Co comprise a
number of shareholders, none of whom hold more than 5 per cent of votes. These shareholders have no
arrangements to vote collectively and representation at general meetings is historically less than 30 per cent.
Required:
Explain how IFRS 10 establishes control. (3 marks)
Explain, with justification, whether Peartree Co has power over Gorse Co. (3 marks)
Question 7 (10 marks)
On 6 May 20X5, Travis Co purchased 65 per cent of the 100 000 equity shares in Perkins Co in exchange
for 45 000 of its own shares. On the date of this transaction the fair value of a share in Perkins Co was $10
and the fair value of a share in Travis Co was $16.50. The non-controlling interest is measured at fair value.
The carrying amount of Perkins Co's share capital and reserves on 6 May 20X5 was $850 000. Perkins Co
adopts the historical cost model to measure property, plant and equipment and at this date property had a
fair value $200 000 in excess of book value. Over a number of years Perkins Co has developed a brand
name 'Switch', however, this is not recognised in its individual statement of financial position in accordance
with IAS 38. The fair value of the brand was determined at $70 000 at the acquisition date by specialists in
this field. In the last financial statements of Perkins Co at 31 March 20X5, a contingent liability was
disclosed in respect of a legal claim. Lawyers advised the management of Travis Co that as at the acquisition
date there was a 30 per cent chance of Perkins losing the legal case and its fair value amounted to $35 000.
The tax department of Perkins Co have provided the following information:
1. The tax rate applicable to Perkins Co is 20 per cent.
2. Costs associated with the development of the brand were allowable for tax purposes when incurred.
3. Costs associated with the legal claim will be allowable when any payment is made.
At 31 March 20X6 as a result of unexpected legislative changes that adversely affected Perkins' market, the
goodwill in that company was assessed to be impaired by 20 per cent.
Required:
Explain why this transaction constitutes a business combination. (2 marks)
Explain how goodwill arising on a business combination is initially recognised and subsequently
measured. (2 marks)
Calculate goodwill arising on the acquisition of Perkins Co and prepare the consolidation adjustment
journal(s) to recognise goodwill in the consolidated financial statements. (6 marks)
Question 8 (10 marks)
Three companies, Winter Co, Summer Co and Autumn Co hold 30, 50 and 20 per cent of shares
respectively in a fourth company, Spring Co. A contract between the three investors requires at least
75 per cent of votes to make decisions about the relevant activities of Spring Co.
Summer's investment in Spring Co cost $740 000 on 1 October 20X5. The statements of profit or loss for
the year ended 30 September 20X6 of Summer Co, its 70 per cent subsidiary Season Co and Spring Co are
provided below.
Summer Co Season Co Spring Co
$ $ $
Revenue 1 150 000 265 000 482 500
Cost of sales (660 500) (160 000) (289 500)
Gross profit 489 500 105 000 193 000
Operating expenses (69 500) (22 500) (39 000)
Operating profit 420 000 82 500 154 000
Finance costs (25 000) (1 500) (2 000)
Profit before tax 395 000 81 000 152 000
Income tax expense (80 000) (16 000) (32 000)
Profit for the year 315 000 65 000 120 000

60 Financial Reporting
During the year, Summer sold goods to Season for $90 000, realising a profit of $30 000. Ten per cent of
these goods remained in Season's inventory at the year end. Summer also sold goods to Spring in the year
for $110 000, realising a profit of $45 000. A third of these remained in Spring's warehouse at the year end.
Required:
Explain which companies have joint control of Spring Co. (2 marks)
Use a consolidation worksheet to prepare Summer Group's statement of profit or loss for the year
ended 30 September 20X6. (6 marks)
Calculate the carrying amount of Summer Co's investment in Spring Co in the consolidated
statement of financial position at 30 September 20X6. (2 marks)

Module questions 61
 Module 6 FINANCIAL INSTRUMENTS

Multiple choice questions

1 Which of the following would NOT qualify as a financial instrument according to the definition in
IAS 32 Financial Instruments: Presentation?
A trade receivable of $250 000
B $200 000 borrowed under a mortgage
C $15 000 bank deposit with a 3-year fixed term
D $25 000 payment in advance for a 12-month insurance policy
2 Which of the following are NOT financial liabilities in accordance with IAS 32 Financial Instruments:
Presentation?
A loan notes
B equity shares
C trade payables
D redeemable preference shares
3 Watson Co issued 20 000 preference shares which are redeemable only at the option of Watson
Co. The preference share dividend is payable at the same amount per share as any ordinary share
dividend declared during the year.
How are the preference shares classified by Watson Co?
A equity
B derivative
C financial asset
D financial liability
4 A company issued 6 000 ten-year convertible bonds at $100 each on 1 January 20X2. The present
value of the redemption value and interest payments determined at the market rate of interest for
debt with a similar risk but without conversion options is $550 000.
Using the residual valuation approach what amounts should be attributed to the liability and equity
components at 1 January 20X2 (in $)?
Liability Equity
A Nil 600 000
B 50 000 550 000
C 550 000 50 000
D 600 000 Nil
5 Which of the following preference shares are classified as equity in the issuer's financial statements in
accordance with IAS 32 Financial Instruments: Presentation?
A redeemable preference shares with a fixed redemption date
B preference shares that are redeemable on request by the holder
C preference shares that are redeemable at the discretion of the issuer
D preference shares that are redeemable at the discretion of the issuer and the issuer has
informed the holders of its intention to redeem

62 Financial Reporting
6 Which of the following statements is not correct according to IAS 32 Financial Instruments:
Presentation?
A A derivative financial instrument derived its value from an underlying item, which may be
non-financial.
B In order to be classified as a derivative a contract must have a settlement and maturity date,
which may be the same.
C In the books of the issuer, compound financial instruments are split at initial recognition
between a liability and equity element.
D Convertible loan stock that allows the holder to exchange a fixed amount of debt for a
variable number of shares is a compound instrument.
7 Carroll Co has a financial asset debt investment with a carrying amount of $500 000 based on
measurement at amortised cost. At 31 March 20X6 the financial controller of Carroll Co is unsure
whether the financial asset is at stage 2 or stage 3 of the IFRS 9 credit losses model.
How does the accounting treatment differ if the asset is determined to be at stage 3 rather than
stage 2 of the model?
A The impairment allowance is the same amount, however, interest is calculated on the carrying
amount of the gross asset rather than the carrying amount net of the allowance.
B The impairment allowance is the same amount in both cases, however, interest is calculated
on the carrying amount of the asset net of the allowance rather than the gross amount.
C Interest is calculated on the carrying amount of the asset net of the allowance in both cases,
however, the impairment allowance is based on lifetime rather than 12 month expected credit
losses.
D The impairment allowance is based on lifetime rather than 12 month expected credit losses
and interest is calculated on the carrying amount of the asset net of the allowance rather than
the gross amount.
8 Barrow Co issues $2 million 6 per cent convertible loan notes on 1 June 20X6. Interest is payable in
arrears. The conversion option can be exercised in a number of years' time. The liability component
is initially measured at $1 841 160, based on an 8 per cent market rate of interest for a similar
non-convertible bond.
What amounts are recognised in the statement of financial position at 31 May 20X7?
A A liability of $1 961 160 and equity of $38 840
B A liability of $1 988 453 and equity of $11 547
C A liability of $1 813 867 and equity of $186 133
D A liability of $1 868 453 and equity of $158 840
9 On 1 January 20X3 Deferred Co issued $600 000 loan notes. Issue costs were $200. The loan notes
do not carry interest, but are redeemable at a premium of $152 389 on 31 December 20X4. The loan
notes are measured at amortised cost. The effective finance cost of the loan notes is 12 per cent.
What is the finance cost in respect of the loan notes for the year ended 31 December 20X4?
A $71 976
B $76 194
C $80 613
D $80 640

Module questions 63
 10 Which of the following disclosures is NOT required by IFRS 7 Financial Instruments: Disclosures?
A the carrying amount of any financial assets that have been pledged as collateral
B the amount of impairment loss recognised in the period for each class of financial asset
C the original cost of any equity investments measured at fair value through profit or loss or fair
value through other comprehensive income
D where a financial liability is measured at fair value through profit or loss, the difference
between carrying amount and the amount that the reporting entity is contractually required
to pay at the maturity of the liability
11 Which of the following statements is true regarding accounting for a financial liability measured at
amortised cost, in accordance with IFRS 9 Financial Instruments?
A The liability is recognised initially at the fair value of the consideration received.
B Issue costs paid in connection with the issue of the instrument are expensed immediately.
C The finance cost of the liability is recognised over the term of the instrument at a constant
rate.
D The carrying amount of the liability is reduced by the finance cost each year, calculated using
the effective rate.
12 On 1 October 20X6 Gannon Co entered into a hedging arrangement whereby it sold futures
contracts for gold to protect future sales revenue arising from sale of its current inventories of gold
and gold jewellery. The selling price of jewellery is heavily dependent on the market price of gold. At
31 December 20X6, Gannon Co has calculated the gain on the futures contract to be $120 000.
Which of the following statements is correct?
A This is a fair value hedge and the full gain on the futures contract is recognised in profit or
loss to match the gain on the fair value of inventories
B This is a fair value hedge and the effective gain on the futures contract is recognised in profit
or loss; any ineffective gain is recognised in other comprehensive income.
C This is a cash flow hedge and the gain on the futures contract is recognised in other
comprehensive income and reclassified to profit or loss in the future when inventories are
sold.
D This is a cash flows hedge and the effective gain on the futures contract is recognised in other
comprehensive income and reclassified to profit or loss when inventories are sold; any
ineffective gain is recognised in profit or loss.
13 On 1 January 20X1 Instrument Co acquired 460 000 $100 2 per cent bonds for $94 each. Issue
costs amount to $22 600 in total. The redemption value of the zero-coupon bonds is higher than the
par value, which gives rise to an implicit annual rate of interest of 5 per cent. The bonds are
measured at amortised cost and interest is received in arrears.
What is the carrying amount of the bonds as at 31 December 20X1?
A $44 458 270
B $44 482 000
C $44 505 730
D $44 560 930

64 Financial Reporting
14 Shannon Co acquired a derivative on 1 January 20X2 for $2000 cash. Transaction costs were $100.
At 31 December 20X2 the fair value of the derivative was $2300. Which of the following is the
correct journal entry to record these transactions?
$ $
A Debit Derivative financial asset 2 100
Credit Cash 2 100
B Debit Derivative financial asset 2 300
Credit Cash 2 100
Credit Profit or loss 200
C Debit Derivative financial asset 2 300
Debit Profit or loss 100
Credit Other comprehensive income 300
Credit Cash 2 100
D Debit Derivative financial asset 2 300
Credit Cash 2 100
Credit Other comprehensive income 200
15 At 1 October 20X2 Bradley Co held inventory with a cost of $800 000 and a fair value of $1 000 000.
In order to hedge against a fall in the fair value of its inventory below $1 000 000 Bradley acquired a
derivative. Conditions to hedge account are met. At 31 December 20X2 the fair value of the entity's
inventory had fallen by $40 000 and the derivative had a value of $40 000.
At 31 December 20X2 at what value should the inventory be recognised in the financial statements?
A $760 000
B $800 000
C $960 000
D $1 000 000
16 A company owns inventories of 20 000 gallons of oil which cost $400 000 on 1 December 20X3.
In order to hedge the fluctuation in the market value of the oil the company signs a futures contract
to deliver 20 000 gallons of oil on 31 March 20X4 at the futures price of $22 per gallon.
The market price of oil on 31 December 20X3 is $23 per gallon and the futures price for delivery on
31 March 20X4 is $24 per gallon.
What are the correct journal entries at 31 December 20X3 assuming that hedge accounting is
adopted and all required conditions are met?
$ $
A Debit Profit or loss 40 000
Credit Financial liability 40 000
B Debit Inventory 40 000
Credit Financial liability 40 000
C Debit Inventory 60 000
Credit Financial liability 40 000
Credit Profit or loss 20 000
D Debit Financial liability 40 000
Debit Profit or loss 20 000
Credit Inventory 60 000

Module questions 65
 17 On 1 January 20X2 a company enters into a hedge in order to protect its future cash inflows relating
to a recognised financial asset held at amortised cost. At inception the hedging instrument had a
value of $NIL but by 31 December 20X2 it had a fair value of $17 600. In fair value terms the
corresponding loss in respect of future cash flows amounted to $18 200. The ratio of the hedging
instrument and hedged item in the hedging relationship is the same as that actually used for risk
management purposes.
Which of the following statements regarding this hedging arrangement is true?
A The hedge is effective because the change in hedging instrument is 97 per cent of the change
in hedged item.
B The hedge is not effective because the gain on the hedging instrument is not the same as the
loss on the hedged item.
C The hedge is not effective because although the hedge ratio is consistent with that used for
risk management purposes, there is no economic relationship between the hedged item and
the hedging instrument.
D The hedge is effective because there is an economic relationship between the hedged item
and hedging instrument, value changes are not dominated by credit risk and the hedge ratio is
consistent with that used for risk management purposes.
18 Moor Co owes Green Co $540 000 for goods supplied and is also owed $390 000 for services that
it has supplied to Green Co. Which of the following statements is true?
A IAS 32 prohibits the presentation of a net financial liability of $150 000.
B A net financial liability of $150 000 must be presented in Moor Co's financial statements.
C A net financial liability of $150 000 may only be presented in Moor Co's financial statements if
Green Co agrees to such presentation and Moor Co customarily settles amounts with other
parties on a net basis.
D A net financial liability of $150 000 may only be presented in Moor Co's financial statements if
it has a legally enforceable right to set off the payable and receivable amounts and it intends to
settle on a net basis.
19 Which of the following are the main components of market risk, in accordance with IFRS 7 Financial
Instruments: Disclosures?
A credit risk and liquidity risk
B currency risk and credit risk
C interest rate risk and liquidity risk
D interest rate risk and currency risk
20 Which of the following amounts is recognised outside the statement of profit or loss in accordance
with IAS 32 and IFRS 9?
A a gain on an equity investment that is held for trading
B an increase in impairment allowance on a financial asset measured at amortised cost
C a loss on an interest rate swap used to protect the value of a recognised debt instrument
D a gain on a financial liability measured at fair value through profit or loss due to changes in
credit risk
21 Which one of the following factors would prevent the application of hedge accounting in accordance
with IFRS 9 Financial Instruments?
A The hedge is of a net investment in a foreign operation.
B There is no economic relationship between the hedged item and the hedging instrument.
C The effect of credit risk does not dominate fair value changes in the hedging instrument and
hedged item.
D The hedge ratio of the hedging relationship is only equal to that resulting from the quantity of
the hedged item that the entity actually hedges and the quantity of the hedging instrument
that the entity actually uses to hedge that quantity of hedged item.

66 Financial Reporting
22 Voss Co holds a debt instrument in another company. For a number of years it has measured the
financial asset at amortised cost. The management has decided that measurement at fair value
through profit or loss would result in more relevant information being included in the financial
statements.
Which of the following statements is true?
A In accordance with IFRS 9, Voss Co is prohibited from reclassifying the financial asset to be
measured at fair value through profit or loss.
B This is a valid reason for the change the measurement basis and the remeasurement to fair
value at the transfer date is recognised in profit or loss.
C This is a valid reason for the change the measurement basis and the remeasurement to fair
value at the transfer date is recognised in other comprehensive income.
D The debt instrument cannot be reclassified to be measured at fair value through profit or loss
unless Voss Co no longer intends to hold the instrument to collect amounts that it is entitled
to from the issuer.
23 Which of the following is a primary financial instrument?
A a contract to swap a fixed rate of interest on a notional $1 million for a variable rate
B a contract to buy 2 million Euro at a fixed date in the future at a specified exchange rate
C a contract to deliver a fixed number of ordinary shares in the future equal to a fixed currency
amount
D a contract giving the holder the option to sell 500 troy ounces of gold on a fixed date in the
future at a specified price
24 Snape Co has in issue $500 000 6 per cent preference shares which are redeemable at the option of
the holder. The preference shares have been in issue for over ten years and none of them has ever
been redeemed. The company has treated the $30 000 annual payment as a deduction from equity.
Is this treatment correct, according to IAS 32 Financial Instruments: Presentation?
A yes, because shares are equity and the annual payment is a dividend
B no, because the annual payment must be separated into dividend and interest components
C no, because the preference shares should be classified as a financial liability and the annual
payment is interest
D yes, because although the preference shares appear to be a liability the substance of the
arrangement is that they are equity; in practice they are unlikely ever to be redeemed
25 A company discloses information in the notes to its financial statements in order to comply with the
requirements of IFRS 7 Financial Instruments: Disclosures. It presents a maturity analysis for both non-
derivative and derivative financial liabilities. Which type of risk does this analysis primarily attempt to
disclose?
A credit risk
D market risk
C liquidity risk
D currency risk

Module questions 67
 26 Burke Co issued 5.5 per cent loan stock a number of years ago. At 31 December 20X6 the loan
stock had a carrying amount of $10 million (based on measurement at amortised cost and an
effective interest rate of 6 per cent). Due to difficult trading conditions during 20X6, Burke Co
renegotiated the terms of the loan stock with lenders. The loan term was extended and the coupon
rate increased from 5.5 to 8 per cent with effect from 1 January 20X7. The present value of the loan
under the revised terms was $10.5 million and transaction costs of $550 000 were payable in respect
of the renegotiation.
How is this transaction reflected in the accounts of Burke Co?
A The original loan is derecognised and a new loan with a carrying amount of $9.95 million is
recognised, giving rise to a loss of $500 000.
B The transaction costs are deducted from the carrying amount to give a revised carrying
amount of $9 450 000. This is amortised at the new effective interest rate.
C The liability continues to be amortised based on the original terms; any difference between
carrying amount and cash paid to settle to obligation at the redemption date is recognised in
profit or loss.
D The carrying amount of the liability remains at $10 million, and the new coupon rate and
effective interest rate are applied prospectively; $550 000 transaction costs are recognised in
profit or loss.
27 Davies Co acquires a non-controlling investment in equity shares on 1 January 20X6 at a cost of
$450 000. Davies Co makes no elections in respect of the investment. At Davies' year end of
31 December 20X6 the investment has a fair value of $462 000. Davies' incremental borrowing rate
is 6 per cent and a dividend of $20 000 was received in respect of the investment during the year.
What amounts are recognised in Davies Co's financial statements in the year ended
31 December 20X6?
A a financial asset with a carrying amount of $450 000 and income of $20 000 recognised in
profit or loss
B a financial asset with a carrying amount of $462 000 and income of $32 000 recognised in
profit or loss
C a financial asset with a carrying amount of $457 000 and income of $27 000 recognised in
profit or loss
D a financial asset with a carrying amount of $462 000 and income of $20 000 recognised in
profit or loss and $12 000 recognised in other comprehensive income.
28 Shortly before the year end, Blaxhall Co entered into a futures contract to purchase a specified
quantity of wheat at a particular date. This contract is a financial instrument and will not be settled
by physical delivery of wheat. Wheat is a commodity and the market price at the reporting date is
easily determined. According to IFRS 9 Financial Instruments, should Blaxhall Co recognise the
contract in its financial statements at the end of the reporting period?
A no, because no consideration has yet been paid
B yes, because the financial instrument can be measured reliably
C no, because the company has not received physical delivery of the wheat
D yes, because the company has become a party to the contractual provisions of the financial
instrument
29 Leiston Co transfers a proportion of its receivables (balances due from customers) to Saxmundham
Co for $800 000. The receivables transferred have a net carrying amount of $750 000, made up of
gross receivables $800 000 and an allowance for doubtful debts $50 000. Leiston Co guarantees
Saxmundham Co for default losses on receivables up to $25 000. Actual losses in excess of this
amount will be assumed by Saxmundham Co.
Which of the following statements is correct, according to IFRS 9 Financial Instruments?
A Leiston Co should derecognise the receivables.
B Leiston Co should record a profit on sale of $50 000.
C Leiston Co should continue to recognise the receivables.
D Leiston Co should recognise a separate guarantee liability of $75 000.

68 Financial Reporting
30 Antiqua Co has recently purchased two financial assets:
$100 000 6 per cent loan stock which is redeemable in five years' time at a premium of
5 per cent. Antiqua Co intends to hold the loan stock until maturity in order to collect the
interest payments and the principal amount.
$250 000 7 per cent loan stock which is convertible into equity shares in five years' time.
Again, Antiqua Co intends to hold the loan stock for the long term, in order to collect the
interest payments.
Antiqua Co holds no other financial assets and for the foreseeable future does not intend to hold
financial assets for trading or for hedging purposes.
In accordance with the requirements of IFRS 9 Financial Instruments, how should the two financial
assets be classified?
A Both financial assets should be measured at amortised cost.
B Both financial assets should be measured at fair value through profit or loss.
C The redeemable loan stock should be measured at amortised cost and the convertible loan
stock should be measured at fair value through profit or loss.
D The redeemable loan stock should be measured at fair value through other comprehensive
income and the convertible loan stock should be measured at fair value through profit or loss.
31 In accordance with the requirements of IFRS 9 Financial Instruments, which of the following is
measured at amortised cost?
A a contract to deliver £900 000 at a date in the future in exchange for $1 476 000
B $1 million 8 per cent loan stock issued by another company; it is intended that the loan stock
will be held until maturity
C a $2 million loan made to another entity; the variable rate of interest on the loan is reset each
quarter to 1.25 times LIBOR
D an investment in 10 per cent of the equity shares of another company; it is intended that the
shareholding will be held in the long term
32 Metal Co raises $5 million through the issue of loan stock. The amount of coupon interest payable
on the loan stock is indexed to the price of gold, such that it increases when the market price of
gold increases and decreases when the market price falls. What is the correct treatment of this
contract?
A The loan stock is measured at fair value through profit or loss and therefore the embedded
derivative is accounted for separately as a derivative if it has the same economic
characteristics as the loan stock.
B The loan stock is not measured at fair value through profit or loss and therefore the
embedded derivative is accounted for separately as a derivative if it has the same economic
characteristics as the loan stock.
C The loan stock is measured at fair value through profit or loss and therefore the embedded
derivative is accounted for separately as a derivative if it does not have the same economic
characteristics as the loan stock.
D The loan stock is not measured at fair value through profit or loss and therefore the
embedded derivative is accounted for separately as a derivative if it does not have the same
economic characteristics as the loan stock.

