201. On 1 April an entity brings a plant into use and recognises a decommissioning provision at its present value of CU 600,000, with the same amount capitalised in the plant's cost. The plant has a useful life of 8 years, the annual discount rate is 5% and the year end is 31 December. What is charged to profit or loss in this first period in respect of the decommissioning obligation?

A) CU 56,250, being depreciation of the capitalised decommissioning cost only, because unwinding is added to the plant until settlement
B) CU 78,750, being depreciation of CU 56,250 within operating costs plus unwinding of CU 22,500 within finance costs, both for nine months
C) CU 22,500, being the unwinding of the discount only, because the capitalised cost is part of the plant and is not charged for the obligation
D) CU 105,000, being a full year of depreciation of CU 75,000 plus a full year of unwinding of CU 30,000, because charges are not apportioned

Correct: B difficult IAS 37.45, IAS 37.60, IFRIC 1

The capitalised CU 600,000 is depreciated over the 8-year life, giving 600,000 / 8 x 9/12 = CU 56,250 for the nine months, and IAS 37 requires the unwinding of the discount to be recognised as a finance cost: 600,000 x 5% x 9/12 = CU 22,500. Both charges run from the date the obligation is recognised, so the total is CU 78,750. Adding the unwinding to the asset would capitalise a finance cost that IAS 37 treats as an expense, and a full-year charge ignores that the plant was in use for only nine months.

202. A lessee takes a 12-month lease of premises at CU 15,000 a month and applies the IFRS 16 short-term lease exemption. The lease cannot be cancelled. At the year end the premises have been vacated and eight months of the lease remain. A subtenant is realistically expected to pay CU 9,000 a month only for the last five months. Ignoring discounting, what is recognised?

A) A provision of CU 75,000 under IAS 37: remaining rent of CU 120,000 less sublease income of CU 45,000, as no lease liability exists
B) An impairment loss of CU 75,000 on the right-of-use asset, as for a lease that is recognised in full under IFRS 16 and vacated
C) Nil, because short-term lease payments are expensed as they fall due, so the exemption removes any onerous contract provision here
D) A provision of CU 120,000, being all the remaining rent, with the expected sublease income left out as a contingent asset

Correct: A complex IAS 37.5, IFRS 16.5-6

A lessee that uses the short-term exemption recognises payments as an expense and has no lease liability or right-of-use asset, so the IFRS 16 route (impairment of the asset) is unavailable. IAS 37 therefore applies if the lease becomes onerous. The unavoidable net cost is 8 x 15,000 = 120,000 less realistic sublease income 5 x 9,000 = 45,000, giving a provision of CU 75,000. Excluding sublease income overstates the loss, because it is an expected benefit of the contract, not a contingent asset, and a nil answer ignores the onerous contract rules.

203. A private company has a CU 20,000,000 term loan from a bank, recognised in its statement of financial position. The bank also holds personal guarantees from two directors for the whole loan, and the company pays no fee for them. How are the guarantees reflected in the company's financial statements?

A) A financial guarantee liability is recognised by the company at expected credit loss under IFRS 9, because the company benefits from the guarantees
B) The loan is the company's own liability, so no contingent liability arises, and the directors' guarantees are disclosed as related party arrangements
C) Nothing is disclosed, because a guarantee given by directors costs the company nothing and is a private matter between the directors and the bank
D) A contingent liability of CU 20,000,000 is disclosed by the company for the guarantees, because the bank can call on the directors

Correct: B difficult IAS 24.18-21, IAS 37.10

The company is the borrower, so the CU 20,000,000 loan is its own recognised liability and a guarantee from the directors does not create a further obligation of the company, whether recognised or contingent. IAS 24 treats the provision of guarantees by related parties as a related party transaction that is disclosed, together with the amount of the outstanding balance and the terms, even though no fee is charged. Showing a contingent liability would double count the loan, a financial guarantee liability belongs to the guarantor and not the borrower, and silence omits information users need about the directors' support.

204. A contractor completes a building and hands it over at the year end, five weeks after the contractual date. The contract price is CU 3,000,000 and the customer is entitled to deduct delay damages of CU 12,000 for each week of delay. Costs of the contract were CU 2,400,000. What revenue does the contractor recognise?

