9/6/23, 10:22 PM FR M1 – Module Quiz 2 (Part 2) - KnowledgEquity

FR M1 – Module Quiz 2 (Part 2)

YOU SCORED 9 OUT OF A POSSIBLE 10 [90%]

Question 1 Marks: 1
Which of the following statements about the application of IFRS in accordance with The
Conceptual Framework is the most correct?

Answer Options
You answered B. The correct answer is B
USER SELECTION CORRECT ANSWER

Entities that are not expected to continue in the foreseeable future are to
A
prepare their accounts on the net realisable value assumption.

Entities may change the valuation and measurement of assets provided they
B
disclose the change and its effects in the financial report.

Entities within the scope of the Corporations Act can choose to apply
C Australian or International accounting standards when preparing their financial
reports.

Entities may prepare financial statements on a cash flow basis provided that
D they meet the characteristics of comparability, understandability, timeliness
and verifiability.

Answer Explanation

B is correct because disclosing accounting policies that were used in preparing the
financials would improve comparability.

A is incorrect because where an entity is not expected to continue into the foreseeable
future, it is required to use another basis for preparing its financial statements as the going

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concern assumption is not appropriate, so the financial statements should be prepared on

some other basis. The Conceptual Framework does not specify an alternative basis.

C is incorrect because where a reporting entity falls within the scope of the Corporations
Act, its general purpose financial reports shall apply Australian Accounting Standards.
They are also subject to other relevant legislation and should also apply IFRS, as Australia
adopted IFRSs for reporting periods commencing on or after 1 January 2005.

D is incorrect because the financial statements should always be prepared on an accrual

basis (Conceptual Framework, para. OB17).
Module: 1 > 1.3 Qualitative characteristics of useful financial
information > Enhancing qualitative characteristics > Page: 18

Question 2 Marks: 1
Which of the following factors will be reflected in the amount of a short-term employee
benefit obligation measured in accordance with IAS 19 Employee Benefits?

Answer Options
You answered C. The correct answer is C

USER SELECTION CORRECT ANSWER

A The risk-free interest rate.

B Salary rates current at reporting date.

C Salary rates that reflect the expected amount to be paid.

D Interest rates on high-quality corporate bonds.

Answer Explanation

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C is correct. IAS 19 requires the entity to recognise the undiscounted amount of short term
employee benefits expected to be paid in exchange for that service. This would take
account of salary rates at the date of payment for the benefits.

A is incorrect. Discounting of future payments to present value is not required for short-
term employee obligations.

B is incorrect. The salary rate at the date of payment, not the reporting date, should be
used to determine the amount of the liability.

D is incorrect. Discounting is not required for short-term employee benefits.

Module: 1 > 1.6 Application of measurement principles in the

International Financial Reporting Standards > Employee benefits >
Page: 45

Question 3 Marks: 1
According to IAS 19 Employee Benefits, which of the following should measurement of the
long-term employee benefit obligation should be based on?

Answer Options
You answered C. The correct answer is C
USER SELECTION CORRECT ANSWER

A Vested benefits at future salary rates.

B Vested benefits at current salary rates.

C Vested and non-vested benefits at future salary rates.

D Vested and non-vested benefits at current salary rates.

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Answer Explanation

C is correct. As discussed in IAS 19, para. 72, the obligation (e.g. long-service leave)
reflects both vested and non-vested benefits measured at future salaries. That is, each
period of service gives rise to additional units of benefits regardless of whether they are
vested or non vested.

A is incorrect. It should include non-vested benefits.

B is incorrect. It should include non-vested benefits and should be based on future

salaries.

D is incorrect. It should be based on future salary rates.

Module: 1 > 1.6 Application of measurement principles in the

International Financial Reporting Standards > Employee benefits >
Page: 46

Question 4 Marks: 1
Brodie Ltd (Brodie) measures its investment in Sentosa Ltd (Sentosa) shares at fair value.
Sentosa shares are listed and actively traded on the stock exchange.

Which of the following valuations should Brodie use to measure its investment in shares in
Sentosa in its financial statements at 30 June 20X0?

Answer Options
You answered A. The correct answer is A

USER SELECTION CORRECT ANSWER

A The closing price of Sentosa shares on the stock market at 30 June 20X0.