Module questions 69
 33 On 1 January 20X1 Martlett Co purchased 40 000 $1 equity shares in Swift Co, a holding of
5 per cent of the total issued equity share capital of that company. Martlett Co has a portfolio of
investments, which it holds with the objective of trading to realise changes in fair value. At the time
of purchase, the shares in Swift Co were treated as forming part of that portfolio, even though
management intended to hold these shares for the long term, with a view to possibly acquiring a
further investment in Swift Co at a later date.
During the year ended 31 December 20X2, the fair value of shares in Swift Co fell significantly. In the
financial statements for the year ended 31 December 20X2, the loss on remeasurement of these
shares has been recognised in other comprehensive income.
According to IFRS 9 Financial Instruments, is this treatment correct?
A yes, because Martlett Co has changed its business model
B no, because the shares in Swift Co are not held for trading and should therefore be measured
at amortised cost
C yes, because the size of the shareholding in Swift Co indicates that the shares are a strategic
investment, rather than part of the portfolio held for trading
D no, because Martlett Co did not make an irrevocable election to recognise changes in fair
value in other comprehensive income when the shares were initially recognised
34 On 1 January 20X4 Kington Co sold shares in Brilley Co to Hergest Co for $250 000. At that date,
the carrying amount of the shares was $210 000. Brilley Co is an unlisted company and the fair value
of its shares has not changed materially for several years.
On the same date, Kington Co agreed to repurchase the shares from Hergest Co for $260 000 in
six months' time.
In accordance with IFRS 9 Financial Instruments, which of the following statements is correct?
A Kington Co should record a profit on sale of $40 000.
B Kington Co should derecognise the shares in Brilley Co.
C Kington Co should continue to recognise the shares in Brilley Co.
D Kington Co should recognise a loan payable of $260 000 at 1 January 20X4.
35 On 1 January 20X6, Siddons Co acquired an investment in $1 million 8 per cent loan stock, which it
measured at amortised cost. At 31 December 20X6 the borrower breached loan covenants and the
investment was determined to be credit impaired; estimated credit losses over the remainder of the
loan stock term arising from default within the 12 months to 31 December 20X7 are $550 000 and
estimated credit losses over the remainder of the term arising from default at any time in the
remainder of the term are $700 000.
What expense is recognised in profit or loss in the year ended 31 December 20X7?
A an impairment loss of $550 000 and interest income of $36 000
B an impairment loss of $550 000 and interest income of $80 000
C an impairment loss of $700 000 and interest income of $24 000
D an impairment loss of $700 000 and interest income of $80 000

70 Financial Reporting
Written response questions – Module 6
Question 1 (5 marks)
An entity has entered two separate contracts:
contract A – a firm commitment (an order) to buy a specific quantity of iron
contract B – a forward contract to buy a specific quantity of iron at a specified price on a specified
date provided delivery of the iron is not taken.
Required:
Explain the recognition criteria for financial instruments in accordance with IFRS 9 Financial
Instruments and contrast this with the recognition criteria in the IASB's Conceptual Framework.
(3 marks)
Explain the appropriate accounting treatment of the two contracts. (2 marks)
Question 2 (5 marks)
Port Co entered into the following transactions during the year ended 31 December 20X3:
1 Entered into a speculative interest rate option costing $10 000 on 1 January 20X3 to borrow $6 000 000
from AB Bank commencing 31 March 20X5 for 6 months at 4 per cent. The fair value of the option
at 31 December 20X3 was $15 250.
2 Purchased 50 000 shares in Plymouth Co on 1 July 20X3 for $3.50 each as a strategic investment.
Port Co intends to hold this investment for the long term. The share price on 31 December 20X3
was $3.75.
Port Co has no other financial assets. The management of Port Co does not wish to classify financial assets
as measured at fair value through profit or loss unless this is unavoidable.
Required:
Explain the accounting treatment using journals for both of the transactions described above.
(3 marks)
Prepare relevant extracts from the statement of financial position and statement of profit or loss and
other comprehensive income for the year ended 31 December 20X3. (2 marks)
Question 3 (5 marks)
Brown Co issues 4 000 convertible bonds on 1 January 20X2 at par. Each bond is redeemable three years
later at its par value of $500 per bond, which is its nominal value.
The bonds pay interest annually in arrears at an interest rate of 5 per cent. Each bond can be converted at
the maturity date into 30 $1 shares.
The prevailing market interest rate for three year bonds that have no right of conversion is 9 per cent.
Required:
Calculate amounts to be presented in the statement of financial position at 1 January 20X2.
(2 marks)
Explain the accounting treatment to be applied to the convertible bonds in subsequent years.
(2 marks)
Prepare any journal entries that are required in the year ended 31 December 20X2. (1 mark)
Cumulative three-year annuity factors:
5% 2.723
9% 2.531

Module questions 71
 Question 4 (7 marks)
Robinson Co is preparing its financial statements for the year ended 31 May 20X6. On 1 May 20X5,
Robinson made a loan of $100 million to a customer with a similar credit risk to Robinson. Interest payable
on this loan was 4.5 per cent per annum. The loan was recognised as a financial asset measured at
amortised cost. On 31 May 20X5 the initial present value of expected credit losses over the life of the loan,
using a discount factor of 4 per cent, was $25 million. At that date, the probability of default over the next
12 months was 10 per cent. An allowance of $2 500 000, being 12 months' expected credit losses was
recognised at 31 May 20X5 in accordance with IFRS 9 Financial Instruments.
By 31 May 20X6 it became clear that the customer was in serious financial difficulties, and the directors of
Robinson believed that there was objective evidence of impairment. The present value of expected credit
losses was revised to $48.1 million.
Required:
Explain, with supporting calculations, how the impairment of this loan should be accounted for in the
financial statements of Robinson for the year ended 31 May 20X6. (5 marks)
Explain what disclosures Robinson Co must make in the year ended 31 May 20X6 in respect of
credit losses. (2 marks)
Question 5 (7 marks)
The following information relates to Westville Co, which has Australian dollars as its functional currency,
in the year ended 1 April 20X7:
1 It purchased a debt instrument issued by another company with the intention of holding it for a
maximum of two years before selling it to another party. This intention reflects the objective of the
business model within which the debt instrument is held.
2 It entered into a speculative forward contract to exchange $4 000 000 for €3 100 000.
3 It entered into two forward contracts to issue equity shares:
a contract with Entity A to issue 10 000 shares at $5 each on 31 January 20X8
a contract with Entity B to issue 5 000 shares at a dollar price equal to Euro 10 on
28 February 20X8.
Required:
Explain how the definitions of financial instruments and classification requirements of IFRS 9 are applied to
these transactions
Question 6 (5 marks)
Moorfield Co took out a $100 000 bank loan with AAB Bank on 1 August 20X3. The loan agreement
provided for a 7 per cent fixed rate of interest with interest paid annually in arrears, and a repayment date
of 31 July 20X8. During the year ended 31 July 20X6, Moorfield suffered a drop in sales and as a result
renegotiated the terms of the bank loan such that the repayment date is extended to 31 July 20Y0 and a
new interest rate of 4 per cent is applied to the loan with effect from 1 August 20X6.
During the year ended 31 July 20X6. Moorfield Co also sold the following financial assets:
1 an investment in shares. Moorfield retained an option to repurchase the shares at any time at a price
equal to their market value at the repurchase date.
2 a proportion of its receivables. Moorfield received an immediate cash payment of 90 per cent of the
value of the receivables, however it must compensate the purchaser for any amounts not recovered
after 6 months.
Required:
Explain how the renegotiation of the loan should be treated in the financial statements for the year
ended 31 July 20X7, according to IFRS 9 Financial Instruments. You are not required to calculate
amounts for inclusion in the financial statements. (2 marks)
Discuss whether the investment and receivables should be derecognised by Moorfield. (3 marks)

72 Financial Reporting
Question 7 (7 marks)
Allister Co sells goods to a customer based in San Francisco on 1 October 20X6, recognising a receivable
of US$850 000. The customer has been provided with 90 days credit and payment is expected at the end of
December. In order to protect the value of the receivable, Allister Co has entered into a forward contract
to sell US$850 000 for $1 105 000 on 31 December 20X6. Exchange rates at 1 October 20X6 and the year
end of 31 October 20X6 were US$1:$1.32 and US$1:$1.36 respectively. At 31 October 20X6, the available
rate for a forward contract to be settled on 31 December 20X6 was US$1:$1.35.
Required:
Explain what conditions must be met in order for this arrangement to be accounted for as a hedging
transaction and consider whether the conditions are met. (3 marks)
Calculate amounts to be recognised in the financial statements of Allister Co in the year ended
31 October 20X6 (2 marks)
Explain the IFRS 7 disclosures that Allister Co should make in respect of any hedging arrangements.
(2 marks)

Module questions 73
 Module 7 IMPAIRMENT OF ASSETS

Multiple choice questions

1 Happy purchased 100 per cent of Cheerful a number of years ago for $400 000 when the net fair
value of the identifiable assets and liabilities of Cheerful was $360 000. At the date of acquisition, the
book value of the assets was equivalent to fair value.
No impairment losses had previously been necessary. An impairment test conducted at the year-end
revealed that the recoverable amount of Cheerful, a single cash-generating unit, had fallen to $368
000. Recoverable amount was determined including all assets and liabilities.
Cheerful's own statement of financial position showed the following net assets at the date of the
impairment test:
$'000
Property, plant and equipment 320
Intangible assets 64
Inventories 42
Other current assets 74
Liabilities (96)
404
The fair value less costs of disposal of the property, plant and equipment was determined to be
$310 000. The fair value of the other assets cannot be determined reliably on an individual basis.
At what value are the intangible assets and property, plant and equipment recognised in the books
following the impairment test?
Property, plant and equipment Intangible assets
A $320 000 $64 000
B $310 000 $38 000
C $290 000 $58 000
D $310 000 $58 000
2 Denne Co has a cash generating unit. The unit was reviewed for impairment at 31 December 20X6
as required by IAS 36 Impairment of Assets. The impairment review revealed that the cash generating
unit had a value in use of $50 million and a fair value less costs of disposal of $46 million. The
carrying amounts of the net assets of the cash generating unit immediately prior to the impairment
review were as follows.
$'000
Goodwill 10 000
Property, plant and equipment 36 000
Current assets 8 000
54 000
The review indicated that an item of plant (included in the above figure of $36 million) with a
carrying amount of $2 million had been severely damaged and was virtually worthless. There was no
other evidence of obvious impairment to specific assets.
What is the carrying amount of the goodwill relating to the unit immediately after the results of the
impairment review have been reflected in accordance with IAS 36?
A $2 million
B $4 million
C $6 million
D $8 million

74 Financial Reporting
3 G Co buys an asset for $100 000 which will have a scrap value of $10 000 after ten years of useful
life. It is depreciated on a straight line basis over its useful life. At the end of Year 3 of use an
impairment review indicates the asset's value in use is $60 000 and its current fair value less costs of
disposal is $66 000. The asset value is adjusted for the impairment loss.
What amount is recognised in profit or loss in respect of the asset in Year 3?
A $7000
B $13 000
C $16 000
D $22 000
4 Company P acquires Company S for $10 million, its tangible assets being valued at $7 million and
goodwill at $3 million. Some of the assets, with a carrying amount of $2.5 million are subsequently
destroyed and it is established that the business could be sold for $6 million, whilst its value in use is
$5.5 million.
What is the carrying amount of the goodwill subsequent to this impairment review?
A $Nil
B $1 500 000
C $2 000 000
D $3 000 000
5 Which of the following statements regarding the scope of IAS 36 is true?
A IAS 36 does not apply to assets measured based on fair value.
B IAS 36 applies to investments in subsidiaries, associates and joint ventures.
C Non-current assets classified as held for sale are measured in accordance with IAS 36.
D The requirements of IAS 36 do not apply to properties that are leased out under operating
leases.
6 V Co has suffered an impairment loss of $90 000 on one of its cash generating units because low
market entry barriers have enabled its competitors to successfully develop and market new rival
products. The carrying amounts of the assets of that unit, before adjusting for impairment, are as
follows:
$'000
Goodwill 60
Land and buildings 100
Plant and machinery 50
What is the post impairment carrying amount of plant and machinery?
A $Nil
B $10 000
C $40 000
D $50 000

Module questions 75
 7 A cash generating unit in Steel Co becomes impaired when the product it makes is overtaken by a
competitor's more advanced model. As a result an impairment loss of $110 million arises allocated
as follows:
Carrying amount Carrying amount
before impairment after impairment
$m $m
Goodwill 50 –
Patent (with no market value) 30 16
Tangible long-term assets 100 54
180 70

After several years Steel Co itself makes a technological breakthrough and the recoverable amount
of the cash generating unit increases to $130 million. Had the original impairment not arisen, the
carrying amount of the patent would have been $Nil and the carrying amount of the tangible long-
term assets would have been $90 million.
What will the carrying amounts be after the reversal of the original impairment?
Tangible long-term
Goodwill Patent assets
$m $m $m
A – – 70
B – – 90
C 25 15 90
D 40 – 90
8 What is the impairment loss (if any) relating to G Co's property, plant and equipment in this
situation?
$'000
Carrying amount 900
Fair value less costs of disposal 600
Value in use 800
A $Nil
B $100 000
C $200 000
D $300 000
9 Barton Co recognised goodwill of $210 000 on the acquisition of another business, which qualified as
a CGU several years ago. Last year as a result of poor trading conditions the goodwill was written
down to $90 000. Barton Co now wishes to reverse the impairment loss on the basis that internal
reporting suggests that the economic performance of the business will be better than expected.
Which of the following statements is true?
A A reversal an impairment loss is permitted at the discretion of the management; this results in
a revised carrying amount of goodwill of $210 000.
B The reversal of an impairment loss that originally arose on the goodwill of a CGU is not
permitted as this represents internally generated goodwill.
C An impairment loss on a CGU can be reversed, however it must be attributed to the other
assets of the CGU rather than recognised as an increase in the carrying amount of goodwill.
D A reversal of the full $120 000 loss can be recognised in this instance and attributed to
goodwill, as there is evidence that the original factors that indicated impairment no longer
apply.

76 Financial Reporting
10 Brown Co owns an item of equipment with a carrying amount at 30 November 20X3 of $2 000 000.
The depreciated historical cost of the item at that date was $1 500 000. An impairment review has
been carried out because the company is finding it difficult to sell its goods overseas. This produces
the following results for the equipment:
Fair value less costs of disposal $1 200 000
Value in use $1 300 000
What is the impairment loss and how should it be recognised in the financial statements?
A loss of $800 000 to be charged to profit or loss
B loss of $700 000 to be charged to profit or loss
C loss of $800 000, $500 000 to be charged to other comprehensive income, $300 000 to be
charged to profit or loss
D loss of $700 000, $500 000 to be charged to other comprehensive income, $200 000 to be
charged to profit or loss
11 Which of the following best describes the underlying principle of IAS 36?
A Assets and liabilities should be carried at an amount that best reflects their value to a
reporting entity.
B Assets should be measured at an amount that conforms to the measurement bases of the
Conceptual Framework.
C Assets should not be measured at more than the net amount that they can be sold for or the
amount they will generate through use.
D The carrying amount of assets should not be overstated in the statement of financial position
and the carrying amount of liabilities should not be understated.
12 A non-current asset has a carrying amount of $40 000. It could be sold for $37 000 with selling costs
of $1 000. Its value in use is $44 000 and its replacement cost is $100 000.
According to IAS 36 Impairment of Assets what is the recoverable amount of this asset?
A $36 000
B $40 000
C $44 000
D $100 000
13 In accordance with IAS 36 Impairment of Assets which of the following must be tested for impairment
annually?
A a brand name that is being amortised over 10 years
B non-depreciable land held for an undetermined use
C a machine that has previously suffered an impairment loss
D capitalised costs associated with an ongoing development project
14 IAS 36 requires numerous disclosures when an impairment loss is recognised in the year. Which of
the following disclosures is not required for an impairment loss relating to a single asset?
A the line item of the statement of comprehensive income in which impairment losses are
recognised
B the nature of the impaired asset and, where relevant, the IFRS 8 operating segment to which
it is allocated
C the original cost of the impaired asset and its carrying amount prior to recognition of the
impairment loss
D the recoverable amount of the asset and whether this is based on fair value less costs of
disposal or value in use

Module questions 77
 15 On 1 January 20X1 Court Co purchased an asset for $100 000 with a useful life of 10 years. The
asset is depreciated on a straight-line basis. On 31 December 20X2, due to some impairment
indicators an impairment review was carried out and the recoverable amount of the asset was
estimated to be $50 000. An impairment loss of $30 000 was recognised. The total life of the asset
remained unchanged.
At 31 December 20X4 the recoverable amount of the asset was estimated to be $70 000.
What amount is recognised as income in the statement of profit or loss in respect of the reversal of
the impairment of this asset in the year ended 31 December 20X4?
A $20 000
B $22 500
C $32 500
D $70 000
16 M Co owns two production plants, N and O. A significant component used in the final product
produced by O is a component produced by N. 85 per cent of O's final production is sold to
customers outside the entity. 70 per cent of the components produced by N are sold to O with the
remainder being sold to external customers. N could sell the components sold to O to external
customers.
Based on this information which of the following statements is true in accordance with IAS 36
Impairment of Assets?
A The cash-generating unit is M Co as a whole.
B N and O are likely to be separate cash-generating units.
C N and O together are likely to be a cash-generating unit.
D O is likely to be a separate cash-generating unit. N will form part of the cash-generating unit
of M Co.
17 Which of the following statements regarding impairment testing is or are correct?
1 An increase in interest rates is an indicator that an asset may be impaired.
2 The recoverable amount of a CGU to which goodwill has been allocated in the year must be
tested for impairment for the first time 12 months after the business combination that gave
rise to the goodwill.
A 1 only
B 2 only
C both 1 and 2
D neither 1 nor 2

78 Financial Reporting
18 A building owned by Poretta Co has been reviewed for impairment. The following information is
relevant:
The carrying amount of the building is $900 000.
The estimated fair value less disposal costs is $750 000.
The value in use is $700 000.
The building has previously been revalued upwards and the related revaluation surplus is
$100 000.
In accordance with IAS 16 Property, Plant and Equipment and IAS 36 Impairment of Assets, which one of
the following journal entries correctly recognises the impairment loss?
Debit Credit
$ $
A Impairment loss 150 000
Accumulated depreciation
and accumulated impairment losses 150 000
B Impairment loss 200 000
Accumulated depreciation
and accumulated impairment losses 200 000
C Impairment loss 50 000
Revaluation surplus 100 000
Accumulated depreciation
and accumulated impairment losses 150 000
D Impairment loss 100 000
Revaluation surplus 100 000
Accumulated depreciation
and accumulated impairment losses 200 000
19 To which of the following assets does IAS 36 apply?
A inventories of finished goods measured at cost
B cattle measured by a farmer at fair value less costs to sell
C a 5 per cent holding in the equity shares of a listed company measured at fair value through
profit or loss
D an internally generated brand initially recognised at fair value on the date of a business
combination
20 IAS 36 requires that disclosure is made to inform users of financial reports about actual impairment
losses that have occurred in the reporting period and any reversals of impairment losses.
Which of the following statements is/are true?
1 A material impairment loss must be presented separately in the statement of profit or loss
and other comprehensive income in the period in which it arises.
2 Where an impairment loss arises on a CGU in the year, a description of any change in the
assets that make up the CGU since the last estimate of recoverable amount.
A 1 only
B 2 only
C both 1 and 2
D neither 1 nor 2

Module questions 79
 21 Pracchia Co owns a machine. An expert valuer has estimated that the price that could be obtained
from selling the machine in an orderly sale is $750 000. Pracchia Co would be required to cover the
estimated costs of $20 000 to remove the machine from its factory and transport it to any potential
buyer. Use of the machine is essential in manufacturing one of the company's product lines, so that in
practice disposal of the machine would lead to a minor reorganisation of the business. The costs of
carrying out this reorganisation are estimated at $40 000. The fee charged by the expert valuer for
performing the valuation was $5000.
In accordance with the requirements of IAS 36 Impairment of Assets, what is the fair value less costs
of disposal of the machine?
A $685 000
B $690 000
C $725 000
D $730 000
22 At 31 December 20X4, Marchese Co reviewed a building for impairment. At that date the building
had a carrying amount of $900 000 (fair value of $1 000 000 less accumulated depreciation of
$100 000). The building was last revalued at 1 January 20X0 and its useful life was estimated at
50 years from that date. The revaluation surplus relating to the building was $300 000. The
recoverable amount of the building was assessed at $675 000, with a remaining useful life of 45 years
and no residual value. This impairment was reflected in the financial statements for the year ended
31 December 20X4.
The building continued to be depreciated on a straight-line basis for each of the five years ended
31 December 20X9. At 31 December 20X9, a further review estimated the recoverable amount of
the building at $850 000.
Following this second review and the reversal of the impairment, which of the following statements
is correct?
A The carrying amount of the building is $800 000.
B The carrying amount of the building is $850 000.
C The company should recognise a gain of $200 000 in profit or loss.
D The company should recognise a gain of $250 000 in profit or loss.
23 Marroni Co is preparing its financial statements for the year ended 31 December 20X2. The
company has the following assets:
development expenditure relating to a new product which went on sale shortly before the
year end. The expenditure will be amortised on a systematic basis over the next six years
(after which sales of the product are expected to decline sharply).
goodwill acquired in a business combination on 1 January 20X2. The acquired entity's draft
financial statements show that both sales revenue and profits have significantly increased for
the third year running.
an office block which has suffered physical damage due to adverse weather conditions.
Which of these assets should be reviewed for impairment at 31 December 20X2, according to
IAS 36 Impairment of Assets?
A all three assets
B the goodwill and the office block only
C the development expenditure and the goodwill only
D the development expenditure and the office block only

80 Financial Reporting
24 The new accountant of Terme Co has determined the value in use of one of its assets. He has
assessed future cash inflows arising from the continued use and ultimate disposal of the asset and has
used the official cash rate as determined by the Reserve Bank of Australia to discount the cash flows.
Which of the following statements is correct regarding the accountant's calculation of value in use?
A Cash flows should not include those arising on the disposal of the asset and the discount rate
should be Terme's borrowing rate.
B The cash flows considered are in accordance with IAS 36, however, an appropriate cash rate
is Terme's weighted average cost of capital.
C The discount rate applied is appropriate, however, cash flows should also include cash
outflows arising from the continued use of the asset.
D Cash flows should also include cash outflows arising from the continued use of the asset and
the discount rate should be a pre-tax rate that reflects the risks specific to the asset.
25 The information below relates to two assets:
Fair value less
Carrying amount costs of disposal Value in use
$ $ $
Asset 1 500 000 450 000 520 000
Asset 2 350 000 380 000 340 000
Which of the following statements is correct, according to IAS 36 Impairment of Assets?
A The total impairment loss is $50 000.
B The total impairment loss is $60 000.
C The recoverable amount of Asset 1 is $450 000.
D The recoverable amount of Asset 2 is $380 000.
26 The management of Houndsgate Co has identified two cash generating units (CGUs) and a research
division that does not generate cash flows independently of the two CGUs. The carrying amount of
the research division cannot be allocated between the two CGUs on a reasonable and consistent
basis.
The following information relates to the cash generating units and the research division:
CGU X CGU Y Research division
$ $ $
Carrying amount 600 000 300 000 120 000
Recoverable amount 560 000 330 000
The recoverable amount of the company as a whole (the two CGUs plus the research division) is
$1 000 000.
In accordance with IAS 36 Impairment of Assets, what is the total impairment loss for the company as
a whole?
A $Nil
B $10 000
C $40 000
D $130 000
27 An asset's value in use is the present value of the future cash flows expected to be derived from it.
According to IAS 36 Impairment of Assets, which of the following items should be included in the
calculation of value in use?
A income tax payments and cash inflows from the continuing use of the asset
B cash inflows from the continuing use of the asset and net cash flows to be received from the
disposal of the asset at the end of its useful life
C cash inflows from the continuing use of the asset and cash flows expected to arise from
improving or enhancing the asset's performance
D cash inflows from the continuing use of the asset and net cash flows to be received from the
disposal of the asset at the end of its useful life and income tax payments

Module questions 81
 28 Carney Co has three CGUs – X, Y and Z. At 1 December, Carney Co acquired a competitor,
Wine Co, with identifiable assets of $120 000, giving rise to $90 000 goodwill. Prior to the
acquisition, the assets of CGU X had a carrying amount of $560 000, those of CGU Y had a carrying
amount of $920 000 and those of CGU Z had a carrying amount of $900 000. The goodwill arising
on the acquisition of Wine Co is expected to benefit all three CGUs, whilst the identifiable assets
are to be allocated equally to CGU X and CGU Z. The CGUs are run from a central head office,
which is not a CGU. It has a carrying amount of $200 000. Management has decided that this should
be allocated to CGUs based on their carrying amount. What is the carrying amount of CGU X for
the purposes of testing for impairment?
A $678 193
B $700 193
C $716 351
D $716 667

82 Financial Reporting
Assumed knowledge questions – Module 7
1 What is the purpose of charging depreciation in historical cost accounts?
A to reduce the possibility of an asset becoming impaired
B to ensure that funds are available for the eventual replacement of the asset
C to reduce the cost of the asset in the statement of financial position to its estimated market
value
D to allocate the cost less residual value of a non-current asset over the accounting periods
expected to benefit from its use
2 IAS 16 Property, Plant and Equipment requires non-current assets to be depreciated using which of the
following methods?
A the straight line or reducing balance method
B the straight line method or any similar method
C a method that allocates the cost as fairly as possible
D a method that allocates the depreciable amount as fairly as possible
3 The plant and machinery cost account of Brown Co for the year ended 30 June 20X4 was as follows:
Plant and machinery – cost
$ $
20X3 20X3
1 Jul Balance 240 000 30 Sep Transfer disposal 60 000
account
20X4 20X4
1 Jan Cash – purchase of plant 160 000 30 Jun Balance 340 000
400 000 400 000

The company's policy is to charge depreciation at 20 per cent per year on the straight-line basis,
with proportionate depreciation in the years of purchase and disposal.
What should be the depreciation charge for the year ended 30 June 20X4?
A $55 000
B $61 000
C $64 000
D $68 000
4 Beige Co's plant and machinery ledger account for the year ended 30 September 20X2 was as
follows:
Plant and machinery – cost
$ $
20X1 20X2
1 Oct Balance 381 200 1 Jun Disposal account – cost 36 000
of asset sold
1 Dec Cash – addition 18 000 30 Sep Balance 363 200
399 200 399 200
The company's policy is to charge depreciation at 20 per cent per year on the straight-line basis,
with proportionate depreciation in years of purchase and sale.
What is the depreciation charge for the year ended 30 September 20X2?
A $72 640
B $74 440
C $76 840
D $84 040

Module questions 83
 5 Your firm bought a machine for $5000 on 1 January 20X1, which had an expected useful life of four
years and an expected residual value of $1000; the asset was to be depreciated on the straight-line
basis. The firm's policy is to charge proportionate depreciation in the year of disposal. On
31 December 20X3, the machine was sold for $1600.
What is the profit or loss on disposal?
A Loss of $400
B Loss of $600
C Profit of $350
D Profit of $600

84 Financial Reporting
Written response questions – Module 7
Question 1 (5 marks)
IAS 36 Impairment of Assets provides guidance on the identification and accounting treatment of impairment
losses.
Required:
Explain the requirement for impairment review for the following assets:
– items of property, plant and equipment
– intangible assets with an indefinite life and goodwill arising on a business combination.
(2 marks)
Explain why the impairment requirement in respect of these assets differs. (1 mark)
List four sources of information which might indicate that an asset has been impaired. (2 marks)
Question 2 (6 marks)
On 1 January 20X2 Stanley Co acquired a piece of manufacturing equipment for $500 000. At that date the
asset was assessed to have a life of five years and to have no residual value at the end of its life. On
31 December 20X3 new environmental legislation was issued which would mean that the company would
have to withdraw the goods produced by the equipment from sale by 31 December 20X5. At
31 December 20X3 the following information regarding the equipment was available.
It has been estimated that in an orderly sale the equipment could realise $330 000. However the
company would incur legal costs of $20 000 and dismantling costs of $15 000. Staff currently
operating this piece of equipment would need to be retrained and redeployed. The costs of doing
this would be $10 000.
The net cash inflows generated by the equipment over its remaining life, having taken into account
the circumstances described, were estimated to be:
20X4 $60 000
20X5 $45 000
20X6 $10 000
The net cash flows in 20X5 include $10 000 of routine maintenance costs.
Stanley Co has determined that a pre-tax discount rate that reflects the market's assessment of the
time value of money and the risks associated with this asset is 10 per cent. Stanley Co can borrow at
8 per cent.
The tax rate is 30 per cent.
Required:
Calculate amounts to be recognised in the financial statements of Stanley Co in the year ended
31 December 20X3. (4 marks)
Describe the disclosures that Stanley Co should provide in relation to the impairment loss. (2 marks)
Question 3 (4 marks)
The assets of a cash-generating unit (CGU) of Orton Co at 31 December 20X2 are as follows:
$
Goodwill 28 000
Patent 56 000
Property, plant and equipment 84 000
Investment property (at fair value) 110 000
Inventories 60 000
338 000