A) CU 3,000,000, with the CU 60,000 disclosed only as a contingent liability until the customer formally deducts it from payment
B) CU 2,940,000, with a further IAS 37 provision of CU 60,000 for the same delay damages, so the penalty is recognised in full
C) CU 2,940,000, being the price less CU 60,000 of delay penalties, which are variable consideration and not an IAS 37 provision
D) CU 3,000,000, with the CU 60,000 of delay damages charged to cost of sales through an IAS 37 provision for the penalty

Correct: C complex IFRS 15.50-51, IAS 37

Under IFRS 15, amounts the entity expects to pay or credit to the customer, including penalties, are variable consideration that reduces the transaction price, so revenue is 3,000,000 - 60,000 = CU 2,940,000. The delay damages are therefore not a separate cost to be recognised under IAS 37, and the liability to the customer is a reduction of the amount receivable or a refund liability. Recording the penalty as an expense overstates revenue, treating it as a contingent liability ignores that the delay has already occurred, and a further provision would count it twice.

205. An authority reclassifies a tariff code and assesses extra non-recoverable import duty on goods imported last year. The earlier classification was reasonable at the time. The entity concludes that payment is probable, with a best estimate of CU 1,200,000. Of the goods concerned, 60% have been sold and 40% remain in inventory, which is still carried below net realisable value. What is charged to profit or loss?

A) CU 720,000 to cost of sales, with CU 480,000 added to the cost of the goods in inventory, and a provision of CU 1,200,000
B) CU 480,000 to cost of sales, with CU 720,000 added to the cost of inventory, because the larger share is attributed to goods held
C) CU 720,000 to cost of sales, with the CU 480,000 held as a deferred asset outside inventory until the dispute is settled
D) CU 1,200,000 to profit or loss as an expense, because the duty relates to an earlier period, with no change in the cost of inventory

Correct: A difficult IAS 37.14, IAS 2.10-11, IAS 8

A liability of CU 1,200,000 is recognised because payment is probable and reliably estimated. IAS 2 includes non-recoverable import duties in the cost of inventory, and the revision of the duty is a change in estimate, not an error, since the earlier view was reasonable. The extra cost is therefore shared in line with the goods: 60% x 1,200,000 = CU 720,000 reaches cost of sales and 40% x 1,200,000 = CU 480,000 is added to inventory, subject to the net realisable value test. Expensing everything or deferring the share outside inventory misstates the cost of the goods held.

206. A regulator issued a formal penalty notice in November 2025, and the 2025 financial statements, authorised in March 2026, omitted a provision although a best estimate of CU 400,000 was supportable and material. The penalty was settled in 2026 for CU 380,000. How is this reflected in the 2026 financial statements?

A) The 2025 comparatives are restated for a CU 400,000 provision and charge; the CU 20,000 release on settlement goes to 2026 profit
B) The 2025 comparatives are restated with a CU 380,000 charge, the amount actually paid, and nothing is credited to 2026 profit
C) The CU 380,000 settlement is charged to 2026 profit and 2025 is left unchanged, because the omission is only a change in estimate
D) Opening 2026 retained earnings are reduced by CU 400,000 without restating the 2025 comparatives, and CU 20,000 is credited to 2026 profit

Correct: A complex IAS 8.41-42, IAS 8.53, IAS 37.59

Failing to recognise a provision for which reliable information was available at the time is a prior period error, not a change in estimate. IAS 8 requires a material error to be corrected retrospectively by restating the comparative amounts, using the estimate that was supportable when the 2025 statements were authorised and not hindsight: a CU 400,000 charge and liability in 2025. When the penalty is settled for CU 380,000 the CU 20,000 difference is a change in estimate credited to 2026 profit. Restating with the settled amount uses hindsight, and charging 2026 leaves 2025 misstated.

207. Draft figures show current assets of CU 1,800,000 and current liabilities of CU 1,200,000 (current ratio 1.50). The draft omits a probable claim with a best estimate of CU 300,000, due for settlement in eight months, of which an insurer will virtually certainly reimburse CU 200,000 within the same period. It also omits a decommissioning provision of CU 150,000 due in six years and a possible claim of CU 500,000 that is not probable. What is the corrected current ratio?

