Q1. A company's defined benefit plan gives 1/60 of final salary per year of service. From 1 July the formula becomes 1/50 for service after that date only, with benefits for earlier service unchanged. The current service cost at the old formula is CU 400,000 a year and CU 480,000 a year at the new formula. How is the amendment reflected in the year to 31 December? Correct

A) No past service cost arises, but the current service cost stays at CU 400,000 because a mid-year amendment takes effect next year
B) No past service cost arises, and the current service cost is CU 480,000 for the full year as the new formula applies to all service
C) No past service cost arises, and the current service cost is CU 440,000: CU 200,000 for six months at the old rate and CU 240,000 at the new
D) A past service cost of CU 40,000 is recognised immediately, with the current service cost for the year remaining at CU 400,000

Your answer: C  |  Correct answer: C

Past service cost arises only when a plan amendment changes the obligation for service already rendered (IAS 19.102-103). An amendment affecting future service only leaves the obligation for past service unchanged, so there is no past service cost. For the period after the amendment, current service cost is determined using the assumptions and benefits as amended (IAS 19.122A). The year therefore bears 400,000 x 6/12 + 480,000 x 6/12 = CU 440,000. Applying the higher rate to the first half would reflect a retrospective change that the plan does not make.

IAS 19.102-103, 19.122A

Q2. A company issues Sukuk al-Ijara certificates to investors, receiving cash proceeds in exchange for the certificates, which are classified as a financial liability. How should the cash proceeds received on issuance of the Sukuk be presented in the statement of cash flows? Incorrect

A) As a financing activities cash inflow, in the same manner as proceeds from issuing conventional loan notes or bonds, since the Sukuk is classified as a financial liability raising cash for the entity
B) As an operating activities cash inflow, since Sukuk proceeds typically fund working capital needs
C) As a non-cash financing transaction excluded from the statement of cash flows and disclosed only by note
D) As an investing activities cash inflow, since the underlying Ijara structure involves an identified asset

Your answer: D  |  Correct answer: A

Cash proceeds received on issuing a liability-classified Sukuk instrument are a genuine cash inflow from raising finance, presented as a financing activity in the same way as proceeds from issuing conventional loan notes or bonds. The underlying Ijara asset structuring does not change the cash flow classification of the proceeds actually received, and there is no basis for excluding the transaction as non-cash, since real cash is received.

IAS 7

Q3. Trading Co is a financial institution for which dealing in derivative instruments is a principal revenue-generating activity, and it classifies the cash flows from its derivatives held for trading purposes as operating activities. Separately, Trading Co holds a derivative that it has designated as a hedge of a highly probable forecast purchase of machinery. How should the cash flows on this hedging derivative be classified in Trading Co's statement of cash flows? Correct

A) As a non-cash item excluded from the statement of cash flows entirely, since the derivative's cash flows relate to a transaction (the machinery purchase) that has not yet occurred at the reporting date
B) As financing activities, because all derivative cash flows other than those from instruments held purely for trading are classified as financing activities under IAS 7 regardless of what the derivative is hedging
C) Consistently with the classification of the cash flows of the hedged item, so that because the forecast machinery purchase would itself be an investing activity, the hedging derivative's cash flows are also classified as investing activities
D) Consistently with all of Trading Co's other derivative cash flows, as operating activities, since the entity's overall business model is derivatives trading and classification should be applied uniformly across all derivative instruments it holds

Your answer: C  |  Correct answer: C

IAS 7 states that cash flows arising from derivative instruments accounted for as hedges are classified in a manner consistent with the classification of the cash flows of the item being hedged, rather than according to the nature of the derivative itself or the entity's general trading activities. Here, the underlying hedged item is a forecast purchase of machinery (property, plant and equipment), whose cash flows would be investing activities, so the derivative's cash flows are also classified as investing activities. This is a deliberate exception to option D's general principle that Trading Co's other, non-hedging derivative cash flows (held for trading, a principal revenue-generating activity) are classified as operating: that general operating classification applies only to non-hedging derivatives, not to one specifically designated as a hedge of an investing-activity item. Option B invents a rule requiring financing classification with no basis in IAS 7; option A incorrectly denies the derivative's own cash flows a place in the statement.

IAS 7 Statement of Cash Flows, paragraph 16 (derivatives held for trading) and hedge accounting classification guidance

Q4. On 1 January a company buys equipment with a cash price of CU 100,000, payable in four annual instalments of CU 31,547 on 31 December, at an implicit interest rate of 10%. How is the liability presented at 31 December Year 1 after the first instalment, and what is the Year 1 interest? Incorrect

A) Current CU 31,547 and non-current CU 46,906, taking the whole next instalment as current, with CU 10,000 of interest
B) Output VAT is CU 5,478, based on the CU 42,000 received, because the consideration is the cash that is finally realised
C) A total of CU 68,453 split in the same way, with CU 31,547 of Year 1 interest charged against the instalment paid
D) Current CU 23,702 and non-current CU 54,751, with CU 10,000 of interest charged in Year 1 and the rest being principal

Your answer: A  |  Correct answer: D

The liability starts at the cash price of CU 100,000. Year 1 interest is 10% x CU 100,000 = CU 10,000, so the balance after the payment is 100,000 + 10,000 - 31,547 = CU 78,453. Next year's interest is CU 7,845, so the principal repaid in Year 2 is CU 31,547 - CU 7,845 = CU 23,702, which is the current portion, and the remaining CU 54,751 is non-current. Undiscounted instalments and a whole instalment as current would overstate the liability.

