MULTIPLE-CHOICE QUESTIONS1. An entity has bought a 25% share in anotherentity with a view to selling that investment within sixmonths. The investment has been classified as heldfor sale in accordance with IFRS 5. How should theinvestment be treated in the final year accounts?(a) It should be equity accounted.(b) The assets and liabilities should be presentedseparately from other assets in the balancesheet under IFRS 5.(c) The investment should be dealt with underIAS 29.(d) Purchase accounting should be used for thisinvestment.Answer: (b)2. The Standard does not require the equity methodto be applied when the associate has been acquiredand held with a view to its disposal within a certaintime period. What is the period within which the associatemust be disposed of?(a) Six months.(b) Twelve months.(c) Two years.(d) In the near future.Answer: (b)3. How is goodwill arising on the acquisition of anassociate dealt with in the financial statements?(a) It is amortized.(b) It is impairment tested individually.(c) It is written off against profit or loss.(d) Goodwill is not recognized separately withinthe carrying amount of the investment.Answer: (d)4. An investor must apply the requirements of IAS39 in determining whether it is necessary to recognizeany impairment loss in the investment in an associate.How is the impairment test carried out?(a) The goodwill is separated from the rest ofthe investment and is impairment tested individually.

(b) The entire carrying amount of the investmentis tested for impairment under IAS 36by comparing its recoverable amount withits carrying amount.(c) The carrying value of the investment shouldbe compared with its market value.(d) The recoverable amounts of all investmentsin associates should be assessed together todetermine whether there has been an impairmenton all investments.Answer: (b)5. What should happen when the financial statementsof an associate are not prepared to the samedate as the investor’s accounts?(a) The associate should prepare financial statementsfor the use of the investor at the samedate as those of the investor.(b) The financial statements of the associateprepared up to a different accounting datewill be used as normal.(c) Any major transactions between the date ofthe financial statements of the investor andthat of the associate should be accounted for.(d) As long as the gap is not greater than threemonths, there is no problem.Answer: (a)6. If the investor ceases to have significant influenceover an associate, how should the investment betreated?(a) It should still be treated using equity accounting.(b) It should be treated in accordance with IAS39.(c) The investment should be frozen at the dateat which the investor ceases to have significantinfluence.(d) The investment should be treated at cost.Answer: (b)7. If there is any excess of the investor’s share ofthe net fair value of the associate’s identifiable assets

and contingent liabilities over the cost of the investment,that is, negative goodwill, how should that excessbe treated?(a) It should be included in the carrying amountof the investment.(b) It should be written off against retainedearnings.(c) It should be included as income in the determinationof the investor’s share of the associate’sprofit or loss for the period.(d) It should be disclosed separately as part ofthe investor’s equity.Answer: (c)8. What accounting method should be used for aninvestment in an associate where it is operating undersevere long-term restrictions—for example where thegovernment of a company has temporary control overthe associate?(a) IAS 39 should be applied.(b) The equity method should be applied if significantinfluence can be exerted.(c) The associate should be shown at cost.(d) Proportionate consolidation should be used.Answer: (b)9. An investor sells inventory for cash to a 25%associate. The inventory cost the investor $6 millionand is sold to the associate for $10 million. None ofthe inventory has been sold at year-end. How much ofthe profit on the transaction would be reported in thegroup accounts?(a) $4 million.(b) $1 million.(c) $3 million.(d) Zero.Answer: (c) 1. A joint venture is exempt from using the equitymethod or proportionate consolidation in certain circumstances.Which of the following circumstances isnot a legitimate reason for not using the equity