A) 1.21, being current assets of CU 2,000,000 over current liabilities of CU 1,650,000, with the decommissioning provision shown as current
B) 1.00, being current assets of CU 2,000,000 over current liabilities of CU 2,000,000, with the possible claim also provided in full
C) 1.38, being current assets of CU 1,800,000 over current liabilities of CU 1,300,000, with the recovery netted against the claim
D) 1.33, being current assets of CU 2,000,000 (with the insurance asset) over current liabilities of CU 1,500,000 (claim gross)

Correct: D difficult IAS 37.53-54, IAS 37.28, IAS 1.69

The probable claim is a provision of CU 300,000 due within twelve months, so current liabilities become 1,200,000 + 300,000 = CU 1,500,000. The virtually certain CU 200,000 reimbursement is a separate current asset, not a deduction from the provision, so current assets become CU 2,000,000 and the ratio is 1.33. The decommissioning provision falls due in six years and is non-current, and the possible claim is only disclosed as a contingent liability. Netting the recovery, treating the long-term provision as current or providing the possible claim each distorts the ratio.

208. At the year end an entity has provisions for: warranties on washing machines CU 140,000; warranties on air conditioners CU 90,000; a customer lawsuit CU 60,000; a closure plan CU 80,000; and site decommissioning CU 300,000. How should the IAS 37 reconciliation of movements in provisions be presented?

A) One single reconciliation for the CU 670,000 total, because all five items are provisions measured under the same IAS 37 standard
B) Two classes, current and non-current provisions, because the reconciliation follows the statement of financial position split
C) Four classes: warranties combined at CU 230,000, then litigation, restructuring and decommissioning, as dissimilar items stay apart
D) Five classes, one for each provision listed, because IAS 37 requires every separate provision to have its own full reconciliation

Correct: C difficult IAS 37.84, IAS 37.87

IAS 37 requires a reconciliation of the carrying amount at the start and end of the period for each class of provision, and leaves it to the entity to decide which provisions may be aggregated by considering whether their nature is sufficiently similar for a single statement. Warranties on two product lines are similar and combine to 140,000 + 90,000 = CU 230,000, but litigation, restructuring and decommissioning differ in nature and need their own classes: four in all. A single total hides the different drivers, and a class per item or per current and non-current split is not what the standard asks for.

209. An entity discounts customers' bills receivable with a face value of CU 2,000,000 at its bank and receives CU 1,940,000. The bank has full recourse to the entity if a customer fails to pay at maturity, and the entity has kept the risk of customer default and late payment. The bills have not matured at the year end. How are they reported?

A) The receivables are derecognised with a CU 60,000 loss, and nothing is disclosed because default by customers is assumed remote
B) The receivables are derecognised and a CU 1,940,000 IAS 37 provision is recognised for the recourse, as default is more likely than not
C) The receivables are derecognised and CU 2,000,000 is disclosed as a contingent liability, as the recourse is only a possible outflow
D) The receivables stay at CU 2,000,000 with a CU 1,940,000 financial liability, as the risks are kept; no contingent liability arises

Correct: D difficult IFRS 9.3.2.6, IFRS 9.3.2.15

Under IFRS 9 a transferred asset is derecognised only if substantially all the risks and rewards are transferred. With full recourse and the credit and late-payment risk retained, they are not, so the receivable continues to be recognised in full and the cash received is recognised as a financial liability, with the CU 60,000 discount spread as finance cost. The older practice of derecognising the bills and noting a contingent liability does not apply, because the exposure is already on the statement of financial position. A provision for recourse is wrong because it presumes a transfer that did not happen.

210. The board approved a detailed plan to close a factory on 20 December. Nobody outside the board was told until a full announcement to employees and the union on 15 January, which stated redundancy costs of CU 850,000. The year ended on 31 December and the financial statements were authorised on 10 March. How are the redundancy costs treated in the year-end statements?

A) No provision and no disclosure, because the costs will be incurred in the next year and never reported in the earlier statements
B) A provision of CU 850,000, because the detailed plan approved by the board on 20 December created the obligation before the year end
C) No provision, as no valid expectation existed at the year end; the announcement is a non-adjusting event, disclosed (CU 850,000)
D) A provision of CU 850,000 as an adjusting event, because the January announcement confirms a plan that already existed at the year end

Correct: C difficult IAS 37.72, IAS 10.21-22

A constructive obligation to restructure arises only when there is a detailed formal plan and the entity has raised a valid expectation in those affected by starting to implement it or announcing its main features. Until 15 January only the board knew, so there was no obligation at the year end and no provision. The announcement is an event after the reporting period that does not provide evidence of conditions at the year end, so it is non-adjusting, and IAS 10 asks for its nature and estimated effect, here CU 850,000, to be disclosed. A board decision alone is not enough, and omitting disclosure hides a major restructuring.

