FR: Accounting for transactions

Answer: D. Initial cost of an item of PPE = purchase price + directly attributable costs + present value of the dismantling/restoration obligation. Cost = $480,000 + $18,000 + $15,000 = $513,000. Because Marlow uses the deferred income model, the $40,000 grant is held as a separate liability and released to profit or loss over the asset's life — it does not reduce the machine's carrying amount, so the machine is recognised at the full $513,000. Option B ($473,000) is the figure under the alternative netting method (deducting the grant from cost), which does not apply here. Option A ($458,000) both deducts the grant and omits the dismantling provision. Option C ($518,000) mishandles the dismantling cost; the obligation is included at its present value of $15,000, not the nominal $25,000.

Answer: A. Under IAS 16, a decrease on revaluation is first used to eliminate any existing revaluation surplus on that asset — charged to OCI. Any excess fall below the original cost is charged to profit or loss. Here: existing surplus = $150,000; total fall = $230,000. First $150,000 eliminates the surplus (OCI debit); remaining $80,000 ($230,000 − $150,000) goes to profit or loss. Option B would only apply if the fall didn't exceed the surplus. Option C ignores the existing surplus entirely. Option D reverses the order incorrectly.

Answer: B. Component depreciation (IAS 16): each significant component is depreciated separately. Airframe cost = $12,000,000 − $3,000,000 = $9,000,000 over 20 years = $450,000/year. Engines = $3,000,000 over 6 years = $500,000/year. Total = $450,000 + $500,000 = $950,000/year. Option A treats the whole aircraft as $12m/20 years = $600,000 (ignores component lives). Option C treats the whole aircraft as $12m/12 years = $1m (averaged life). Option D is just the airframe element.

Answer: C. Carrying amount at disposal = $200,000 − $140,000 = $60,000. Proceeds = $85,000. Gain on disposal = $85,000 − $60,000 = $25,000. The revaluation surplus of $20,000 (in OCI/equity) is transferred to retained earnings on disposal but does NOT affect the profit or loss gain. Option A of $45,000 incorrectly adds the revaluation surplus to the gain. Option B of $5,000 loss deducts the revaluation surplus from proceeds. Option D confuses the direction.

Answer: D. Under IAS 40, when the fair value model is used, gains and losses from changes in the fair value of investment property are recognised directly in profit or loss — not in OCI. This differs from IAS 16 revaluation model (which uses OCI for increases). The distinction is that IAS 40 fair value changes reflect current performance of a held investment, so they flow through the income statement. Option A describes the IAS 16 revaluation treatment. Option C defers recognition incorrectly.

Answer: A. Under IAS 38, development costs must be capitalised once all six criteria are met (technical feasibility, intention to complete, ability to use/sell, probable future economic benefits, adequate resources, ability to measure reliably). Costs before this point cannot be capitalised retrospectively — they are expensed as incurred. Option B incorrectly treats subsequent success as retroactively justifying earlier capitalisation. Option C has the wrong phase — it's pre-criteria costs that are expensed, not capitalised. Option D confuses research (always expensed) with development (conditional capitalisation).

Answer: B. IAS 38 prohibits recognition of internally generated goodwill and internally generated intangibles where the criteria cannot be reliably met — this specifically includes customer lists (A), brands (C), and publishing titles (D) generated internally, because their cost cannot be distinguished from developing the business as a whole. Purchased goodwill (B) arises on a business combination — it has a reliably measured cost (excess of consideration over fair value of net assets) and is recognised under IFRS 3. The key distinction is internally generated (generally not recognised) vs externally acquired (recognised if cost measurable).

Answer: C. A change in useful life is a change in accounting estimate (IAS 8). Changes in estimates are applied prospectively. After 2 years, carrying amount = $600,000 − 2 × ($600,000/5) = $600,000 − $240,000 = $360,000. This is now amortised over the revised remaining life of 2 years: $360,000/2 = $180,000/year. Retrospective restatement (A) applies to changes in accounting policy or errors, not estimates. Immediate write-off (B) would only apply if the asset became impaired. Estimates can and must be revised when circumstances change (D is wrong).

