Question

Question 1. An associate is a company over which :

A- the parent has control; it should therefore be fully consolidated

B- the parent has significant influence; it should be fully consolidated

C- the parent has significant influence; it should be equity accounted for in the group accounts

D- the parent has significant influence; it should be treated as a simple investment in the group accounts

Question 2. Which one of the following statements is correct according to IFRS 3 Business Combinations?

A- The acquisition date in a business combination is the date on which the acquirer transfers purchase consideration.

B- On consolidation, contingent liabilities of the subsidiary (which have previously only been disclosed in the notes to the financial statements) are recognised at their fair value

C- Contingent consideration should not be included in the calculation of goodwill

D- Negative goodwill is recognised in the statement of financial position as a negative asset.

Question 3. The following material events occurred after the reporting date but before the financial statements were authorised for issue. According to IAS 10 Events after the Reporting Period, which of these would be classed as an adjusting event?

A- The disposal of a subsidiary

B- Change of foreign exchange rates

C- Destruction of inventory in a warehouse fire but not affecting the going concern status

D- Bankruptcy of a customer with a balance outstanding at the year end

Question 4. Langer Co acquired the entire share capital of Gruber Co on 31 December 20X0 for €10,000. The fair value of the net assets acquired was €11,000.

In accordance with IFRS3 Business Combinations, what is the carrying amount of goodwill in the Statement of Financial Position at 31 December 20X0?

A- Nil

B- € 1,000

C- € 11,000

D- € 10,000

Question 5. IAS 23 Borrowing Costs outlines the treatment of borrowing costs and whether they should be added to the capitalised cost of an asset.

Which of the following statements are correct?

1. Interest on a finance lease liability may be an eligible borrowing cost.
2. Capitalisation of interest is suspended if construction of an asset is suspended for an extended period.
3. Interest on general borrowings can never be capitalised.

A- 1 and 2

B- 1 and 3

C- 2 and 3

D- 1,2 and 3

Answer 1

Question 1: The correct answer is "C: the parent has significant influence; it should be equity accounted for in the group accounts".

Associate refers to when the ownership % is between 20 and 50. It is accounted for under the equity method.

Question 2: The correct answer is "D: Negative goodwill is recognised in the statement of financial position as a negative asset".

IFRS 3 Business combinations allows the acquirer to account and record even negative goodwill in the books. Thereforre "D" statement is true.

Question 3: The correct answer is "D: Bankruptcy of a customer with a balance outstanding at the year end"

For an event to be treated as adjusting event following 2 conditions should be satisfied:

1. Conditions must have existed on balance sheet date

2. Event should be impacting reporting period

In the "D" case both of the above conditions are satisified hence it should be accounted for as an adjusting event.

Question 4: The correct answer is "B: -1,000"

Goodwill = Purchase consideration - Fair value of net assets

Goodwill = 10,000 - 11,000 = -1,000

Question 5: The correct answer is "A: 1 and 2".

Statement 3, i.e., Interest on general borrowings can never be capitalised is incorrect since interest on general borrowings is also capitalised. It is just that the way of capitalisation is different where first the capitalization rate is calculated which is then multiplied by the amount spent on qualifying assets.