Module questions 85
 At 31 December 20X2 an impairment review is carried out and the recoverable amount of the CGU
(measured based on all assets but no liabilities) is calculated to be $306 000. The impairment loss is
recognised in profit or loss. A year later on 31 December 20X3 property, plant and equipment had a
carrying amount of $60 480, the patent had a carrying amount of $40 320, the investment property had a
fair value of $115 000 and there was inventory of $70 000. The recoverable amount of the CGU (measured
on the same basis as the previous year) was assessed as $311 000. If the original impairment had not
occurred the property, plant and equipment would now be carried at $67 200 and the patent at $44 800.
Required:
Calculate the revised balances of the assets in the CGU of Orton Co at 31 December 20X2
following the impairment review and explain your treatment of the impairment loss. (2 marks)
Calculate the revised balances of the assets in the CGU of Orton Co at 31 December 20X3
explaining how the reversal of the impairment is dealt with. (2 marks)
Question 4 (5 marks)
Randall Co structures its business through two segments – Domestic Operations and International
Operations. The segments share a corporate headquarters which has a carrying amount of $8 500 000 at
31 August 20X9.
The two business segments have identifiable assets and goodwill attributed to them at this date as follows:
Domestic Operations International Operations
$ $
Goodwill 2 300 000 3 536 000
Property, plant and equipment 21 000 000 13 600 000
Current assets 12 700 000 6 864 000
Total 36 000 000 24 000 000
As a result of worldwide economic recession, Randall's management has recently been prompted to initiate
an impairment review of its operating segments. As part of this review, it has been established that the
recoverable amounts (excluding liabilities) of the segments are:
Domestic Operations $45 000 000
International Operations $21 000 000
The management are unable to clearly establish whether the corporate headquarters is impaired.
Required:
Allocate the corporate headquarters to each segment based on the carrying amount of total assets
before the allocation and calculate the impairment loss, if any, for each segment. (2 marks)
Calculate the carrying amount of the corporate headquarters immediately after the impairment
review on 31 August 20X9. (3 marks)
Question 5 (8 marks)
Ocean Co is a global distributor providing logistics solutions to several large organisations. It operates a
number of container ships, one of which has recently been involved in a collision. The hull of the ship has
suffered the majority of the damage resulting from the collision. It originally cost $12 million of the total
cost of the ship of $14.5 million exactly four years prior to the collision, and was being depreciated over
20 years. Since the collision the ship has been in dry dock and $2 million has been spent on repair costs.
The remaining useful life has been reduced to 10 years. The propeller system of the ship has also been
repaired at a cost of $300 000. This originally cost $2.5 million and had a useful life of 10 years.
The repaired hull could be sold for its fair value of $6 million less $600 000 selling costs. The fair value of
the propellor system is $910 000 and costs to sell would be $10 000. Cash inflows expected to be
generated through use of the ship over the next five years are as follows:
Year 1 = $2.5 million
Year 2 = $2.05 million
Year 3 = $1.5 million
Year 4 = $1.0 million

86 Financial Reporting
Year 5 = $950 000
In year 3 the ship will require a mandatory service to ensure continued seaworthiness. This will cost an
expected $250 000.
A pre-tax discount rate that reflects the risks specific to the ship is 6 per cent.
Required:
Explain briefly how IAS 36 is applied to the ship (no calculations are required). (1 mark)
Calculate the recoverable amount of the ship. (3 marks)
Calculate the impairment loss and explain how this is presented and disclosed. (4 marks)

Module questions 87
88 Financial Reporting
Module answers

89
90
Module 1 THE ROLE AND IMPORTANCE OF
FINANCIAL REPORTING

Multiple choice answers

1 D In order to be recognised as an asset, an item must first meet the definition of an asset and
secondly meet the recognition criteria.
An asset is a resource controlled by an entity as a result of past events and from which future
economic benefits are expected to flow to an entity. It is recognised if the future economic
benefits are probable and the item can be measured reliably.
Staff members are not a resource within the control of an entity and therefore the costs of
training them is not an asset; there is no probability that research costs will lead to economic
benefit and therefore these can not be capitalised; a contract with a customer is not a
resource controlled by a company and so it is not an asset.
A professional sportsperson that is transferred to a new club is controlled by that club (under
the terms of their contract) and will lead to probable future economic benefits (ticket sales).
2 C Conceptual Framework (4.55c)
3 D Faithful representation means that financial information is complete, neutral and free from
error. The disclosure of contingent liabilities results is required for completeness.
4 B Verifiability exists if observers can reach a consensus that information is faithfully represented.
In this case, financial information is directly verifiable by confirming to quoted price.
5 C IAS 40 refers to the fair value model and (historical) cost model.
IAS 16 refers to the (historical) cost model and revaluation (fair value) model.
IAS 36 refers to the carrying amount of assets (which may be based on the historical cost or a
fair value model) and the recoverable amount (which may be based on value in use or fair
value less costs to sell).
IFRS 5 refers to the carrying amount (which may be based on historical cost, a fair value
model, or in the case of inventory, net realisable value) and fair value less costs to sell.
6 B The IASB focuses on a narrow range of primary users, being investors, potential investors,
lenders and other creditors.
7 A Conceptual Framework (OB 7 and 8)
8 A IAS 1 (17–19) Additional disclosure is necessary when an entity departs from an IFRS, but it is
not the only occasion. C would go against the requirements of fair presentation. A consistent
approach must be maintained with deviations clearly justified and explained.
9 D In a conflict, the requirements of the IFRS override those of the Conceptual Framework.
10 B A limitation of general purpose financial statements is that they do not meet the needs of all
users. Special purpose financial statements are required to meet the specific needs of banks,
regulators and other specialised users.
11 C A conceptual framework addresses the issue of historical inconsistency between accounting
standards through the application of core principles when standards are being amended or
revised. Therefore this is not constraint, but an advantage of a conceptual framework.
12 B Historical cost is relevant on the day the transaction takes place. But it becomes less relevant
as a measurement tool as time passes. However, it is often considered that this disadvantage
is outweighed by the fact that it is objective, an actual transaction amount rather than a
subjective valuation. It is reliable, easy to understand and calculate, as there are no valuation
issues and there should be sound documentary evidence.

Module answers 91
 13 D The underlying assumption is the accrual basis.
14 B The definition of an expense excludes distributions to shareholders.
Equity is a residual of assets – liabilities and its measurement depends on the measurement of
those elements.
There is no present obligation (as a result of a past event) to pay for repairs to the leaky roof,
therefore this does not meet the definition of a liability.
15 C IFRS do not require a business strategy report, however, companies may provide such a
report voluntarily and come companies (e.g. listed companies) may be required by other
forms of regulation to provide one.
16 A Although the brands meet the definition of an asset and it is probable that economic benefits
will flow to the company in the form of revenue, it is impossible to measure their cost or
value reliably therefore in line with most internally generated intangible assets they are not
capitalised. Information about the brands would certainly be relevant to users, but it could
not be faithfully represented.
17 B Fair value is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date (IFRS 13 (9)).
As it is an exit value, the purchase price of units in the new warehouse is irrelevant. Fair value
must be determined by reference to an orderly transaction and therefore the selling price of
the unit on liquidation is not relevant.
18 C The Conceptual Framework has not been developed in order to eliminate the requirement to
use professional judgment, and it refers to the need to use professional judgment when
preparing financial reports.
19 B Transactions may be material by nature or by amount. A transaction with a director is
generally regarded as material, even where the amount is not numercially significant, because
directors are engaged to run a company by its shareholders. The sales transaction is material
by amount. The transaction with employees is not material by nature or amount.
20 A The accounting policy is to depreciate the property. This is in line with the requirements of
IAS 16 and is therefore appropriate. The accounting estimate of useful life at 20 years appears
short for a property, however, it may be appropriate in specific circumstances.
The capitalisation of repainting costs is inappropriate as these costs do not meet the
definition of an asset.
The recognition of gains on investment property in OCI is inappropriate as this does not
reflect the requirements of IAS 40.
The recognition of an equity-settled share-based payment expense when shares are issued to
the counterparty is inappropriate because IFRS 2 requires recognition when the related goods
or services are received.
21 A The property meets the definition of investment property. The IAS 40 measurement basis
that best reflects faithful representation is the cost model, because cost is objective. IAS 40
requires that the IAS 16 cost model is applied i.e. cost less depreciation. Therefore the
property is depreciated over its 50-year life at $10 000 per annum.
22 C General purpose financial statements are prepared primarily to meet the needs of investors,
lenders and creditors. They are not designed to specifically meet the needs of other user
groups such as the general public. Furthermore, narrative information within the financial
statements is limited and numerical information presented in accordance with IFRS would give
little information about an entity's impact on the local community.
23 C The disclosure of accounting policies enables users to compare the financial statements of
one entity with those of another.
24 B Tower A meets the definition of an investment property. Therefore it is measured at fair
value at the reporting date with changes recognised in profit or loss. Fair value is an exit value
(IFRS 13) i.e. the amount that the property could be sold for in an orderly transaction.

92 Financial Reporting
25 D IAS 40 requires that the same measurement model is applied to all investment properties.
IAS 16 requires that the same measurement model is applied to each class of assets, but not
all PPE.
IAS 36 does not allow a choice when determining recoverable amount; it is the higher of
value in use and fair value less costs to sell.
IFRS 2 requires that a staff expense is recognised in relation to rewards in the form of share
options, so making staff costs comparable with other companies in which share options do
not form part of the reward package.
26 B A liability for non-vesting compensated absences should be recognised only for that part of
the accumulated entitlement that is expected to result in additional payments to employees.
A liability for a compensated absence which is non-accumulating must not be recognised until
the absence occurs.
Compensated absences that are expected to be settled beyond 12 months after the end of
the reporting period are measured using present value techniques.
27 B The transaction is initially measured at the fair value of the amount payable i.e.
50 000 $4.10 = $205 000. It is subsequently remeasured based on the year end share price.
As this is a cash-settled transaction a liability is recognised rather than equity.
28 C IAS 19 states that long-term employee benefit obligations (liabilities) such as these should be
measured at the present value of the obligation at the reporting date.
29 B This is an equity-settled transaction. The remuneration expense for the year is based on the
fair value of the options granted at the grant date (1 July 20X3). This fair value is not
remeasured at the year end.
30 C Land held for a currently undetermined use meets the definition of investment property.
IAS 40 states that an entity may use either the cost model (in accordance with IAS 16) or the
fair value model to measure investment property. The fair value model is not the same as the
revaluation model in IAS 16. Changes in fair value are recognised in profit or loss, rather than
in other comprehensive income. Note that all assets in the category must be treated in the
same way.

Module answers 93
 Written response answers – Module 1
Answer 1
Relevance
The relevance of information must be considered in terms of the decision-making needs of users. It is
relevant when it can influence their economic decisions or allow them to reassess past decisions and
evaluations. Economic decisions often have a predictive quality – users may make financial decisions on the
basis of what they expect to happen in the future. To some degree past performance gives information on
expected future performance and this is enhanced by the provision of comparatives, so that users can see
the direction in which the company is moving. One aspect of relevance is materiality. An item is material if
its omission or misstatement could influence the economic decisions of users. Relevance would not be
enhanced by the inclusion of immaterial items which may serve to obscure the important issues.
Faithful representation
Information is useful when it faithfully represents relevant economic phenomena. In order to achieve this
the information should have the following characteristics:
Complete
Information is complete if it includes all the information necessary for a user to understand it. What
constitutes complete information will vary depending on the nature of the item but may include
explanations of significant facts about the quality and nature of items as well as details of numerical amounts.
Neutral
Relevant financial information is free from bias. It must not be manipulated so that it is more likely to be
interpreted in a certain way.
Free from error
This does not mean that the information must be perfectly accurate in all respects. For example accounting
information will often include figures based on estimates. Provided that the amount is clearly described as
an estimate and that an appropriate method has been correctly applied for developing the estimate the
representation will be deemed to be faithful.
Relevance and faithful representation should be applied to achieve useful information as follows:
Identify an economic phenomenon which has the potential to be useful to users.
Identify the type of information which would be most relevant if available and can be faithfully
represented.
Determine whether that information is available and can be faithfully represented.
Answer 2
Role of financial reporting
Investors delegate the management of their investment to directors; financial reporting is the method by
which directors report back to investors on the position and performance of the company that they have
invested in. Financial statements may therefore be viewed as a key form of communication between the
management of a company and its shareholders, and a tool through which investors can assess the
performance of the directors in managing the company.
Financial statements provides shareholders (as well as lenders, creditors and other users) with the
information that they need in order to make economic decisions, e.g. whether to sell shares, lend money or
trade with an entity.
Role of the Conceptual Framework in financial reporting
The Conceptual Framework is not an accounting standard. In other words it does not prescribe the
accounting treatment that should be applied to a particular transaction. It does, however, set out the
concepts and principles that underlie the preparation and presentation of financial statements.

94 Financial Reporting
The Conceptual Framework deals with accounting issues that are relevant to most, if not all transactions, for
example the definition of an asset and a liability and what characteristics reported financial information
should possess.
The purpose of the Conceptual Framework is:
to assist in the development of future accounting standards and review of existing accounting
standards
to assist those parties who are responsible for preparing financial statements to apply accounting
standards and deal with topics that are not the subject of an accounting standard
to assist auditors in deciding whether financial statements comply with accounting standards
to assist users of the financial statements to understand and interpret information within them.
In summary, the Conceptual Framework provides a frame of reference for the types of transactions that
should be accounted for, when they should be recognised, how they should be measured and how
transactions should be presented in the financial statements.
The Conceptual Framework and IFRS
The Conceptual Framework is not itself an accounting standard and it does not override any specific IFRS. It
is, however used as a basis in the development of new accounting standards, and therefore several
standards reflect elements of its content exactly. For example, the Conceptual Framework's definition of an
asset is reflected in standards relating to assets, such as IAS 16 Property, Plant and Equipment and IFRS 16
Leases; the definition of a liability is reflected in standards such as IAS 19 Employee Benefits and IAS 37
Provisions, Contingent Liabilities and Contingent Assets.
The recognition criteria within the Conceptual Framework are also reflected in a number of standards, and in
some cases expanded to become more relevant to a particular topic. For example the recognition criteria
relevant to an asset are reflected in IAS 16.
IFRS also reflect the mixed measurement model adopted by the Conceptual Framework. Standards such as
IAS 16 and IAS 40 Investment Property allow the use of either a cost-based or fair-value based measurement;
whilst other standards refer to more specific measurement bases, e.g. amortised cost in IFRS 9 Financial
Instruments, net realisable value in IAS 2 Inventories and value in use in IAS 36 Impairment of Assets.
Note that in the rare case that there is a conflict between an accounting standard and the Conceptual
Framework, the requirements of the accounting standard prevail. Cases of conflict will, however, reduce as
older accounting standards are revised and amended and brought into line with the general principles
presented in the Conceptual Framework.
Constraints to the Conceptual Framework
The application of the Conceptual Framework may be constrained by the following factors:
Economic
Application of the Conceptual Framework requires considerable input in the way of time and cost.
Economic constraints may therefore hinder its application. Economic constraints may also exist
because the application of the Conceptual Framework is considered to result in an outcome that
economically disadvantages certain user groups. This may result in pressure to disregard the
requirements of the framework.
Legal
In certain jurisdictions, legal requirements may contradict the Conceptual Framework and so hinder its
application.
Social
Professional accountants may feel that the Conceptual Framework prevents them from exercising
judgment on matters. If an accountant's judgment contradicts principles within the Conceptual
Framework, (s)he may feel that as someone with a close knowledge of a matter (s)he is in a position
to override the Conceptual Framework.

Module answers 95
 Political
Bodies such as local regulators and standard setters may act as a barrier to the application of a
framework as a result of having their own ideas as to how transactions should be reported and
wishing to exert their authority in this area.
Staff training costs
An asset is defined in the Conceptual Framework as a resource controlled by an entity as a result of past
events and from which future economic benefits are expected to flow to the entity.
In the case of training costs, future economic benefits (such as increased revenues achieved by charging a
premium price for the better service provided by more skilled and knowledgeable staff) would be the result
of staff members applying the training provided to them.
In this case however, staff members are not a resource within the control of Brighton Co; the staff may
leave the employment of the company.
In the worst case scenario, staff members may leave immediately after receiving their training, in which case
the benefit of the training will be lost to the company and it will certainly not result in future economic
benefits.
Therefore training costs do not meet the definition of an asset and so they cannot be recognised.
Answer 3
The share option scheme is an example of a share-based payment scheme, accounting guidelines for
which are provided in IFRS 2.
Share-based payment schemes can be classified as either equity-settled or cash-settled. In equity-
settled schemes, the counterparty receives equity instruments in exchange for goods or services
provided; in cash-settled schemes, the counterparty receives cash in exchange for goods or services
provided, with the amount of cash linked to share price.
In this case the share-based payment is equity-settled because employees are awarded equity share
options in exchange for their services to the company.
Equity-settled share-based payment schemes result in the recognition of an asset or expense in profit
or loss (in this case an expense, being staff costs), and a corresponding increase in equity.
In this case the total amount to be recognised as an expense and in equity is measured at the fair
value of the share options on the day on which they were granted.
This amount is recognised when Whitequay benefits from employee services, i.e. in the year that the
options are granted.
The long service leave scheme is an example of a long-term employee benefit and is accounted for in
accordance with IAS 19 Employee Benefits.
The surplus or deficit associated with a long-term employee benefit is recognised in the statement of
financial position as an asset or liability measured as:
Present value of the defined benefit obligation (X)
Fair value of plan assets X
Net scheme deficit (liability)/surplus (X)/X
In most cases, a long service leave scheme will not have plan assets associated with it and therefore a
deficit (liability) which is equal to the present value of the future obligation is recognised.
The present value of Whitequay's sabbatical leave obligation should be measured at each period end,
even before the management are contractually entitled to the leave, using the projected unit credit
method. When measuring the obligation, this takes into account:
– the number of managers expected to serve long enough to benefit; and
– the future salary levels of the managerial staff.
The amount calculated should be discounted to present value using a rate determined by reference
to current market yields on high quality corporate bonds.

96 Financial Reporting
 Changes in present value of the sabbatical leave obligation from year to year (due to the revision of
assumptions used in the projected unit credit method and the unwinding of the discount) are
recognised in profit or loss.
Answer 4
The fundamental qualitative characteristics of financial information are faithful representation and relevance.
Faithful representation
Transactions and events should be faithfully represented in the financial statements such that a user can
understand the phenomenon being depicted; there should be a fair representation of economic outcomes
or reality.
The legal form of a transaction does not always reflect the economic reality of a transaction, and in these
cases, presenting the legal form in the financial statements would not result in a faithful representation.
In this case, the legal form of the transaction is a sale followed by a repurchase at a later date. It is,
however, clear from the scenario that the economic reality is that Macduff is using the maturing whisky as
security for an eight-year loan with the bank.
To recognise the sale transaction would not faithfully represent the transaction, and users of the financial
statements would be misled by such a depiction.
Relevance
Information is relevant if it is capable of making a difference in the decisions made by users. This is the case
where the information has predictive or confirmatory value.
The recognition of a loan in respect of the transaction with Rubens Bank results in predictive value. Users
of the financial statements are made aware of a future cash outflow in respect of the repayment of the loan.
This predictive value would be absent if the transaction were reported in line with its legal form, as a sale
and repurchase.
Liability
A liability is defined as a present obligation of an entity arising from a past event, the settlement of which is
expected to result in an outflow of economic benefits.
Here, Macduff is contractually obliged (a present obligation as a result of a past event, being the advance of
the loan) to pay Rubens Bank to repurchase the whisky in eight years' time. Therefore the definition of a
liability is met.
Tutorial note: The difference between the $4.6 million recognised as a loan and the $5.4 million payable is
interest and over the eight years will be recognised as a finance cost and accrue to the loan balance.
Answer 5
Benefits and disadvantages of the revaluation model
Adoption of the revaluation model means that the property is carried at its fair value in the statement of
financial position. This results in more relevant information, particularly since fair value provides a
prediction of the amount that the property could achieve if sold and so may help users, including
management, to make economic decisions. Use of the fair value may also make the carrying amount more
comparable, particularly with other recently acquired assets (which are initially recognised at cost ie up to
date values regardless of which measurement model is subsequently used) and property for sale on the
open market.
Use of the revaluation model does, however, have drawbacks:
The quality of faithful representation may be compromised by use of a measurement other than cost.
Cost is objective, however there is an element of subjectivity in determining fair value.
Fair value may be difficult for users of the financial statements to verify.
Fair value measurement of a single class of assets means that their carrying amount is not
comparable with other asset classes measured using the historical cost model.
Mixed measurement models may result in financial statements that are less understandable to users.

Module answers 97
 IAS 16 and the Conceptual Framework
IAS 16 allows a choice to use either the cost or the revaluation model for a class of assets. These
measurement options reflect the mixed measurement model within the Conceptual Framework.
The Conceptual Framework refers to historical cost, current cost, realisable value and present value. The cost
model equates to the historical cost measurement basis, whereby assets are recorded at the amount of
cash or cash equivalents paid to acquire them.
The IAS 16 revaluation model equates to the realisable value, which is the amount of cash that could
currently be obtained by selling the asset in an orderly disposal.
The measurement section of the Conceptual Framework does not refer to the use of depreciated cost or
depreciated valuation, however, the IAS 16 requirement for depreciation reflects the fundamental concept
of accrual accounting, which is included elsewhere in the Conceptual Framework.
Fair value
IFRS 13 provides guidance on the determination of fair value. Fair value is an exit (selling) price that could
be achieved in an orderly transaction. An orderly transaction does not include a 'quick sale' such as that
described in the question.
The fair value of Zafira's property is therefore likely to be $2.4 million, assuming that this has been
determined in accordance with IFRS 13 principles.
IFRS 13 requires that Level 1 inputs are used to determine fair value where possible. These are quoted
prices for identical assets or liabilities, and their use does not require the use of professional judgment.
Level 1 inputs do not exist for property, as by its nature, it is unique based on design or location.
Level 2 inputs (a valuation model or present value technique) may be used, however their use requires a
degree of professional judgment. It is therefore the case that the $2.4 million market value provided by the
surveyor is an estimated rather than exact fair value, with estimated inputs based on the judgment of the
surveyor.
Disclosure
The use of an independent valuer is likely to result in a more faithful representation. Knowing that an
external valuer has been used allows users to conclude that the valuation is neutral rather than biased in
favour of the reporting entity (i.e. a high valuation). It also means that the revaluated amount is likely to be
verifiable, i.e. knowledgeable and independent observers would reach a consensus that the value is faithfully
represented.
Disclosure of the carrying amount of a revalued asset under the cost model enhances comparability by
allowing users to compare the reporting entity's position with that of other entities that do not apply the
revaluation model.

98 Financial Reporting
Module 2 PRESENTATION OF FINANCIAL
STATEMENTS

Multiple choice answers

1 D A and B are changes in accounting estimates.
2 D Changes in accounting policy require retrospective application.
Correction of material errors requires retrospective restatement.
Changes in accounting estimates are adjusted against profits in the year they occur.
3 D A third statement of financial position forms part of a complete set of financial statements
when there has been retrospective application of a new accounting policy or retrospective
correction of an error.
4 D An error is adjusted retrospectively. Inventory was overvalued at 31 December 20X6 and
therefore profits for the year then ended should have been $150 000 less. As the 20X6
comparatives are not presented in the financial statements for 20X8, this amount is adjusted
in retained earnings in the statement of changes in equity. By definition, the opening inventory
at 1 December 20X7 was overstated and therefore this created a cost of sales that was $150
000 too high in the year ended 31 December 20X7. Therefore the 20X7 comparatives are
restated to reduce cost of sales and increase profits.
5 D All other disclosures also always required.
6 C A: All significant accounting policies should be disclosed.
B: Where no IFRS exists, management judgment should be applied to select accounting
policies; reference should be made to the Conceptual Framework and management may also
consider national standards however there is no requirement to apply them.
D: A voluntary change in accounting policy is made only if it results in more reliable and
relevant information.
7 B A dividend received may be reported as a cash flow from operating activities.
8 A This is a non-adjusting event and warrants disclosure. All the other events relate to
conditions that existed at the end of the reporting period and so are adjusting events.
9 B Disclosures relating to adjusting events are updated, however the requirement to disclose
nature and financial effect relates only to non-adjusting events. An event that indicates that
the going concern assumption no longer applies results in the financial statements being
presented on a different basis.
10 B Ordinary dividends declared after the period end are not recognised as liabilities. The
settlement of the court case is an adjusting event and the provision is updated to reflect the
amount that Dors Co will be required to pay.
11 B The fire had not taken place at the year end therefore the event did not provide further
information regarding a condition existing at the period end.
12 D This is a non-adjusting event as it relates to a condition which did not exist at the period end.
As the effect is material disclosure should be provided in the financial statements. The
disclosure should refer to the bat
13 C Exceptional income and expenses and dividends received are recognised in profit or loss. Tax
arising on a revaluation surplus forms part of other comprehensive income and so is included
within an aggregate figure for other comprehensive income in the statement of changes in
equity, however, it is not separately disclosed.

