Applying IFRS Standards 4th Edition Ruth Picker – Test Bank

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Sample Questions

Multiple Choice Questions

1.

2.

3.  1.

2.

Which of the following is a reason why the IASB and FASB jointly developed a revenue standard? remove inconsistencies and weaknesses in the current revenue recognition literature; provide a more robust framework for addressing revenue recognition issues; improve comparability of revenue recognition practices across the various industries, entities, jurisdictions and capital markets; provide a single reference point in order to reduce the volume of the relevant standards and interpretations that entities will need to refer to; provide more useful information to users through enhanced­disclosure requirements.

Learning Objective 4.1 Understand the background to the issuance of IFRS 15

1.

2.

3.

I, II only II, III and IV only I, III and IV only

*d. I, II, III, IV and V

2.

Which of the following are excluded from the scope of IFRS 15?

I the initial recognition of agricultural produce II insurance contracts within the scope of IFRS 4 Insurance Contracts III the extraction of mineral ores IV lease agreements

Learning Objective 4.2 Identify the types of contracts that are within the scope of IFRS 15 1.

2.

3.

I, II only II, III and IV only I, III and IV only

*d. I, II, III and IV

3.

Which of the following contracts with customers to provide goods or services in the ordinary course of business are included within the scope of IFRS 15?

I lease contracts accounted for under IAS 17 Leases; II insurance contracts accounted for under IFRS 4 Insurance Contracts; III financial instruments and other contractual rights or obligations accounted for under IFRS 9 Financial Instruments or IAS 39 Financial Instruments: Recognition and Measurement, IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures IV non­monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers.

Learning Objective 4.2 Identify the types of contracts that are within the scope of IFRS 15 1.

2.

3.

I., II. and III. III. only I., II. and IV.

*d. None of the above

4.

According to IFRS 15, an entity will recognise revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to a customer, which requires entities to apply a five­step model as follows:

Learning Objective 4.3 Apply the five­step model for measuring and recognising revenue under IFRS 15

1. Identify the contract(s) with a customer 2. Identify the performance obligations in the contract a.

3. Determine the transaction price 4. Recognise revenue when (or as) the entity satisfies a performance obligation 5. Allocate the transaction price to the performance obligations in the contract

1. Identify the performance obligations in the contract 2. Identify the customer

b.

3. Determine the transaction price 4. Allocate the transaction price to the performance obligations in the contract 5. Recognise revenue when (or as) the entity satisfies a performance obligation

*c.

1. Identify the contract(s) with a customer

2. Identify the performance obligations in the contract 3. Determine the transaction price 4. Allocate the transaction price to the performance obligations in the contract 5. Recognise revenue when (or as) the entity satisfies a performance obligation

d.

None of the above

5.

In which circumstances arrangements with customers are contracts within the scope of IFRS 15?

6.

the contract might be approved by all parties in writing, or in accordance with other customary business practices, 7. the parties are committed to carrying out their respective obligations;  the entity cannot identify the rights of each party with regard to the goods or services that are to be transferred under the contract; 1. the entity cannot identify the payment terms for the goods or services to be transferred; 2. the entity has completed performing all of its obligations under the contract and has received all, or substantially all, of the consideration promised by the customer.

Learning Objective 4.3 Apply the five­step model for measuring and recognising revenue under IFRS 15 1.

2.

3.

I., II. and III. II. and V. I., II. and IV.

*d. None of the above

6.

According to IFRS 15, which method should be used to estimate the stand­alone selling prices?

7.

Adjusted market assessment approach.

8.

Expected cost plus a margin approach.  Residual approach, in limited circumstances.

Learning Objective 4.3 Apply the five­step model for measuring and recognising revenue under IFRS 15 *a. I., II. and III. 1.

2.

3.

I. and II. II. and III. None of the above

7.

Blue Marine Limited sells boats and provides mooring facilities for its customers. Blue Marine sells the boats for €60,000 each and provides mooring facilities for €10,000 per year. Blue Marine sells these goods and services separately; therefore, they are distinct and accounted for as separate performance obligations. Blue Marine enters into a contract to sell a boat and one year of mooring services to a customer for €65,000.

Blue Marine Limited will allocate the transaction price of €65,000 to the performance obligations as follows:

Learning Objective 4.3 Apply the five­step model for measuring and recognising revenue under IFRS 15 Boat Mooring services 1.

2.

3.

€65,000 Nil Nil €65,000 €55,000 €10,000

*d. €55,714 €9,286

8.

