1. When can a “provision” be recognized in accordancewith IAS 37?(a) When there is a legal obligation arising froma past (obligating) event, the probability ofthe outflow of resources is more than remote(but less than probable), and a reliable estimatecan be made of the amount of the obligation.(b) When there is a constructive obligation as aresult of a past (obligating) event, the outflowof resources is probable, and a reliableestimate can be made of the amount of theobligation.(c) When there is a possible obligation arisingfrom a past event, the outflow of resourcesis probable, and an approximate amount canbe set aside toward the obligation.(d) When management decides that it is essentialthat a provision be made for unforeseencircumstances and keeping in mind this yearthe profits were enough but next year theremay be losses.Answer: (b)2. Amazon Inc. has been served a legal notice onDecember 15, 20X1, by the local environmental protectionagency (EPA) to fit smoke detectors in itsfactory on or before June 30, 20X2 (before June 30 ofthe following year). The cost of fitting smoke detectorsin its factory is estimated at $250,000. Howshould Amazon Inc. treat this in its financial statementsfor the year ended December 31, 20X1?(a) Recognize a provision for $250,000 in thefinancial statements for the year ended December31, 20X1.(b) Recognize a provision for $125,000 in thefinancial statements for the year ended December31, 20X1, because the other 50% ofthe estimated amount will be recognizednext year in the financial statement for theyear ended December 31, 20X2.(c) Because Amazon Inc. can avoid the futureexpenditure by changing the method of operations

and thus there is no present obligationfor the future expenditure, no provisionis required at December 31, 20X1, but asthere is a possible obligation, this warrantsdisclosure in footnotes to the financialstatements for the year ended December 31,20X1.(d) Ignore this for the purposes of the financialstatements for the year ended December 31,20X1, and neither disclose nor provide theestimated amount of $250,000.Answer: (c)3. A competitor has sued an entity for unauthorizeduse of its patented technology. The amount that theentity may be required to pay to the competitor if thecompetitor succeeds in the lawsuit is determinablewith reliability, and according to the legal counsel it isless than probable (but more than remote) that anoutflow of the resources would be needed to meet theobligation. The entity that was sued should at yearend:(a) Recognize a provision for this possible obligation.(b) Make a disclosure of the possible obligationin footnotes to the financial statements.(c) Make no provision or disclosure and waituntil the lawsuit is finally decided and thenexpense the amount paid on settlement, ifany.(d) Set aside, as an appropriation, a contingencyreserve, an amount based on the best estimateof the possible liability.Answer: (b)4. A factory owned by XYZ Inc. was destroyed byfire. XYZ Inc. lodged an insurance claim for the valueof the factory building, plant, and an amount equal toone year’s net profit. During the year there were anumber of meetings with the representatives of theinsurance company. Finally, before year-end, it wasdecided that XYZ Inc. would receive compensation

for 90% of its claim. XYZ Inc. received a letter thatthe settlement check for that amount had been mailed,but it was not received before year-end. How shouldXYZ Inc. treat this in its financial statements?(a) Disclose the contingent asset in the footnotes.(b) Wait until next year when the settlementcheck is actually received and not recognizeor disclose this receivable at all since atyear-end it is a contingent asset.(c) Because the settlement of the claim wasconveyed by a letter from the insurancecompany that also stated that the settlementcheck was in the mail for 90% of the claim,record 90% of the claim as a receivable as itis virtually certain that the contingent assetwill be received.(d) Because the settlement of the claim wasconveyed by a letter from the insurancecompany that also stated that the settlementcheck was in the mail for 90% of the claim,record 100% of the claim as a receivable atyear-end as it is virtually certain that thecontingent asset will be received, and adjustthe 10% next year when the settlementcheck is actually received.Answer: (c)5. The board of directors of ABC Inc. decided onDecember 15, 20XX, to wind up international operationsin the Far East and move them to Australia. Thedecision was based on a detailed formal plan of restructuringas required by IAS 37. This decision wasconveyed to all workers and management personnel atthe headquarters in Europe. The cost of restructuringthe operations in the Far East as per this detailed planwas $2 million. How should ABC Inc. treat this restructuringin its financial statements for the year-endDecember 31, 20XX?(a) Because ABC Inc. has not announced the restructuringto those affected by the decisionand thus has not raised an expectation thatABC Inc. will actually carry out the restructuring

