ACCA ACCA Financial Reporting Standards 2 — Questions and Answers
Question 1: Under IFRS 9, into which three categories are financial assets classified?
- Held-to-maturity, available-for-sale, and trading
- Amortized cost, fair value through other comprehensive income (FVOCI), and fair value through profit or loss (FVTPL) (Correct answer)
- Short-term, long-term, and derivative
- Debt, equity, and hybrid instruments
Correct answer: Amortized cost, fair value through other comprehensive income (FVOCI), and fair value through profit or loss (FVTPL)
IFRS 9 classifies financial assets into amortized cost, FVOCI, and FVTPL based on the entity's business model and the contractual cash flow characteristics.
Question 2: What does IAS 19 govern in financial reporting?
- Property, plant and equipment
- Employee benefits including pensions (Correct answer)
- Foreign currency transactions
- Provisions and contingent liabilities
Correct answer: Employee benefits including pensions
IAS 19 Employee Benefits prescribes how companies account for and disclose employee benefits, including short-term benefits, post-employment benefits, and pensions.
Question 3: Under IFRS 3, how should goodwill arising on a business combination be accounted for?
- Amortized over its useful economic life
- Written off immediately against retained earnings
- Recognized as an asset and tested annually for impairment (Correct answer)
- Recognized as an expense in the year of acquisition
Correct answer: Recognized as an asset and tested annually for impairment
IFRS 3 requires goodwill to be recognized as an intangible asset and subjected to annual impairment testing rather than systematic amortization.
Question 4: What is the 'conceptual framework' in IFRS and what is its primary purpose?
- A legal document that overrides all individual standards
- A guide that underpins the development of IFRS standards and assists preparers in applying them (Correct answer)
- A list of approved accounting methods for each industry
- A compliance checklist issued by national regulators
Correct answer: A guide that underpins the development of IFRS standards and assists preparers in applying them
The IFRS Conceptual Framework provides the underlying concepts that guide the IASB in developing standards and helps preparers develop consistent accounting policies.
Question 5: Under IAS 37, when should a provision be recognized on the balance sheet?
- When management decides to set aside funds for a future event
- When there is a present obligation, probable outflow of resources, and reliable estimate (Correct answer)
- When an expense is likely to occur in the next financial year
- Only when a legal claim has been filed against the company
Correct answer: When there is a present obligation, probable outflow of resources, and reliable estimate
IAS 37 requires a provision to be recognized only when there is a present obligation (legal or constructive), a probable outflow of economic benefits, and a reliable estimate can be made.
Question 6: What is the 'effective interest method' used for under IFRS financial reporting?
- Allocating dividends to shareholders over time
- Amortizing the premium or discount on financial instruments to reflect true interest cost (Correct answer)
- Calculating depreciation on PPE using interest-equivalent rates
- Determining the fair value of derivative instruments
Correct answer: Amortizing the premium or discount on financial instruments to reflect true interest cost
The effective interest method allocates interest income or expense over the relevant period, spreading any discount or premium on a financial instrument at a constant rate.
ACCA ACCA Financial Reporting Standards 2
Under IFRS 9, into which three categories are financial assets classified?