211. A company with a year end of 31 December paid an interim dividend of CU 1 per share in September on 2,000,000 shares. On 20 February the directors proposed a final dividend of CU 3 per share, subject to approval at the general meeting on 28 April, and the company has increased its final dividend every year for a decade. What is recognised in the year-end financial statements?

A) The CU 2,000,000 interim dividend only, with no disclosure of the final dividend, because it is not a liability and was proposed later
B) The CU 2,000,000 interim dividend plus a CU 6,000,000 final dividend liability, as approval is expected and past increases are a constructive obligation
C) Only the CU 2,000,000 interim dividend, as a deduction from equity, with the CU 6,000,000 proposed final dividend disclosed in the notes
D) Only a CU 6,000,000 liability for the proposed final dividend, because the interim dividend was paid in cash and is already in equity

Correct: C difficult IAS 10.12-13, IAS 37.14

IAS 10 states that dividends declared after the reporting period are not recognised as a liability, because no obligation exists at that date, and a shareholder-approved dividend is not an obligation until it is declared. A history of increasing dividends does not create a constructive obligation, since the company retains discretion and no valid expectation of payment has been raised by a specific commitment. The paid interim dividend of CU 2,000,000 is deducted from equity, and the proposed CU 6,000,000 is disclosed in the notes rather than provided. Provision would recognise a liability with no past obligating event.

212. An entity has four separate fixed-price contracts with different customers. Contract A is expected to lose CU 90,000, contract B to earn CU 150,000, contract C to lose CU 40,000 and contract D to lose CU 30,000 if performed. Contract D can be cancelled at any time on payment of a penalty of CU 10,000. What onerous contract provision is recognised?

A) CU 140,000, being the losses on contracts A and C of CU 130,000 plus the CU 10,000 exit penalty on D, with the profit on B not offset
B) Nil, because losses expected on future performance are future operating losses, which may not be provided, and the entity is profitable overall
C) CU 160,000, being the losses on contracts A, C and D in full, ignoring the cheaper way of exiting contract D by paying the penalty
D) CU 10,000, being the net loss across all four contracts after setting the CU 150,000 profit on contract B against the losses

Correct: A complex IAS 37.66-69

An onerous contract is one whose unavoidable costs exceed its expected benefits, and the test is applied contract by contract, so the CU 150,000 expected on contract B is not available to absorb losses on other contracts. Contracts A and C give provisions of 90,000 and 40,000. For contract D the unavoidable cost is the lower of the cost of fulfilling it (CU 30,000) and the penalty for exiting it (CU 10,000), so CU 10,000 is provided: 90,000 + 40,000 + 10,000 = CU 140,000. Netting against B, or provisioning the full CU 30,000 for D, gives the wrong figure, and a loss on an existing contract is not a future operating loss.

213. On 1 December 2026 an entity with a 31 December year end communicates an irrevocable closure plan to affected staff. Staff are released on 31 January 2027, and termination benefits totalling CU 2,000,000 are payable on 31 December 2028 whether or not they find other work. Yields on high-quality corporate bonds with a two-year term are 6% a year. What liability is recognised at 31 December 2026 for the termination benefits?

A) CU 1,779,993, being CU 2,000,000 discounted for two years at 6%, as the benefits fall due beyond twelve months after the year end
B) CU 2,000,000, the full undiscounted amount, because termination benefits are recognised at the amount the entity has promised to pay out
C) CU 1,886,792, discounted for one year only, being the part of the period that falls beyond the twelve-month window after the year end
D) CU 1,000,000, one half of the amount, because the benefits are earned evenly over the two years that remain until they are paid out

Correct: A difficult IAS 19

Termination benefits are recognised when the entity can no longer withdraw the offer, which here is the announcement of the irrevocable plan, and the staff do not have to work until payment, so nothing is spread over a service period. IAS 19 requires benefits that are not expected to be settled wholly within twelve months after the reporting period to be discounted using the yield on high-quality corporate bonds. The present value is 2,000,000 / 1.06^2 = CU 1,779,993. Discounting for one year only misreads the twelve-month rule, which decides whether discounting is needed and does not remove a year from the discount period, and recognising the undiscounted amount ignores the time value of money.