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9/6/23, 10:22 PM FR M1 – Module Quiz 2 (Part 2) - KnowledgEquity

The average price of Sentosa shares on the stock market from 1 June 20X0 to
B
30 June 20X0.

An estimate derived from a model that uses observable industry growth rates
C
and past cash flows.

An estimate derived from a model that uses Brodie’s estimates of Sentosa’s

D
future profits and required rate of return.

Answer Explanation

A is correct. IFRS 13 Fair Value Measurement establishes a hierarchy for the measurement
of fair value. The price of Sentosa shares on the stock market is a Level 1 input because
the share price is an observable quoted price and the shares traded on the market are
identical to Brodie’s parcel of Sentosa shares.

B is incorrect because the average share price for the month is not its fair value at 30 June
20X0.

C is incorrect because it is based on Level 2 inputs and should not be used if a quoted
price for an identical asset is available.

D is incorrect because it is based on Level 3 inputs and should not be used if a

measurement based on Level 1 inputs or Level 2 inputs is available.

Module: 1 > 1.5 Measurement of elements of financial statements >

Cost-based and value-based measures used in the International
Financial Reporting Standards > Page: 32

Question 5 Marks: 1
Which of the following statements relating to current cost is not correct?

Answer Options
You answered A. The correct answer is A

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9/6/23, 10:22 PM FR M1 – Module Quiz 2 (Part 2) - KnowledgEquity

USER SELECTION CORRECT ANSWER

A The amounts are calculated using the effective interest method.

Replacement cost is an entity-specific measure that depends on management

B
intention.

It lacks comparability as there may be significant differences between entities

C
in determining current cost.

In some circumstances reproduction cost may not be able to be established

D
due to the uniqueness of a particular asset.

Answer Explanation

A is correct because it is not a valid statement in relation to current cost. The effective
interest method is applied when measuring assets at amortised cost. Assets measured at
current cost are not discounted; they relate to the amounts that would be paid if an
equivalent asset were acquired currently, or the liability settled.

Options B, C and D are all correct statements in relation to current cost.

Module: 1 > 1.5 Measurement of elements of financial statements >

Cost-based and value-based measures used in the International
Financial Reporting Standards > Page: 33

Question 6 Marks: 1
Which of the following is not a criticism of historical cost measurement?

Answer Options
You answered B. The correct answer is B

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USER SELECTION CORRECT ANSWER

A It may result in the arbitrary allocation of cost to assets.

Its application to assets that do not generate contractual cash flows is

B
problematic.

It has limited relevance to decision-making as it distorts performance

C
measurement.

Profits are recognised when realised rather than when prices or other values of
D
assets and liabilities change.

Answer Explanation

B is the correct answer because it is not a criticism of historical cost measurement. This is
a criticism of the value in use basis of measurement and does not apply to historical cost.
Measurement at historical cost does not require the consideration of the ability of an asset
to generate contractual cash flows.

A, C and D are all incorrect because they are criticisms of historical cost.

Module: 1 > 1.5 Measurement of elements of financial statements >

Cost-based and value-based measures used in the International
Financial Reporting Standards > Page: 28

Question 7 Marks: 1
On 1 June 20X1 Timon Ltd (Timon) acquired an item of plant for an agreed consideration of
1,000 of its own shares.

The plant was received on 1 June 20X1 and the obligation to transfer shares was to be
settled on 1 August 20X1. The fair value of the plant was $20,000 on 1 June 20X1. Timon’s
share price was $16 on 1 June 20X1 and $18 on 30 June 20X1.

In accordance with IFRS 2 Share-based Payment, Timon should do which of the following?

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9/6/23, 10:22 PM FR M1 – Module Quiz 2 (Part 2) - KnowledgEquity

Answer Options
You answered D. The correct answer is D

USER SELECTION CORRECT ANSWER

A Remeasure the equity to $18,000 on 30 June 20X1.

B Initially recognise the plant and equity at $16,000 on 1 June 20X1.

C Make no entry in relation to the transaction until 1 August 20X1.

D Initially recognise the plant and equity at $20,000 on 1 June 20X1.