method or proportionate consolidation?(a) Where the interest is held for sale underIFRS 5.(b) Where the exception in IAS 27 applies regardingan entity not being required to presentconsolidated financial statements.(c) Where the venturer is wholly owned, is not apublicly traded entity and does not intend tobe, the ultimate parent produces consolidatedaccounts, and the owners do not objectto the nonusage of the accounting methods.(d) Where the joint venture’s activities are dissimilarfrom those of the parent.Answer: (d)2. In the case of a jointly controlled operation, aventurer should account for its interest by(a) Using the equity method or proportionateconsolidation.(b) Recognizing the assets and liabilities, expensesand income that relate to its interestin the joint venture.(c) Showing its share of the assets that it jointlycontrols, any liabilities incurred jointly orseverally, and any income or expense relatingto its interest in the joint venture.(d) Using the purchase method of accounting.Answer: (b)3. In the case of jointly controlled assets, a venturershould account for its interest by(a) Using the equity method or proportionateconsolidation.(b) Recognizing the assets and liabilities, expensesand income that relate to its interestin the joint venture.(c) Showing its share of the assets that it jointlycontrols, any liabilities incurred jointly orseverally, and any income or expense relatingto its interest in the joint venture.(d) Using the purchase method of accounting.Answer: (c)4. In the case of jointly controlled entities, a venturershould account for its interest by(a) Using the equity method or proportionate

consolidation.(b) Recognizing the assets and liabilities, expensesand income that relate to its interestin the joint venture.(c) Showing its share of the assets that it jointlycontrols, any liabilities incurred jointly orseverally, and any income or expense relatingto its interest in the joint venture.(d) Using the purchase method of accounting.Answer: (a)5. The exemption from applying the equity methodor proportionate consolidation is available in the followingcircumstances:(a) Where severe long-term restrictions impairthe ability to transfer funds to the investor.(b) Where the interest is acquired with a view toresale within twelve months.(c) Where the activities of the venturer and jointventure are dissimilar.(d) Where the venturer does not exert significantinfluence.Answer: (b)6. Under proportionate consolidation, the minorityinterest in the venture is(a) Shown as a deduction from the net assets.(b) Shown in the equity of the venturer.(c) Shown as part of long-term liabilities of theventurer.(d) Not included in the financial statements ofthe venturer.Answer: (d)7. A company has a 40% share in a joint ventureand loans the venture $2 million. What figure will beshown for the loan in the balance sheet of the venturer?(a) $2 million.(b) $800,000(c) $1.2 million.(d) Zero.Answer: (c)

1. The scope of IAS 39 includes all of the followingitems except:(a) Financial instruments that meet the definitionof a financial asset.(b) Financial instruments that meet the definitionof a financial liability.(c) Financial instruments issued by the entitythat meet the definition of an equity instrument.(d) Contracts to buy or sell nonfinancial itemsthat can be settled net.Answer: (c)2. Which of the following is not a category of financialassets defined in IAS 39?(a) Financial assets at fair value through profitor loss.(b) Available-for-sale financial assets.(c) Held-for-sale investments.(d) Loans and receivables.Answer: (c)3. All of the following are characteristics of financialassets classified as held-to-maturity investmentsexcept:(a) They have fixed or determinable paymentsand a fixed maturity.(b) The holder can recover substantially all ofits investment (unless there has been creditdeterioration).(c) They are quoted in an active market.(d) The holder has a demonstrated positiveintention and ability to hold them to maturity.Answer: (b)4. Which of the following items is not precludedfrom classification as a held-to-maturity investment?(a) An investment in an unquoted debt instrument.(b) An investment in a quoted equity instrument.(c) A quoted derivative financial asset.(d) An investment in a quoted debt instrument.Answer: (d)5. All of the following are characteristics offinancial assets classified as loan and receivables

except:(a) They have fixed or determinable payments.(b) The holder can recover substantially all ofits investment (unless there has been creditdeterioration).(c) They are not quoted in an active market.(d) The holder has a demonstrated positiveintention and ability to hold them to maturity.Answer: (d)6. What is the principle for recognition of a financialasset or a financial liability in IAS 39?(a) A financial asset is recognized when, andonly when, it is probable that future economicbenefits will flow to the entity and thecost or value of the instrument can be measuredreliably.(b) A financial asset is recognized when, andonly when, the entity obtains control of theinstrument and has the ability to dispose ofthe financial asset independent of the actionsof others.(c) A financial asset is recognized when, andonly when, the entity obtains the risks andrewards of ownership of the financial assetand has the ability to dispose the financialasset.(d) A financial asset is recognized when, andonly when, the entity becomes a party to thecontractual provisions of the instrument.Answer: (d)7. In which of the following circumstances is derecognitionof a financial asset not appropriate?(a) The contractual rights to the cash flows ofthe financial assets have expired.(b) The financial asset has been transferred andsubstantially all the risks and rewards ofownership of the transferred asset have alsobeen transferred.(c) The financial asset has been transferred andthe entity has retained substantially all therisks and rewards of ownership of the transferredasset.(d) The financial asset has been transferred andthe entity has neither retained nor transferred