214. Employees of an entity may carry unused annual leave forward without limit and are paid in cash for every unused day when they leave. At the year end 90 employees hold 1,260 unused leave days in total. Staff also have 10 days of paid sick leave a year, which lapses if unused, and 360 sick days were unused at the year end. Maternity pay of CU 150,000 is expected to be paid next year to two employees. Each day costs CU 3,500, and 300 of the carried-forward leave days are expected to be taken next year on top of next year's own entitlement. What liability for compensated absences is recognised at the year end?

A) CU 4,560,000, being the 1,260 leave days at CU 3,500 plus the CU 150,000 maternity pay that is expected to be paid next year
B) CU 1,050,000, being only the 300 days expected to be taken beyond next year's entitlement, valued at CU 3,500 each
C) CU 4,410,000, being all 1,260 vesting leave days at CU 3,500, with nothing for the lapsing sick days or the maternity pay
D) CU 5,670,000, being the 1,260 leave days plus the 360 unused sick days, each valued at CU 3,500 as a liability earned through service

Correct: C difficult IAS 19

Accumulating paid absences give rise to a liability as employees render the service that earns them. When the days vest, the employee is paid in cash for unused days on leaving, so the liability is the full 1,260 x CU 3,500 = CU 4,410,000, whether or not the leave is ever taken. The expected-additional-usage measure of CU 1,050,000 is the basis for non-vesting leave and understates a vesting entitlement. Sick leave that lapses and maternity leave are non-accumulating absences, which are recognised only when the absence occurs because staff service does not increase the entitlement.

215. On 1 October 2026 an entity announces a retention bonus of CU 60,000 for each of its 50 technical staff who are still employed on 30 September 2028. Staff who leave earlier receive nothing, and the entity expects 10% of the 50 to leave before that date. The year end is 31 December 2026 and discounting is immaterial. What liability is recognised at 31 December 2026?

A) CU 375,000, being all 50 staff x CU 60,000 x 3/24, with no allowance for the 10% who are expected to leave before the bonus is earned
B) Nil, because the bonus depends on service until 30 September 2028 and so is recognised only once that condition has been met
C) CU 337,500, being 45 expected stayers x CU 60,000 x 3/24, as the bonus is earned over the 24 months of service to the payment date
D) CU 2,700,000, being 45 expected stayers x CU 60,000, because the entity became committed to the bonus on the announcement date

Correct: C difficult IAS 19

A benefit that depends on continued service is earned as the employees render that service, so IAS 19 recognises the cost over the service period and not on the announcement date, and measures it allowing for the staff expected to leave and forfeit it. Expected recipients are 50 x 90% = 45, giving a total cost of CU 2,700,000, of which 3 months out of 24 has been earned: 2,700,000 x 3/24 = CU 337,500. Ignoring leavers overstates the liability, the full amount at announcement ignores the service condition, and waiting until the condition is met ignores that service has already been given.

216. For twelve years an entity has paid every employee an annual bonus of 1.5 months' salary on 31 March after each year end, and staff expect it, although their contracts do not promise it. Employees who have left by 31 March receive nothing. At 31 December 2026 the monthly payroll is CU 800,000 and the entity expects 6% of the bonus pool to be forfeited by leavers before 31 March. What is recognised at 31 December 2026 for the bonus?

A) A liability of CU 282,000, being the 94% of the pool attributable to the three months from January to March before the payment date
B) Nil, because the contracts do not promise the bonus, so it is recognised only when it is approved and paid on 31 March after the year end
C) A liability of CU 1,200,000, being the whole pool, because the bonus relates to service in the year and forfeitures are ignored until they occur
D) A liability of CU 1,128,000, being the CU 1,200,000 pool less the 6% expected to be forfeited, as past practice is a constructive obligation

Correct: D difficult IAS 19

IAS 19 requires a bonus to be recognised when the entity has a present legal or constructive obligation to pay it as a result of past service and can estimate it reliably, and twelve years of unbroken practice leave the entity no realistic alternative to paying it. The pool is 1.5 x 800,000 = CU 1,200,000, and because staff who leave before the payment date receive nothing, the measurement reflects the expected forfeitures: 1,200,000 x 94% = CU 1,128,000. Ignoring forfeitures overstates the liability, and apportioning to January to March confuses the payment period with the service period, which is the whole year just ended.

