ACA Financial Accounting and Reporting — Questions and Answers
Question 1: Under FRS 102, which of the following items should be classified as an intangible asset?
- Factory machinery
- Internally generated goodwill
- A purchased patent with a finite useful life (Correct answer)
- Land and buildings
Correct answer: A purchased patent with a finite useful life
Under FRS 102 Section 18, a purchased patent with a finite useful life meets the definition of an intangible asset — it is an identifiable non-monetary asset without physical substance. Internally generated goodwill is specifically prohibited from recognition. Machinery, land, and buildings are tangible assets.
Question 2: Under FRS 102, what is the correct accounting treatment for development costs that meet the capitalisation criteria?
- Always expensed immediately as incurred
- May be capitalised as an intangible asset and amortised over the development's useful life (Correct answer)
- Recognised as revenue immediately
- Recorded as a contingent liability
Correct answer: May be capitalised as an intangible asset and amortised over the development's useful life
FRS 102 Section 18 allows (but does not require) development expenditure to be capitalised as an intangible asset if certain criteria are met: technical feasibility, intention to complete, ability to use or sell, probable future economic benefits, adequate resources, and reliable cost measurement. Once capitalised, it must be amortised over its useful life.
Question 3: A UK company issues 100,000 ordinary shares with a nominal value of £1 each at a price of £3.50 per share. What is the share premium arising from this issue?
- £100,000
- £250,000 (Correct answer)
- £350,000
- £150,000
Correct answer: £250,000
Share premium = (Issue price − Nominal value) × Number of shares = (£3.50 − £1.00) × 100,000 = £250,000. The total proceeds of £350,000 are split between share capital (£100,000 at nominal value) and share premium (£250,000). Share premium is a non-distributable reserve under the Companies Act 2006.
Question 4: Under FRS 102, how should a provision be measured?
- At the maximum possible amount of the obligation
- At the best estimate of the expenditure required to settle the present obligation at the reporting date (Correct answer)
- At the invoice value received from the supplier
- At the amount management would prefer to pay
Correct answer: At the best estimate of the expenditure required to settle the present obligation at the reporting date
FRS 102 Section 21 requires provisions to be measured at the best estimate of the amount required to settle the present obligation at the reporting date. Where the effect of the time value of money is material, the provision should be discounted to present value.
Question 5: Under the Companies Act 2006, which of the following is a legal requirement for the directors' report of a UK company?
- A detailed five-year financial forecast
- A recommended dividend amount (if applicable) and the names of the directors who served during the year (Correct answer)
- A full list of all employees and their salaries
- The CEO's personal investment portfolio
Correct answer: A recommended dividend amount (if applicable) and the names of the directors who served during the year
The Companies Act 2006 (sections 415-419) requires the directors' report to include information such as the names of directors who served during the year, the recommended dividend, principal activities of the company, and political and charitable donations above certain thresholds.
Question 6: Under FRS 102, what is the treatment of borrowing costs directly attributable to the acquisition of a qualifying asset?
- Always expensed to profit or loss as incurred
- Must be capitalised as part of the cost of the qualifying asset
- May be either capitalised or expensed as an accounting policy choice (Correct answer)
- Recognised directly in equity
Correct answer: May be either capitalised or expensed as an accounting policy choice
FRS 102 Section 25 gives entities an accounting policy choice: borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset may either be capitalised as part of the asset's cost or expensed to profit or loss as incurred. The policy chosen must be applied consistently.
ACA Financial Accounting and Reporting
Under FRS 102, which of the following items should be classified as an intangible asset?