Answer: D. Under IAS 36, recoverable amount = higher of fair value less costs of disposal and value in use = higher of $280,000 and $310,000 = $310,000. Impairment loss = carrying amount − recoverable amount = $350,000 − $310,000 = $40,000. Option A uses FVLCD ($350,000 − $280,000 = $70,000) — incorrect, because recoverable amount is the higher of the two measures. Option B would apply if recoverable amount exceeded carrying amount. Option C writes off the full carrying amount.

Answer: A. Under IAS 36, an impairment loss in a CGU is allocated first to goodwill (until reduced to zero), then pro-rata to the other assets based on their carrying amounts. Goodwill absorbs $80,000 first, leaving $100,000 − $80,000 = $20,000 to allocate across patent ($120,000) and equipment ($200,000), a combined $320,000. Patent: $20,000 × 120,000/320,000 = $7,500. Equipment: $20,000 × 200,000/320,000 = $12,500. Option B ignores the rule that goodwill is impaired first and just splits the loss equally. Option C allocates the residual in the wrong ratio. Option D splits the residual 60:40 (the carrying-amount ratio reversed), giving the patent too much and the equipment too little.

Answer: B. IAS 36 distinguishes external and internal impairment indicators. External indicators include: significant declines in market value, adverse changes in the technological, market, economic, or legal environment, increases in market interest rates, and carrying amount exceeding market capitalisation. Physical damage (A), internal management accounts (C), and restructuring/disposal plans (D) are internal indicators. The distinction matters for the completeness of impairment review requirements — both types trigger a formal impairment test.

Answer: C. IAS 2: inventory is stated at the lower of cost and NRV. When inventory is used as a component, NRV is assessed based on the finished product. NRV of finished product = selling price − further costs to completion − selling costs = $70 − $18 − $4 = $48 per unit. Since NRV of finished product ($48) exceeds the cost of the component ($40), no write-down is needed. Inventory is valued at cost = 500 × $40 = $20,000. Option A uses NRV of the component itself ($45): 500 × $45 = $22,500 (wrong — components are assessed via finished product NRV when used in production). Options C and D use incorrect figures.

Answer: D. IAS 41 requires biological assets to be measured at fair value less costs to sell (FVLCTS) at each reporting date, with any change in FVLCTS recognised in profit or loss. This reflects the continuous biological transformation (growth, decay, reproduction) that makes historical cost unreliable. The examiner (MJ25) explicitly noted IAS 41 is equally examinable as other standards and is under-revised by candidates. Options A (historical cost) and B (lower of cost/NRV) are inventory treatments. Option C misapplies FVOCI treatment.

Answer: A. Amortised cost method: Opening carrying amount = $940,000. Finance cost = $940,000 × 7% = $65,800. Cash paid = $1,000,000 × 5% = $50,000. Closing carrying amount = $940,000 + $65,800 − $50,000 = $955,800. Option B uses the coupon rate (5%) for finance cost and adds it to nominal value. Option C calculates the correct finance cost but adds it without deducting the cash payment. Option D uses 5% on $940,000. The key principle: the finance cost is based on the carrying amount at the effective interest rate; cash paid is based on nominal at the coupon rate.

Answer: B. Under IAS 32, the substance of an instrument determines classification, not its legal form. Redeemable preference shares with a mandatory dividend and mandatory redemption represent contractual obligations to transfer cash — both the dividend payments and the redemption are obligations. Therefore, the entire instrument is classified as a financial liability. The name 'preference shares' is irrelevant (A). A fixed dividend rate is irrelevant — what matters is whether payment is mandatory (C). Option D would apply to convertible instruments where a conversion option separates equity from debt.