217. A contractor hands over a completed building on 1 October 2026 under a CU 20,000,000 fixed-price contract and recognises all the revenue. The contract has a 12-month defects liability period, during which the contractor must repair defects free of charge, and the customer withholds a 5% retention of CU 1,000,000 until the period ends. Experience suggests rectification costs of 1.2% of the contract price. The year end is 31 December 2026. How is the defects obligation accounted for?

A) A provision of CU 240,000 (1.2% x CU 20,000,000) is recognised at handover, with the CU 1,000,000 retention a separate receivable, not netted
B) A provision of CU 1,000,000 equal to the retention is recognised, because the customer may apply the whole retention against any defects found
C) No provision is recognised, because the CU 1,000,000 retention held by the customer already covers the expected CU 240,000 of repair costs
D) A provision of CU 60,000 is recognised, being three months of the expected CU 240,000 cost, because repairs are spread evenly over twelve months

Correct: A complex IAS 37.14, IFRS 15.B28-B33

A defects liability period that only assures the work meets the contract is an assurance-type warranty, so it is accounted for under IAS 37 and not as a separate performance obligation. The obligating event is the handover, which has happened, so the whole expected cost of CU 240,000 is provided at once and not spread over the twelve months. The retention is the contractor's own receivable, held by the customer as security, and is not a reimbursement from a third party, so it neither reduces the provision nor sets its amount. A provision equal to the retention would replace the best estimate of the cost with the size of the security.

218. An entity measures a processing plant at cost, and its decommissioning cost was capitalised as part of the plant. At the year end, after depreciation for the year, the plant's carrying amount is CU 150,000. Following a change in the estimated cash flows, the present value of the decommissioning provision falls by CU 220,000. Ignore unwinding of the discount. How is the CU 220,000 decrease accounted for?

A) The whole CU 220,000 is deducted from the plant, leaving a negative carrying amount of CU 70,000 that is released over its remaining life
B) The whole CU 220,000 is credited to profit or loss, because the plant is nearly fully depreciated and the change no longer affects its cost
C) CU 150,000 is deducted from the plant and the excess of CU 70,000 is credited to a revaluation surplus in other comprehensive income
D) CU 150,000 is deducted from the plant, reducing it to nil, and the excess of CU 70,000 is credited to profit or loss immediately as a gain

Correct: D difficult IFRIC 1

Under IFRIC 1, a change in the estimated cash flows of a decommissioning liability on a cost-model asset is deducted from the asset's cost in the current period, but the deduction cannot exceed the asset's carrying amount. Here the plant is reduced by CU 150,000 to nil and the remaining 220,000 - 150,000 = CU 70,000 is recognised immediately in profit or loss. Crediting the whole amount to profit or loss ignores the link to the asset's cost, a negative asset is not permitted, and a revaluation surplus arises only under the revaluation model, which does not apply here.

219. An entity applies the cost model to a pipeline whose carrying amount is CU 1,000,000 before a revision of the decommissioning estimate. The revision increases the present value of the decommissioning provision by CU 300,000. The pipeline's recoverable amount, measured on the same basis as its carrying amount, is CU 1,150,000. How is the CU 300,000 increase accounted for?

A) It is added to the pipeline's cost and the asset is then tested: CU 1,300,000 against CU 1,150,000 gives an impairment loss of CU 150,000
B) It is added to the pipeline's cost, giving CU 1,300,000, with no impairment test because the increase arises from a liability estimate
C) It is charged to profit or loss in full, and the pipeline stays at CU 1,000,000 because that is below its recoverable amount of CU 1,150,000
D) It is added to the pipeline's cost and the whole CU 300,000 is impaired, because an addition arising from a provision earns no cash flows

Correct: A complex IFRIC 1, IAS 36

IFRIC 1 adds a change in a decommissioning liability to the cost of the related asset, but where the change increases the cost, the entity must consider whether the new carrying amount may not be fully recoverable and, if so, test the asset for impairment under IAS 36. The revised carrying amount is 1,000,000 + 300,000 = CU 1,300,000, which exceeds the recoverable amount of CU 1,150,000 by CU 150,000, recognised as an impairment loss. Skipping the test overstates the asset, expensing the increase ignores the link to cost, and impairing all of it ignores that the asset is still partly recoverable.

