Financial Reporting and IFRS Quiz

Financial Reporting Regulation Sources

• Regulatory framework for financial reporting includes legislation, accounting standards, and stock exchange regulations.
• All of the above sources are part of the framework.

International Financial Reporting Standards Adherence

• Entities adopting international financial reporting standards (IFRS) must adhere to the requirements of each standard, regardless of circumstances.
• This is a factual statement (True).

Financial Reporting Users

• The primary users of general-purpose financial reports are investors and lenders.

Departures from International Standards

• An entity complying with IFRS may depart from the requirements of an international standard if compliance would produce misleading information, or if compliance costs are excessive.
• It is not permissible to depart from standards merely at the entity's choice.

IFRS Underlying Principle - Fair Presentation

• Fair presentation is an underlying component of IFRS accounting.
• Other underlying principles are Accrual Basis of Accounting, Comparative Information, Timeliness and Consistency of Presentation.
• Going Concern is also not an underlying principle but a separate principle

Underlying Principle of Prudence

• The "Prudence Principle" is an underlying principle of IFRS Accounting.
• This is not a principle of German GAAP.

IFRS and HGB Classification

• IFRS and HGB are principle-based and rule-based accounting systems, respectively.

International Accounting Standards Board Standards

• Standards issued by the International Accounting Standards Board (IASB) are known as International Financial Reporting Standards (IFRS).

Standardisation in Financial Reporting

• A key advantage of standardisation in financial reporting is comparability across accounting periods and entities.
• This is a key function of standardisation

Conceptual Framework of Financial Reporting

• The conceptual framework of financial reporting comprises a set of principles that underlie financial reporting.
• This does not provide a list of items in the financial statement

Qualitative Characteristics of Financial Information

• Fundamental qualitative characteristics of financial information include relevance, faithful representation, and comparability.
• Verifiability and understandability are also important characteristics

Financial Statement Elements

• The elements of financial statements relating to financial position are assets, liabilities, and equity.
• The elements relating to performance are income and expenses

Components of Financial Statements

• A complete set of financial statements includes a statement of comprehensive income (profit and loss), balance sheet (financial position), and statement of cash flows.
• A management commentary and a set of notes are not part of the fundamental financial statements

Main Financial Performance Statement

• The primary financial performance statement is the statement of profit or loss and other comprehensive income.

Property, Plant, and Equipment (PPE)

• A machine bought for use in more than one accounting period is considered PPE.
• Computer software bought for use in more than one period is also PPE

Carrying Amount of PPE

• The carrying amount of property, plant, and equipment (PPE) refers to the amount at which the item is recognised in the financial statements.
• This is not the depreciable amount.

Accounting Treatment of Revaluation - Example

• A change in the valuation of land, used under a revaluation model, needs to be reflected in other comprehensive income (OCI) in the period of the revaluation.

Initial Measurement of PPE

• Property, Plant and Equipment (PPE) is initially measured at cost.

Subsequent Measurement of PPE

• PPE can be measured using either the cost model or the revaluation model in subsequent periods (more than initial measurement).
• It cannot be used with an accrual model, which is used for other transactions and not directly with PPE.

IAS2 Inventory Definition

• The definition of inventories under IAS 2 states that items qualify as inventories only if they are held for resale in the ordinary course of business, or are in the process of production for sale. (True).

Items Not Included in Inventory Cost

• Costs not included in the cost of inventories are irrecoverable import duties, fixed production overheads, and variable production overheads.
• The cost of abnormal wastage of materials and labour can be included.

Cost Formulas for Inventories

• Permitted cost formulas under IAS 2 include FIFO (first-in, first-out), LIFO (last-in, first-out), and weighted-average cost.

FIFO Cost Formula Assumption

• Under the FIFO (first-in, first-out) cost formula, the inventory items sold or consumed are the ones acquired earliest.

Inventory Cost and Net Realizable Value Example

• In a specific example, the cost of partly completed inventory is £26,300, further costs of £8,900 are estimated, and the expected revenue is £47,500. Selling costs estimated at £2,000, the calculated cost is £35,200. The net realizable value is this reduced by estimated selling costs or £45,500

Determining Stage of Completion of Contract

• The stage of completion of a construction contract can be determined by comparing costs incurred to date to estimated total costs, carrying out a survey of work performed to date, or considering the physical proportion of contract work completed.

Expected Profits and Losses in Construction Contracts

• Expected profits of a construction contract are spread over the contract period. Losses are recognized when they become probable

Lease Classification as Finance Lease

• A lease can be classified as a finance lease if, at the commencement of the lease, the present value of the minimum lease payments amounts to substantially all of the fair value of the asset. This also applies in other circumstances such as the lease term exceeding substantially the economic life of the asset. Another condition is the transfer of ownership to the lessee at the end of the lease term.

Lease of Land and Finance Leases

• A lease of land that does not transfer legal title to the lessee by the end of the lease term cannot be a finance lease. (True).

Operating Leases

• In operating leases, the lessor does not retain the risks and rewards associated with ownership; lease payments are expensed by the lessee, and the leased item is not shown as an asset on the lessor's financial statements.

Measurement of Finance Leases at Commencement

• At the commencement of a finance lease, both an asset and a liability are recognized, measured at the present value of the minimum lease payments

IFRS 3 Goodwill Recognition

• After a business acquisition, goodwill arising from the business combination is an asset, and is not necessarily identified as its own distinct asset.

Goodwill Measurement

• Goodwill acquired in a business combination is measured at cost.

Impairment Loss

• An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount (the higher of its fair value less costs to sell and its value in use), not the written down value or market value

External Indicators of Impairment

• External indicators of impairment include an unexpected decline in an asset's market value and an adverse technological change affecting the market in which the entity operates.

Goodwill Impairment Reversal

• A previously recognised goodwill impairment loss should be reversed if evidence emerges that the loss no longer exists

Research and Development Expenditure Accounting

• Research expenditure should generally be written off as an expense; development expenditure is capitalized as an intangible asset only if it meets specified conditions.

Advertising and Promotion Expenditure

• Expenditure on advertising and promotion, typically, does not create an intangible asset.. (True)

Revaluation of Intangible Assets

• Intangible assets, generally, cannot be measured using the revaluation model. There must be an active market in the type of asset