Seller enters into a contract with a customer to sell Products A, B and C for a total transaction price of £100,000. Seller regularly sells Product A for £25,000 and Product B for £45,000 on a stand­alone basis. Product C is a new product that has not been sold previously, has no established price, and is not sold by competitors in the market. Products A and B are not regularly sold together at a discounted price. Product C is delivered on 1 March, and Products A and B are delivered on 1 April.

How should Seller determine the stand­alone selling price of Product C? 9.

Seller can use the residual approach to estimate the stand­alone selling price of Product C, because Seller has not previously sold or established a price for Product C.

10.



Prior to using the residual approach, Seller should assess whether any other observable data exists to estimate the stand­alone selling price. For example, although Product C is a new product, Seller might be able to estimate a stand­alone selling price through other methods, such as using expected cost plus a margin.

Seller has observable evidence that Products A and B sell for £25,000 and £45,000 respectively, for a total of £70,000. The residual approach results in an estimated stand­alone selling price of £30,000 for Product C (£100,000 total transaction price less £70,000).

Learning Objective 4.3 Apply the five­step model for measuring and recognising revenue under IFRS 15 *a. I., II. and III. 1.

2.

3.

I. and II. II. and III. None of the above

9.

According to IFRS 15, the methods for recognising revenue on arrangements involving the transfer of goods or services over time are: 10.

Output methods 11.

Residual method  Input methods 1.

Adjusted assessment method Learning Objective 4.3 Apply the five­step model for measuring and recognising revenue under IFRS 15 1.

2.

I., II. and III. I. and IV.

*c. I. and III. 1.

II., III. and IV.

10.

Construction Co lays railroad track and enters into a contract with Railroad to replace a stretch of track for a fixed fee of €100,000. All work in process is the property of Railroad.

Construction Co has replaced 75 units of track out of 100 total units of track to be replaced by year end. The effort required of Construction Co is consistent across each of the 100 units of track to be replaced.

Construction Co determines that the performance obligation is satisfied over time, as Railroad controls the work in process asset being created.

Construction Co should recognise revenue totalling: Learning Objective 4.3 Apply the five­step model for measuring and recognising revenue under IFRS 15 1.

€100,000.

*b. €75,000 1.

2.

€25,000 €175,000

11.

 

In 2016 Contractor enters into a contract with Government to build an aircraft carrier for a fixed price of €4 billion. The contract contains a single performance obligation that is satisfied over time.

Additional contract characteristics are: Total estimated contract costs are €3.6 billion, excluding costs related to wasted labour and materials.

Costs incurred in year one are €740m, including €20m of wasted labour and materials.

Contractor concludes that the performance obligation is satisfied over time, because Government controls the aircraft carrier as it is created. Contractor also concludes that an input method using costs incurred relative to total cost expected to be incurred is an appropriate measure of progress towards satisfying the performance obligation.

How much revenue and cost should Contractor recognise as of the end of 2016?

Learning Objective 4.3 Apply the five­step model for measuring and recognising revenue under IFRS 15 Revenue Cost *a. €800m €740m 1.

2.

3.

€800m €760m €800m €720m €760m €740m

12.

Equipment Dealer enters into a contract to deliver construction equipment to Landscaping Inc. Equipment Dealer operates in a country where it is common to retain title to construction

equipment and other heavy machinery as protection against non­payment by a buyer.

Equipment Dealer’s normal practice is to retain title to the equipment until the buyer pays for it in full. Retaining title enables Equipment Dealer to more easily recover the equipment if the buyer defaults on payment.

Equipment Dealer concludes that there is one performance obligation in the contract that is satisfied at a point in time when control transfers. Landscaping Inc has the ability to use the equipment and move it between various work locations once it is delivered. Normal payment and credit terms apply.

When should Equipment Dealer recognise revenue for the sale of the equipment?

Learning Objective 4.3 Apply the five­step model for measuring and recognising revenue under IFRS 15 1.

when entering the contract

*b. upon delivery 1.

2.

when full payment is made none of the above

13.

Biotech licenses intellectual property (IP) to an early­stage drug compound to Pharma.

Biotech also provides research and development (R&D) services as part of the arrangement.

Biotech is the only vendor able to provide the R&D services based on its specialised knowledge of the technology.

How is this arrangement defined?

Learning Objective 4.5 Identify other significant application issues associated with IFRS 15 1.