Module answers 99
 14 C A is incorrect because Trent Co can choose to present its liabilities (and assets) in order of
liquidity rather than split into current and non-current.
B is incorrect because IAS 1 requires investment property and property, plant and equipment
to be presented as separate line items.
D is incorrect because a third statement of financial position is only required where there is a
retrospective adjustment due to the correction of an error or change in accounting policy.
15 D In the case of a material non-adjusting event, the nature of the event and an estimate of its
financial effect must be disclosed.
16 D When a reclassification adjustment takes place (an amount previously recognised as other
comprehensive income is recognised in profit or loss), the amount must be reversed out of
other comprehensive income.
A reduction in revaluation surplus is recognised as other comprehensive income.
Other comprehensive income is transferred to other components of equity (reserves other
than retained earnings).
OCI may be presented net of tax or as a gross amount with tax presented separately.
17 D
$
Share capital 100 000
Retained earnings 975 000
Revaluation surplus 210 000
Cash flow hedge reserve 25 000
Non-controlling interest 60 000
1 370 000
18 B The increase in fair value of investment property and the related tax effect are recognised in
profit or loss: $210 000 – $42 000 = $168 000.
The increase in fair value of owner occupied property and related tax effect are recognised in
other comprehensive income: $450 000 – $90 000 = $360 000.
19 B Dividends received and interest received are classified as either operating or investing cash
flows and therefore cannot feature in the calculation of financing cash flows.
Both dividends paid and interest paid may be classified as either operating or financing cash
flows. In order to minimise the cash outflow from financing they would be reported as
operating cash flows.
The minimum cash outflow from financing is therefore the proceeds of share issue $140 000
– redemption of bonds $200 000 = $60 000 outflow.
20 B IAS 1 permits expenses to be classified by nature or function. Classification as cost of sales,
distribution costs and administrative expenses is by function rather than by nature.
21 D $
Opening total equity 4 000 000
Revaluation (1500 – 750) 750 000
Share issue (400 + 100) 500 000
Profit for period 1 000 000
6 250 000

The dividend was declared after the year end therefore it does not reduce total equity at the
reporting date.
22 C A change in the classification of expenses is allowed. This is a change in accounting policy (as
the classification of expenses is a rule, principle, convention or practice applied in the
presentation of financial statements).
IAS 1 does not mandate the presentation of expenses; the function of expenses or nature of
expenses method may be applied and within each of these, professional judgment is required
to decide the classification of costs.

100 Financial Reporting

23 D Inappropriate accounting policies cannot be rectified by disclosure.
Financial statements must not be prepared on a going concern basis if the entity is not a going
concern.
The statement of cash flows is not prepared on an accruals basis.
24 C As the company is a house builder both properties represent inventory. Property 1 is realised
within 12 months of the period end. Property 2 is realised after 12 months but within the
normal operating cycle for the business. Both are therefore current assets. (IAS 1 (66) and
(68))
25 C The acquisition of a machine is an investing activity.
The share issue is a financing activity.
$
Cash receipts from customers 345 000
Payments to suppliers and employees (120 000)
Grant income 55 000
Tax paid (45 000)
Net cash flow from operating activities 235 000

Module answers 101

 Assumed knowledge answers – Module 2
1 C 1 250 000 – 1 096 000 – 100 000 + 150 000 = $204 000
Alternative working:
Property, plant and equipment at carrying amount
$'000 $'000
B/f 1 096 Depreciation 150
Revaluation 100
Additions (bal fig) 204 C/f 1 250
1 400 1 400

2 A Proceeds from issue of share capital $400 000 inflow less repayment of long-term borrowings
$600 000 outflow.
3 A Bonus issues do not involve cash.
4 B This is reported under 'investing activities' as a payment to acquire intangibles.
5 A The outflow is classified under 'Purchase of property, plant and equipment' as an investing
activity.
The inflow is classified under 'Proceeds from issuance of share capital' as a financing activity.
6 A 300 000 + 20 000 – 140 000 = $180 000
Purchases of non-current assets: 100 000 – 60 000 + 30 000 + 70 000 = $140 000
Alternative workings:
Property, plant and equipment – cost
$ $
B/d 180 000 Disposals 80 000
Therefore purchases 140 000 C/d 240 000
320 000 320 000

Property, plant and equipment – accumulated depreciation

$ $
B/d 120 000
Disposals 50 000 Therefore charge 70 000
C/d 140 000
190 000 190 000

Disposals
$ $
Cost 80 000 Depreciation 50 000
Proceeds 20 000
Therefore loss 10 000
80 000 80 000

7 A Revaluations have no cash flow implications.

8 D
$
Decrease in cash for the period (4 900)
Taxation paid 30 000
Dividends paid 13 000
Purchase of non-current assets 31 000
Cash received from sale of non-current assets (5 400)
Issue of share capital (91 000)
Cash outflow from operating activities (27 300)

102 Financial Reporting

9 C The $9000 profit on disposal is not a cash flow. Therefore it is deducted from the profit in
the reconciliation of net profit before tax to net cash from operating activities. The cash
received is $30 000 and this is an inflow under the heading of cash flows from investing
activities.
10 C $
Inflows: Share issue 5 000
Loan 9 000
14 000
Outflows: Share expenses (500)
Loan repayment, less interest (2200 – 300) (1 900)
11 600
$12 100 is incorrect. Share issue expenses are reported under financing.
$11 300 is incorrect. Loan interest repayments are included in the category: Operating
activities.
$7100 is incorrect. $9000 – ($2200 – $300). This excludes the share issue and expenses of
this issue.
11 C A decrease in trade and other receivables means that cash has been received, so the decrease
is added back to profit before tax. The reverse is true of the increase in inventories and the
decrease in trade payables.
Proceeds from sale of property, plant and equipment is a cash inflow, but is part of investing
activities, not operating activities.
12 C $
Profit before tax 15 000
Depreciation 4 280
Decrease in inventory (18 240 – 15 730) 2 510
Increase in receivables (22 400 – 23 900) (1 500)
Decrease in payables (16 700 – 19 600) (2 900)
Cash inflow from operations 17 390

13 C A decrease in loan stock means that the debt is being paid back and this will reduce the cash
balance.
14 B This would not appear as an outflow of cash, as it is not a cash flow.

Module answers 103

 Written response answers – Module 2
Answer 1
Statement of profit or loss and other comprehensive income (extract)
20X2 20X1
$ $
Profit for the year 936 000 910 000
(916 000 + 20 000) / (890 000 + 20 000)

Statement of changes in equity (extract)

$
Balance at 1 January 20X1 8 386 000
Correction of prior period error (100 000)
Restated balance 8 286 000
Total comprehensive income for 20X1 910 000
Balance at 31 December 20X1 9 196 000
Total comprehensive income for 20X2 936 000
Balance at 31 December 20X2 10 132 000

Medic Co must disclose the following information in respect of the error:

the fact that it arose from the incorrect capitalisation of development costs that should have been
recognised as an expense
the line item in the statement of profit or loss in which the $20 000 adjustment is made in both
20X2 and 20X1
the line item in the statement of financial position in which $80 000 adjustment is made at the 20X1
reporting date and $60 000 adjustment at the 20X2 reporting date
the fact that $100 000 correction is made at the start of the earliest period presented.
Answer 2
Other comprehensive income
Other comprehensive income (OCI) includes gains and losses specifically identified by IAS 1 that are not
recognised in profit or loss and are not recognised directly in equity but are accumulated in equity.
Examples of OCI include:
exchange differences on translating foreign operations
gains and losses on financial assets measured at fair value through other comprehensive income
revaluation surpluses recognised in accordance with IAS 16
gains and losses on the hedging instrument in a cash flow hedge
gains and losses on the remeasurement of defined benefit pension plans.
IAS 1 requires that other comprehensive income is reported separately from profit or loss, either in the
same primary statement, but after profit or loss or in a separate statement.
Other comprehensive income should be grouped by type and may be reported either net of income tax
effects or before tax, with a separate amount reported for total tax in relation to OCI.
OCI should be classified as amounts that may be reclassified to profit or loss and amounts that will not be
reclassified to profit or loss.
Reclassification
A reclassification adjustment is an amount reclassified to profit or loss in the current period which was
recognised in other comprehensive income in the current or previous periods.

104 Financial Reporting

Arlo Group statement of profit or loss and other comprehensive income for the year ended
31 December 20X8 (extracts)
$'000
Profit or loss
Gain on disposal of subsidiary (4320 – 514) 3 806

Other comprehensive income

Exchange gain on retranslating foreign operations 98
Reclassification adjustment on disposal of foreign 514
operations (612 – 98)
612
Note: The net cumulative exchange loss (612 – 98) is reclassified to profit or loss and set off against the
overall gain on disposal.
Answer 3
Bankruptcy of customer
This is an adjusting event as it provides additional evidence regarding the value of the receivable balance at
the period end. As the accountant has proposed, the debt should be written off as irrecoverable. However,
at 30 June 20X2 the debt balance was $25 000. This is the amount which would be eliminated in the
financial statements at that date. The additional $5000 should be recognised as revenue and as an
irrecoverable debt expense in profit or loss in the year ended 30 June 20X3.
Production plant
The destruction of the plant by fire is a non-adjusting event after the reporting period. No adjustment is
required as proposed by the accountant, unless the destruction of the plant results in going concern issues.
In this case the financial statements of Glover Co are prepared on the break up basis. Assuming that going
concern is unaffected, as the plant is described as 'major', disclosure of the event should be provided in the
notes to the financial statements. This disclosure should include a description of the nature of the event
and an estimate of its financial effect. If the financial effect cannot be estimated, that fact should be disclosed.
Dividends declared
IAS 10 specifically deals with dividends and states that where ordinary dividends are declared after the
reporting period they should not be recognised as a liability as they do not meet the criteria of a present
obligation. Where ordinary dividends are declared after the reporting period but before the financial
statements are authorised for issue they should be disclosed. The accountant's proposed treatment is
therefore incorrect.
Major fraud
The discovery of the fraud is potentially an adjusting event if the fraud means that the financial statements
are incorrect. The treatment required therefore depends on the nature of the fraud, the way that it is
currently accounted for and the impact on the financial statements of any required adjustments. The
accountant's statement that no adjustment is required as the fraud was discovered after the period end is
not valid. The key issue is that the fraud took place during the reporting period.
Answer 4
Current assets
IAS 1 states that an entity should classify an asset as current if it meets one of the following criteria:
The asset is expected to be realised, sold or consumed within the entity's normal operating cycle.
The asset is held primarily for the purpose of trading.
The asset is expected to be realised within 12 months after the reporting period.
The asset is cash or a cash equivalent unless the asset is restricted from being exchanged or used to
settle a liability for at least 12 months after the reporting period.

Module answers 105

 Loan
The loan should be reported in Reacher's statement of financial position as a current liability. The loan is
only classified as a non-current liability if Reacher both expects to, and has the discretion, to refinance the
obligation for at least 12 months. In this case the refinancing is at the discretion of the bank.
The refinancing negotiations are concluded between the reporting date and the date on which the financial
statements are authorised for issue. Therefore the refinancing is an event after the reporting period as
defined in IAS 10. IAS 1 clarifies that where a loan is classified as a current liability, any refinancing after the
end of the reporting period is a non-adjusting event which should be disclosed in accordance with IAS 10.
On the assumption that the loan is material, Reacher should therefore disclose:
the nature of the refinancing
an estimate of the financial effect of the refinancing.
Answer 5
Cash generated from operations for Tuckey Co for the year ended 31 August 20X6
Cash flows from operating activities $'000
Cash receipts from customers (W1) 25 830
Cash paid to suppliers (W2) (13 600)
Cash expenses (W3) (6 470)
Cash generated from operations 5 760
WORKINGS
(W1) Cash receipts from customers
$'000
Trade receivables b/f 2 380
Revenue 25 600
Trade receivables c/f (2 150)
Cash received from customers 25 830
(W2) Cash paid to suppliers
$'000 $'000
Trade payables b/f 1 950
Purchases:
Cost of sales 14 800
Closing inventory 1 600
Opening inventory (2 100)
Expenses 14 300
Depreciation (550)
13 750
Trade payables c/f (2 100)
Cash paid to suppliers 13 600
(W3) Cash expenses
$'000
Accruals b/f 400
Prepayments b/f (750)
Distribution costs excluding depreciation (4300 – 180) 4 120
Administrative expenses excluding depreciation (2600 – 120) 2 480
Accruals c/f (380)
Prepayments c/f 600
Cash expenses 6 470

106 Financial Reporting

Net cash flow from financing activities
$'000 $'000
Cash flows from financing activities
Issue of shares (W1) 600
Dividend paid (W2) (100)
Loan repayment (9346 – 6258) (3 088)
Net cash used in financing activities (2 588)
WORKINGS
(W1) Issue of shares
$'000
Share capital c/f 5 000
Share capital b/f (4 000)
Issue of shares 1 000
Bonus issue (400)
Cash issue 600
(W2) Dividends paid
$'000
Retained earnings c/f 3 450
Retained earnings b/f (1 530)
1 920
Retained profit for the year (2 420)
Bonus issue 400
Dividend paid (100)
Usefulness of statement of cash flows
Although a statement of cash flows is historic, it can help a user to assess an entity's ability to generate cash
in the future in a number of ways.
Operating cash flows (cash generated through day to day trading) are generally viewed as sustainable. In
other words, these are cash flows that exist each year. Where an entity shows a trend of positive operating
cash flows, assuming that the trading environment has not changed substantially, these should continue in
future years. Conversely, a downward trend in operating cash flows may indicate that an entity will be less
able to generate cash through trading activities in future years unless it changes aspects of its business.
Investing cash flows include payments to acquire new assets and proceeds from the sale of old assets.
Where significant purchases of new assets are evident, this indicates that an entity's ability to generate cash
in the future will improve. This is because assets are acquired for their income earning (and so cash
generating) potential. Future cash generated may be returns on investments such as dividend income or
rental income from investment property, or increased revenues through use of new property, plant and
equipment.
Financing cash flows also provide indication of an entity's ability to generate future net cash inflows. Where
debt is repaid, future interest payments will fall; where debt is issued, interest payments in the future will
use a greater proportion of operating cash flows than previously.
Therefore although the statement of cash flows is historic, the information contained within it can be used
to help gain an understanding of expected cash performance and position in the future.
Answer 6
Fair presentation
IAS 1 requires that the financial position, financial performance and cash flows of an entity are presented
fairly within a set of financial statements. Fair presentation requires the faithful representation of the effects
of transactions other events and conditions in accordance with the definitions of assets, liabilities, income
and expenses and the recognition criteria included within the Conceptual Framework. It is presumed that the
application of IFRS, together with additional disclosure as necessary, will result in fair presentation.

Module answers 107

 Accounting policies
The management of Eddison Co should refer to IFRS and Interpretations when selecting accounting policies.
An accounting policy should take into account the IFRS/Interpretation itself and any accompanying
mandatory Implementation Guidance.
Where no accounting standard or interpretation applies to a particular event or transaction, management
should use professional judgment to develop accounting policies that provide relevant and reliable
information. In doing so, they should refer in the first place to the requirements of IFRS that deal with
similar events and in the second place to the principles of the Conceptual Framework. Management may also
refer to national accounting standards and industry practice to the extent that this is consistent with other
primary sources of information.
Pension scheme
IAS 1 allows departure from an IFRS only where compliance would be so misleading that it would conflict
with the objective of financial statements. In other words, compliance would not result in faithful
representation of the underlying transactions and events and consequently would be likely to influence
users of the financial statements in their economic decisions.
IAS 1 states that this is the case only in extremely rare circumstances.
Where this is the case, and the relevant regulatory framework allows a departure, additional disclosures in
respect of the departure must be made:
that management have concluded that the financial statements present fairly financial position,
financial performance and cash flows
the title of the IFRS from which the entity has departed, together with details of the nature of
departure and reason why compliance would be misleading
the financial effect of the departure on each relevant item for each period presented.

108 Financial Reporting

Module 3 REVENUE FROM CONTRACTS WITH
CUSTOMERS; PROVISIONS, CONTINGENT
LIABILITIES AND CONTINGENT ASSETS

Multiple choice answers

1 A The sale of a non-financial asset, such as investment property or plant and equipment, falls
within the scope of IFRS 15. Contracts relating to financial instruments and group interests
are, however, out of scope.
2 B $
1.12.20X5 35 500 50% (control of the asset is not transferred to
the customer on delivery, as the goods can be returned. 17 750
Revenue is recognised when control transfers, ie when
goods are sold to third party)
15.12.20X5 (10 000 / 12 500 10 000) + ((2500 / 12 500 10,000)/4 8 250
½) (the transaction price is allocated to performance
obligations based on their fair values)
31.12.20X5 $10 000 3* 30 000
56 000

*As the instalments are all due within one year, the financing component is not considered
when determining transaction price.
3 D $ $
Dr Receivable 1 000 000
Cr Contract liability 20 000
Cr Revenue recognised in year (35% $2.8m) 980 000

IFRS 15 only allows the recognition of the revenue insofar as the performance obligation is
satisfied. As a higher amount has been billed to the customer, the balance is a liability which
represents a payment promise received from a customer before a performance obligation (or
part of) has been delivered.
$1 000 000 is a receivable rather than a contract asset because it is an unconditional right to
receive compensation.
4 C A contract may be oral, written or implied and must be between an entity and its customer.
The contract must:
be approved by the parties to it
have commercial substance
identify each parties' rights and payment terms.
In addition, it must be likely that the entity will collect consideration that it is entitled to
(although this may be subject to a price concession, as in cases B and D).
In the case of C, although the contract is with a customer, that customer is not acting in the
capacity of customer within the context of the contract. This is because the payment to be
made is not in exchange for goods or services.

Module answers 109

 5 A $'000
Revenue per draft profit or loss 27 000
Servicing costs ((2m / 2m + 8m) 8m) (1 600)
Agency collections (4 000)
Agency commission (4000 10%) 400
21 800
The $8 million for vehicles is apportioned between the vehicles themselves and the servicing
agreements based on the standalone prices of each. No revenue is recognised in respect of
servicing agreements because the agreements have not commenced at the reporting date.
6 C A performance obligation is distinct if the customer can benefit from the good or service on
its own or with other resources readily available to them and the seller's promise to transfer
the good or service is separately identifiable from other promises in the contract. A promise
to transfer goods or services is separately identifiable if the seller does not provide a
significant service of integrating the good or service with others promised in the contract, the
good or service does not significantly modify of customise another good or service promised
in the contract or the good or service is not highly dependent on other goods or services in
the contract.
In C, the provision of the licence is highly dependent on the customised installation service.
Therefore these are not separately identifiable promises/distinct performance obligations. The
contract therefore represents a single performance obligation.
In all other cases each good or service provided is separately identifiable and does not rely on
/is not integrated with other promises in the contract.
7 D No sale has taken place as control of the goods has not been transferred, but Cambridge
must recognise a contract liability to reflect the fact that it is has received $90 000 prior to
transferring goods to its customer.
8 B Variable consideration is included in the transaction price only if it is highly probable that a
significant amount will not be reversed. In the first six months it is not expected that more
than 400 coats will be sold to the retailer and therefore a significant reversal of revenue is not
highly probable. In the second six months of the contract, an unexpected increase in units
sold means that the price reduction is triggered. The revenue recognised in this period
includes an adjustment to revenue recognised in the first half of the contract:
$'000
Second half sales ($175 500) 87 500
Adjustment ($25 150) (3 750)
Revenue 83 750
9 B The transaction includes a significant financing component which benefits Wood Designs. On
1 July 20X5, the cash advance is recognised by Wood Designs as a contract liability. Over the
year to 30 June 20X6, in accordance with IFRS 15 the contract liability balance accrues
interest at Wood Design's incremental borrowing rate (the rate that reflects the credit
characteristics of the party receiving financing).
$'000
Contract liability (1 July 20X5) 5 144
Interest at 7% 360

Contract liability (30 June 20X6) 5 504

10 C Non cash consideration is measured at its fair value if this can be reasonably estimated.
Consideration payable to a customer (including vouchers, coupons and credits) is accounted
for as a reduction of transaction price.

110 Financial Reporting

11 D $2 200 is payable in 6 months' time. IFRS 15 does not require a separate financing component
to be accounted for if the period of time between the transfer of goods and payment of
consideration is 12 months or less.
As mincers and blenders are regularly sold in a bundle with a discount equal to that in the
contract, the full $800 discount ($1000 + $1100 + $900 – $2200) is allocated to the mincer
and blender. Therefore the transaction price allocated to the mixer is the same as its
standalone selling price.
12 C Revenue should be recognised as the contract progresses using either input or output
methods. Time elapsed (as opposed to hours worked on contract) is not an appropriate
method to assess progress. The number of calls made as a proportion of all calls is an
appropriate output method and therefore 35 per cent of revenue is recognised. As the
amount invoiced exceeds the performance obligation that has been satisfied, a contract
liability is also recognised.
13 B IFRS 15 requires that revenue from contracts with customers is disaggregated by categories
that depict how the nature, amount, timing and uncertainty of revenue and cash flows are
affected by economic factors. This may include disaggregation by geographical location of
customer, however, there is no requirement to provide this information if the underlying
disclosure requirement is not met through the provision of this information.
14 D Incremental costs of obtaining the contract are the production of the tender brochure and
the legal fees. These are capitalised if expected to be recovered. In this case recovery is
expected through the pricing of the contract. These costs are amortised over the life of the
contract.
$'000
Capitalised costs
Production of tender brochure 12
External legal fees 15
27
Expensed costs
Allocation of staff costs to tendering process 18
Staff hours spent working on contract 83
Amortisation of capitalised costs 27 6 / 18 9
110
15 A A constructive obligation exists at 31 December 20X2 as the decision has been
communicated to customers and employees. A valid expectation that the division will be
closed has been created. There is no obligation at 31 December 20X2 in respect of the new
legislation (a legal obligation to pay for sound proofing only exists when it has actually been
installed and money is owed to the fitter; the factories could be sold before that happens) or
the planned refurbishment.
16 D No provision can be made for A as there is no obligation. B and C are liabilities rather than
provisions.
17 D A constructive present obligation arises where there is a valid expectation in other parties
that an entity will discharge an obligation. Here as a result of Wade's marketing activities, the
public would expect the company to make good the damage it has caused.
18 B Where the conditions to make a provision are met, other than the requirement to reliably
measure the obligation, a contingent liability is disclosed.
19 B This is a single obligation and so the best estimate of the liability is $2.5 million. An expected
values approach would be used if the provision related to a large population of items. IAS 37
requires discounting of a provision where the time value of money is material therefore the
initial provision is $2.5 million discounted to $1.9 million.

Module answers 111

 20 A Direct costs of a management restructuring which has been announced publicly are provided
for. The public announcement creates a constructive obligation
Warranty costs are not provided for as they relate to sales that have not yet taken place ie
there is no past event.
Retraining costs are not provided for as there is no present obligation to provide these costs.
21 C A provision is not always recognised when there is a present obligation arising from a past
event. Further conditions of recognition are that payment is probable and the provision can
be reliably measured.
IAS 37 does not take an especially prudent view of liabilities. It requires that a provision is
measured at its expected value rather than worst-case value. It also requires that a provision
is not recognised if an expected outflow of economic benefits is anything less than probable.
22 C If the directors of the company decide that disclosure of the facts relating to a provision
would be seriously prejudicial to its business then a detailed disclosure need not be given.
However, the provision should still be recognised and the general nature of the dispute
disclosed.
23 A A provision is only made if a transfer of economic benefits is probable. Probable is defined as
'more likely than not' i.e. over 50%.
24 D There is a legal obligation and payment is probable, therefore a provision is made. This is
made for the best estimate of the amount payable, which is $500 000. Legal fees payable are a
liability, however, they are an accrual rather than a provision as there is no uncertainty
attached.
25 D Contingent liabilities are disclosed unless the likelihood of their occurrence is remote;
contingent assets are disclosed only when probable to arise.
26 C As the amount cannot be measured with sufficient reliability it is classed as a contingent
liability.
27 D IAS 37 states that a provision must be recognised if there is an obligation based on a past
event and a probable outflow which can be reliably estimated. Therefore a provision is
recognised for the $1 000 000 damages. The contingent asset regarding the counter claim is
not recognised in the financial statements but is disclosed in the notes to the financial
statements as a contingent asset.
Note: reimbursements should be recognised only when they are virtually certain.
28 A Units $
Screen repairs
100 000 x 5% 5 000
Repaired in the year (250)
Expected future number of repairs 4 750
Total cost of repairs at $75 per unit 356 250
Power regulator repairs
100 000 x 3% 3 000
Repaired in the year (300)
Expected future number of repairs 2 700
Total cost of repairs at $90 per unit 243 000
Total required provision 599 250
Provision b/f (475 000)
Increase in provision (expense in profit 124 250
or loss)
29 A A contingent liability is only disclosed if the probability of an outflow of economic benefits is
not remote.
30 B (85% nil) + (10% $100 000) + (5% $500 000)
31 B Where there is a single obligation, the individual most likely outcome is normally the best
estimate of the amount of the obligation.
IAS 37 explains that in almost all cases an entity will be able to make a sufficiently reliable
estimate of an obligation.

