International Accounting Standards: Quiz!

2.

What does IAS 16 state about how we should depreciate an asset?

All assets having a known useful life should be depreciated
Assets should be recognised in the balance sheet at their carrying amount
Assets should be depreciated by systematically allocating their depreciable amount over their useful life
The carrying amount of an asset is the value recognised in the accounts after deducting depreciation and impairment losses

Correct Answer

A. Assets should be depreciated by systematically allocating their depreciable amount over their useful life

Explanation

Some non-current assets are not depreciated.

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3.

How should an entity choose which depreciation method to use?

Always use 25% diminishing balance unless there is a good reason not to
The method which best reflects way we use up the value of the asset over its expected useful life
If the residual value is negligible you can ignore it when calculating the depreciable amount
Useful life and and residual value should be reviewed annually and any changes reported according to IAS 8
When determining useful life, expected usage and expected physical wear and tear must be considered

Correct Answer

A. The method which best reflects way we use up the value of the asset over its expected useful life

Explanation

IAS8, Accounting Policies; Changes in Accounting Estimates; and Errors

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4.

What are the 3 key elements used to decide whether an intangible fixed asset should be recognised in the accounts?

Control, marketability, materiality
Completion of development, control, identifiability
Control, identifiability, economic benefits
Intention to complete development, economic benefits, identifiability

Correct Answer

A. Control, identifiability, economic benefits

Explanation

Remember intangible non-current assets include capitalised development costs

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5.

Research costs - What does IAS38, Intangible Assets, the state is the accounting treatment for research costs?

All research costs should be written off at the time they are incurred in line with the Prudence Concept.
Revenue costs are treated as expenses on the Income Statement whereas Capital costs are treated as Non-current Assets

Correct Answer

A. Revenue costs are treated as expenses on the Income Statement whereas Capital costs are treated as Non-current Assets

Explanation

IAS 38, Intangible Assets, states that research costs should be expensed as incurred. This means that all research costs should be treated as revenue costs and recorded as expenses on the Income Statement. On the other hand, capital costs are treated as non-current assets and are capitalized on the balance sheet. Therefore, the correct answer is that revenue costs are treated as expenses on the Income Statement, while capital costs are treated as non-current assets.

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6.

Which TWO of the following options show ALL 6 of the criteria an entity needs to demonstrate in order to recognize development expenditure as a capital cost?

Intention to complete, technically feasible, usefulness or marketability
Control, technically feasible, usefulness
Sufficient resources to enable completion, cost can be reliably measured, how economic benefits will be achieved
Identifiability, cost can be reliably measured, control

Correct Answer(s)

A. Intention to complete, technically feasible, usefulness or marketability
A. Sufficient resources to enable completion, cost can be reliably measured, how economic benefits will be achieved

Explanation

In 1961 Rolls Royce changed accounting policy and capitalised its development costs so it could show a profit. (Matching Concept) It then had to borrow money to pay dividends out of the "profits". Rolls Royce was liquidated in 1971.

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7.

IAS 36 Impairment of fixed assets - The present value of future net cash inflows to the entity from a Cash Generating Unit is the definition of which value?

Value in use
Recoverable amount
Carrying amount

Correct Answer

A. Value in use

Explanation

Value in use refers to the present value of future net cash inflows that an entity is expected to derive from a cash-generating unit (CGU) or a group of CGUs. It represents the higher of the fair value less costs of disposal and the value in use of an asset. Therefore, the correct answer is "Value in use" as it aligns with the definition provided in the question.

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8.

What does the following definition describe? “the higher of the fair value less costs to sell, and the value in use of an asset or cash-generating unit”

Carrying amount
Recoverable amount
Market value in an arm's length transaction

Correct Answer

A. Recoverable amount

Explanation

This definition is describing the "recoverable amount" of an asset or cash-generating unit. The recoverable amount is the higher value between the fair value less costs to sell and the value in use of the asset or unit. It represents the amount that can be recovered from the asset or unit, either through its sale or through its continued use.

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9.

Why would we need to consider a Cash generating unit (a group of assets) rather than an individual non-current asset when determining recoverable amount?