2.

licence distinct licence

*c. non distinct licence 1.

patent

14.

Software Co provides a perpetual software licence to Engineer. Software Co will also install the software as part of the arrangement. Software Co offers the software licence to its customers with or without installation services, and Engineer could select a different vendor for installation.

The installation does not result in significant customisation or modification of the software.

How is this arrangement defined?

Learning Objective 4.5 Identify other significant application issues associated with IFRS 15 1.

patent

*b. distinct licence 1.

2.

non distinct licence trademark

15.      

Web Co operates a website selling used books. Web Co enters into a contract with Bookstore, a used bookshop, to sell books sold by Bookstore. The terms and conditions of the contract include: Web Co will transport the books sold to the end customer.

Web Co does not take possession of the books sold to the customers; however, the customer returns the books to Web Co if they are dissatisfied.

Web Co has the right to return books to Bookstore without penalty if they are returned by the customer.

Web Co will invoice the customer for the sale.

Web Co earns a fixed margin on the books sold, and has no flexibility in establishing the sales price of the book.

Bookstore retains credit risk for sales to the customer.

Web Co should recognise revenue on the transfer of the books to the customer: Learning Objective 4.5 Identify other significant application issues associated with IFRS 15 1.

on a gross basis

*b. on a net basis 1.

2.

on a gross basis as Bookstore retains all credit risk on a net basis as Web Co does not set the sales price

16.

Travel Co negotiates with major airlines to obtain access to airline tickets at reduced rates, and it sells the tickets to its customers through its website. Travel Co contracts with the airlines to buy a specific number of tickets at agreed rates and must pay for those tickets regardless of whether it is able to resell them. Customers visiting Travel Co’s website search Travel Co’s inventory of tickets, and Travel Co has latitude to set the prices for the tickets that it sells to its customers.

Customers pay for airline tickets using credit cards, and Travel Co is the merchant of record. Credit card charges are pre­authorised; however, Travel Co incurs occasional losses as a result of disputed charges.

Travel Co is responsible for delivering the ticket to the customer. Travel Co will also assist the customer in resolving complaints with the service provided by the airlines. The airline is responsible for fulfilling all other obligations associated with the ticket, including the air travel and related services (that is, the flight), and remedies for service dissatisfaction.

Travel Co should recognise revenue:

Learning Objective 4.5 Identify other significant application issues associated with IFRS 15 1.

for the ticket price agreed with the airlines

*b. for the fee charged to customers on a gross basis 1.

2.

for the fee charged to customers net of the amounts paid to the airlines for the fee charged to customers net of credit card charges

17.

Data Co enters into a two­year contract with a customer to build a data centre in exchange for consideration of €1m.

Data Co incurs incremental costs to obtain the contract and costs to fulfil the contract that are recognised as assets and amortised over the expected period of benefit.

The economy subsequently deteriorates, and the parties agree to renegotiate the pricing in the contract, resulting in a modification of the contract terms.

The remaining amount of consideration to which Data Co expects to be entitled is €650,000. The carrying value of the asset recognised for contract costs is €600,000. An expected cost of €150,000 would be required to complete the data centre.

How should Data Co account for the asset after the contract modification?

Learning Objective 4.5 Identify other significant application issues associated with IFRS 15 *a. Data Co should recognise an impairment loss of C100,000.

1.

2.

Data Co should record the contract asset for €1m.

The carrying value of the asset recognised for contract cost should be €500,000 (€650,000 less €150,000).

3.

Data Co should recognise an impairment loss of €150,000.

18.

On 1 January 2016, Producer enters into a contract to deliver a product to Customer on 31 March 2016. The contract is non­cancellable and requires Customer to make an advance payment of €5,000 on 1 February 2016. Customer does not pay the consideration until 1 March.

How should Producer reflect the transaction in the statement of financial position?

Learning Objective 4.5 Identify other significant application issues associated with IFRS 15 1.

1 February 2016

Dr Trade Receivables €5,000 Cr Contract Liability €5,000 31 March 2016 Dr Contract Liability €5,000 Cr Revenue €5,000

*b. 1 February 2016 Dr Trade Receivables €5,000 Cr Contract Liability €5,000 1 March 2016 Dr Cash €5,000 Cr Trade Receivables €5,000 31 March 2016 Dr Contract Liability €5,000 Cr Revenue €5,000

1.

