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CPA Australia Financial Reporting Mid-Semester Test (Knowledge Equity) (ANSWERS & WORKINGS)
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CPA Australia Financial Reporting Mid-Semester Test
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1FR Mid-Semester Test adjusting event. In this case, the financial statements would have
to be presented on the basis that the entity is not a going concern,
Question 1 for example, using liquidation values.
Which of the following would be a non-adjusting event after
the reporting period in terms of IAS 10 assuming the financial Module: 2 > Part: A > 2.4 Events after the reporting period > Types
year end is 30 June? of events after the reporting period > Figure 2.3 > Page: 77-79
A. On 23 July, management decided to liquidate the Question 2
business. In order to satisfy the ‘decision-usefulness’ objective, Entity
B. Inventory was recorded at its cost of $50 per widget. On A’s financial report included disclosures about its impact on
3 July, the same widgets were sold for $39. the environment for both the current and prior year.
C. At year end, the entity recorded a contingent liability for a
court case that was in progress. On 29 August, the court Which qualitative characteristic is the most difficult to satisfy
ruled in favour of the plaintiff and the entity was liable for when making this disclosure?
damages.
D. The share price of an investment dropped from $300,000 A. Relevance
to $200,000 on 15 July due to rumours that its CEO had B. Verifiability
secretly unsuccessfully tried to sell her shares during the C. Comparability
financial year. D. Understandability
Answer: Answer:
D. The share price of an investment dropped from $300,000 to B. Verifiability
$200,000 on 15 July due to rumours that its CEO had secretly
unsuccessfully tried to sell her shares during the financial B is correct as the ability to verify non-financial information,
year. especially environmental impact is difficult and this is likely to the
most difficult aspect to achieve when preparing the additional
D is correct as this is a non-adjusting event (para 10. of IAS 10) as disclosures.
a decline in market value is linked to events that have occurred
after the end of the period. Furthermore, the rumours may be A, C and D are incorrect as the inclusion of non-financial
unfounded even though they relate to the financial year. information is relevant to users decision making and the fact that
both the current and prior years were disclosed means that
A, B and C are all adjusting post-balance sheet events as comparability would not likely be an issue. The company can also
described in paragraph 3(a), 9 and a 22 of IAS 10. provide adequate explanations to ensure that users understand
the disclosures.
From page 77: Examples of adjusting events include:
Module: 1 > 1.3 Qualitative characteristics of useful financial
• where a court case that was in existence, but had not been information > Fundamental qualitative characteristics > Figure 1.3,
settled by the end of the reporting period, is subsequently decided Table 1.4 > Page: 16
after the reporting period where the outcome is now known
• the discovery of fraud or errors after the reporting period that
reveals that the financial statements were incorrect at the end of
the reporting period.
• where an asset value has been estimated at the end of the
reporting period, and further information has become available
after the reporting period that alters or changes the value of the
asset — for example, the ascertainment of selling prices for
inventory items, after the reporting period, where those prices
were uncertain at the end of the reporting period, thereby affecting
the determination of the carrying amount of inventory items
measured at net realisable values
From page 78: Going into liquidation is an adjusting event:
IAS 10 does not permit an entity to prepare its financial statements
on a going concern basis if management determines after the
reporting period that it either intends to liquidate the entity or
cease trading, or has no realistic alternative but to do so (IAS 10,
para. 14).
If the event after the reporting period reveals that the entity is no
longer a going concern, then the financial statements should not
be presented as if the entity is a going concern. IAS 10 effectively
treats the new information regarding going concern as an
, 2
Question 3 Question 4
On 1 January 20X7, John took out an operating lease for a The accounting policies for Meema Ltd are set out in the
tractor for a period of 3 years. The annual lease payments of notes to the financial statements under Note 1 which state
$50,000 are paid in advance. that fixed assets are measured using the cost model and are
depreciated over a useful life of 10 years.
The market interest rate is 8% and the interest rate implicit in
the lease is 9%. During the current financial year, the useful life of a particular
item of PPE that was purchased 2 years ago was determined
In terms of IFRS 16, what is value of the lease asset (if any) to only be 7 years.
that will be recognised in John’s accounting records?
How should this be treated in the accounting records in terms
A. $0 of IAS 8?
B. $128,855
C. $137,955 A. Change in accounting policy and full retrospective
D. $139,165 adjustment.
B. Change in accounting estimate with prospective
Answer: adjustment.
C. $137,955 C. An accounting error with restatement of comparative
years.
C is correct because the lease asset will be recognised based on D. A voluntary change in accounting policy with prospective
a present value using the interest rate implicit in the lease (which adjustment and disclosure in the notes regarding the
is 9%). The PV factor for an annuity for 2 year period at a rate of reason for the change.
9% is 1.7591.
Answer:
Here is the link to the FV and PV tables to calculate an annuity B. Change in accounting estimate with prospective
(Go to Table 4 and look at the 9% column and the Period 2 row = adjustment.
1.7591).
B is correct as the change in the useful life from 10 years to 7
KEQ FV and PV tables years is a change in estimate. (IAS 8, para. 32).
NOTE: The discount period is 2 years because the payments are A and D are incorrect as this is not an accounting policy change.
made in advance and so the first payment of $50,000 does not
need to be discounted. C is incorrect as this is not an error.
First payment: $50,000 Module: 2 > Part: A > 2.3 Revision of accounting estimates and
correction of errors > Changes in accounting estimates > Page: 74
Add: $50,000 x 1.7591 = $87,955
Total Right-of-use asset = $137,955
A is incorrect because the lessee will be required to recognise a
'right of use' asset even if the lease is an operating lease (IFRS
16).
Module: 1 > Part: A > 1.6 Application of measurement principles in
the international financial reporting standards. > Leases >
Example 1.7 (Pages 40-41) > Page: 38-44
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