(and as no constructive obligationhas arisen), only disclose the restructuringdecision and the cost of restructuring of$2 million in footnotes to the financial statements.(b) Recognize a provision for restructuringsince the board of directors has approved itand it has been announced in the headquartersof ABC Inc. in Europe.(c) Mention the decision to restructure and thecost involved in the chairman’s statement inthe annual report since it a decision of theboard of directors.(d) Because the restructuring has not commencedbefore year-end, based on prudence,wait until next year and do nothing in thisyear’s financial statements.Answer: (a)

as its financial advisor. The entity has recently completedone of its highly publicized research and developmentprojects and seeks your advice on theaccuracy of the following statements made by one ofits stakeholders. Which one is it?(a) Costs incurred during the “research phase”can be capitalized.(b) Costs incurred during the “developmentphase” can be capitalized if criteria such astechnical feasibility of the project being establishedare met.(c) Training costs of technicians used in researchcan be capitalized.(d) Designing of jigs and tools qualify as researchactivities.Answer: (b)2. Which item listed below does not qualify as anintangible asset?(a) Computer software.(b) Registered patent.(c) Copyrights that are protected.(d) Notebook computer.Answer: (d)3. Which of the following items qualify as an intangibleasset under IAS 38?(a) Advertising and promotion on the launch of

a huge product.(b) College tuition fees paid to employees whodecide to enroll in an executive M.B.A. programat Harvard University while workingwith the company.(c) Operating losses during the initial stages ofthe project.(d) Legal costs paid to intellectual property lawyersto register a patent.Answer: (d)4. Once recognized, intangible assets can be carriedat(a) Cost less accumulated depreciation.(b) Cost less accumulated depreciation and lessaccumulated amortization.(c) Revalued amount less accumulated depreciation.(d) Cost plus a notional increase in fair valuesince the intangible asset is acquired.Answer: (b)5. Which of the following disclosures is notrequired by IAS 38?(a) Useful lives of the intangible assets.(b) Reconciliation of carrying amount at the beginningand the end of the year.(c) Contractual commitments for the acquisitionof intangible assets.(d) Fair value of similar intangible assets usedby its competitors.Answer: (d)

1. A gain arising from a change in the fair value ofan investment property for which an entity has optedto use the fair value model is recognized in(a) Net profit or loss for the year.(b) General reserve in the shareholders’ equity.(c) Valuation reserve in the shareholders’ equity.(d) None of the above.Answer: (a)2. An investment property should be measured initiallyat(a) Cost.(b) Cost less accumulated impairment losses.

(c) Depreciable cost less accumulated impairmentlosses.(d) Fair value less accumulated impairmentlosses.Answer: (a)3. The applicable IFRS/IAS for a property beingconstructed or developed for future use as investmentproperty is(a) IAS 2, Inventories, until construction iscomplete and then it is accounted for underIAS 40, Investment Property.(b) IAS 40, Investment Property.(c) IAS 11, Construction Contracts, until constructionis complete and then it is accountedfor under IAS 40, Investment Property.(d) IAS 16, Property, Plant, and Equipment, untilconstruction is complete and then it is accountedfor under IAS 40, Investment Property.Answer: (d)4. In case of property held under an operating leaseand classified as investment property(a) The entity has to account for the investmentproperty under the cost model only.(b) The entity has to use the fair value modelonly.(c) The entity has the choice between the costmodel and the fair value model.(d) The entity needs only to disclose the fairvalue and can use the cost model underIAS 38.Answer: (b)5. Transfers from investment property to property,plant, and equipment are appropriate(a) When there is change of use.(b) Based on the entity’s discretion.(c) Only when the entity adopts the fair valuemodel under IAS 38.(d) The entity can never transfer property intoanother classification on the balance sheetonce it is classified as investment property.Answer: (a)6. An investment property is derecognized (eliminatedfrom the balance sheet) when(a) It is disposed to a third party.(b) It is permanently withdrawn from use.

(c) No future economic benefits are expectedfrom its disposal.(d) In all of the above cases.Answer: (d)7. An entity has a factory that has been shut downfor a year due to various reasons, including workerunrest and strike. The entity plans to sell this factory.It should(a) Classify the factory as investment property.(b) Classify the factory as property held for salein the ordinary course of business under IAS2.(c) Classify the factory as property, plant, andequipment under IAS 16.(d) Write off the net book value and disclosethat fact in the footnotes to the financialstatements.Answer: (b)