ACCA AS Financial Reporting (FR) — Questions and Answers
Question 1: Under IAS 16 Property, Plant and Equipment, which of the following costs should be included in the initial measurement of an item of PPE?
- Staff training costs for operating the asset
- Administration and general overhead costs
- Cost of testing whether the asset functions properly (Correct answer)
- Costs of relocating the asset to a different site after initial installation
Correct answer: Cost of testing whether the asset functions properly
IAS 16.17 states that the cost of an item of PPE includes directly attributable costs of bringing the asset to the condition necessary for it to be capable of operating as intended, which includes testing costs (less any revenue from items produced during testing). Staff training, admin overheads, and relocation costs are expensed as incurred.
Question 2: According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, when should a provision be recognised?
- When there is a possible obligation arising from past events
- When there is a present obligation from a past event, and it is probable that an outflow of resources will be required, and a reliable estimate can be made (Correct answer)
- Whenever management considers a future cost is likely
- Only when the exact amount of the obligation is known with certainty
Correct answer: When there is a present obligation from a past event, and it is probable that an outflow of resources will be required, and a reliable estimate can be made
IAS 37.14 requires all three conditions to be met: (1) present obligation from a past event, (2) probable outflow of economic benefits, and (3) reliable estimate of the amount. A possible obligation (not probable) is disclosed as a contingent liability. An obligation with no reliable estimate is also a contingent liability.
Question 3: Under IFRS 15 Revenue from Contracts with Customers, at which step is revenue recognised?
- Step 1: Identify the contract
- Step 3: Determine the transaction price
- Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation (Correct answer)
- Step 2: Identify the performance obligations
Correct answer: Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation
IFRS 15 follows a five-step model. Revenue is recognised at Step 5 when (or as) the entity satisfies a performance obligation by transferring a promised good or service to the customer. This occurs when the customer obtains control of the asset. The earlier steps identify the contract, obligations, and pricing.
Question 4: A company revalues land from its carrying amount of £200,000 to its fair value of £350,000. How should the revaluation surplus of £150,000 be treated?
- Recognised in profit or loss as a gain
- Recognised in other comprehensive income and accumulated in the revaluation surplus within equity (Correct answer)
- Offset against accumulated depreciation
- Treated as a prior period adjustment
Correct answer: Recognised in other comprehensive income and accumulated in the revaluation surplus within equity
Under IAS 16.39, a revaluation increase (where there is no previous revaluation decrease for the same asset recognised in profit or loss) is recognised in other comprehensive income (OCI) and accumulated in equity under the heading 'revaluation surplus'. It bypasses the income statement entirely unless it reverses a previous decrease.
Question 5: Under IAS 10 Events After the Reporting Period, which of the following is an adjusting event?
- A major acquisition of another entity announced after year end
- Destruction of a factory by flood after the reporting date
- Settlement after the reporting date of a court case confirming the entity had a present obligation at the reporting date (Correct answer)
- A decline in market value of investments after year end
Correct answer: Settlement after the reporting date of a court case confirming the entity had a present obligation at the reporting date
An adjusting event provides evidence of conditions that existed at the reporting date. The settlement of a court case after year end that confirms a liability existed at the reporting date is adjusting — the financial statements should be adjusted. A new acquisition, flood, and market decline are non-adjusting events (conditions arose after the reporting date).
Question 6: Under IAS 38 Intangible Assets, how should research expenditure be treated?
- Capitalised as an intangible asset
- Expensed as incurred (Correct answer)
- Capitalised if the project is expected to be profitable
- Deferred and amortised over the expected benefit period
Correct answer: Expensed as incurred
IAS 38.54 requires all research expenditure to be expensed as incurred because, at the research stage, an entity cannot demonstrate that an intangible asset exists that will generate probable future economic benefits. Only development expenditure can be capitalised, and only if all six strict criteria in IAS 38.57 are met.
ACCA AS Financial Reporting (FR)
Under IAS 16 Property, Plant and Equipment, which of the following costs should be included in the initial measurement of an item of PPE?