substantially all the risks and rewards ofownership of the transferred asset. In addition,the entity has lost control of the transferredasset.Answer: (c)8. Which of the following transfers of financialassets qualifies for derecognition?(a) A sale of a financial asset where the entityretains an option to buy the asset back at itscurrent fair value on the repurchase date.(b) A sale of a financial asset where the entityagrees to repurchase the asset in one year fora fixed price plus interest.(c) A sale of a portfolio of short-term accountsreceivables where the entity guarantees tocompensate the buyer for any losses in theportfolio.(d) A loan of a security to another entity (i.e., asecurities lending transaction).Answer: (a)9. Which of the following is not a relevant considerationwhen evaluating whether to derecognize a financialliability?(a) Whether the obligation has been discharged.(b) Whether the obligation has been canceled.(c) Whether the obligation has expired.(d) Whether substantially all the risks and rewardsof the obligation have been transferred.Answer: (d)

10. At what amount is a financial asset or financialliability measured on initial recognition?(a) The consideration paid or received for the financialasset or financial liability.(b) Acquisition cost. Acquisition cost is the considerationpaid or received plus any directlyattributable transaction costs to the acquisitionor issuance of the financial asset or financialliability.(c) Fair value. For items that are not measured

at fair value through profit or loss, transactioncosts are also included in the initialmeasurement.(d) Zero.Answer: (c)11. In addition to financial assets at fair valuethrough profit or loss, which of the following categoriesof financial assets is measured at fair value in thebalance sheet?(a) Available-for-sale financial assets.(b) Held-to-maturity investments.(c) Loans and receivables.(d) Investments in unquoted equity instruments.Answer: (a)12. What is the best evidence of the fair value of afinancial instrument?(a) Its cost, including transaction costs directlyattributable to the purchase, origination, orissuance of the financial instrument.(b) Its estimated value determined using discountedcash flow techniques, option pricingmodels, or other valuation techniques.(c) Its quoted price, if an active market existsfor the financial instrument.(d) The present value of the contractual cashflows less impairment.Answer: (c)13. Is there any exception to the requirement tomeasure at fair value financial assets classified as atfair value through profit or loss or available for sale?(a) No. Such assets are always measured at fairvalue.(b) Yes. If the fair value of such assets increasesabove cost, the resulting unrealized holdinggains are not recognized but deferred untilrealized.(c) Yes. If the entity has the positive intentionand ability to hold assets classified in thosecategories to maturity, they are measured atamortized cost.(d) Yes. Investments in unquoted equity instrumentsthat cannot be reliably measured at

fair value (or derivatives that are linked toand must be settled in such unquoted equityinstruments) are measured at cost.Answer: (d)14. What is the effective interest rate of a bond orother debt instrument measured at amortized cost?(a) The stated coupon rate of the debt instrument.(b) The interest rate currently charged by theentity or by others for similar debt instruments(i.e., similar remaining maturity, cashflow pattern, currency, credit risk, collateral,and interest basis).(c) The interest rate that exactly discounts estimatedfuture cash payments or receiptsthrough the expected life of the debt instrumentor, when appropriate, a shorter periodto the net carrying amount of the instrument.(d) The basic, risk-free interest rate that is derivedfrom observable government bondprices.Answer: (c)15. Which of the following is not objective evidenceof impairment of a financial asset?(a) Significant financial difficulty of the issueror obligor.(b) A decline in the fair value of the asset belowits previous carrying amount.(c) A breach of contract, such as a default or delinquencyin interest or principal payments.(d) Observable data indicating that there is ameasurable decrease in the estimated futurecash flows from a group of financial assetsalthough the decrease cannot yet be associatedwith any individual financial asset.Answer: (b)16. Under IAS 39, all of the following are characteristicsof a derivative except:(a) It is acquired or incurred by the entity forthe purpose of generating a profit fromshort-term fluctuations in market factors.(b) Its value changes in response to the changein a specified underlying (e.g., interest rate,financial instrument price, commodity price,