Answer: C. Under IAS 32, a convertible bond is split into a liability and an equity component. The liability component is the present value of the cash flows discounted at the market rate for similar non-convertible debt. Annual interest = $2,000,000 × 4% = $80,000. PV of interest = $80,000 × 3.993 = $319,440. PV of redemption = $2,000,000 × 0.681 = $1,362,000. Liability component = $319,440 + $1,362,000 = $1,681,440. The equity component is the residual: $2,000,000 − $1,681,440 = $318,560, representing the value of the conversion option. Option A wrongly classifies the whole instrument as equity. Option B treats the discount differently. Option D uses the full nominal value, ignoring the split.

Answer: D. Under IFRS 16, the lease liability is initially measured at the present value of future lease payments. Lease liability = $60,000 × 3.465 = $207,900. The right-of-use (ROU) asset is initially equal to the lease liability (plus any initial direct costs, prepayments, or lease incentives — none here). So both are $207,900. Option A uses undiscounted total payments ($60,000 × 4 = $240,000). Option B uses only one year's payment. Option C correctly calculates the liability but uses undiscounted total for the ROU asset — these must be equal on initial recognition (absent adjustments).

Answer: A. Lease liability unwinding: Opening liability = $207,900. Interest = $207,900 × 6% = $12,474. Payment = $60,000. Closing liability = $207,900 + $12,474 − $60,000 = $160,374. The ROU asset is depreciated separately: $207,900/4 = $51,975/year. Option B is the unchanged opening balance. Option C deducts the payment without adding interest. Option D adds interest without deducting the payment. The examiner (SD25) noted candidates commonly use year 1 interest for year 2 calculations — always restart from the closing balance.

Answer: B. The examiner (SD25) specifically tested this distinction and noted most candidates answered incorrectly. Short-term lease exemption (leases with a term of 12 months or less at commencement date) is elected by CLASS of underlying asset — e.g. all short-term leases of cars, or all short-term leases of office equipment. Low-value asset exemption (assets worth approximately $5,000 or less when new) is elected lease-by-lease. Option A gets short-term correct but wrong level for the election. Option C is incorrect — they are independent elections. Option D gets the threshold backwards (it applies to assets of LOW value, not above $5,000).

Answer: C. Under IFRS 16, on a sale and leaseback at fair value the seller-lessee recognises only the portion of the gain that relates to the rights transferred to the buyer. Total gain = fair value − carrying amount = $5,000,000 − $3,500,000 = $1,500,000. Proportion of rights transferred = (fair value − lease liability) ÷ fair value = ($5,000,000 − $4,200,000) ÷ $5,000,000 = 16%. Recognised gain = $1,500,000 × 16% = $240,000. The remaining 84% of the gain relates to the rights retained through the leaseback and is not recognised immediately. Option A recognises the full $1,500,000, the pre-IFRS 16 treatment. Option D recognises nothing, which is also wrong. Option B applies an incorrect proportion.

Answer: D. Under IAS 37, a provision is only recognised when: (1) there is a present obligation as a result of a past event, (2) it is probable (more likely than not, i.e. >50%) that an outflow will be required, and (3) a reliable estimate can be made. With only 50% probability, the 'more likely than not' threshold is not met. No provision is recognised. Instead, a contingent liability is disclosed in the notes (obligation is possible but not probable). Option A and B both recognise a provision despite probability being only 50% — the threshold requires probability to exceed 50%.

Answer: A. Initial provision = PV of future decommissioning cost = $2,000,000 × 0.463 = $926,000. The provision is added to the cost of the asset (IAS 16) and recognised as a liability. Unwinding of discount for year 1 = $926,000 × 8% = $74,080. This is a finance cost in profit or loss. Option B uses the undiscounted cost. Option C uses the correct provision but applies 8% to the undiscounted amount. Option D appears to divide by 2 incorrectly.

Answer: B. Adjusting events are those that provide evidence of conditions that existed at the reporting date. The court case: the obligation existed at 31 December 20X4 (the condition was present) — the February settlement confirms the amount. This is adjusting. The flood (A) is a new event post-year-end — non-adjusting, disclosed. Restructuring announced after year-end (C) — if not a present obligation at year-end, non-adjusting. The acquisition (D) is a post-year-end event — non-adjusting. The key question is always: did the condition EXIST at the reporting date?