112 Financial Reporting

Written response answers – Module 3
Answer 1
IFRS 15 Revenue from Contracts with Customers has a five-step process for recognising revenue.
(1) Identify the contract with the customer.
(2) Identify the separate performance obligations.
(3) Determine the transaction price.
(4) Allocate the transaction price to the performance obligations.
(5) Recognise revenue when (or as) a performance obligation is satisfied.
Of these steps, (1) and (3) are uncontroversial – there is a contract with the card purchaser and the price is
$21 per card.
The performance obligation should be considered. Dennis provides a call card immediately which gives
access to phone services for a future period. It should therefore be considered whether the provision of
the card is a separate performance obligation from the provision of phone services.
A company accounts for a performance obligation separately only if the good or service is distinct. A good
or service is distinct if the customer can benefit from the good or service either on its own or together
with other resources that are available to the customer and the seller's promise to transfer the good or
service to the customer is separately identifiable from other promises in the contract. In this case the call
card is not distinct, because it is not separately identifiable from the promise to provide phone services.
There is therefore one performance obligation, which is the provision of phone services.
All of the transaction price is allocated to the single performance obligation (step (4)) and revenue is
recognised as the phone service is provided (step (5)).
The performance obligation is satisfied over time because the customer simultaneously receives and
consumes the benefits as the performance takes place.
The $21 received per call card is therefore recognised as a contract liability (deferred revenue) at the point
of sale. This is recognised over the six-month period from the date of sale. The $3 unused credit forms part
of the revenue earned as this is non-refundable.
Answer 2
Jenkins has a contract with individuals when they stay in its hotel accommodation. The contract contains
two promises: the provision of accommodation and the provision of a discount voucher. Step 2 of the IFRS
15 model requires the performance obligation(s) within a contract to be identified, and in this case the issue
is whether there is a single performance obligation which includes both promises or two separate
performance obligations.
One promise is distinct from others in the contract (and so forms a separate performance obligation) if the
customer can benefit from the promise either on its own or with other resources that are available to the
customer and the promise is separately identifiable from others in the contract. In this case, a customer
can benefit from the discount voucher through its use in the future. The voucher is separately identifiable
because it is not related to the other promise in the contract to provide accommodation. Therefore the
provision of the voucher and promise of a discount forms a separate performance obligation.
The total transaction price within the contract is the price charged to customers for their hotel stay. The
total transaction price in the year is $300 million.
IFRS 15 requires that the transaction price is allocated to each performance obligation in the contract.
Therefore the $300 million is allocated between the provision of accommodation and the provision of the
discount voucher. This allocation must be based on the standalone selling price of each of the promises
(performance obligations) in the contract. This is the price that the entity would charge a customer for
each distinct good or service. As not all discount vouchers are expected to be used, the price that the
entity would charge a customer is reduced and this should be taken into account when making the
allocation of transaction price.
Vouchers worth $20 million are eligible for discount as at 31 May 20X8. However, based on past
experience, it is likely that only one in five vouchers will be redeemed, that is vouchers worth $4 million.

Module answers 113

 Therefore room sales have a standalone price of $300 million and the provision of vouchers has a
standalone price of $4 million (giving a total $304 million).
The transaction price is therefore allocated as follows:
300
Room sales: $300m = $296.1m
304
Vouchers (balance) = $3.9m
Step 5 of the IFRS five-step approach requires revenue to be recognised when each performance obligation
is satisfied. Therefore $296 100 000 is recognised as revenue in the year ended 31 May 20X8. The balance
of the transaction price of $3 900 000 is recognised as revenue when the related vouchers are redeemed.
Until that time this amount is recognised as a contract liability. On redemption of a voucher, $39 (3.9m /
4m $40) is derecognised as a contract liability and recognised as revenue.
Disclosure requirements
Jenkins is required to disclose information about its contracts with customers and the significant judgements
made in applying IFRS 15.
Revenue should be disclosed disaggregated into categories that help users to understand how economic
factors affect the nature, amount and timing of revenue and cash flows. As Jenkins is an international chain,
disaggregation may be made by geographical area.
The balance of contract liabilities (in relation to discount vouchers) should be disclosed at the start and end
of the reporting period, as should any revenue recognised in the period that was in the contract liabilities
opening balance (i.e. revenue recognised on redemption of discount vouchers). Jenkins is unlikely to have a
significant receivables or contract assets balance due to the nature of the hotel industry, however the
opening and closing balances of any should be disclosed.
A description of performance obligations should also be disclosed which explains the nature of the services
transferred by Jenkins and the point at which performance obligations are typically satisfied (on provision of
a hotel room and on redemption of a discount voucher).
Answer 3
Objective of IFRS 15
IFRS 15 replaces IAS 18 and IAS 11 (and three Interpretations). The replaced standards lacked guidance,
particularly in terms of application to certain situations, and as a result a divergence of practice emerged. An
objective of IFRS 15 is therefore to provide a comprehensive single model to be applied by all entities to
determine when revenue arising from contracts with customers should be recognised and at what amount.
This will result in increased comparability of revenue recognition practices. IFRS 15 also expands on the
disclosure requirements of the previous standards and aims to provide sufficient information so that users
can understand judgements, estimates and practice in recognising revenue.
Criteria for a contract
A contract exists when an agreement between two or more parties creates enforceable rights and
obligations between those parties. The agreement does not need to be in writing to be a contract; it may
be oral or implied by normal business practices.
IFRS 15 only applies to a criteria that has specific attributes:
The parties should have approved the contract and are committed to perform their respective
obligations. It would be questionable whether that contract is enforceable if this were not the case.
In the case of oral or implied contracts, this may be difficult but all relevant facts and circumstances
should be considered in assessing the parties' commitment.
Each party's rights and the payment terms can be identified regarding the goods or services to be
transferred. This latter requirement is the key to determining the transaction price.
The contract has commercial substance; without this requirement entities might artificially inflate
their revenue.
It should be probable that the entity will collect the consideration due under the contract. An
assessment of a customer's credit risk is an important element in deciding whether a contract has

114 Financial Reporting

 validity but customer credit risk does not affect the measurement or presentation of revenue.
The consideration may be different to the contract price because of discounts and bonus offerings.
The entity should assess the ability of the customer to pay and the customer's intention to pay the
consideration.
If a contract with a customer does not meet these criteria, the entity must continually re-assess the
contract to determine whether it subsequently meets the criteria.
Two or more contracts which are entered into around the same time with the same customer
may be combined and accounted for as a single contract, if they meet the specified criteria.
IFRS 15 also provides detailed requirements for contract modifications. A modification may be
accounted for as a separate contract or a modification of the original contract, depending upon
the circumstances of the case.
Remaining IFRS 15 steps
Step one in the five-step model requires the identification of the contract with the customer. After a
contract has been determined to fall within the scope of IFRS 15, a further four steps are applied.
Step two requires the identification of the separate performance obligations in the contract. This is often
referred to as 'unbundling', and is done at the beginning of a contract. The key factor in identifying a
separate performance obligation is whether a good or service, or a bundle of goods or services is distinct.
A good or service is distinct if the customer can benefit from the good or service on its own or together
with other readily available resources and it is separately identifiable from other elements of the contract.
IFRS 15 requires a series of distinct goods or services which are substantially the same with the same
pattern of transfer, to be regarded as a single performance obligation. Goods or services which are not
distinct should be combined with other goods or services until the entity identifies a bundle of goods or
services which is distinct. IFRS 15 provides indicators rather than criteria to determine when a good or
service is distinct within the context of the contract. This allows management to apply judgement to
determine the separate performance obligations which best reflect the economic substance of a transaction.
Step three requires the entity to determine the transaction price, which is the amount of consideration
which an entity expects to be entitled to in exchange for the promised goods or services. This amount
excludes amounts collected on behalf of a third party, for example, government taxes. An entity must
determine the amount of consideration to which it expects to be entitled in order to recognise revenue.
The transaction price might include variable or contingent consideration. Variable consideration is
estimated as either the expected value or the most likely amount. An entity can only include variable
consideration in the transaction price to the extent that it is highly probable that a subsequent change in the
estimated variable consideration will not result in a significant revenue reversal. Additionally, an entity
should estimate the transaction price taking into account non-cash consideration, consideration payable to
the customer and the time value of money if a significant financing component is present. The latter is not
required if the time period between the transfer of goods or services and payment is less than one year.
Step four requires the allocation of the transaction price to the separate performance obligations. The
allocation is based on the relative standalone selling prices of the goods or services promised. The best
evidence of standalone selling price is the observable price of a good or service when the entity sells that
good or service separately. If that is not available, an estimate is made by using an approach which
maximises the use of observable inputs. For example, expected cost plus an appropriate margin or the
assessment of market prices for similar goods or services adjusted for entity-specific costs and margins or in
limited circumstances a residual approach. When a contract contains more than one distinct performance
obligation, an entity allocates the transaction price to each distinct performance obligation on the basis of
the standalone selling price. Where the transaction price includes a variable amount and discounts,
consideration needs to be given as to whether these amounts relate to all or only some of the performance
obligations in the contract. Discounts and variable consideration will typically be allocated proportionately
to all of the performance obligations in the contract. However, if certain conditions are met, they can be
allocated to one or more separate performance obligations.
Step five requires revenue to be recognised as each performance obligation is satisfied. An entity satisfies a
performance obligation by transferring control of a promised good or service to the customer, which could
occur over time or at a point in time.

Module answers 115

 Tang
Tang accounts for the promised bundle of goods and services as a single performance obligation satisfied
over time in accordance with IFRS 15. At the inception of the contract, Tang expects the following:
Transaction price $1 500 000
Costs $800 000
Profit $700 000
At contract inception, Tang excludes the $100 000 bonus from the transaction price because it cannot
conclude that it is highly probable that a significant reversal in the amount of cumulative revenue recognised
will not occur. Completion of the printing machine is highly susceptible to factors outside the entity's
influence. By the end of the first year, the entity has satisfied 65 per cent of its performance obligation on
the basis of costs incurred to date. Costs incurred to date are therefore $520 000 ($800 000 65%) and
Tang reassesses the variable consideration and concludes that the amount is still constrained. Therefore at
30 November 20X5, the following amount are recognised:
Revenue ($1 500 000 65%) $975 000
Costs $520 000
Gross profit $455 000
On 4 December 20X5, the contract is modified. As a result, the fixed consideration and expected costs
increase by $110 000 and $60 000, respectively. The modification does not result in an increase in the
scope of the contract (as no additional distinct goods or services are promised) and therefore it is not
accounted for as a separate contract. It is accounted for as part of the existing contract.
On modification, Tang must update its estimates of costs and revenue.
As part of the modification, the allowable time for achieving the bonus is extended by six months with the
result that Tang concludes that it is highly probable that including the bonus in the transaction price will
not result in a significant reversal in the amount of cumulative revenue recognised in accordance with IFRS
15. The revised transaction price after the modification is therefore $1 710 000 ($1 500 000 + $110 000 +
$100 000).
Tang has satisfied 60.5 per cent of its performance obligation ($520 000 actual costs incurred compared to
$860 000 revised total expected costs).
Revenue recognised to date should therefore be 60.5% x $1 710 000 = $1 034 550. Therefore an additional
$59 550 ($1 034 550 – $975 000) is recognised at the date of the modification as an adjustment.
Answer 4
An obligation is referred to in the Conceptual Framework as a duty or responsibility to act in a particular way.
The Conceptual Framework goes on to explain that an obligation may be legally enforceable due to a binding
contract or statutory requirement. Alternatively it may arise from normal business practice or custom.
IAS 37 Provisions, Contingent Liabilities and Contingent Assets refers to both legal and constructive obligations.
A legal obligation means that another party has a legal right to enforce payment or performance. A
constructive obligation arises as result of the entity creating a valid expectation about a course of action.
This expectation may have been created by an established pattern of past practice or published policies. In
respect of the restructuring, Singh Co has a legal (contractual) obligation to pay lease termination costs,
however has no legal obligation in respect of other costs.
The company does, however, have a constructive obligation in respect of the restructuring. This arises
because Singh Co has a formal closure plan in place and the main features have been announced both to the
staff and, via the press, to suppliers and customers. The commencement of the plan takes place less than a
month later and is expected to be completed within three months of the period end. This timeframe makes
it unlikely that significant changes to the plan will be made. On the basis of the information provided a
constructive obligation appears to exist.
The provision includes only amounts that Singh Co has a present obligation to pay. There is a legal present
obligation in respect of the lease termination costs and a constructive present obligation in respect of
redundancy costs. There is, however no present obligation to retrain retained staff; this cost relates to the
future operation of the business, as do the operating losses, and as such these do not satisfy the definition
of a liability and no provision can be made.

116 Financial Reporting

The required provision is calculated as follows:
$ 000
Lease termination costs 16 000
Employee redundancy costs 12 000
28 000

IAS 37 requires that quantitative and qualitative disclosures are made in respect of provisions. These
disclosures are made to assist users of the financial statements to understand the reasons, uncertainty and
subjectivity relating to recognised provisions. Singh Co should make narrative disclosures explaining that the
provision relates to the closure of a loss-making division. It should also identify the expected timing of
outflows of economic benefits (payment of the lease termination costs and redundancy costs) and any
uncertainties about the amount or timing of the outflows.
If the announcement had been made on 2 January 20X3 a constructive obligation would not have existed as
31 December 20X2 and therefore a provision for restructuring costs would not have been recognised. A
management or board decision to restructure taken before the end of the reporting period in itself does
not give rise to a constructive obligation. In this case the event would constitute a non-adjusting event in
accordance with IAS 10 Events After the Reporting Period. If it is material and could influence the economic
decisions taken by users of the financial statements, disclosure of the event and its financial effect should be
provided.
Answer 5
IAS 37 requires that a provision is measured at the best estimate of the expenditure required to settle an
obligation (or transfer it to a third party) at the reporting date. Where the provision relates to a single
obligation, the individual most likely outcome may be the best estimate of the liability. However, where the
provision being measured involves a large population of items, IAS 37 states that it should be measured
using 'expected values' i.e. by weighting all possible outcomes by their associated probabilities. Doll
Electrical's warranty provision relates to 450 000 items and therefore the expected values approach is
required in order to calculate the best estimate of the liability.
The provision is calculated as:
$
((450 000 10%) ¾ ) $50 1 687 500
((450 000 10%) ¼) $200 2 250 000
Provision at 31 December 20X3 3 937 500
The provision was $3 000 000 at the start of the year. Costs of $2 900 000 have been incurred against this
opening provision. A balance of $100 000 is therefore left on the provision account, meaning that the
provision is increased by $3 837 500 in order to give the required closing balance. This reconciliation is
provided in the notes to the financial statements in numerical format as follows:
Warranty
provision
$
At 1 January 20X3 3 000 000
Amounts used during the year (2 900 000)
Additions 3 837 500
At 31 December 20X3 3 937 500
The increase in the provision (additions) is charged to profit or loss as an expense.

Module answers 117

 Answer 6
A liability is a present obligation arising from past events , the settlement of which is expected to result in
an outflow of economic benefits. An example of a liability is a bank loan balance. An entity has a contractual
obligation to repay the bank which arises from the past event, being the provision of the loan to the entity.
The eventual repayment of the bank loan represents an outflow of economic benefits to the reporting
entity.
A provision differs from this in that there is an element of uncertainty. Like a liability, a provision represents
an obligation, however, the timing or amount (or both) of the outflow of economic benefits is uncertain.
The recognition criteria for a provision reflect both the definition of a liability and this uncertainty. A
provision is recognised if:
there is a present obligation arising from a past event,
the outflow of economic benefits is probable, and
the outflow of economic benefits can be reliably measured.
The first criterion reflects the definition of a liability; the second and third reflect the uncertainty. An
example of a provision is an obligation to pay damages arising from a legal case that an entity believes it will
probably lose. Probably is taken to mean more likely than not, quantified as a greater than 50 per cent
probability. The uncertainty relates to the timing and amount of a payment in this case.
A contingent liability can arise in three situations:
where a possible obligation exists (as opposed to a present obligation)
where there is a present obligation but it is not recognised as it is not probable that economic
benefits will flow from the entity
where there is a present obligation but the obligation cannot be measured with sufficient reliability.
A contingent liability arises where one entity guarantees the borrowings of another (typically related) entity
from a third party. In this case there is a present contractual (legal) obligation arising from a past event (the
provision of the loan by the third party and agreement of the entity to act as guarantor). The amount can
be measured with sufficient reliability, however it is not probable that the guarantor will be required to
repay the loan (they are unlikely to have provided a guarantee if the other party were likely to default!).
Answer 7
A provision is only recognised if all three IAS 37 criteria are met:
1. There is a present obligation arising from a past event.
2. There is a probable outflow of economic benefits.
3. The obligation can be reliably measured.
A contingent liability is disclosed if an entity has:
a present obligation arising from past events that is not probable or that cannot be reliably
measured, or
a possible obligation arising from past events whose existence will be confirmed only by the
occurrence or non-occurrence of uncertain future events outside the entity's control.
Davies Co is required to fit seatbelts to its vehicles by 31 August 20X7, however has not yet done so.
Therefore at 31 December 20X6 there is no past event that results in either a present or possible
obligation. Neither the conditions to recognise a provision nor the definition of a contingent liability are
met and as a result no accounting entries are made or disclosure provided.
By 31 December 20X7 the new requirement has become law, however Davies Co has not fitted seatbelts
to its buses. At this date there is no legal (contractual) obligation to pay for seatbelts to be fitted because
the fitting has not taken place. There is, however, a legal (statutory) obligation to pay the fines for non-
compliance. Therefore a provision should be made for $125 000 ($5 000 x 25), assuming that the fines will
probably be enforced.

118 Financial Reporting

Module 4 INCOME TAXES

Multiple choice answers

1 B
$
Deferred tax asset b/f (54 000 30%) 16 200
Charge to profit or loss (bal fig) (9 600)
Deferred tax asset c/f (22 000 30%) 6 600
2 A Receipt of a government grant creates a permanent difference between accounting and
taxable profits. The other options all create temporary differences and so give rise to
deferred tax liabilities.
3 C The balance sheet liability method results in the recognition of the current and future tax
consequences of:
transactions and other events of the current period that are recognised in an entity's
financial statements.
the future recovery of the carrying amount of assets (or settlement of the carrying
amount of liabilities) that are recognised in an entity's statement of financial position.
4 A
$
Accounting profit 540 000
Add back accounting depreciation 76 000
Deduct government grant (100 000)
Tax-allowable depreciation (50 000)
Taxable profit 466 000

Tax charge for the year: 466 000 30% 139 800
Installment (50 000)
Year end current tax liability 89 800
5 C B describes the tax base of an asset; C is driven by the statement of profit or loss rather than
statement of financial position and so does not refer to the balance sheet liability method.
6 C IAS 1 prohibits deferred tax amounts from being presented as due within one year. IAS 12
requires a deferred tax asset and liability to be offset if there is a right of set off and the entity
intends to settle on a net basis.
7 C Carrying amount exceeds tax base and therefore this is a taxable temporary difference, which
is described by C. A describes a deferred tax asset; B describes a deferred tax liability; D
describes a deductible temporary difference.
8 A
Tax charge
Current tax: $ $
Profit 16 000 000
Add back accounting depreciation 2 000 000
Deduct capital allowances (3 500 000)
14 500 000
Taxed at 30% 4 350 000
Deferred tax:
Carrying amount 10 500 000
Tax base (9 000 000)
Taxable TD 1 500 000
Required DT liability 30% 450 000
Increase in deferred tax liability (450 000 – 370 000) 80 000

Module answers 119

 9 B A initially resulted in a deductible temporary difference (carrying amount of $300 and tax base
of nil). The receipt is therefore a reversal of a deductible temporary difference. This results in
an inflow of economic benefits (the receipt of the interest).
B initially resulted in a taxable temporary difference (carrying amount of ($500) and tax base
of nil). The payment is therefore a reversal of a taxable temporary difference. This results in
an outflow of economic benefits (the payment of the accrued expenses).
No temporary difference arose in the case of C – the carrying amount of $6000 was equal to
the tax base of $6000; no temporary difference arose in the case of D – the carrying amount
of ($900) was equal to the tax base of ($900).
10 A Deferred tax does not affect the amount of tax actually payable in the period. It is an
accounting measure used to match the tax effects of transactions with their accounting
impact.
11 B
Carrying
amount Tax base
$ $
Cost 1.10.X2 600 000 600 000
Depreciation 10% / WDA 25% (60 000) (150 000)
WDV 30.9.X3 540 000 450 000
Depreciation 10% / WDA 25% (60 000) (112 500)
WDV 30.9.X4 480 000 337 500
Depreciation 10% / WDA 25% (60 000) (84 375)
WDV 30.9.X5 420 000 253 125

Taxable temporary difference $166 875

Deferred tax liability at 30% $50 063

12 B (15 000 – 9000) 30%

If the asset were to be sold without further use, the deferred tax liability would be calculated
at 25 per cent, the tax rate appropriate to the circumstances.
13 D Carrying amount: (56 800 + 72 200) – 20 000) = $109 000
Tax base: $109 000 + Nil – $109 000 = Nil
Therefore a taxable TD of $109 000 arises and a deferred tax liability of $109 000 30%
= $32 700
14 D IAS 12 requires that deferred tax liabilities are recognised in full as the temporary difference
arises and are not discounted.
(960 000 – 600 000) 30% = $108 000
15 C Losses that are carried back have no deferred tax impact. After carrying $74 000 losses back,
$186 000 losses are available to carry forward.
Deferred tax assets relating to losses carried forward are recognised only to the extent that
it is probable that future taxable profit will be available against which the tax losses can be
used.
In this case taxable profits are not expected in the foreseeable future, however a deferred tax
asset can be recognised to the extent that Ranger Co has taxable temporary differences that
will reverse before the losses expire. Losses can be carried forward indefinitely by Ranger,
therefore the deferred tax liability is ($188 000 – ($260 000 – $74 000)) 25% = $500
16 C Debit Asset (600 000 – 240 000) = $360 000
Credit Other comprehensive income $360 000
Debit Other comprehensive income (30% $360 000) $108 000
Credit Deferred tax liability = $108 000

120 Financial Reporting

17 C Tax base = (3 000 000 18 / 20) = 2 700 000
Carrying amount = 4 320 000
Deferred tax (4320 – 2700) 30% = $486 000
As the revaluation surplus is recognised as other comprehensive income and accumulated in
revaluation reserve, the deferred tax charge is recognised in the same way.
18 A $1 000 000 of the loss is relieved by carry back leaving $8 400 000 to carry forward. The
carry forward is limited to likely future profits so $4 400 000.
4 400 000 30% = $1 320 000.
19 B The measurement of the tax base is affected by the manner of recovery ie the expectation
that the property will be sold. It is calculated as the $325 000 amount allowable for CGT
purposes less the $110 000 tax depreciation already given (which will be clawed back on a
sale at a profit). Tax base is therefore $215 000.
Carrying amount is $210 000 which is $5000 less than tax base resulting in a deductible
temporary difference.
20 A The tax base of the receivable balance is $Nil as the accrual is not recognised for tax
purposes. This results in a taxable temporary difference of $10 000.
21 C The tax base of the asset is $250 000. The tax base is equal to the carrying amount of the
asset therefore there is no temporary difference and no deferred tax.
22 D As the gain arising on the revaluation has been credited to other comprehensive income and
accumulated in the revaluation surplus, the tax effect is also recognised in other
comprehensive income and accumulated in the revaluation surplus account.
23 C As it is probable that future profits will be available to offset any unused tax losses a deferred
tax asset should be recognised in respect of the losses and the deductible temporary
differences.
24 A There is no requirement to disclose the deferred tax charge in the statement of profit or loss;
the tax expense is presented as a single line item in the statement of profit or loss and the
notes to the accounts detail the components of this expense, including the deferred tax
charge.
25 C The tax base of sales revenue received in advance is its carrying amount, less any amount of
revenue that will not be taxed in the future because it has already been taxed ($600 – $600).
The carrying amount of $600 is greater than the tax base of $Nil, so the company will pay
less tax in future periods than it would have done had revenue been taxed on an accounts
basis, therefore this is a deductible temporary difference.
26 C The tax base of an asset is the amount that will be deductible in the future i.e. nil. The
carrying amount of $70 is greater than the tax base of $Nil, so the company will have to pay
more tax in future periods than it would have done if interest had been taxed on an accounts
basis. This results in a deferred tax liability.
27 A The tax rate applicable when calculating deferred tax is the rate that is expected to apply
when the deferred tax asset is realised or deferred tax liability is settled in the future, based
on tax laws that have been enacted or substantively enacted by the reporting date.
28 B The tax base of the asset is $400 000 and the carrying amount $900 000. Therefore there is a
taxable temporary difference of $500 000. Any excess of sales proceeds over cost ($600 000)
is not taxable, therefore no deferred tax liability arises relating to $300 000 ($900 000
carrying amount less $600 000 cost) of the temporary difference. The deferred tax liability in
respect of the remaining $200 000 temporary difference is taxed at 20 per cent giving
$40 000. This $200 000 represents the claw back of tax allowances already given.

Module answers 121

 29 B There is a taxable temporary difference of $50 000 relating to the machine, resulting in a
deferred tax liability of $15 000. The carrying amount is greater than the tax base, meaning
that the company will pay more tax in future periods than it would have done if the tax
expense had been based on the accounts profit.
There is a deductible temporary difference of $40 000 in respect of the receivables, resulting
in a deferred tax asset of $12 000. The tax base (gross receivables of $100 000) is greater
than the carrying amount net of the allowance, meaning that the company will pay less tax in
future periods than it would have done if the tax expense had been based on the accounts
profit.
The net of the two is the $3000 deferred tax liability.
30 A IAS 12 requires that in respect of each type of temporary difference the following is disclosed:
the amount of deferred tax asset or liability recognised in the statement of financial
position, and
the amount of deferred tax income or expense recognised in profit or loss, if this is
not apparent from changes in the amount recognised in the statement of financial
position.
There is no requirement to explain how the temporary difference arose.
Carrying Taxable temporary Deferred
amount Tax base difference tax liability
$ $ $ $
31 December 20X1 180 000 Nil 180 000 54 000
1 January 20X1 110 000 Nil 110 000 33 000
Change (expense) 21 000
31 A IAS 12 states that deferred tax assets and liabilities should be measured at the tax rates that
are expected to apply to the period when the asset is realised or the liability is settled, based
on tax rates (and tax laws) that have been enacted or (as in this case) substantively enacted by
the end of the reporting period.
Therefore the tax expense is $12 000 (240 000 × 25% – 160 000 × 30%).
32 B The total taxable temporary difference is $200 000 (new carrying amount of $375 000 less
tax base of $175 000) and the total deferred tax liability is $60 000. Of this amount, $25 000
relates to depreciation (original carrying amount of $200 000 less tax base of $175 000) and
therefore $7500 is recognised as a deferred tax expense while the balance of $52 500 is
recognised in other comprehensive income.
The capital gains tax cost base is irrelevant as the company does not intend to sell the
building.
33 B The current tax expense for the year is $75 000 (250 000 30%). This is greater than the
total tax expense of $65 000 and therefore there must have been a reduction in the
deferred tax liability of $10 000 (tax income or transfer from deferred tax).
The deferred tax liability at the beginning of the year was $40 000 ($30 000 + the reduction
of $10 000).