1 January 2016

Dr Trade Receivables €5,000 Cr Contract Liability €5,000 1 February 2016 Dr Cash €5,000 Cr Trade Receivables €5,000 31 March 2016

Dr Contract Liability €5,000 Cr Revenue €5,000 1.

None of the above

19.

20.

21. 

Which of the following disclosure are required by IFRS 15?

Total income, allocated between revenue and other gains qualitative and quantitative information about contracts with customers qualitative and quantitative information about any assets recognised from the costs to obtain or fulfil a contract with a customer 1. the opening and closing balances of receivables, contract assets and contract liabilities from contracts with customers, if not otherwise separately presented or disclosed Learning Objective 4.6 Explain the presentation and disclosure requirements of IFRS 15 1.

I and II only

*b. II, III and IV only 1.

2.

I, II and III only I, II, III and IV

Multiple Choice Questions

1.

When first issued, IAS 39 was:

Learning Objective 7.1 Describe the background to the development of accounting standards on financial instruments *a. More rule­based than other AASB standards 1.

2.

3.

Less rule­based than other AASB standards Wider in scope that other AASB standards Narrower in scope that other AASB standards

2.

Which of the following is NOT an example of a derivative financial instrument?

Learning Objective 7.4 Explain the concept of a derivative

1.

A forward exchange contract

*b. A commercial bill contract 1.

2.

A futures contract An option contract

3.

Company A issues preference shares to Company B, the terms of which entitle party B to redeem the preference shares for cash if Company A’s revenues fall below a specified level. From Company A’s perspective the preference shares are:

Learning Objective 7.4 Distinguish between equity instruments and financial liabilities 1.

an equity instrument

*b. a financial liability 1.

2.

a compound financial instrument a financial asset

4.

Which of the following items is classified as a financial asset?

Learning Objective 7.3 Outline and apply the definitions of financial assets and financial liabilities 1.

2.

ordinary shares of the issuer; loans payable (owed by the borrower);

*c. accounts receivable; 1.

inventory.

5.

All of the following would be regarded as financial instruments except:

Learning Objective 7.2 Define a financial instrument 1.

2.

3.

bank overdraft; notes payable; cash;

*d. equipment.

6.

Which of the following items are regarded as a financial liability?

Learning Objective 7.3 Outline and apply the definitions of financial assets and financial liabilities 1.

ordinary shares held in another entity;

*b. a contract that is a non­derivative for which the entity is obliged to deliver a variable number of its own equity instruments; 1.

a contractual right to exchange under potentially favourable conditions, an option to purchase shares below the market price; 2. the right of a depositor to obtain cash from a financial institution with which it has deposited cash.

7.

Which of the following are regarded as financial instruments:

I Deposits held by a financial institution; II Ordinary shares; III Raw materials inventories; IV Property, plant and equipment.

V Accounts receivable and accounts payable.

Learning Objective 7.2 Define a financial instrument 1.

2.

I, II, IV and V only; II, III and IV only;

*c. I, II and V only; 1.

I, IV and V only.

8.

Company A issued convertible notes 3 years ago and accounted for them as a compound financial instrument. Complete the following:

At the end of the three year period the portion of the (1) component that relates to the notes which have been converted (2) .

Learning Objective 7.5 Explain the concept of a compound financial instrument (1) (2) 1.

2.

equity is transferred to profit & loss liability remains as a liability

*c. liability is transferred to equity 1.

liability is transferred to profit & loss

9.

Company A has convertible notes on issue. These notes are convertible to ordinary shares of the Company after 3 years. The distributions made to the note holders by Company A are classified by Company A as follows:

Learning Objective 7.5 Explain the concept of a compound financial instrument 1.

2.

interest expense. dividends distributed.

*c. a portion representing interest expense and a portion representing dividends distributed 1.

indeterminable based on the information provided.

10.

Which of the following events provide objective evidence that a financial asset has been impaired:

I A default in interest payments.

II The borrower enters into bankruptcy.

III Significant financial difficulty of the issuer.

IV The downgrade of an entity’s credit rating.

Learning Objective 7.11 understand and apply the measurement criteria for each category of financial instrument *a. I, II and III only; 1.

2.

3.

II, III and IV only; I, III and IV only; II and IV only.

11.

IFRS 9 requires that on initial recognition financial liabilities must be measured at:

Learning Objective 7.11 understand and apply the measurement criteria for each category of financial instrument 1.

fair value;

*b. fair value minus transaction costs; 1.

2.

fair value plus transaction costs; discounted future net cash flows.

12.