Answer: C. Taxable temporary difference at 31/12/20X4 = carrying amount − tax base = $800,000 − $560,000 = $240,000. Deferred tax liability = $240,000 × 25% = $60,000. Opening deferred tax liability = $45,000. Movement (charge to P&L) = $60,000 − $45,000 = $15,000 charge. Option A is the closing balance, not the movement. Option B and D confuse the direction — the liability has increased (carrying amount exceeds tax base = taxable temporary difference), so a charge arises. A deferred tax credit would arise if the liability decreased or if deferred tax assets increased.

Answer: D. A deductible temporary difference arises when the tax base of an asset/liability is higher than its carrying amount (for liabilities) or lower (for assets) — it reduces taxable profit in future periods. A warranty provision: carrying amount = $X (recognised in P&L now); tax base = $0 (deductible later when paid). Tax base > carrying amount for a liability → deductible difference → deferred tax asset. Accelerated capital allowances (A) create taxable temporary differences (liability). Revenue recognised early (B) creates taxable differences. Revaluation (C) creates taxable differences.

Answer: A. A bonus issue is treated as if it had always been in issue (retrospective adjustment). Shares after bonus = 4,000,000 × 5/4 = 5,000,000. These 5,000,000 shares are used for the full year regardless of when the bonus issue occurred. Basic EPS = $800,000 / 5,000,000 = $0.16. Option B uses pre-bonus shares: $800,000/4,000,000 = $0.20. Option C time-weights: 4m × 6/12 + 5m × 6/12 = 4.5m shares, giving $800,000/4.5m = $0.178 — this is correct for a market-value issue, but NOT for a bonus issue. Option D uses incorrect shares.

Answer: B. Rights issue adjustment: bonus element fraction = market price / TERP = $2.60 / $2.45 = 1.0612. Weighted average shares: pre-rights 6,000,000 × 9/12 × 1.0612 = 4,775,510; post-rights 8,000,000 × 3/12 = 2,000,000. Total = 6,775,510. EPS = $1,470,000 / 6,775,510 = $0.217, or $0.22 to two decimal places. Option A ignores the bonus element: 6m × 9/12 + 8m × 3/12 = 6.5m, and $1,470,000 / 6,500,000 = $0.226 ($0.23). Option C ignores the new shares altogether: $1,470,000 / 6,000,000 = $0.245 ($0.25). Option D divides by the 8,000,000 shares in issue at the year end ($0.18). The bonus fraction adjusts the pre-issue shares for the free element of the rights issue.

Answer: C. Under IFRS 5, assets classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell (FVLCTS). Carrying amount at classification = $420,000. FVLCTS = $400,000 − $15,000 = $385,000. Lower = $385,000. Depreciation ceases at the date of classification (no further depreciation in the three months to year end). Option A maintains carrying amount, ignoring the IFRS 5 rule. Option B uses FV without deducting selling costs. Option D incorrectly continues depreciating after classification.

Answer: D. The transaction price determination considers: variable consideration, constraining estimates of variable consideration, significant financing components, non-cash consideration, and consideration payable to the customer. Credit quality of the customer (D) is not a factor in determining the transaction price — it affects whether revenue is recognised at all (step 1: contract identification requires collectability to be probable) but does not modify the price itself. Options A, B and C are all factors explicitly addressed in IFRS 15 Step 3.

Answer: A. Under IFRS 15, an agent recognises revenue as the net amount (commission) because it does not control the goods or services before they are transferred to the customer. PlatformX never takes ownership, bears no inventory risk, and does not set prices — it is an agent. Revenue = $1,000 × 15% = $150. A principal controls the goods before transfer and recognises gross revenue. The key tests: does the entity obtain control of the goods before transfer? Does it bear inventory risk? Can it direct use of the goods? PlatformX fails all three — it is an agent. $850 is the amount passed on to the seller, and $500 has no basis in IFRS 15.