122 Financial Reporting

Written response answers – Module 4
Answer 1
Extracts from the financial statements of Warne Co for the year ended 30 September 20X5:
$
Statement of profit or loss:
Income tax expense 140 credit

Statement of financial position:

Non-current liabilities
Deferred tax liability 5 695
WORKING
Cumulative
temporary
NCA Tax base difference
$ $ $
1.10.20X2 Cost 90 000 90 000
30.9.20X3 Dep'n
(90 000 – 5 000) / 10 yrs (8 500)
90 000 30% (27 000)
81 500 63 000 18 500
30.9.20X4
Dep'n (8 500)
63 000 15% (9 450)
73 000 53 550 19 450
30.9.20X5
Dep'n (8 500)
53 550 15% (8 033)
64 500 45 517 18 983

$
Required deferred tax liability at 30.9.20X5 is $18 983 30% 5 695
Required deferred tax liability at 30.9.20X4 was $19 450 30% 5 835
Required reduction in y/e 30.9.20X5 140
Debit Deferred tax liability
Credit Income tax expense
Answer 2
Purpose of deferred tax
The need for deferred tax arises because of the temporary differences that exist between amounts
recognised for accounting purposes and those recognised for tax purposes. In many (but not all) cases,
these differences result in profits being recognised in the financial statements in an accounting period that is
different from the period in which the entity is liable to pay tax on such profits. This results in a mismatch
between the tax expense in profit or loss and the profit against which it is being charged. The purpose of
deferred tax is to alleviate this mismatch by recognising the tax effect of transactions in the period in which
such transactions are recognised in the financial statements rather than the period in which the tax effect
actually crystallises in the tax computation.
Accounting for deferred tax is entirely consistent with the going concern concept. By recognising a deferred
tax liability, the entity is essentially recognising a tax liability that has yet to crystallise but will become due
and payable in a future period when the temporary difference that caused it reverses. Hence the implicit
assumption is that the entity will continue in operational existence until this reversal occurs i.e. the entity is
a going concern.

Module answers 123

 Balance sheet liability method
Under the balance sheet liability method, deferred tax assets and liabilities arise as a result of temporary
differences. A temporary difference is calculated as the difference between the carrying amount of an item
and its tax base (being the amount attributable to the item for tax purposes). Therefore deferred tax is
driven by amounts that are recognised in the balance sheet (or statement of financial position). An
alternative approach to deferred tax could be driven by the difference in timing between the recognition of
income and expenses in the statement of profit or loss compared with their recognition for tax purposes
(e.g. an expense may be recognised in one year but is not allowable for tax until paid). If this approach
were adopted, however, deferred tax would not be recognised on items that are recognised in profit or
loss but not for tax purposes or vice versa eg assets that do not benefit from tax allowances.
Lord Co
A taxable temporary difference arises where the carrying amount of an item exceeds its tax base, as is the
case here:
The asset has a carrying amount of $800 and a tax base of $500. In this case, it is anticipated that in the
future:
the $800 carrying amount of the item will be recovered (either through using the asset to generate
income or through selling it), so resulting in $800 taxable income; and
the $500 tax base will be allowable for tax purposes.
The net position is therefore that there will be $300 excess of income over allowable expense, which is
taxable. By applying the relevant tax rate to the $300, the amount of additional tax payable in the future as a
result of owning the asset is calculated. Future tax payable is a deferred tax liability.
A deductible temporary difference arises where the carrying amount of an item is less than its tax base.
Here the liability has a carrying amount of ($700) and a tax base of nil. In this case, it is anticipated that in
the future:
the $700 carrying amount of the liability will be settled so resulting in $700 allowable expense; and
no amount will be allowable or taxable for tax purposes.
The net position is therefore that there will be $700 of allowable expense, which is deductible in the
tax computation. By applying the relevant tax rate to the $700, the amount of saved tax arising in the
future is calculated. Future saved tax is a deferred tax asset.

124 Financial Reporting

Answer 3
Worksheet
Taxable Deductible
Carrying Tax temporary temporary
amount base difference difference
Assets $ $ $ $
Property, plant and equipment 80 000 70 000 10 000
at NCA
Current asset investments 20 000 15 000 5 000
Inventory 60 000 60 000
Accounts receivable (net) 40 000 55 000 15 000
Cash 30 000 30 000
230 000

Liabilities
Trade payables 95 000 95 000
Accrued expenses 2 500 – 2 500
Interest revenue 8 000 – 8 000
Employee benefits liability 40 000 – 40 000
145 500

Total 15 000 65 500

At 30% 4 500 19 650

Net deferred tax asset 15 150
Journal entry
Debit Tax expense $350
Credit Deferred tax asset
(15 500 – 15 150) $350
Deferred tax assets
Angel Co has a deferred tax asset of $19 650 arising as a result of deductible temporary differences of
$65 500. IAS 12 states that this deferred tax asset can be recognised only when it is probable that future
economic benefits associated with the asset will flow to Angel Co i.e. it is probable that sufficient taxable
profit will be available from which the $65 500 temporary differences can be deducted, so reducing future
tax payable.
One source of taxable profit in the future taxable temporary differences; when such differences reverse,
they are included in taxable profits. In Angel Co's case, there are taxable temporary differences of $15 000.
After deducting this amount from deductible temporary differences, a net $50 500 deductible temporary
differences remain.
Angel can recognise the resulting net deferred tax asset of $15 150 only to the extent that:
it is probable that there will be excess taxable profits in the future to absorb these deductible
temporary differences (after allowing for that future taxable profit required to absorb future
deductible temporary differences); or
it can create taxable profit through tax planning opportunities.

Module answers 125

 Revaluation model
If Angel Co applied the revaluation model of IAS 16 and recognised a revaluation surplus of $20 000 in
other comprehensive income at 31 December 20X2, this would give rise to additional deferred tax. As a
result of the revaluation, the carrying amount ($100 000) is $30 000 greater than the tax base ($100 000 –
$70 000). This taxable temporary difference results in a $9000 deferred tax liability (30% $30 000). The
temporary difference is in part due to the revaluation and in part due to the difference between historical
cost carrying amount and tax base. The $6000 (30% $20 000) part of the deferred tax liability that is due
to the revaluation must be recognised in other comprehensive income rather than in the tax expense in
profit or loss. The journal required to recognise by Angel Co to recognise the movement in deferred tax in
the year would therefore be:
Debit Tax expense $350
Debit Other comprehensive income (revaluation surplus) $6 000
Credit Deferred tax asset $6 350
Answer 4
Manufacturing plant
As Rombald intends to operate from the manufacturing plant for the foreseeable future, it must be assumed
that the carrying amount of the property will be recovered through use.
Therefore deferred tax is calculated using the corporate income tax rate:
$
Carrying amount 16 000 000
Tax base 9 000 000
Taxable temporary difference 7 000 000

Deferred tax liability (7 000 000 20%) 1 400 000

A deferred tax liability of $1.4 million is recognised in the statement of financial position in respect of the
manufacturing plant.
The deferred tax charge in relation to the revaluation gain of $4 million ($16m – $12m) is recognised in
other comprehensive income.
The deferred tax charge in relation to the difference between historical cost carrying amount and tax
written down value of $3 million ($12m – $9m) is recognised in profit or loss.
Investment property
Land is not depreciated in accordance with IAS 16. IAS 12 contains a rebuttable presumption that the
carrying amount of a non-depreciable asset will be recovered through sale.
Therefore deferred tax arises at 31 March 20X4 based on the $1.5 million difference between the tax base
of $10 million and the carrying amount of $11.5 million.
A deferred tax liability of $450 000 (30% $1.5m) is recognised in the statement of financial position.
The deferred tax charge is recognised in profit or loss.

126 Financial Reporting

Module 5 BUSINESS COMBINATIONS AND GROUP
ACCOUNTING

Multiple choice answers

1 C
$'000 $'000
Consideration transferred 1 000
Fair value of identifiable net assets:
Plant and equipment 350
Trade marks 45
Inventories 310
(705)
295
The goodwill already recognised by the acquiree does not form part of net assets at
acquisition because it is not identifiable ie not capable of separate sale.
2 C
$'000
Fair value of identifiable net assets:
(1300 + 425 + 100 – 500) 1 325
Less contingent liability (150)
Add deferred tax asset (150 30%) 45
1 220
2 000 000 – 1 220 000 = $780 000
In line with IFRS 3 the contingent liability is recognised as part of the fair value of assets and
liabilities acquired by Big Co, provided it is a present obligation from past events and can be
reasonably estimated.
3 C
$'000 $'000
Consideration transferred 1 500
Fair value of identifiable net assets
(130 + 710 + 800 – 400) 1 240
Less deferred tax liability
(710 – 690) 30% (6)
(1 234)
266
4 D A business combination is a transaction or event in which an acquirer obtains control of a
business. Mergers are also business combinations.
There is no transfer of control in the case of D; the same shareholders control Company Z
before and after the transaction.
5 B Acquisition accounting is applied only where the acquirer gains control of the acquiree in a
business combination; this is not the case in situation 2.
Situation 3 is not a business combination as the transfer of PPE does not constitute the
transfer of a business. A business is an integrated set of activities and assets that is capable of
being conducted and managed for the purpose of providing a return to investors.

Module answers 127

 6 D
$
Consideration transferred (2 000 000 + (400 000 3)) 3 200 000
NCI share (20% 2 000 000) 400 000
3 600 000
Fair value of net assets 2 000 000
Goodwill 1 600 000
Impairment (25%) (400 000)
Carrying amount of goodwill 1 200 000
7 D
$ $
Consideration transferred 400 000
Fair value of non-controlling interest (3.75 20 000) 45 000
Fair value of net assets:
Share capital 200 000
Retained earnings 185 000
Fair value adjustment 80 000
(465 000)
Bargain purchase (recognised in profit or loss immediately) (20 000)

Total expense recognised:

Bargain purchase 20 000
Acquisition costs 15 000
Excess depreciation (80 000 / 10) 8 000
43 000
8 C Goodwill is not amortised but instead tested for impairment annually. The expense to profit
or loss is therefore the impairment charge of 15% $210 000 = $31 500.
9 A The consideration transferred is the fair value of the shares in Amber Co (25 000 $3.20).
Transaction costs, such as the legal fees, are not included in the amount of consideration, but
treated as expenses. (IFRS 3 (32) and (37) (53))
10 D
$
Deferred tax liability – book value 75 500
Deferred tax on FV adjustment to plant and equipment (70 000 20%)
– increases deferred tax liability 14 000
Deferred tax on FV adjustment to warranty provision (20 000 20%)
– decreases deferred tax asset 4 000
93 500

11 A IFRS 3 contains disclosure requirements relating to business combinations (Including the

effect of adjustments as a result of the application of the acquisition method); all other
disclosure in relation to group accounting is included within IFRS 12.
12 C Company Apple has substantive rights over 60 per cent of voting shares in Company Banana
(it holds 40% of the shares and has options that can be exercised without restriction over a
further 20%). Therefore it has power over Company Banana.
Company Cherry has the current ability to direct the relevant activities of Company Damson
(the activities that significantly affect its returns) through the contractual agreement. This
gives Company Cherry power regardless of voting rights.
13 C Although Feldspar Co does not have a majority of voting rights, it has the power to direct the
relevant activities of Mineral Co. The fact that it has not yet actually exercised that power is
irrelevant; it has the ability to do so.

128 Financial Reporting

14 B On the basis of the information provided, Dorstone Co is an investment entity. IFRS 10
requires that a parent that is an investment entity measures its investment at fair value with
changes in fair value recognised in profit or loss in accordance with IFRS 9 Financial
Instruments.
15 B Goodwill is calculated as:
$ $
Consideration 980 000
NCI (25% $1 250 000) 312 500
Net assets of acquiree:
Share capital 250 000
Reserves (1 100 000 – 250 000) 850 000
Fair value adjustment 150 000
(1 250 000)
Goodwill 42 500
Therefore the acquisition journal is:
$ $
Debit Goodwill 42 500
Debit Share capital 250 000
Debit Reserves 850 000
Debit Business Combination reserve 150 000
Credit Non-controlling interest 312 500
Credit Investment in Shipley Co 980 000
16 B
$
Trench cost of sales 1 950 000
Hill cost of sales 1 340 000
Intercompany sales (450 000)
Unrealised profit (25% $450 000 25 / 125%) 22 500
Consolidated cost of sales 2 862 500
17 D The parent company should include dividends received from subsidiaries in its profit or loss as
this is valid income for it as an individual company.
The consolidated profit or loss should not include dividends paid by subsidiaries. They are
intra-group items.
18 C The net carrying amount at disposal was:
10 000 – (5 1000) = $5000.
Unrealised profit on the transaction was:
13 000 – 5000 = $8000.
Depreciation based on the transfer price is $1300, overstated by $300 (this is the difference
between the depreciation charged in Company X and that charged in Company Y).
The net reduction of group profit is therefore: 8000 – 300 = $7700.
19 B
$
Depreciation charge for Squeak Co (120 000 / 6) 20 000
Group depreciation charge (150 000 / 6) 25 000
Additional depreciation charge 5 000
Deferred tax (5000 30%) 1 500
The increase in depreciation reduces group profit therefore the income tax expense of the
group is reduced. Goodwill is not affected by subsequent depreciation of a fair value
adjustment.
20 C Sales and cost of sales are adjusted so that they show only transactions with third parties.
Inventory is adjusted to original cost to the group. As a profit on sale has been eliminated
income tax expense is reduced and a deferred tax asset recognised (as the tax base of the
inventory is greater than its carrying amount to the group).

Module answers 129

 21 C The full results of the subsidiary are included within the consolidated statement of profit or
loss and other comprehensive income, in order to show the total profit or loss and total
comprehensive income for the period. Profit or loss for the period and total comprehensive
income for the period is then allocated between that attributable to owners of the parent and
that attributable to non-controlling interests.
22 C IAS 1 requires that non-controlling interests are presented within equity, separately from the
equity of the parent.
Where the non-controlling interest is measured at fair value, this measurement applies only at
the acquisition date; subsequently the balance increases or decreases by the NCI share of
post acquisition movements in reserves. This is unlikely to equate to fair value at any
reporting date subsequent to acquisition.
Adjustment to the NCI for unrealised profits on intercompany sales (of both inventory and
asstes) is only made if the subsidiary is the seller.
23 B
$
NCI share of profit for the year (20% $2 000 000) 400 000
NCI share of unrealised profit on disposal of plant (20% $30 000) (6 000)
NCI share of reduction in deferred tax liability due to
elimination of unrealised profit and so reduction in
carrying amount of plant (20% $30 000 30%) 1 800
395 800
24 D Details of intragroup transactions are not required.
25 C Significant influence is the power to take part in the financial and operating policies of another
entity.
The investor in Company Z does not exercise this power, however, it does exist by virtue of
the 40 per cent shareholding and therefore there is significant influence.
The investor in Company Y has too small a shareholding for significant influence to be
presumed, however it does have a representative on the board of Company Y and there are
material transactions between investor and investee. These are indicators of significant
influence.
26 A Winter Co has 25 / 50 = 50% by value of Summer share capital, but 34 / 70 = 48.6% by voting
rights in Summer Co.
Therefore assuming that possession of 48.6 per cent of the votes in Summer Co would allow
the exercise of significant influence, Summer Co would be treated as an associate.
27 B
$
Fudge 500 000
Vanilla 300 000
800 000
Consolidated revenue does not include revenue from the associate therefore the revenue
balance is not adjusted for the sale of goods to Chocolate.
28 D If Denny Co owns more than 20 per cent but less than 50 per cent of the equity shares in
Edwin Co, then Denny Co is presumed to have significant influence over Edwin Co, however,
this is not definitely the case, if there are indicators which suggest otherwise.
If Denny Co controls the operating and financial policies of Edwin Co, this suggests that the
relationship is one of parent-subsidiary rather than parent-associate.
With the exception of the group share of unrealised profits, transactions and balances
between a parent and its associate are not eliminated when preparing consolidated financial
statements.

130 Financial Reporting

29 B
$
South Group retained earnings 300 000
Share of dividend (35% of $6000) 2 100
Share of Soldier post-acquisition earnings
(35% (90 000 – 22 000)) 23 800
Group reserves 325 900

30 B Other disclosures are required in the notes to the financial statements but not in the
consolidated statement of profit or loss and other comprehensive income.
31 C
$
Boot Co 88 000
Less sales to Shoe Co (15 000)
Add Shoe Co 20 000
93 000

Shoe Co is a subsidiary so 100 per cent of its revenue is included in the group figure. Sandal
Co is an associate so its revenue does not feature in the group figure. There is cancellation of
intra-group transactions between the parent company and its subsidiaries but not its
associates.
32 C In its simplest form, an investment in associate is carried at cost plus the group share of post-
acquisition profits. The cost of the investment is already represented in the parent company's
individual financial statements and therefore the purpose of the consolidation adjustment is to
recognise post acquisition profits attributable to group – here 25% ($540 000 + $620 000)
= $290 000. Profits attributable to the group that relate to the year are credited to the
statement of profit or loss (and in line with other profits for the year accumulate in retained
earnings in the statement of financial position) and profits attributable to the group that relate
to previous years are credited directly to retained earnings.
33 A
$
Cost of investment 1 400 000
Share of post acquisition profits 40% (230 000 – 20 000) 84 000
Share of post acquisition OCI 40% 80 000 32 000
Less share of dividend paid 40% $100 000 (40 000)
1 476 000
Post-acquisition profits are reduced to reflect the fact that the fair value of inventories was
$20 000 higher than carrying value on the acquisition date. The profit made by Ribbon Co
when these inventories were sold is therefore $20 000 higher than it would have been if the
profit were calculated based on fair value.
34 C
$
Cost of investment 75 000
Share of post-acquisition retained earnings:
((270 000 – 50 000) 30%) 66 000
141 000
35 C
$
Investment in associate 1.4.X2 60 000
At 31.3.X3: Share of loss (200 000 40%) (80 000)
(20 000)
At 31.3.X4: Share of profit (100 000 40%) 40 000
20 000
At 31 March 20X3 the investment can only be written down to zero but before subsequent
profits can be recognised the loss not recognised (from 31.3.X3) must be offset.

Module answers 131

 36 C
$
Share of profit (250 000 30%) 75 000
Share of unrealised profit after tax (21 000* 30%) (6 300)
68 700
*Unrealised profit
Profit on intragroup sales 30 000
Tax at 30% (9 000)
Post tax profit 21 000
37 A Only the investor's share of the unrealised profit, net of deferred tax, is eliminated: $1 400
(40% 5000 70%).
38 D Joint control only exists where there is a contractual agreement between parties and the
unanimous consent of the controlling parties is required in order to make decisions about
relevant activities. Since White Co could join with either Red Co or Pink Co to make
decisions, there is no unanimous consent and this is not a joint arrangement.
White Co does not control Black Co because its vote can be blocked by Red Co and Pink
Co opposing it.
White Co is assumed to have significant influence over Black Co by virtue of its 50 per cent
shareholding.

132 Financial Reporting

Assumed knowledge answers – Module 5
1 A Cost + Profit = Selling price
100% + 20% = 120%
Unrealised profit is ($2400 20 / 120) 3/4
= $300
2 B $15m + $12m + $1m – $4m = $24m
3 C Cost + Profit = Selling price
100% + 25% = 125%
Unrealised profit is (25 / 125 $45 000) 2 / 3 = $6 000
Inventory is therefore $120 000 + $60 000 – $6 000 = $174 000
4 D The unrealised profit in the unsold inventory is:
(120 000 – 100 000) 25% = $5000 of which 80% ($4000) is attributable to the group and
20% ($1000) is attributable to the non-controlling interests.
Therefore the group profit is $150 000 – $4000 = $146 000.
5 D $90 000 + $50 000 + $5000 = $145 000
6 D The share capital in the consolidated statement of financial position is always that of the
parent alone.
Investments in subsidiaries in the parent company's statement of financial position cancel with
subsidiary share capital on consolidation.
Intra-group loans also cancel out.
7 B The asset is reported in the consolidated accounts as if it hadn't been transferred i.e. at its
cost of $94 000 less four years' depreciation ($37 600) = $56 400.
The asset is currently in S's statement of financial position at cost of $96 000 less one year's
depreciation out of 8 – $12 000 = $84 000.
Non-current assets therefore need to be adjusted by $27 600.
8 D The mark-up on unsold inventory is $119 000 11% ½ = $6545.
This reduces parent company profits and therefore group profits. Inventory is reduced by the
same amount.
9 A
Time cost of sales $300 000
Watch cost of sales (11 / 12m $240 000) $220 000
Less intra-group sales ($47 000)
$473 000

The fair value adjustment on the inventory is not included in cost of sales until the inventory
is sold.

Module answers 133

 Written response answers – Module 5
Answer 1
$ $
Debit Plant 4 000
Credit Opening retained earnings 4 000
Being elimination of loss and restatement of plant.
Debit Opening retained earnings (4000 × 30%) 1 200
Credit Deferred tax liability 1 200
Being adjustment required to reinstate deferred tax liability.
Debit Depreciation expense (4000/4) 1 000
Credit Accumulated depreciation 1 000
Being correction of depreciation so that it is based on cost to the group.
Debit Deferred tax liability (1000 × 30%) 300
Credit Income tax expense 300
Being adjustment required as profit is reduced by additional depreciation.
Non-controlling interest in consolidated profit for the year ended 31 December 20X3
$
Profit in financial statements of Sauce Co 200 000
Less realised loss on plant via depreciation (1 000)
Add tax effect of realised loss 300
199 300
NCI share (199 300 × 20%) 39 860
Non-controlling interest in the statement of financial position at 31 December 20X3
$
Closing retained earnings of Sauce Co 320 000
Add remaining unrealised loss on sale of plant 2 100
((1 000 – 300) × 3)
322 100
NCI share (322 100 × 20%) 64 420
NCI share in share capital (100 000 × 20%) 20 000
84 420
Presentation of non-controlling interest in financial statements
IFRS 10 requires that the consolidated statement of profit or loss and other comprehensive income is
prepared on the basis of adding the income, expenses and other comprehensive income on a line by line
basis. IAS 1 then requires that the profit or loss and total comprehensive income for the year are allocated
between the owners of the parent and the non-controlling interest at the end of the statement.
Similarly in the consolidated statement of financial position, assets and liabilities of a parent and its
subsidiaries are aggregated; equity, being the residual of assets less liabilities is split between amounts
attributable to the owners of the parent (share capital and group reserves) and the non-controlling interest.
The non-controlling interest is therefore presented as an element of equity.
In the statement of changes in equity, total comprehensive income must be presented split between the
owners of the group and the non-controlling interest

134 Financial Reporting

Answer 2
Consolidated deferred tax balance as at 31 December 20X2
$
Deferred tax asset (300 + 900) 1 200
WORKINGS
Consolidation worksheet journal entries
$ $
Debit Opening retained earnings (10 000 – 8000) 2 000
Credit Cost of sales 1 000
Credit Inventory 1 000
To account for opening unrealised profit in inventory
Debit Tax expense (1000 30%) 300
Debit Deferred tax asset 300
Credit Opening retained earnings 600
To account for deferred tax relating to the opening unrealised
profit in inventory
$ $
Debit Sales 15 000
Credit Cost of sales 12 000
Credit Inventory 3 000
To eliminate intercompany sales and the closing unrealised profit
in inventory
Debit Deferred tax asset (3000 30%) 900
Credit Tax expense 900
To account for deferred tax in relation to the closing unrealised
profit in inventory
Non-controlling interest in profit for the year
$
Profit for the year 150 000
Less unrealised profit on sale of inventory (net of tax) (2 100)
147 900
NCI share (147 900 25%) 36 975
Parent equity interest in consolidated retained earnings at 31 December 20X2
$
Polly Co retained earnings per q 1 700 000
Less unrealised profit on inventory held by Sally Co (700)
Sally Co (550 000 – 75 000 – 2100) 75% 354 675
2 053 975
Answer 3
In accordance with IAS 28 under the equity method the investment in the associate is initially measured at
cost. This represents the investor's share of net assets plus any goodwill (or minus any gain on a bargain
purchase). Unlike acquisition accounting therefore goodwill is not separately recognised but forms part of
the investment in the associate figure. After acquisition goodwill remains as part of the investment in the
associate. It is not separately tested for impairment, instead the total carrying amount of the investment
(including the goodwill) is assessed for impairment in accordance with IAS 36.
Extract from consolidated statement of profit or loss
$
Share of profit of associate (W1) 78 600
Profit before tax (12 500 000 + 78 600) 12 578 600
Income tax expense (3 500 000)
Profit for the year 9 078 600

Module answers 135

 $
Extract from consolidated statement of financial position
Equity and liabilities (45 000 000 + 70 600) 45 070 600
Investment in Ash Co (W2) 1 320 600
Other assets 43 750 000
45 070 600
WORKINGS
(W1) Share of profit or loss
$
Group share of profit for the period (200 000 40%) 80 000
Less group share of post-tax unrealised profit
(10 000 70% ½) 40% (1 400)
78 600
(W2) Investment in associate
$
Cost of investment 1 250 000
Add increase in retained earnings
(200 000 – 20 000 – 3 500) 40% 70 600
1 320 600

Disclosure requirements
IFRS 12 requires the disclosure of:
significant judgements and assumptions that are made in determining whether significant influence
exists over Ash Co
the existence of any contractual arrangements with other investors in Ash
the nature of an risks related to the investment in Ash
assuming that Ash is a material associate, its name, principal place of business, the fact that Poplar
owns 40 per cent and the nature of relationship between Poplar and Ash
summarised financial information for Ash (again assuming it is material) and the fact that equity
accounting is applied
any contingent liabilities incurred in relation to the associate.
Answer 4
The key concept behind the accounting treatment of an associate in consolidated financial statements is that
of significant influence. Significant influence is normally determined by the extent of the investor's voting
power and it is presumed to exist where an investor holds between 20 and 50 per cent of the voting power
of an investee, unless it can clearly be demonstrated that this is not the case. Equally where an investor
holds less than 20 per cent of the voting power, it is presumed that significant influence does not exist,
unless such influence can be clearly demonstrated. A number of factors suggest that one entity may have
significant influence over another. These include representation on the board of directors, participation in
policy-making processes, material transactions between the two entities, interchange of management
personnel or the provision of essential technical information by one entity to another.
In accordance with IAS 28 an investment in which an entity has significant influence should be accounted for
using the equity method. This method replaces the cost of investment in the consolidated statement of
financial position with the group share of the net assets in the associate. In the statement of profit or loss
and other comprehensive income dividend income is replaced with the group share of profit after tax. Both
of these amounts are introduced as a 'one line' entry as opposed to the line by line consolidation technique
adopted for a subsidiary. This reflects the fact that, whilst there is significant influence, control does not
exist as it does in a parent-subsidiary relationship.