The formal documentation of a hedging relationship must include identification of:

I II III IV The hedging instrument No No Yes Yes The hedged item No Yes Yes No The nature of the risk being hedged No Yes Yes Yes How the entity will assess hedge effectiveness Yes No Yes No

Learning Objective 7.13 Outline the rules of hedge accounting set out in IFRS 9 and be able to apply the rules to simple common cash flow and fair value hedges 1.

2.

I; II;

*c. III; 1.

IV.

13.

To be regarded as ‘highly effective’ in achieving offsetting changes in fair value or cash flows, actual hedge results must be in the range:

Learning Objective 7.13 Outline the rules of hedge accounting set out in IFRS 9 and be able to apply the rules to simple common cash flow and fair value hedges 1.

70% – 100%;

*b. 80% – 125%; 1.

2.

90% – 100%; 20% – 50%.

14.

Whitnall Limited lost $150 on a hedging instrument and had a corresponding gain on the hedged item of $100. The effectiveness range for the associated transactions is:

Learning Objective 7.13 Outline the rules of hedge accounting set out in IFRS 9 and be able to apply the rules to simple common cash flow and fair value hedges 1.

2.

3.

100% – 150%; 20% – 30%; 0% – 15%;

*d. 66% – 150%.

15.

The degree to which changes in the fair value or cash flows of a hedge item that are attributable to a hedge risk are offset by the changes in the fair value or cash flows of a hedging instrument, describes:

Learning Objective 7.13 Outline the rules of hedge accounting set out in IFRS 9 and be able to apply the rules to simple common cash flow and fair value hedges

1.

2.

transaction exposure; hedge ineffectiveness;

*c. hedge effectiveness; 1.

transaction variability.

16.

When accounting for a cash flow hedge, IFRS 9 requires that hedge ineffectiveness is:

Learning Objective 7.13 Outline the rules of hedge accounting set out in IFRS 9 and be able to apply the rules to simple common cash flow and fair value hedges *a. recorded in profit or loss; 1.

2.

3.

separately recorded in equity; recorded separately as a financial liability; capitalised as a deferred asset.

17.

The definition of a derivative requires which of the following characteristics to be met?

I its value must change in response to a change in an underlying variable such as a specified interest rate, price or foreign exchange rate.

II it must be settled on a net basis III it must require no initial net investment or an additional net investment that is smaller than would be required for other types of contracts with similar responses to changes in market factors.

IV it is to be settled at a future date Learning Objective 7.8 explain the concept of an embedded derivative 1.

I, II and III

*b. I, III and IV 1.

2.

I, II and IV II, III and IV

18.

Callas Corporation Limited buys an option that entitles it to purchase 2000 shares in Maria Limited at $5 per share at any time in the next 3 months. The derivative financial instrument in this transaction is the:

Learning Objective 7.8 explain the concept of an embedded derivative 1.

2.

3.

shares in Callas Corporation Limited; shares in Maria Limited; price of the shares in Maria Limited after 3 months have elapsed;

*d. option priced at $5.

19.

The classification of a financial instrument on the Statement of Financial Position of an entity is governed by the principle of:

Learning Objective 7.4 Distinguish between equity instruments and financial liabilities 1.

2.

legal form; net present value;

*c. substance over form; 1.

forfeiture.

20.

The appropriate accounting treatment for incremental costs directly attributable to an equity transaction that would otherwise have been avoided is to:

Learning Objective 7.6 determine the classification of revenues and expenses arising from financial instruments *a. deduct from equity, net of tax; 1.

2.

3.

add to equity, net of tax; expense in the period incurred; defer as a contingent asset.

21.

When an entity has a legally enforceable right to set off the recognised amounts of a financial asset and financial liability and it intends to settle on a net basis, it:

Learning Objective 7.12 determine when financial assets and financial liabilities may be offset 1.

can write off both the asset and the liability;

*b. may offset the financial asset and liability; 1.

2.

is not entitled to offset the asset and liability; need not present the asset, the liability or the net amount in its financial statements.

22.

The risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss is referred to as:

Learning Objective 7.14 describe the main disclosure requirements of IFRS 7 1.

2.

3.

interest rate risk; liquidity risk; market risk;

*d. credit risk.

23.

Which of the following is within the scope of IFRS 9?

Learning Objective 7.7 describe the scope of IFRS 9 1.

a lease obligation

*b. a lease renewal option within a lease agreement 1.

2.

a financial guarantee contract an investment in a joint venture.