Answer: B. Under the deferred income approach (IAS 20), the grant is recognised as deferred income and released to profit or loss over the asset's useful life — matching the depreciation charge. Annual release = $300,000 / 10 years = $30,000. After 3 years: deferred income remaining = $300,000 − (3 × $30,000) = $300,000 − $90,000 = $210,000. Option A describes the net asset approach (where grant is deducted from asset cost upfront). Option C holds the full grant without systematic release. Option D uses wrong amortisation period.

Answer: C. At 1 November: liability = €200,000 × $1.25 = $250,000. At 31 December: liability = €200,000 × $1.30 = $260,000. The liability has increased in $ terms — this is a loss (Bentham owes more). Exchange loss = $260,000 − $250,000 = $10,000, recognised in profit or loss. Option A incorrectly records a gain (the liability increased, not decreased). Option B is just the year-end balance, not the movement. Option D is incorrect — monetary items are retranslated at the closing rate at each reporting date.

Answer: D. IAS 21 defines functional currency as the currency of the primary economic environment in which the entity operates — the environment in which it mainly generates and expends cash. Key indicators include the currency in which sales prices, labour, and materials are denominated. Presentation currency (A) is the currency chosen for financial statement presentation — it may differ from functional currency. The parent's currency (B) is irrelevant. Bank account currency (C) is an indicator but not the definition.

Answer: A. IFRS 9 requires equity investments to be measured at FVTPL by default, with gains/losses in profit or loss. However, there is an irrevocable election for equity instruments not held for trading to designate them as FVOCI — gains and losses go to OCI and are never reclassified to profit or loss (not even on disposal). This is appropriate for strategic long-term holdings where the entity doesn't want P&L volatility. Amortised cost (C) cannot be used for equity instruments. Historical cost (D) is not permitted under IFRS 9.

Answer: B. Contingent liability (possible obligation, not probable): disclose in notes — do not recognise. Contingent asset: when realisation is virtually certain, it is not contingent — it is a receivable/asset that should be recognised. When probable (but not virtually certain), disclose in notes. Only when possible is it not disclosed. Here: $180,000 is possible → disclose as contingent liability. $90,000 is virtually certain → recognise as asset. Option A recognises the liability (wrong — only possible, not probable). Option C discloses both (wrong for the virtually certain asset). Option D does nothing (wrong).

Answer: C. Under IAS 8, changes in accounting policy are applied retrospectively — all prior period comparatives are restated as if the new policy had always been applied. The cumulative adjustment is made to opening retained earnings of the earliest period presented. This ensures comparability across periods. Prospective treatment (A) applies to changes in accounting estimates. Recognising as an exceptional item (B) is not permitted under IAS 8. Continuing with the old policy (D) is incorrect — the change must be applied.

Answer: D. Start from accounting profit and adjust for the timing/permanent differences. Add back accounting depreciation (not tax-deductible): +$80,000. Deduct capital allowances (the tax equivalent): −$120,000. Add back the restructuring provision (not deductible until paid): +$30,000. Taxable profit = $500,000 + $80,000 − $120,000 + $30,000 = $490,000. Current tax charge = $490,000 × 20% = $98,000. Option A ($100,000) applies 20% to the accounting profit with no adjustments. Option B ($78,000) is 20% of $390,000, deducting items that should be added back. Option C ($108,000) is 20% of $540,000, adding the capital allowances instead of deducting them.

Answer: A. Under IAS 16, subsequent expenditure is capitalised only if it increases the future economic benefits beyond the originally assessed standard of performance. Routine maintenance painting (1): day-to-day servicing — expensed. Security system (2): enhances value and extends life — capitalised. Storm repair (3): restores the asset to its previously assessed standard of performance (i.e. makes good damage) — expensed as it does not improve beyond the original standard. Therefore only $85,000 is capitalised. Option B capitalises all. Option C incorrectly capitalises repairs. Option D capitalises only maintenance.

Answer: B. IFRS 9 requires derecognition of a financial asset when the entity transfers substantially all the risks and rewards of ownership. Here, the bank bears all credit risk — Swinton has transferred substantially all risks and rewards. Therefore: derecognise the full receivable, recognise 90% cash received, and recognise the 10% difference as a finance cost/expense. Option A would apply if Swinton retained the credit risk (recourse factoring). Option C is a partial derecognition approach — incorrect when substantially all risks are transferred. Option D is never correct — factoring has accounting consequences.