136 Financial Reporting

Answer 5
Consolidated trade receivables (230 + 50 – 20) $260 000
Consolidated trade payables (500 + 95 – 20) $575 000
In the consolidation worksheet the consolidated receivables and payables balances are initially calculated as
the sum of the individual balances in Purple and Scarlet's financial statements. Amber's balances are not
aggregated because it is an associate. Therefore the journal entry required on consolidation is to eliminate
the intercompany balances outstanding between Purple and Scarlet.
This is achieved by:
$ $
Debit Payables 20 000
Credit Receivables 20 000
The intra-group balances are treated differently due to the differing nature of the investment. As Scarlet Co
is a subsidiary the single entity concept applies. The trade payables and trade receivables balances are
consolidated (i.e. all balances are added in on a line by line basis). Intra-group balances are then eliminated
so that the consolidation shows transactions between the group and third parties only.
The associate is accounted for using equity accounting. The individual balances in the associate's financial
statements are not incorporated therefore the trade receivables and payables of Amber Co are not
consolidated. Instead the group investment is shown as a one line entry 'investment in associates'. There is
no cancellation of intra-group transactions with an associate therefore the consolidated trade receivables
will include amounts receivable from Amber. In this respect the associate is treated as a third party.
Answer 6
An investor controls an investee only where all of the following are evident:
a The investor has power over the investee.
b The investor has exposure or rights to variable returns from its involvement with the investee.
c The investor can use its power over the investee to affect the amount of the investor's returns.
Power
Power arises from rights that give the investor the current ability to direct the relevant activities (the
activities that significantly affect the investee's returns such as determining operating policies or appointing
management). This may be achieved through voting rights, potential voting rights or contractual
arrangements. Consideration of these rights should take into account factors such as the size and dispersion
of other shareholders.
Variable returns
Returns may be positive, negative or both and may include dividends, remuneration, cost savings or other
returns that are not available to other interest holders.
Power and returns
The investor must be able to use its power to affect the investor's returns from its involvement with the
investee. An investor that has power over an investee, but cannot benefit from that power, does not
control the investee.
Peartree Co holds 48 per cent of the equity shares and so has 48 per cent of the votes. The other
shareholders each hold at most 5 per cent of the shares, meaning that there are at least 11 other
shareholders.
The issue is whether Peartree has power over Gorse. It may be argued that where one investor holds 48
per cent of votes and the remaining investors all hold 5 per cent or less, the 48 per cent holding is sufficient
to constitute power, however, this is not conclusive and other factors should be considered.
Peartree Co dominates the nominations process for electing directors in Gorse Co. In addition, the
remaining shareholders have not been well represented at general meetings in the past and have not
formed a group to vote collectively.
These additional factors suggest that Peartree Co controls Gorse Co.

Module answers 137

 Answer 7
Business combination
A business combination is a transaction or event in which an acquirer obtains control of one or more
businesses. A business is defined as an integrated set of activities and assets that is capable of being
conducted and managed for the purpose of providing a return to investors.
Travis has purchased 65 per cent of the shares in Perkins and therefore Travis can be assumed to have
obtained control of Perkins by virtue of acquiring the majority of voting rights. Perkins is a company and
therefore meets the definition of a business in accordance with IFRS 3.
Accounting for goodwill
Goodwill is initially recognised as a non-current asset in the consolidated statement of financial position.
Subsequently it is not amortised, but is tested for impairment annually. Any impairment loss reduces the
carrying amount of goodwill and is recognised in consolidated profit or loss as a consolidation adjustment.
Where goodwill is attributable only to the parent company (because the non-controlling interest (NCI) is
measured as a proportion of net assets), the impairment charge is allocated to the owners of the parent in
its entirety. Where goodwill is attributable to both the parent company and the non-controlling interest
(because the NCI is measured at fair value), the impairment charge is allocated in proportion to the
ownership interests to the owners of the parent and the NCI.
Calculation of goodwill
$ $
Consideration (45 000 $16.50) 742 500
NCI (35% 100 000 $10) 350 000
1 092 500
Net assets at acquisition date (book value) 850 000
Fair value adjustment (property) 200 000
Deferred tax liability on property adjustment (20% $200 000) (40 000)
Fair value adjustment (brand) 70 000
Deferred tax liability on brand (20% 70 000) (14 000)
Fair value adjustment (contingent liability) (35 000)
Deferred tax asset on contingent liability (20% 35 000) 7 000
1 038 000
Goodwill at acquisition 54 500
The consolidation adjustments required to recognise the fair value adjustments is:
$ $
Debit Property 200 000
Debit Intangible assets – brand 70 000
Credit Liability – contingency 35 000
Credit Deferred tax liability (40 000 + 14 000 – 7000) 47 000
Credit Business combination reserve 188 000

The consolidation adjustment to recognise initial goodwill and eliminate the investment in subsidiary against
its share capital and reserves (including the business combination reserve) is:
$ $
Debit Goodwill 54 500
Debit Share capital and reserves 850 000
Debit Business combination reserve 188 000
Credit Investment in subsidiary 742 500
Credit Non-controlling interest 350 000

138 Financial Reporting

The subsequent impairment of goodwill by 20 per cent is recognised by:
$ $
Debit Impairment of goodwill – consolidated statement 27 250
of profit or loss (20% 54 500)
Credit Goodwill 27 250
Answer 8
Joint control requires the contractually agreed sharing of control of an arrangement which exists when
decisions about the relevant activities require the unanimous consent of the parties sharing.
In this case Summer Co, Winter Co and Autumn Co are all parties to a contract regarding the control of
Spring Co. In order for decisions to be made regarding Spring's relevant activities, a 75 per cent majority
must vote in favour. This can only be achieved if Winter and Summer vote together (which gives an 80 per
cent majority). Therefore any decisions require the unanimous consent of Winter and Summer and these
companies jointly control Spring Co.
Consolidated statement of profit or loss for the year ended 30 September 20X6 – Summer
Group
Adjustments
Summer Co Season Co Dr Cr Group
$ $ $
Revenue 1 150 000 265 000 90 000 1 325 000
Cost of sales (660 500) (160 000) 3 000 90 000 (733 500)
Gross profit 489 500 105 000 591 500
Operating expenses (69 500) (22 500) (92 000)
Operating profit 420 000 82 500 499 500
Finance costs (25 000) (1 500) (26 500)
Share pf profit or 7 500 60 000 52 500
associates
Profit before tax 395 000 81 000 525 500
Income tax expense (80 000 (16 000) (96 000)
Profit for the year 315 000 65 000 429 500
Allocated to the owners 410 000
of the parent
Allocated to the NCI 19 500
(30% 65 000)
429 500
Adjustments:
1. Intercompany sales Summer sales to Season
The intercompany sales are eliminated by:
$ $
Debit Revenue 90 000
Credit Cost of sales 90 000
2. Unrealised profit Summer sales to Season
The unrealised profit is $3000 (10% $30 000). This is eliminated by:

$ $
Debit Cost of sales 3 000
Credit Inventory 3 000
As Summer is the seller, none of this adjustment is allocated to the non-controlling interest.

Module answers 139

 3. Share of Spring's profit
Springs profit for the year is $120 000. As Spring is a joint venture, it is equity accounted and
Summer recognises its share of profits for the year, being $60 000 (50% $120 000):

$ $
Debit Investment in associate (CSOFP) 60 000
Credit Share of profits of associate 60 000
4. Unrealised profit Summer sales to Spring
The unrealised profit is $15 000 (1/3 $45 000). As Spring is equity accounted, only the group share
of this amount is eliminated, i.e. $7 500 ($15 000 50%). It is eliminated against the associate by:
$ $
Debit Share of profits of associate 7 500
Credit Investment in associate (CSOFP) 7 500
The carrying amount of Spring Co in the consolidated statement of financial position is calculated as:
$
Cost of investment 740 000
Share of profits of associate since acquisition (as above) 60 000
Adjustment for unrealised profit (7 500)

140 Financial Reporting

Module 6 FINANCIAL INSTRUMENTS

Multiple choice answers

1 D The advance is recognised as a prepayment. The future economic benefit is the right to
receive a service rather than cash therefore this prepayment is not a financial instrument.
The deposit is a financial instrument (financial asset) as it gives a contractual right to receive
the cash in three years.
The mortgage represents a contractual obligation to repay $200 000 and is therefore a
financial liability.
The trade receivable is a financial asset as there is a contractual right to receive cash.
2 B Equity shares do not carry a contractual obligation to transfer cash. Dividends on equity
shares are paid at the discretion of the issuing entity.
3 A The preference shares are classified as equity as there is no obligation to transfer financial
assets in future. The dividends are not contractual obligations as they are only paid when
ordinary share dividends are declared.
4 C At the date of issue the components of the instrument are split.
$
Net proceeds (6000 × 100) 600 000
Fair value of liability component 550 000
Equity component 50 000
5 C There is no present obligation for the issuer to redeem the shares and therefore they are not
a liability.
6 D This contract fails the fixed for fixed test (a fixed amount of debt is settled by delivering a
variable number of equity instruments). Therefore the loan stock is a liability.
7 B At stage 2 the impairment allowance is based on lifetime expected credit losses and interest is
calculated on the gross carrying amount of the asset; at stage 3 the impairment allowance is
based on lifetime expected credit losses and interest is calculated on the carrying amount of
the asset net of allowance.
8 D
$
Liability
Initial recognition 1 841 160
Interest at 8% 147 293
Coupon paid (6% x $2 million) (120 000)
At 31 May 20X7 1 868 453
The equity balance is initially measured at $158 840 ($2m – $1 841 160). This is not
remeasured over the life of the loan notes.
9 C The premium on redemption of the loan notes represents a finance cost. The effective rate of
interest must be applied in order to measure the debt at amortised cost (IFRS 9).
At the time of issue, the loan notes are recognised at their net proceeds of $599 800
(600 000 – 200).
The finance cost for the year ended 31 December 20X4 is calculated as follows:
B/f Interest @ 12% C/f
$ $ $
20X3 599 800 71 976 671 776
20X4 671 776 80 613 752 389

Module answers 141

 10 C IFRS 9 does not require disclosure of the original cost of any financial instrument measured at
fair value.
11 C A liability measured at amortised cost is initially recognised at fair value less transaction costs.
Therefore A and B are incorrect; the carrying amount of debt is increased each year by the
finance cost calculated using the effective rate (being a constant rate), and reduced by any
interest paid.
12 D The hedged item is the future cash flow (revenue); therefore this is a cash flow hedge. In a
cash flow hedge the effective change in fair value of the hedging item is recognised in other
comprehensive income and reclassified to profit or loss to match the hedged item (the cash
flow) in the future. The ineffective gain or loss is recognised in profit or loss.
13 C
$
Fair value of consideration given [(460 000 $94) + 22 600] 43 262 600
Investment income (5% 43 262 600) 2 163 130
Interest received (2% 460 000 $100) (920 000)
44 505 730
14 B A derivative asset is initially measured at fair value ($2000). Transaction costs are recognised
as an expense. Subsequently the financial asset is remeasured at fair value. Changes in fair
value are recognised in the statement of profit or loss. In this case the asset is measured at
the period end at $2300. The credit to profit and loss is the net of the increase in fair value
and the transaction costs (300 – 100).
15 A The carrying amount of the hedged item is adjusted for the gain or loss. This applies even if
the hedged item would otherwise be measured at cost (as is the case with inventory).
16 C The futures contract is a derivative and therefore must be remeasured to fair value. The loss
on the futures contract is recognised in the statement of profit or loss:
Debit Profit or loss (20 000 (24 – 22)) $40 000
Credit Financial liability $40 000
The inventories are revalued to fair value because this is a hedging relationship:
$
Fair value at 31 December 20X3 (20 000 23) 460 000
Cost (400 000)
Gain 60 000
The gain is also recognised in profit or loss:
Debit Inventory $60 000
Credit Profit or loss $60 000
The net effect on the profit or loss is a gain of $20 000.
17 D IFRS 9 does not measure hedge effectiveness by direct reference to gains/losses on hedged
items. Instead it refers to an economic relationship and consistency of the hedge ratio in a
hedge relationship with actual hedging activities for risk management purposes. An economic
relationship exists where the hedging instrument and hedged items have offsetting changes in
fair value.
18 D IAS 32 allows offsetting only when an entity currently has a legally enforceable right to set off
a financial asset and liability and intends to settle on a net basis or realise the asset and liability
simultaneously.
19 D The other risks are mentioned in IFRS 7 Financial Instruments: Disclosures, but are not main
components of market risk.
20 D An equity investment that is held for trading is measured at fair value through profit or loss.
Impairment losses are recognised in profit or loss.
An interest rate swap to protect the value of a recognised debt instrument (whose value
changes depending on interest rates) is a fair value hedge rather than a cash flow hedge.

142 Financial Reporting

21 B An economic relationship must exist between the hedged item and the hedging instrument
22 D Reclassification is only allowed where an entity changes its business model for managing
financial assets. A debt instrument is classified as measured at amortised cost if it is held
within a business model whose objective is to hold financial assets to collect contractual cash
flows. If this is no longer the case, the financial asset is reclassified to be measured at fair
value. It is measured at fair value through other comprehensive income if the objective of the
business model that it is held within is to collect contractual cash flows and sell financial
assets; otherwise it is measured at fair value through profit or loss.
23 C A, B and D are all derivative financial instruments and share the following characteristics:
Their value changes in response to an underlying item (the variable interest rate in A,
exchange rate in B and market price of gold in D).
Initial investment is nil or a nominal amount.
It is settled at a future date.
C is liability – the value of the obligation to deliver equity instruments is fixed.
24 C Redeemable preference shares are normally classified and presented as a financial liability and
therefore the annual payment should be recognised as interest.
25 C IFRS 7 defines liquidity risk as 'the risk that an entity will encounter difficulty in meeting
obligations associated with financial liabilities'.
26 A Burke Co's existing debt instrument has been modified significantly. Where this is the case
the existing debt instrument is derecognised and the new instrument recognised. Normal
IFRS 9 measurement rules apply to the new financial liability and therefore transaction costs
are deducted:
Debit Financial liability (original) $10 000 000
Debit Loss $500 000
Credit cash $550 000
Credit Financial liability (new) $9 950 000
27 B An investment in equity shares must be measured at fair value through profit or loss unless
the reporting entity has elected to recognise changes in fair value in other comprehensive
income. Davies Co has not made this election and therefore changes in fair value must be
recognised in profit or loss. Dividend income is also recognised in profit or loss.
28 D IFRS 9 states that a financial instrument is recognised when the entity becomes party to the
contractual provisions of the instrument.
29 A Because Saxmundham Co is exposed to the risk of any losses in excess of $25 000, Leiston
Co no longer has control over the receivables and should derecognise them. Leiston should
recognise a liability of $25 000 (the guarantee) and a profit on sale of $25 000 (proceeds of
$800 000 less carrying amount of financial asset sold of $750 000 less the fair value of the
liability assumed of $25 000).
30 C Financial assets are classified as measured at amortised cost if:
(a) the objective of the business model within which the asset is held is to hold assets in
order to collect contractual cash flows; and
(b) the contractual terms of the financial asset give rise on specified dates to cash flows
that are solely payments of principal and interest on the principal outstanding.
They are classified as measured at fair value through other comprehensive income if:
(a) the financial asset is held within a business model whose objective is achieved both by
collecting contractual cash flows and selling financial assets; and
(b) the contractual terms of the financial asset give rise on specified dates to cash flows
that are solely payments of principal and interest on the principal outstanding.

Module answers 143

 The convertible loan stock fails the 'solely payments of principal and interest' in both cases
because the conversion to equity shares does not represent payments of principal and
interest. The convertible loan is therefore measured at fair value through profit or loss.
The redeemable loan stock is held to collect contractual cash flows (it is not held for trading
or hedging) and cash flows are solely payments of principal and interest. Therefore it is
classified as measured at amortised cost.
31 B A is a derivative and must be measured at fair value through profit or loss.
B is held to collect contractual cash flows and the terms of the contract give rise to cash
flows that are solely payments of principal and interest on the principal outstanding on
specified dates.
C is held to collect contractual cash flows, however the fact that the interest rate represents
more than consideration for the time value of money and the credit risk associated with the
principal means that the 'solely payments of principal and interest' test is failed. Therefore this
asset cannot be classified as either measured at amortised cost or fair value through other
comprehensive income.
D must be measured at fair value because equity instruments do not result in contractual cash
flows.
32 D An embedded derivative in a host that is not a financial asset is separated and accounted for
as a derivative if:
its economic characteristics are not similar to those of the host,
a separate instrument with the same terms as the embedded derivative would meet
the definition of a derivative, and
the hybrid contract is not measured at fair value through profit or loss.
33 D A company may make an irrevocable election to recognise gains and losses relating to equity
investments in fair value through other comprehensive income, but this must be made at
initial recognition.
Equity shares cannot be measured at amortised cost, because they do not entitle the holder
to contractual cash flows.
Where an entity has debt instruments that it initially may have been acquired to sell in the
short term but has changed its intention, it may reclassify them, but this only occurs in rare
circumstances, because of a change in the entity's business model for managing financial
instruments. A change in management intention relating to one particular instrument is not a
change in the entity's business model.
34 C Kington Co has a continuing interest in the shares and therefore the transaction is effectively
a secured loan. The loan should initially be measured at the amount received: $250 000. The
difference between this and the repurchase price is effectively loan interest, and will accrue
over the six months until the shares are repurchased.
35 C The financial asset is credit impaired (there is objective evidence of impairment) and therefore
at stage 3 of the approach to credit losses.
Therefore:
lifetime expected credit losses are recognised, being lifetime losses expected to arise
from default at any time in the remainder of the term.
interest is calculated on the financial asset net of the impairment allowance.
Note: 12-month credit losses are lifetime losses expected to arise from default within 12
months of the reporting date.

144 Financial Reporting

Written response answers – Module 6
Answer 1
Financial instruments are recognised in the statement of financial position when the entity becomes a party
to the contractual provisions of the instrument.
The IASB Conceptual Framework requires an asset or liability to be recognised when and only when:
it is probable that the future economic benefits will flow to or from the entity, and
the item has a cost or value that can be measured reliably.
There is no contradiction here as such – it is assumed that a financial instrument meets the recognition
criteria of the Conceptual Framework. A financial instrument involves a contractual arrangement meaning
that parties with a financial asset may insist on performance from parties with a financial liability. This
ensures that future economic benefits will flow to an entity with a financial asset and from an entity with a
financial liability.
Reliable measurement of financial instruments is straightforward in some cases (where cash consideration is
transferred) and more complex in others (e.g. share for share exchanges). IFRS 9 in conjunction with IFRS
13 provides detailed guidance on initial measurement. Therefore reliable measurement is assumed.
Contract A
Contract A is a trading contract. The contract is not a financial instrument as it involves a physical asset. The
entity does not recognise a liability for the iron until the goods have actually been delivered.
Contract B
This is a financial instrument as there is an obligation to deliver cash. Under IFRS 9 the entity recognises a
financial asset or liability on the commitment date rather than waiting for the closing date on which the
exchange takes place.
Answer 2
Interest rate option
This is a derivative and so it must be measured at fair value, with gains and losses on remeasurement
recognised in profit or loss.
Initial measurement (at cost):
Debit Financial asset $10 000
Credit Cash $10 000
At 31.12.20X3 (remeasured to fair value):
Debit Financial asset (15 250 – 10 000) $5 250
Credit Profit or loss $5 250
Shares
Equity instruments must be measured at fair value, because the holder is not automatically entitled to
receive interest or dividends or to redeem the principal amount (contractual cash flows on specified dates).
Gains and losses on remeasurement are normally recognised in profit or loss. However, because the
investment is not held for trading but for the long term, management can make an irrevocable election at
initial recognition of the shares to recognise changes in their fair value in other comprehensive income.
Assuming that this election has been made:
Initial measurement (at cost):
Debit Financial asset (50 000 × $3.50) $175 000
Credit Cash $175 000
At 31.12.20X3 (remeasured to fair value):
Debit Financial asset ((50 000 × $3.75) – 175 000) $12 500
Credit Other comprehensive income (other components of equity) $12 500

Module answers 145

 Statement of financial position extracts
$
Financial assets measured at fair value through other
comprehensive income:
Investments in equity instruments 187 500
Financial assets measured at fair value through profit or loss:
Interest rate option 15 250

Equity:
Other components of equity 12 500
Statement of profit or loss and other comprehensive income extracts
$
Finance income:
Gain on interest rate option 5 250
Other comprehensive income:
Items that will not be reclassified to profit or loss:
Investments in equity instruments 12 500
Answer 3
Statement of financial position at 1 January 20X2
$
Non-current liabilities
Financial liability component of convertible bond (Working) 1 797 467
Equity
Equity component of convertible bond (2 000 000 – (Working) 1 797 467) 202 533
WORKING
Fair value of equivalent non-convertible debt
$
Present value of principal payable at end of 3 years
(4 000 500 = 2 000 000 1/(1.09)3 1 544 367
Present value of interest annuity payable annually in arrears
for 3 years [(5% 2 000 000) 2.531] 253 100
1 797 467
Subsequent treatment
After initial recognition, the following treatment is applied:
The liability component of the convertible debt is amortised to its redemption value. The liability
therefore increases each year by a finance charge, calculated using the effective interest rate and
decreases each year by a cash payment, being the coupon rate of interest. The effective interest rate
is 9 per cent and the finance charge calculated each year incorporates the coupon interest payable
and the unwinding of the discount on the liability.
The equity element remains unchanged throughout the life of the convertible debt.
At maturity bondholder chooses whether to redeem their bonds for cash or convert them to
ordinary shares. If bondholders redeem their bonds for cash, the financial liability balance is
derecognised and cash payment is recorded; if bondholders convert their bonds to ordinary shares,
the financial liability is derecognised and share capital recognised. The equity balance may be
transferred to another reserve within equity.

146 Financial Reporting

Year ended 31 December 20X2
$
Financial liability component of convertible bond at 1 January 20X2 1 797 467
Finance charge at 9% 161 772
Interest paid (5% 4 000 $500) (100 000)
Carrying amount at 31 December 20X2 1 859 239

The required journal entry is:

Debit Finance charge (profit or loss) $161 772
Credit Bank $100 000
Credit financial liability $61 772
Answer 4
On 31 May 20X5, Robinson recognised, in accordance with IFRS 9 Financial Instruments, an allowance
equivalent to 12 months' expected credit losses ie the amount of lifetime losses expected as a result of
default in the next 12 months. This is the lifetime expected credit losses multiplied by the probability of
default in the next 12 months: 10% $25m = $2.5m. This is the brought down loss allowance at 1 June
20X5.
This loss allowance is recognised at a discounted value and therefore the discount must be unwound in
future years. In the year ended 31 May 20X6, interest of $100 000 (4% $2.5m) is recognised by:
Debit Profit or loss (4% $2.5m) $0.1m
Credit Loss allowance $0.1m
The loss allowance at 31 May 20X6 is therefore $2.6m.
Interest income is also be recognised in profit or loss for the year ended 31 May 20X6 on the gross
carrying amount of the financial asset: 4.5% × $100m = $4.5m.
By 31 May 20X6 the financial asset is credit impaired. Stage 3 of the IFRS 9 expected credit loss model has
been reached, and lifetime expected credit losses must be recognised ie the amount of lifetime losses as a
result of default at any time in the life of the loan. Lifetime losses have been revised to $48.1 million and this
must be recognised in full. This means that the loss allowance, including interest, of $2.6 million is increased
to $48.1 million, and the difference charged to profit or loss for the year ended 31 May 20X6:
Debit Profit or loss ($48.1m – $2.6m) $45.5m
Credit Loss allowance $45.5m
Therefore in the year ended 31 May 20X6:
a total of $45.6 million ($45.5 + $0.1) is recognised as an expense in profit or loss
$4.5m is recognised as income in profit or loss
the net carrying amount of the loan at 31 May 20X6 is $51.9 million ($100 – $48.1).
Required disclosures
In accordance with IFRS 7, Robinson Co should disclose:
a reconciliation of changes in the loss allowance during the year
the amount of impairment recognised in profit or loss by each class of asset
in accordance with the credit risk disclosures required by IFRS 7, an analysis of the asset that is
impaired and the reason why it is impaired.
Answer 5
All of the transactions result in a financial instrument because all involve contracts that give rise to a
financial asset of one entity and a financial liability or equity instrument of another.
Debt instrument
The investment in debt instrument is a financial asset because to Westville Co it represents a contractual
right to receive cash from the other entity.