220. On 1 January 2026 an entity begins building a power plant, a qualifying asset that will take two years. On that date site works create a legal restoration obligation, and the entity recognises a decommissioning provision of CU 1,500,000, discounted at 6%, with the same amount added to the plant's cost. A specific loan of CU 5,000,000 at 8% a year, drawn on 1 January and fully spent on the plant, finances construction. What is capitalised and what is charged to profit or loss in 2026 for these finance costs?

A) Nothing is capitalised and CU 490,000 is charged to profit or loss, because the plant is not yet in use and so has no depreciable cost
B) CU 400,000 is capitalised and the CU 90,000 unwinding is not recognised until the plant starts operating and begins to be depreciated
C) CU 400,000 of loan interest is capitalised, and the CU 90,000 unwinding of the discount is charged to profit or loss as a finance cost
D) CU 490,000 is capitalised, being the loan interest of CU 400,000 plus the CU 90,000 unwinding, as both are finance costs of a qualifying asset

Correct: C complex IFRIC 1, IAS 23

Interest on the specific loan is a borrowing cost directly attributable to a qualifying asset, so 5,000,000 x 8% = CU 400,000 is capitalised under IAS 23. IFRIC 1 requires the periodic unwinding of the discount on a decommissioning provision to be recognised in profit or loss as a finance cost as it occurs, and expressly rules out capitalising it under IAS 23, so 1,500,000 x 6% = CU 90,000 is expensed. Deferring the unwinding until the plant operates ignores that a liability accretes from the day it is recognised, and expensing the loan interest ignores the capitalisation rule.

221. An entity depreciates a plant on the straight-line basis over 10 years with no residual value, and the plant cost CU 5,000,000 including a capitalised decommissioning cost. After 4 years its carrying amount is CU 3,000,000. At that date the decommissioning provision is increased by CU 240,000 because estimated costs have risen, and the plant is not impaired. The remaining life is unchanged at 6 years. What is the depreciation charge for year 5?

A) CU 500,000, being the unchanged carrying amount of CU 3,000,000 over the remaining 6 years, with the increase charged to profit or loss
B) CU 540,000, being the revised carrying amount of CU 3,240,000 spread over the remaining 6 years, with no catch-up for earlier years
C) CU 740,000, being CU 500,000 of normal depreciation plus the CU 240,000 increase charged to profit or loss in the same year
D) CU 524,000, being the revised total cost of CU 5,240,000 spread over the original 10-year life, as if the increase were part of the original cost

Correct: B difficult IFRIC 1, IAS 16

Under IFRIC 1 the increase in the provision is added to the cost of the plant in the current period, and the adjusted depreciable amount is depreciated prospectively over the remaining useful life. The revised carrying amount is 3,000,000 + 240,000 = CU 3,240,000, and spreading it over the 6 remaining years gives CU 540,000. Re-spreading the revised total cost over the original 10 years would create a catch-up adjustment for the 4 years already depreciated, and charging the increase to profit or loss ignores that it is part of the asset's cost.

222. A government imposes a national solidarity surcharge on companies, calculated as 3% of taxable profit as determined under the income tax law and paid with the annual tax return four months after the year end. A company's taxable profit for the year ended 31 December 2026 is CU 8,000,000, before the surcharge, and the normal income tax rate is 25%. How is the surcharge accounted for at 31 December 2026?

A) As nothing at the year end, because under IFRIC 21 the liability arises only when the return is filed and paid four months later
B) As current tax of CU 240,000 (3% x CU 8,000,000), accrued with the year's profit, because the surcharge is an income tax within IAS 12
C) As current tax of CU 180,000 (3% x CU 6,000,000), being taxable profit after normal income tax at 25%, accrued with the year's profit
D) As an operating expense of CU 240,000 recognised under IFRIC 21 at the year end, outside the tax charge, because the surcharge is a levy

Correct: B difficult IAS 12.2, IFRIC 21

IFRIC 21 deals with levies imposed by governments, but it excludes income taxes, which are within IAS 12, and IAS 12 applies to taxes based on taxable profit. A surcharge of 3% of taxable profit is therefore an income tax: it accrues as the taxable profit arises, so CU 240,000 (3% x 8,000,000) is current tax at the year end and part of the tax charge. Treating it as a levy would move it into operating expenses or delay it until a trigger date, and the law applies the rate to taxable profit before normal tax, not to the profit left after it.