Answer: A. Under IAS 37, a constructive obligation arises from past practice, published policies, or specific statements that create a valid expectation in third parties. An internal board decision alone does not create a constructive obligation — no one outside the board is yet aware of it, so no valid expectation has been created. Farrow cannot recognise a provision until the restructuring plan is announced or communicated to those affected. A legal obligation would require a contract or legal requirement. Options B and C over-extend the board decision. Option D is incorrect — restructuring provisions are permitted when the criteria are met.

Answer: B. IFRS 5 defines a discontinued operation as a component that has been disposed of or classified as held for sale AND represents: (a) a separate major line of business or geographical area, (b) part of a coordinated plan to dispose of a separate major line of business or geographical area, or (c) a subsidiary acquired exclusively for resale. Closing a single product line within a larger segment (A) typically doesn't meet 'major line of business.' Headcount reduction (C) is irrelevant. Held-for-sale assets (D) don't automatically create a discontinued operation — the business significance test must also be met.

Answer: C. Under IFRS 15, revenue is recognised when (or as) performance obligations are satisfied. This obligation is satisfied over time because the customer simultaneously receives and consumes the benefits of the service (one of the three criteria for over-time recognition). Revenue is recognised on a straight-line basis over the contract period: $180,000 / 3 years = $60,000/year. Recognition at signing (A) would be appropriate only for a point-in-time obligation. Recognition at completion (B) ignores the ongoing benefit. Cash receipt (D) is irrelevant to revenue recognition under accrual accounting.

Answer: D. Under IAS 36, an impairment loss on an asset other than goodwill can be reversed when there are indications that it no longer exists or has decreased. The reversal is capped: the new carrying amount cannot exceed the lower of (a) the current recoverable amount, $360,000, and (b) the carrying amount the asset would have had if no impairment had been recognised, $350,000. The cap is therefore $350,000, and the reversal is $350,000 − $320,000 = $30,000, recognised in profit or loss (unless the asset is carried at a revalued amount). Option A reverses up to the recoverable amount and ignores the cap. Option B reverses the full original loss, which would carry the asset above its depreciated historical amount. Option C is wrong: IAS 36 prohibits reversals only for goodwill.

Answer: A. Under IFRS: Goodwill (from a business combination) — not amortised, tested for impairment at least annually. Other intangible assets with indefinite useful lives — not amortised, tested for impairment at least annually. If the useful life of an intangible subsequently becomes determinable, amortisation commences from that point. The key difference in practice is that goodwill impairment can NEVER be reversed, whereas impairment of other assets CAN be reversed (IAS 36). Option B applies the old UK GAAP amortisation treatment. Option C states a 20-year amortisation — this was the old GAAP approach. Option D ignores the goodwill/intangible distinction on reversals.

Answer: D. Proceeds are 1,000,000 × $3.50 = $3,500,000, of which $1,000,000 is nominal value (share capital) and $2,500,000 is premium. Under IAS 32, the transaction costs of an equity issue are deducted from equity, normally from share premium, not charged to profit or loss. Cash received net of costs is $3,450,000, share capital is $1,000,000 and share premium is $2,500,000 − $50,000 = $2,450,000. Option A ignores the split between nominal value and premium, and the costs. Option B charges the costs to profit or loss, which IAS 32 does not allow for an equity issue (and its entries do not balance). Option C deducts the costs from share capital, which must always equal the nominal value of the shares issued.

Answer: D. Under IFRS 16, the ROU asset is depreciated over the shorter of the lease term and the asset's useful life — but only when it is not reasonably certain that the lessee will obtain ownership. Here: no ownership transfer expected → depreciate over lease term (5 years, shorter than 8). If ownership were reasonably certain, depreciate over the asset's full useful life (8 years). The ROU asset depreciation period and the lease liability unwinding period are independent — the liability unwinds over the lease term using effective interest, but the ROU asset has its own straight-line depreciation charge.