Module answers 147

 On recognition, IFRS 9 requires that financial assets are classified as measured at either:
amortised cost, or
fair value through other comprehensive income, or
fair value through profit or loss.
A financial asset is measured at amortised cost where the objective of the business model within which the
asset is held is to hold assets in order to collect contractual cash flows, and the contractual terms of the
financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on
the principal outstanding.
A financial asset is measured at fair value through other comprehensive income where the objective of the
business model within which it is held is achieved by collecting contractual cash flows and selling financial
assets, and the contractual terms of the financial asset give rise on specified dates to cash flows that are
solely payments of principal and interest on the principal outstanding.
The debt instrument meets the 'solely payments of principal and interest' test in both cases. Westville does
not intend to hold the debt instrument to maturity, to collect contractual cash flows, but does hold the
instrument within a model with the objective of collecting contractual cash flows and selling financial assets.
It is therefore classified as measured at fair value through other comprehensive income.
Forward contract (currency)
The forward contract meets the definition of a derivative instrument i.e. a financial instrument whose value
changes in response to an underlying item (here the exchange rate), which requires little or no initial
investment and which is settled at a future date.
A derivative can be a financial asset if it is favourable (in this case if the dollar has strengthened against the
euro since the contract was entered into) or a financial liability (in this case if the dollar has weakened
against the euro since the contract was entered into).
Regardless of whether a derivative is a financial asset or financial liability, it must be classified as measured at
fair value through profit or loss.
Forward contract (shares)
The forward contracts obligate Westville to issue shares. A contract for the issue of shares may be a
liability or equity depending on whether it meets the 'fixed for fixed' test.
In the case of the contract with Entity A, Westville must exchange a fixed number of shares for a fixed
amount of dollars. Therefore the fixed for fixed test is met and this is an equity instrument, which is
measured at $50 000.
In the case of the contract with entity B, Westville must exchange a fixed number of shares for a dollar
amount that is dependent on the exchange rate, and so it variable. Therefore the fixed for fixed test is not
met and this is a financial liability.
Financial liabilities must be classified as measured at fair value (if a derivative, held for trading or designated
as such) or at amortised cost. In this case the financial liability meets the definition of a derivative and is
measured at fair value through profit or loss.
Answer 6
Bank loan
IFRS 9 requires that a substantial modification of the terms of an existing financial liability, or part of it, is
accounted for as an extinguishment of the original financial liability and the recognition of a new financial
liability.
Therefore, on 1 August 20X6, the renegotiation must be assessed in order to determine whether it is
'substantial'. If the renegotiation is a substantial modification, the original loan should be derecognised and a
new loan should be recognised.
If an exchange of debt instruments or modification of terms is accounted for as an extinguishment, any
costs or fees incurred are recognised as part of the gain or loss on the extinguishment.

148 Financial Reporting

Investment in shares
A financial asset is derecognised if the contractual rights to cash flows from the financial asset expire, or
substantially all of the risks and rewards of ownership of the asset are transferred to another party.
In this case the option to repurchase is at market price on any repurchase date (rather than a fixed price or
sale price plus a lender's return). This indicates that Moorfield has transferred the risks and rewards of
ownership and this is not a financing transaction. Moorfield should derecognise the asset.
Receivables
In this case Moorfield has received 90 per cent of the receivables balance transferred, however it may have
to repay some of this amount if the purchase is not successful in recovering the money owed. Moorfield
therefore retains the risks and rewards of the receivables and they should not be derecognised.
Instead the money received on transfer of the receivables balance should be recognised by Moorfield as a
loan. The 10 per cent of the receivables balance that will not be received by Moorfield represents interest
and is recognised as an expense over the six month period and added to the loan balance.
After six months the receivables balance is derecognised against the loan balance.
Answer 7
Conditions for hedge accounting
Hedge accounting is only permitted by IFRS 9 if certain criteria are met. The criteria are as follows:
The hedging arrangement includes only eligible hedged items and eligible hedging instruments.
The hedging arrangement is formally designates and documented at its inception.
The hedge meets hedge effectiveness requirements.
In order to meet hedge effectiveness requirements, the hedged item and the hedging instrument must be
expected to have offsetting changes in fair value, fair value changes must not be dominated by changes due
to credit risk and the hedge ratio (the quantity of hedging instrument compared with that of hedged item)
must be the same as the actual ratio used for risk management purposes.
In the case of Allister Co the hedged item is a recognised asset and the hedging instrument is a derivative
instrument. These are both eligible for hedge accounting. There is no mention of designation and
documentation, however this is assumed. The hedge appears to meet hedge effectiveness requirements:
The derivative gains value as the receivable loses value and vice versa;
There is no evidence of these fair values being influenced by credit risk
Provided that the accounting hedging arrangement is for the full receivable and full $850 000 subject
of the contract, the hedge ratio is maintained.
Amounts to be recognised in financial statements
The receivable is initially recognised by :
Debit Receivables ($850 000 1.32) $1 122 000
Credit Revenue $1 122 000
The derivative is not initially recognised as it has no cost or fair value at inception.
This is a fair value hedge and therefore the receivable is remeasured at the reporting date to its fair value of
$1 156 000 (US$850 000 1.36). This is recognised by:
Debit Receivables $34 000
Credit Profit or loss $34 000
The derivative is measured at its fair value. This is calculated as:
$
Contract value of US$850 000 1 105 000
Value of US$850 000 based on forward contract entered into at
31 October 20X6 (US$850 000 1.35) 1 147 500
Fair value (liability) 42 500

Module answers 149

 This is therefore a financial liability as the derivative is 'out of the money'. It is recognised by:
Debit Profit or loss $42 500
Credit Derivative financial liability $42 500
Amounts to be presented in the financial statements are therefore:
Statement of financial position extracts
Current assets $
Receivables 1 156 000
Current liabilities
Derivatives 42 500
Statement of profit or loss and other comprehensive income extracts
$
Gain on remeasurement of receivables 34 000
Loss on derivative (42 500)
Disclosure
Allister Co should disclose the following in respect of any hedging arrangements:
the company's risk management strategy and how it is applied;
how hedging arrangements may affect the amount, timing and uncertainty of future cash flows;
the impact that hedge accounting has had on the financial statements;
details of hedging instruments;
how the entity determines the economic relationship for assessing hedge effectiveness;
how the entity establishes the hedge ratio and what the sources of hedge ineffectiveness are;
the nature of risks being hedged;
substantial details about cash flow hedges; and
changes in fair values for fair value hedges (for both the hedging instruments and the hedged items),
together with any ineffectiveness of cash flow hedges and hedges of net investments in foreign
operations recognised in profit or loss.

150 Financial Reporting

Module 7 IMPAIRMENT OF ASSETS

Multiple choice answers

1 B
$'000
Goodwill (400 – 360) 40
Net assets 404
Carrying amount 444
Recoverable amount (368)
Impairment loss 76
Allocated:
$
Goodwill (1st) 40 000
PPE (pro-rata) $36 000 (320 / (320 + 64)) 30 000
Intangible assets (pro-rata) $36 000 (64 / (320 + 64)) 6 000
76 000
Goodwill is impaired first, then the rest of the impairment allocated to the remaining non-
current assets.
However the PPE cannot be reduced below $310 000 so the remaining $20 000 impairment
loss ($30 000 impairment loss less (320 000 – 310 000)) is allocated against the intangible
assets.
The other assets are outside the scope of IAS 36 impairment testing. (IAS 36 para 2)
$
PPE (320 000 – 30 000 + 20 000 charged to intangibles) 310 000
Intangibles (64 000 – 6 000 – 20 000) 38 000
2 D The individual item of plant is impaired and is firstly written down by $2 million to a carrying
amount of nil. The revised carrying amount of other plant is $34 000 000.
The revised carrying amount of the CGU is $52 000 000, and its recoverable amount is
$50 000 000, giving a further impairment loss of $2 000 000.
This is allocated against goodwill, giving a revised carrying amount of goodwill of $8 000 000.
3 C The depreciation charge in each of years 1 – 3 is $9000 (($100 000 – $10 000)/10).
The carrying amount of the asset at the end of year 3 is therefore $73 000.
The recoverable amount is $66 000 and therefore there is an impairment loss of $7000.
The total charge to profit or loss in year 3 is $9000 depreciation + $7000 impairment loss =
$16 000.
4 B Tangible assets are obviously impaired and are written down by $2.5 million.
The revised carrying amount of tangible assets is $4.5 million and therefore the revised
carrying amount of the CGU is $7.5 million.
Recoverable amount is $6 million and therefore there is an impairment loss of $1.5 million.
This is allocated to goodwill, to reduce its carrying amount from $3 million to $1.5 million.
5 B IAS 36 applies to property, plant and equipment, regardless of whether it is measured using
the cost or revaluation (fair value) model.
Non-current assets held for sale are outside the scope of IAS 36. This is because IFRS 5
contains its own measurement and impairment guidance.
A property leased out under an operating lease is an investment property. Investment
property measured using the cost model is within the scope of IAS 36.

Module answers 151

 6 C After setting $60 000 of the impairment loss against goodwill, the remaining $30 000 is
allocated against the remaining assets on a pro-rata basis:
Impairment allocated against plant and machinery =
30 000 (50 000 / (100 000 + 50 000)) = 10 000
So the post impairment value of plant and machinery is:
(50 000 – 10 000) = $40 000
7 B The reversal of an impairment loss cannot result in an asset having a carrying amount that is
higher than that if it had not been impaired originally.
IAS 36 prohibits the reversal of impairments relating to goodwill.
8 B If the asset's recoverable amount is higher than the carrying amount then there is no
impairment; recoverable amount is measured as the higher of fair value less costs of disposal
and value in use.
In this case the recoverable amount is $800 000, leading to an impairment loss of $100 000.
9 B An impairment loss relating to goodwill can never be reversed.
10 D The asset must be written down to its recoverable amount per IAS 36 (i.e. the higher of fair
value less costs of disposal and value in use).
Loss = 2 000 000 – 1 300 000 = $700 000
Where an impairment relates to an asset which has previously been revalued, the loss is
charged to other comprehensive income down to the depreciated historical cost of the asset
(2 000 000 – 1 500 000) with any further loss (1 500 000 – 1 300 000) recognised in profit or
loss for the year.
11 C Liabilities are not within the scope of IAS 36. The standard is based on the principle that the
carrying amount of an asset must not exceed its recoverable amount.
12 C Recoverable amount is the higher of value in use and fair value less costs of disposal.
13 D Capitalised costs associated with an ongoing development project represent an intangible
asset that is not yet available for use. IAS 36 requires that such assets are tested annually for
impairment.
14 C The nature of the asset should be disclosed, but there is no requirement to disclose original
cost or carrying amount.
15 B Carrying amount at date of reversal: 50 000 – (2 × 50 000/8) = 37 500
Reversal restricted to amount that would have been determined had no impairment been
recognised. Carrying amount under historic cost would have been $60 000.
(60 000 – 37 500) = $22 500
16 B N could sell its products in an active market and therefore could generate independent cash
flows.
O sells 85 per cent of its products to external customers therefore its cash flows are
independent.
17 A An increase in interest rates affects the discount rate used to determine value in use and so
may significantly reduce the recoverable amount.
Where a business combination has occurred in the current year and the goodwill arising has
been allocated to a CGU, that CGU must be tested for impairment before the end of the
current year.
18 C Recoverable amount is fair value less disposal costs of $750 000. The building has previously
been revalued upwards, so the impairment of $150 000 is first set off against the revaluation
surplus of $100 000. The balance of $50 000 is recognised in profit or loss.

152 Financial Reporting

19 D Inventories are outside the scope of IAS 36 because IAS 2 contains its own impairment
requirements; financial assets are outside the scope of IAS 36 because IFRS 9 contains
guidance on credit losses; cattle are a biological asset measured in accordance with IAS 41
and so are outside the scope of IAS 36.
20 B There is no requirement to disclose impairment losses or reversals separately in the
statement of profit or loss and other comprehensive income.
21 C IAS 36 states that reorganisation costs following disposal are not costs of disposal.
22 A The asset cannot be measured at more than its depreciated carrying amount would have been
if the original impairment loss had not been recognised ($900 000 × 40 / 45). Because the
building has been revalued, the original impairment loss would have been recognised as a
revaluation loss in other comprehensive income, so the reversal must also be recognised in
other comprehensive income.
23 B Goodwill acquired in a business combination must be reviewed for impairment annually. The
office block is clearly impaired as it has suffered physical damage. The development
expenditure need not be reviewed because (a) it has a finite useful life (so IAS 36 does not
require annual impairment reviews) and (b) there appear to be no indications of impairment
(the asset is generating economic benefits in the form of sales revenue).
24 D Cash flows should include both inflows and outflows from the continued use of the asset. The
discount rate should be a pre-tax rate that reflects the risks specific to the asset; surrogate
rates may be an entity's weighted average cost of capital or incremental borrowing rate.
25 D Recoverable amount is the higher of fair value less costs of disposal and value in use. Neither
asset is impaired.
26 C IAS 36 requires a two step approach where the carrying amount of a corporate asset cannot
be reasonably allocated to CGUs:
1. The carrying amount of each CGU is tested excluding the corporate asset
CGU X CGU Y Impairment loss
$ $ $
Carrying amount 600 000 300 000
Recoverable amount 560 000 330 000
Impairment loss 40 000 Nil 40 000
2. The carrying amount of the smallest group of CGUs to which the corporate asset can
be allocated is tested:
Impairment loss
$ $
CGU X carrying amount post impairment 560 000
CGU Y carrying amount 300 000
Corporate asset 120 000
980 000
Recoverable amount 1 000 000
Impairment loss – –
Therefore the total impairment loss is $40 000.
27 B
28 B
CGU X CGU Y CGU Z
$ $ $
Carrying amount 560 000 920 000 900 000
Goodwill 30 000 30 000 30 000 90 000
Assets of Wine Co 60 000 60 000 120 000
650 000 950 000 990 000 2 590 000
Head office 50 193
700 193
Allocation of head office to CGU X: 650 / 2590 x $200 000 = $50 193.
Goodwill is allocated to the CGUs expected to benefit from an acquisition regardless of how
the acquiree's other assets are allocated to CGUs.

Module answers 153

 Assumed knowledge answers – Module 7
1 D
2 D IAS 16 does not prescribe any specific method.
3 A
$
Plant held all year (240 000 – 60 000) × 20% 36 000
Addition 160 000 × 20% × 6 / 12 16 000
Disposal 60 000 × 20% × 3 / 12 3 000
55 000

4 C
$
December addition – 18 000 × 20% × 10 / 12 3 000
June disposal – 36 000 × 20% × 8 / 12 4 800
Balance – 345 200 × 20% 69 040
76 840

5 A (5 000 – 1 000) / 4 = $1 000 depreciation per annum NCA = $2000

154 Financial Reporting

Written response answers – Module 7
Answer 1
Impairment requirement
For property, plant and equipment an entity is required by IAS 36 to determine at the end of each reporting
period whether there is any indication that an asset has been impaired. The entity is only required to make
a formal estimate of the recoverable amount of an asset where an indication of impairment exists.
Intangible assets with an indefinite life and goodwill arising on a business combination are required to have
their recoverable amount formally estimated and compared to their carrying amount at least annually. This
impairment test can be performed at any time during the year but must be performed at the same time
each year. Goodwill arising on a business combination that took place in the current accounting period
must be tested for impairment before the end of the accounting period.
Difference in requirement
The impairment test requirements are stricter for intangible assets with an indefinite life and goodwill than
for assets such as property, plant and equipment. This is because intangible assets with an indefinite life and
goodwill arising on a business combination are not amortised and, as a result, there is a greater risk that
carrying amount might exceed recoverable amount.
Sources of information
significant decline in market value of an asset
significant adverse changes in the environment or market
increases in market rates which are likely to affect the discount rate used to calculate recoverable
amount
carrying amount of net assets is more than a company's market capitalisation
obsolescence or physical damage of an asset
change in asset use e.g. idle
worsening economic performance of an asset.
Note: Only four points are required.
Answer 2
Statement of financial position at 31 December 20X3
$
Manufacturing equipment 295 000
Statement of profit or loss for the year ended 31 December 20X3
$
Depreciation expense (500 000/5) 100 000
Impairment loss 5 000
WORKINGS
(W1) Carrying amount
$
Cost 500 000
Depreciation 2 years (200 000)
Carrying amount 300 000
(W2) Fair value less costs of disposal
$
Estimated sale proceeds 330 000
Legal costs (20 000)
Dismantling costs (15 000)
295 000

Costs of retraining are not costs of disposal.

Module answers 155

 (W3) Value in use
$
20X4 60 000 1 / 1.1 54 545
20X5 45 000 1 / (1.1 1.1) 37 190
20X6 10 000 1 / (1.1 1.1 1.1) 7 513
99 248

The 10 per cent rate is used as it is the asset specific rate. The interest rate is pre-tax therefore the
tax rate of 30 per cent is irrelevant. The routine maintenance cost is included as part of the cash
outflows.
(W4) Impairment loss
The recoverable amount is $295 000, being the higher of value in use and fair value less costs
to sell.
There is therefore an impairment loss of $5000, which is recognised in profit or loss.
Disclosures
Stanley Co should disclose the following:
the amount of impairment loss recognised in respect of all manufacturing equipment and the line
item in the statement of profit or loss in which it is recognised
the fact that the impairment arose due to new environmental legislation which affected the market
for goods produced by the equipment
the fact that a $5000 impairment loss is recognised in respect of this piece of equipment
the nature of the equipment
the fact that recoverable amount was $295 000 and this was fair value less costs to sell
details regarding the fair value measurement and key assumptions made in estimating fair value.
Answer 3
Revised balances at 31 December 20X2
Before Impairment After
impairment loss impairment
$ $ $
Goodwill 28 000 (28 000) –
Patent 56 000 (5 600) 50 400
Property, plant and equipment 84 000 (8 400) 75 600
Investment property 110 000 – 110 000
Inventory 60 000 – 60 000
338 000 (42 000) 296 000

The impairment loss is $42 000 (228 – 186). This loss is recognised first against goodwill reducing the
balance to $Nil.
The remainder of $14 000 (42 – 28) is then allocated against the remaining assets within the scope of
IAS 36 on a pro-rata basis. However, no individual asset should be written-down to below its recoverable
amount.
No loss is allocated to inventory as this is an asset outside the scope of IAS 36; impairment requirements
for inventories are provided in IAS 2 (inventories are measured at the lower of cost and net realisable
value).
No loss is allocated to investment property measured at fair value; since measurement is at fair value any
impairment loss is recognised in profit or loss through the application of IAS 40.

156 Financial Reporting

Revised balances at 31 December 20X3
The carrying amount of the CGU at 31 December 20X3 is $285 800 (see below); its recoverable amount is
$311 000. This is $25 200 in excess of carrying amount and indicates that a possible reversal of $25 200 of
the previous $42 000 impairment loss can be recognised.
The reversal of an impairment loss cannot be allocated to goodwill or to assets that are outside the scope
of IAS 36. It may therefore only be allocated to the patent and PPE.
The reversal is allocated to the patent and PPE pro-rata to their carrying amounts:
$10 080 (40 320 / (40 320 + 60 480) $25 200) is allocated to the patent.
$15 120 (60 480 / (40 320 + 60 480) $25 200) is allocated to PPE.
The recognition of a reversal is limited: after accounting for a reversal, the carrying amounts of the patent
and the PPE cannot exceed the amounts at which they would have been measured had the original
impairment not occurred.
The patent has a carrying amount of $40 320; the maximum reversal is
$4 480 ($44 800 – $40 320).
The PPE has a carrying amount of $60 480; the maximum reversal is
$6 720 ($67 200 – $60 480).
Therefore a reversal of $4 480 is recognised in respect of the patent and a reversal of $6 720 in respect of
the PPE.
Revised balances at 31 December 20X3 are:
Before reversal Reversal After reversal
$ $ $
Goodwill – – –
Patent 40 320 4 480 44 800
Property, plant and equipment 60 480 6 720 67 200
Investment property 115 000 – 115 000
Inventory 70 000 – 70 000
285 800 11 200 297 000

Answer 4
The corporate headquarters is allocated to the two cash generating units as follows:
Domestic Operations International Operations Total
$ $ $
Total identifiable assets 36 000 000 24 000 000 60 000 000
Corporate
Headquarters
36 / 60 8 500 000 5 100 000
24 / 60 8 500 000 3 400 000 8 500 000
Total assets after 41 100 000 27 400 000 68 500 000
allocation
The recoverable amounts provided exclude liabilities, therefore these can be compared directly with the
carrying amounts of the two segments, which also exclude liabilities:
The recoverable amount of Domestic Operations is $45 million. This exceeds the carrying amount
of the CGU and therefore there is no impairment.
The recoverable amount of International Operations is $21 million. Therefore an impairment loss
arises of $6.4 million.

Module answers 157

 International Operations is impaired and the impairment loss must be allocated across the assets of the
segment, including the corporate headquarters. The loss is allocated first to goodwill in the CGU, and then
on a pro-rata basis to the remaining assets. As current assets are outside the scope of IAS 36, no
impairment loss is allocated to these:
International Original carrying Impairment loss Carrying amount after
Operations amount (working) impairment
$ $ $
Goodwill 3 536 000 (3 536 000) –
Property, plant and 13 600 000 (2 291 200) 11 308 800
equipment
Corporate HQ 3 400 000 (572 800) 2 827 200
Current assets 6 864 000 – 6 864 000
Total 27 400 000 (6 400 000) 21 000 000

Impairment loss working: $

Loss 6 400 000
Goodwill (3 536 000)
2 864 000
PPE 13.6 / (13.6 + 3.4) 2 864 000 (2 291 200)
CHQ 3.4 / (13.6 + 3.4) 2 864 000 (572 800)
–
Therefore the carrying amount of the corporate headquarters at 31 August 20X9 is:
Allocated to Domestic Operations 5 100 000
Allocated to International Operations 2 827 200
Total carrying amount 7 927 200

Answer 5
Application of IAS 36
The ship is made up of two component parts – the hull and the propeller system. These are accounted for
separately (with different useful lives). Neither of these is an asset for which the recoverable amount can
be individually determined since neither can generate cash flows independently of the other.
The ship is therefore a cash-generating unit i.e. it is the smallest identifiable group of assets that generates
cash inflows that are largely independent of the cash inflows for other assets (or groups of assets).
Therefore impairment testing should be applied to the ship as a whole rather than to the hull and propeller
system separately.
Recoverable amount
The recoverable amount is the higher of fair value less costs to sell and value in use.
The fair value less costs to sell of the ship is:
$
Fair value of hull 6 000 000
Less selling costs (600 000)
Fair value of propeller system 900 000
6 300 000
The value in use is:
$
Year 1 $2 500 000 1/1.06 2 264 151
Year 2 $2 050 000 1.1062 1 824 493
Year 3 ($1 500 000 – $250 000) 1/1.063 1 049 524
Year 4 $1 000 000 1.064 792 094
Year 5 $950 000 1.065 709 895
6 640 157
Therefore recoverable amount is $6 640 157.

158 Financial Reporting

Impairment loss
The carrying amount of the ship prior to the impairment is calculated as:
$ $
Hull
Cost 12 000 000
Depreciation 12m/20 4 years (2 400 000)
Carrying amount 9 600 000
Propeller system
Cost 2 500 000
Depreciation 2.5/10 4 years (1 000 000)
1 500 000
Total carrying amount 11 100 000
An impairment loss of $4 459 843 ($11 100 000 – $6 640 157) arises. This is allocated to the hull and
propeller system as follows:
Hull: $4 459 843 9.6/11.1 = $3 857 162
This reduces the carrying amount of the hull to $5 742 838 ($9 600 000 –
$3 857 162)
Propeller system: $4 459 843 1.5/11.1 = $602 681
This reduces the carrying amount of the propeller system to $897 319
($1 500 000 – $602 681)
Recognition of the impairment loss must not result in a carrying amount that is less
than fair value less costs to sell. As the propeller's fair value less costs to sell is $900
000, the amount of impairment loss recognised is limited to
$600 000 ($1 500 000 – $900 000)
A total impairment loss of $4 457 162 ($3 857 162 + $600 000) is therefore recognised in profit or loss in
the year in which the collision happened.
Disclosure
The loss must be disclosed in aggregate with other impairment losses related to container ships.
In relation to this individual ship, Ocean Co must disclose the fact that an impairment loss of $4 457 162
arose on a container ship subsequent to a collision. The recoverable amount is value in use estimated using
a discount rate of 6 per cent.

Module answers 159

160 Financial Reporting