223. A tax authority issues a CU 5,000,000 additional assessment to a company for earlier periods. The law requires 10% of the assessed amount to be deposited before an appeal can be lodged, and the company paid CU 500,000 on 20 December. The deposit is refunded if the appeal succeeds and applied against the assessment if it fails. The company's advisers say the appeal is more likely than not to succeed, so an outflow is not probable. How is this reflected at the year end?

A) The CU 500,000 deposit is held as an asset, no provision is made, and the CU 5,000,000 assessment is disclosed as a contingent liability
B) The CU 500,000 deposit is recognised as an asset and nothing else is reported, because an outflow that is not probable need not be disclosed
C) A provision of CU 5,000,000 is recognised and the CU 500,000 deposit is netted against it, giving a net liability to the authority of CU 4,500,000
D) The CU 500,000 deposit is expensed as tax when it is paid, and the unpaid balance of CU 4,500,000 is disclosed as a contingent liability

Correct: A difficult IAS 37.86

Because the advisers judge that an outflow is not probable, no provision is recognised. The loss is still possible and not remote, so IAS 37 requires the assessment to be disclosed as a contingent liability, and the amount in dispute remains the whole CU 5,000,000. The deposit is a refundable payment on account, not a cost, so it is carried as an asset and assessed for recovery. Expensing it assumes the appeal has failed, netting it against a provision assumes an outflow is probable, and omitting the disclosure ignores that contingent liabilities are disclosed unless the possibility of outflow is remote.

224. At its year end a board approves a detailed closure plan for a factory and announces it publicly, with closure due in six months. The expected costs are employee termination payments of CU 1,200,000, penalties for cancelling supply contracts of CU 300,000, operating losses of the factory until closure of CU 500,000, and an impairment of the factory's plant of CU 700,000. What restructuring provision is recognised at the year end?

A) CU 2,700,000, including all four items, because the announced plan commits the entity to the whole cost of the closure programme
B) CU 1,500,000, being the termination payments and cancellation penalties, as losses to closure arise when incurred and impairment is an IAS 36 matter
C) CU 2,200,000, adding the CU 700,000 plant impairment, because the impairment is a direct result of the closure decision itself
D) CU 2,000,000, adding the CU 500,000 operating losses expected until closure, because they are a direct cost of the closure decision

Correct: B difficult IAS 37

A restructuring provision covers only the direct expenditure that is necessarily entailed by the restructuring, such as termination payments and penalties on contracts that must be cancelled. Identifiable operating losses up to the date of closure relate to ongoing activities and are recognised as they are incurred, and impairment of the plant is measured under IAS 36 and not provided as a liability. The provision is therefore 1,200,000 + 300,000 = CU 1,500,000. Including the losses or the impairment confuses the cost of leaving the business with the results and assets of the business while it continues to operate.

225. At 31 December 2026 an entity measures a site restoration provision at CU 2,000,000 using a contractor's quote. The accounts are authorised in March 2027. A survey in February 2027 shows that the area contaminated at the year end was 15% larger than assumed, which raises the cost in proportion. Separately, a steel price rise in February 2027, caused by a trade ban imposed that month, would raise the cost of all the work, including the extra area, by a further 10%. What should the year-end provision be?

A) CU 2,000,000, because the quote was reasonable at the year end and later information about the area is a non-adjusting event
B) CU 2,200,000, reflecting only the 10% price rise, because the larger area was unknown to management at the year end date
C) CU 2,530,000, reflecting both the larger area and the price rise, because both come to light before the accounts are authorised
D) CU 2,300,000, reflecting the larger area that existed at the year end but not the later price rise, which arose after that date

Correct: D difficult IAS 10.8-10, IAS 37.38

The estimate of a provision is made on the conditions at the reporting date, and IAS 37 says the evidence includes events after the reporting period. The survey provides further evidence of a condition that existed at the year end, so it adjusts the provision: 2,000,000 x 1.15 = CU 2,300,000. The price rise follows a trade ban imposed after the year end, so it reflects a new condition and is a non-adjusting event, which is disclosed if material. Leaving the survey out ignores evidence of the year-end position, and including the price rise or including it alone puts post-year-end conditions into the year-end liability.