Answer: B. Development costs: CA $450,000 > tax base $0 → taxable temporary difference → deferred tax liability = $450,000 × 25% = $112,500. Warranty provision: CA $60,000 > tax base $0 → for a liability, when CA > tax base it means the tax deduction comes later → deductible temporary difference → deferred tax asset = $60,000 × 25% = $15,000. Revaluation surplus: if policy excludes, ignore. Net deferred tax = $112,500 liability − $15,000 asset = $97,500 net liability. Option A ignores the warranty DTA. Option C only shows warranty DTA. Option D is not a liability.

Answer: D. Under IAS 40, when transferring from owner-occupied property to investment property measured at fair value, the treatment at the date of reclassification is as a revaluation under IAS 16. The increase of $150,000 is therefore recognised in OCI as a revaluation surplus. It will only be transferred to profit or loss on subsequent disposal. This is the one occasion where a fair value increase goes to OCI rather than P&L for investment property. Option A incorrectly sends it to P&L. Option B defers it. Option C ignores the fair value change.

Answer: A. IFRS 18 (replacing IAS 1) requires separate disclosure of material items of income or expense — either on the face of the statement of profit or loss or in the notes — when separate disclosure is necessary to understand the entity's financial performance. There is no requirement that items be 'unusual or infrequent' (C) — materiality is the trigger. This supports transparency about the nature and scale of specific income/expense drivers. Option B would reduce transparency. Option D is completely wrong — specific disclosure is required, not prohibited.

Answer: D. Under IFRS 15, incremental costs of obtaining a contract (costs that would not have been incurred if the contract had not been obtained, e.g. sales commissions) should be recognised as an asset if the entity expects to recover them, and amortised on a consistent basis with the transfer of the goods or services to which the asset relates. Over 3 years: $80,000 / 3 = $26,667/year. Exception: if the amortisation period would be ≤1 year, costs may be expensed immediately. Options A and B expense or net the costs incorrectly. Option C treats them as goodwill — incorrect.

Answer: B. Under the deferred income model: Annual release = $200,000 / 5 = $40,000/year. After 3 years: Amount released = $120,000. Deferred income remaining = $200,000 − $120,000 = $80,000. When the grant is repaid, IAS 20 requires the repayment to be treated as a change in accounting estimate. The remaining deferred income ($80,000) is recognised as an expense immediately. The previously recognised income ($120,000) is not reversed. Option A repays the full amount as an expense. Option C reverses previously recognised income incorrectly. Option D represents only one year's release.

Answer: D. Monetary items (cash, receivables, payables denominated in foreign currency) are retranslated at the closing rate at each reporting date under IAS 21. Any exchange differences are recognised in profit or loss. Non-monetary items are NOT retranslated — they retain the historical rate from the transaction date. This is why a foreign currency payable creates a foreign exchange gain or loss as exchange rates move between transaction date and settlement/year end. Options A and B describe non-monetary or average rate treatments. Option C describes a contracted/forward rate.

Answer: B. IFRS S1 sets out general requirements for disclosure of sustainability-related financial information across all sustainability topics. Its objective is to enable primary users of financial reports (investors, lenders) to assess the effects of sustainability-related risks and opportunities on the entity's cash flows, access to finance, and cost of capital. It does not set sustainability targets (A), replace financial reporting standards (C), or mandate specific operational outcomes (D). It is a disclosure standard — 'decision-useful information' is the test.

Answer: D. Before IAS 37, entities had significant discretion in whether and how much to provide for future obligations. This created two problems: under-provisioning (hiding liabilities to flatter the balance sheet) and over-provisioning ('big bath' accounting — creating excessive provisions in bad years to be released in good years to smooth profits). IAS 37's strict recognition criteria and measurement guidance prevent both abuses. Option A describes the problem IAS 37 was designed to prevent. Options B and C address specific technical points rather than the fundamental reason for the standard.