foreign exchange rate, etc.).(c) It requires no initial investment or an initialnet investment that is smaller than would berequired for other types of contracts thatwould be expected to have a similar responseto changes in market factors.(d) It is settled at a future date.Answer: (a)17. Under IAS 39, is a derivative (e.g., an equityconversion option) that is embedded in another contract(e.g., a convertible bond) accounted for separatelyfrom that other contract?(a) Yes. IAS 39 requires all derivatives (bothfreestanding and embedded) to be accountedfor as derivatives.(b) No. IAS 39 precludes entities from splittingfinancial instruments and accounting for thecomponents separately.(c) It depends. IAS 39 requires embeddedderivatives to be accounted for separately asderivatives if, and only if, the entity has embeddedthe derivative in order to avoid derivativesaccounting and has no substantivebusiness purpose for embedding the derivative.

(d) It depends. IAS 39 requires embeddedderivatives to be accounted for separately if,and only if, the economic characteristics andrisks of the embedded derivative and thehost contract are not closely related and thecombined contract is not measured at fairvalue with changes in fair value recognizedin profit or loss.Answer: (d)18. Which of the following is not a condition forhedge accounting?(a) Formal designation and documentation ofthe hedging relationship and the entity’s riskmanagement objective and strategy for undertakingthe hedge at inception of thehedging relationship.(b) The hedge is expected to be highly effectivein achieving offsetting changes in fair valueor cash flows attributable to the hedged risk,the effectiveness of the hedge can be reliably

measured, and the hedge is assessed onan ongoing basis and determined actually tohave been effective.(c) For cash flow hedges, a forecast transactionmust be highly probable and must present anexposure to variations in cash flows thatcould ultimately affect profit or loss.(d) The hedge is expected to reduce the entity’snet exposure to the hedged risk, and thehedge is determined actually to have reducedthe net entity-wide exposure to thehedged risk.Answer: (d)19. What is the accounting treatment of the hedginginstrument and the hedged item under fair valuehedge accounting?(a) The hedging instrument is measured at fairvalue, and the hedged item is measured atfair value with respect to the hedged risk.Changes in fair value are recognized inprofit or loss.(b) The hedging instrument is measured at fairvalue, and the hedged item is measured atfair value with respect to the hedged risk.Changes in fair value are recognized directlyin equity to the extent the hedge is effective.(c) The hedging instrument is measured at fairvalue with changes in fair value recognizeddirectly in equity to the extent the hedge iseffective. The accounting for the hedgeditem is not adjusted.(d) The hedging instrument is accounted for inaccordance with the accounting requirementsfor the hedged item (i.e., at fair value,cost or amortized cost, as applicable), if thehedge is effective.Answer: (a)20. What is the accounting treatment of the hedginginstrument and the hedged item under cash flowhedge accounting?(a) The hedged item and hedging instrument areboth measured at fair value with respect tothe hedged risk, and changes in fair valueare recognized in profit or loss.

(b) The hedged item and hedging instrument areboth measured at fair value with respect tothe hedged risk, and changes in fair valueare recognized directly in equity.(c) The hedging instrument is measured at fairvalue, with changes in fair value recognizeddirectly in equity to the extent the hedge iseffective. The accounting for the hedgeditem is not adjusted.(d) The hedging instrument is accounted for inaccordance with the accounting requirementsfor the hedged item (i.e., at fair value,cost or amortized cost, as applicable), if thehedge is effective.Answer: (c)