Answer Explanation

D is correct. In an equity-settled share-based payment transaction, the goods or services,

in this instance, the plant, are recognised when received and measured at the fair value of
the goods or services acquired unless their fair value cannot be estimated reliably. In the
present case, a reliable measurement of fair value of the goods received is available and
should be used. (See IFRS 2, para. 10.)

A is incorrect. Liabilities for cash-settled share-based payments are remeasured but this
does not apply to equity-settled share-based payments. (See IFRS 2, paras 7–10 and 30.)

B is incorrect. For equity-settled share-based payment transactions, the fair value of the
recognised goods or services drives the measurement of the equity component of the
transaction, subject to reliable estimation of fair value. (See IFRS 2, para. 10.)

C is incorrect. Goods or services acquired in a share-based payment transaction are

recognised when the goods or services are received. (See IFRS 2, para. 7.)

Module: 1 > 1.6 Application of measurement principles in the

International Financial Reporting Standards > Accounting for share-
based payments > Page: 49

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Question 8 Marks: 1
A long-term employee benefit obligation should reflect the amount which, if invested at
measurement date, would provide the necessary pre-tax cash flows to pay the accrued
obligation when expected to be settled.

Where a deep market exists for all relevant financial instruments, IAS 19 Employee Benefits
requires that this amount is invested in which of the following?

Answer Options
You answered D. The correct answer is D

USER SELECTION CORRECT ANSWER

A Risk-free securities

B Government bonds

C A portfolio of high-quality shares

D A portfolio of high-quality corporate bonds

Answer Explanation

D is correct. As outlined in the module, IAS 19 requires the discount rate to be based on
high-quality corporate bonds, where a deep market exists for these bonds. This would
reflect a market-determined, risk adjusted rate.

A and B are incorrect. The return on government bonds (i.e. the risk-free rate) is only used
where there is no deep market for high-quality corporate bonds.

C is incorrect because the discount rate should be the rate that is applicable to high-
quality corporate bonds not equity securities.

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Module: 1 > 1.6 Application of measurement principles in the

International Financial Reporting Standards > Employee benefits >
Page: 45

Question 9 Marks: 1
Which one of the following is a key component of the definition of an asset?

Answer Options
You answered B. The correct answer is B
USER SELECTION CORRECT ANSWER

A An entity owns the asset.

B An entity controls the asset.

C An event will occur in the future.

D An outflow of future economic benefits is expected.

Answer Explanation

B is correct because the Conceptual Framework states an asset is a ‘present economic

resource controlled by the entity’ (Paras 4.3 – 4.4).

A is incorrect because the definition of an asset requires control, not ownership. Having
ownership of the asset does not necessarily mean control.

C is incorrect because the definition of an asset requires a past event to have occurred.

D is incorrect because an outflow of future economic benefits is a key component of the

definition of a liability.

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Module: 1 > 1.4 The elements of financial statements > Defining the
elements of financial statements > Page: 22

Question 10 Marks: 0
The following information is provided in relation to a lease agreement between Lessor Ltd
(Lessor) and Lessee Ltd (Lessee):

Initial lease payment of $10,000 paid upon commencement of the lease

Present value of remaining annual lease payments totals $22,180

Present value of guaranteed residual value is $4,250

Present value of unguaranteed residual value is $1,742

Expected residual value at the end of the lease is nil.

What is the amount of the lease liability recognised by Lessee at the commencement of
the lease in accordance with IFRS 16 Leases?

Answer Options
You answered D. The correct answer is A
USER SELECTION CORRECT ANSWER

A $26,430

B $28,172

C $36,430

D $38,172

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Answer Explanation

A is correct because in accordance with IFRS 16 Leases para. 26, the lease liability is
initially recognised at the present value of future lease payments ($22 180) including the
present value of any guaranteed residual value ($4250) (IFRS 16, para. 26).

The calculation is: $22,180 + $4,250 = $26,430

B is incorrect because it should not include the present value of the unguaranteed residual
value of $1,742.

C is incorrect because it includes the initial lease payment in the lease liability of $10,000.

D is incorrect because it does not include the present value of the guaranteed residual
value of $4,250 and also incorrectly includes the present value of the unguaranteed
residual value in the lease liability of $1,742.

Module: 1 > 1.6 Application of measurement principles in the

International Financial Reporting Standards > Leases > Table 1.8 >
Page: 39

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