Answer: C. Equity investments held for trading must be classified as FVTPL under IFRS 9 — the FVOCI election is not available for instruments held for trading. All fair value changes are recognised in profit or loss. The FVOCI election (A) is available only for equity instruments NOT held for trading — it requires an irrevocable designation and gains/losses are never recycled to P&L. Amortised cost (B) applies to debt instruments with SPPI cash flows. Historical cost (D) is not permitted for equity instruments under IFRS 9.

Answer: C. Goodwill is tested for impairment at least annually — irrespective of whether any indicators of impairment are present — because goodwill has an indefinite useful life and is not amortised. The annual test is mandatory. In addition, goodwill must be tested whenever an indicator of impairment exists (so it may be tested more frequently than annually). Other assets are only tested when indicators exist (A applies to other assets, not goodwill). Options B and D are incorrect — there is no triennial rule and impairment testing is not linked to disposal plans.

Answer: B. Per the SD25 examiner's solution: Year 2 opening = $3,167,000. Effective interest (10%) = $316,700. Cash receipt (7% × $3,500,000) = $245,000. Closing balance = $3,167,000 + $316,700 − $245,000 = $3,238,700 ≈ $3,239,000. The examiner specifically noted candidates either: ignored the discount (getting $3,721,000 — option C), or used the year 1 closing balance as the answer for year 2 (option A, getting $3,167,000). Option D is the nominal value (no adjustment for discount). Always restart from the closing balance of the prior year.

Answer: A. IAS 2 permits two cost formulas for interchangeable inventories: FIFO (first in, first out) and weighted average cost. LIFO is specifically prohibited under IAS 2 (though it is permitted under US GAAP — an important distinction). Specific identification (B) is required only for inventories that are NOT ordinarily interchangeable (e.g. individual artworks, bespoke machinery). Standard cost (D) is permitted as a practical approximation only if it results in values close to actual cost — it is not always appropriate.

Answer: D. Adjusting events provide evidence of conditions that existed at the reporting date. Option D is the adjusting event: the customer owed $400,000 at the year end and the financial difficulty causing the later administration was already present, so the receivable must be written down. Option A (a fire after year end) is a new event — non-adjusting, disclose only. Option B (a dividend proposed after year end) is non-adjusting, as no obligation existed at the year end. Option C (a fall in the market value of investments after year end) reflects post-year-end conditions and is non-adjusting. The test is always whether the underlying condition existed at the reporting date.

Answer: B. Diluted EPS assumes all dilutive instruments convert. Extra shares on conversion = 500,000 bonds × 2 = 1,000,000, giving 5,000,000 + 1,000,000 = 6,000,000 shares. On conversion the company would no longer pay the bond interest, so the post-tax saving is added back to earnings: 500,000 × $0.24 = $120,000. Adjusted earnings = $1,500,000 + $120,000 = $1,620,000. Diluted EPS = $1,620,000 ÷ 6,000,000 = $0.27. Option D ($0.30) is the basic EPS, ignoring dilution. Option A ($0.28) and option C ($0.29) result from omitting or misstating the interest add-back when adjusting earnings.

Answer: A. IAS 32 classification depends on substance — is there a contractual obligation to transfer cash? These preference shares have NO contractual obligation to pay dividends (discretionary) and NO obligation to redeem. Without a contractual obligation, they are classified as equity. Compare with the earlier question (fr030): those shares had mandatory dividends AND mandatory redemption → liability. Here, both are absent → equity. Option B incorrectly assumes all preference shares are liabilities. Option C invents a split that isn't appropriate here. Option D confuses actual payment with contractual obligation.

Answer: C. IAS 12 requires a deferred tax asset to be recognised for unused tax losses, but only to the extent that it is probable that sufficient future taxable profits will be available against which the losses can be utilised. Probability here follows the usual IAS 12 guidance — more likely than not. If there is insufficient evidence of future profitability, the asset is not recognised (or is limited to the amount that can be utilised). Option A ignores the probability test. Option B is wrong — IAS 12 explicitly permits recognition for unused losses; it does not prohibit it. Option D invents a time limit that does not exist in IAS 12.