It is not economically viable to work out the future cash inflows from an individual asset
Materiality
Because individual assets often don't create cash inflows on their own

Correct Answer

A. Because individual assets often don't create cash inflows on their own

Explanation

When determining the recoverable amount, it is necessary to consider a cash generating unit (CGU) rather than an individual non-current asset because individual assets often do not generate cash inflows on their own. The cash inflows are usually generated by a group of assets working together as a unit. By considering the CGU, we can assess the future cash inflows and determine the recoverable amount more accurately. Additionally, it is not economically viable to work out the future cash inflows from an individual asset, as it may not provide a complete picture of the overall cash-generating potential of the group of assets. Materiality is also a factor to consider, as individual assets may not have a significant impact on the overall financial position of the entity.

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10.

If the carrying amount (net book value) of an asset is below the recoverable amount, what is the name we give to the difference between the two values?

Revaluation loss
Impairment loss
Notional loss on sale

Correct Answer

A. Impairment loss

Explanation

When the carrying amount of an asset is below its recoverable amount, it indicates that the asset is impaired, meaning its value has significantly decreased. The difference between the carrying amount and the recoverable amount is referred to as an impairment loss. This loss is recognized in the financial statements as an expense, reflecting the decrease in the asset's value.

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11.

What types of property are considered to be an investment property?

Land held for capital appreciation
Vacant land
Empty warehouse
Property to let

Correct Answer(s)

A. Land held for capital appreciation
A. Vacant land
A. Property to let

12.

Which type of lease is normally long term and transfers all the risks and rewards of ownership?

Finance lease
Operating lease

Correct Answer

A. Finance lease

Explanation

A finance lease is a type of lease that is typically long term and transfers all the risks and rewards of ownership to the lessee. In a finance lease, the lessee is responsible for maintaining and insuring the leased asset, as well as bearing any costs associated with its use, such as repairs and maintenance. At the end of the lease term, the lessee usually has the option to purchase the asset at a predetermined price. This type of lease is commonly used for assets that have a long economic life and are expected to retain their value over time.

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13.

IAS17 allows us to capitalize an asset on a finance lease, this increases our Net Assets Which of the following criteria in our contract would indicate that we should NOT capitalize the leased asset?

Term of the lease is major part of the asset's useful life
At inception, PV of minimum lease payments is substantially all of the FV of the asset
Lessor is responsible for repairs
Ownership transferred at end of lease
Lessee has option to purchase at end of lease at price so much lower than Fair Value it is almost certain they will exercise the option

Correct Answer

A. Lessor is responsible for repairs

14.

IAS 2 requires stock to be valued at “lower of cost and NRV” By recognizing that stock is worth less than what it cost the entity, we have recognized the loss in the accounts before it has occurred ie before we have sold the stock. This is in line with the _______ concept.

Matching
Business Entity
Reliability
Prudence
Historical Cost

Correct Answer

A. Prudence

International Accounting Standards: Quiz!

What are the two key criteria for an item of property, plant & equipment to be “recognized” as an asset?

Quiz Preview

What does IAS 16 state about how we should depreciate an asset?

How should an entity choose which depreciation method to use?

What are the 3 key elements used to decide whether an intangible fixed asset should be recognised in the accounts?

Research costs - What does IAS38, Intangible Assets, the state is the accounting treatment for research costs?

Which TWO of the following options show ALL 6 of the criteria an entity needs to demonstrate in order to recognize development expenditure as a capital cost?

IAS 36 Impairment of fixed assets - The present value of future net cash inflows to the entity from a Cash Generating Unit is the definition of which value?

What does the following definition describe? “the higher of the fair value less costs to sell, and the value in use of an asset or cash-generating unit”

Why would we need to consider a Cash generating unit (a group of assets) rather than an individual non-current asset when determining recoverable amount?

If the carrying amount (net book value) of an asset is below the recoverable amount, what is the name we give to the difference between the two values?

What types of property are considered to be an investment property?

Which type of lease is normally long term and transfers all the risks and rewards of ownership?

IAS17 allows us to capitalize an asset on a finance lease, this increases our Net Assets Which of the following criteria in our contract would indicate that we should NOT capitalize the leased asset?

IAS 2 requires stock to be valued at “lower of cost and NRV” By recognizing that stock is worth less than what it cost the entity, we have recognized the loss in the accounts before it has occurred ie before we have sold the stock. This is in line with the _______ concept.