IFRS 9.5.3.1, IAS 1.69

Q5. For the year ended 31 December Year 2 a company reports profit after tax of CU 1,260,000. It has 6% cumulative preference shares of CU 2,000,000 classified as equity, with the dividend not declared. It had 3,000,000 ordinary shares at 1 January, issued 600,000 shares at full market price on 1 July and made a 1-for-5 bonus issue on 1 October. What is basic earnings per share for Year 2? Incorrect

A) 29.2 cents, being earnings of CU 1,140,000 over 3,900,000 shares, with the bonus applied to the opening shares only
B) 31.8 cents, being profit of CU 1,260,000 over 3,960,000 shares, because the undeclared preference dividend is ignored
C) 32.8 cents, being earnings of CU 1,140,000 over 3,480,000 shares, with the bonus issue time-weighted only from 1 October
D) 28.8 cents, being earnings of CU 1,140,000 after the preference dividend over 3,960,000 shares restated for the bonus issue

Your answer: C  |  Correct answer: D

IAS 33 deducts the dividend on cumulative preference shares from earnings whether or not it has been declared, so earnings are 1,260,000 - 120,000 = CU 1,140,000. A bonus issue brings no new resources, so it is applied retrospectively as if it had occurred at the start of the period, uplifting every earlier share movement by 1.2. Weighted shares are 3,000,000 x 1.2 + 600,000 x 1.2 x 6/12 = 3,960,000, giving 28.8 cents. Time-weighting the bonus from 1 October, or applying it only to the opening shares, understates the share count.

IAS 33.14, IAS 33.26

Q6. Shortly before its year end, Milbank Retail Ltd's government announces a proposal to significantly increase statutory minimum redundancy payment rates, expected to be legislated within the next year and widely expected by commentators to pass. Milbank has no current redundancy programme in progress. How should Milbank reflect this proposed rate increase in its year-end provisions (if it has any pre-existing redundancy provisions)? Incorrect

A) Any existing redundancy provision is increased to reflect the proposed new rates, since enactment is widely expected
B) A new separate provision is recognised for the incremental cost of the proposed increase, disclosed as a distinct line item
C) The proposed increase is treated as a contingent liability requiring disclosure only, in addition to any existing provision measured at the old rates
D) No adjustment is made to any existing provision for the proposed rate increase, since the legislation has not yet been substantively enacted at the reporting date, regardless of how likely enactment is considered

Your answer: B  |  Correct answer: D

A provision is measured using the best estimate of the expenditure required to settle the present obligation, based on legislation actually in force (or substantively enacted) at the reporting date; a mere government proposal, however likely eventual enactment may be considered, does not itself change any existing legal obligation. Because no obligation yet reflects the higher proposed rates, no adjustment is required to any existing provision, and nothing in the fact pattern otherwise gives rise to a fresh provision. Option A and Option B incorrectly anticipate a legal change that has not yet occurred. Option C wrongly treats the proposal as requiring disclosure as a contingent liability, when in substance there is no obligation of any kind yet, merely a legislative proposal.

IAS 37 Provisions, Contingent Liabilities and Contingent Assets, paragraph 36

Q7. A retailer buys 1,000 units of a product at CU 20 each (CU 20,000) and, under a promotion, the supplier delivers 100 additional units free of charge. By the year end 880 of the 1,100 units have been sold. At what unit cost, and total amount, is closing inventory measured? Correct

A) At CU 20 per unit (CU 4,400), with the CU 2,000 market value of the 100 free units recognised as other income when received, as a supplier incentive separate from the cost of inventory
B) At CU 20 per unit, giving closing inventory of 220 units at CU 4,400, because the free units have no cost and the unit price on the supplier's invoice is the cost of every unit in stock
C) At CU 2,400 in total, because the 100 free units are assumed to remain unsold at nil cost and the other 120 units held are valued at CU 20 each according to the invoice price
D) At CU 18.18 per unit (CU 20,000 divided by 1,100 units), giving closing inventory of 220 units at CU 4,000, because the total price paid is spread over all units received

Your answer: D  |  Correct answer: D

The cost of purchase is the net price paid for the goods actually received. Where a supplier gives extra units free, the total paid (CU 20,000) buys 1,100 units, so the average cost is CU 18.18 per unit and 220 units on hand cost CU 4,000. Valuing at CU 20 per unit overstates inventory, recognising income for free units overstates profit on receipt, and assuming the free units are the ones left unsold is an unsupported allocation.

IAS 2 - cost of purchase where the supplier provides free additional units under a promotion

Q8. A company's financial statements disclose, in respect of inventories: the accounting policy for the cost formula used (e.g. FIFO), the total carrying amount of inventories (analysed into appropriate classifications such as raw materials, work in progress and finished goods), the amount of inventories recognised as an expense (cost of sales) during the period, and the amount of any write-down of inventories recognised as an expense during the period. Why does IAS 2 require disclosure of the amount of inventories recognised as an expense SEPARATELY from the amount of any write-down recognised as an expense during the period? Incorrect

A) IAS 2 does not actually require these two amounts to be disclosed separately -- they may always be combined into a single cost of sales figure with no further breakdown
B) IAS 2 requires the write-down amount to be disclosed only when it exceeds 50% of total cost of sales for the period
C) The separate disclosure exists purely to satisfy tax authorities and has no relevance to users of general purpose financial statements
D) Separating the two amounts allows users of the financial statements to distinguish the normal cost of inventories sold (reflecting ordinary trading activity) from the additional expense arising specifically from inventory write-downs (reflecting a loss in value below cost, often due to obsolescence, damage, or falling selling prices) -- this distinction is useful because write-downs may be unusual, non-recurring, or indicative of a specific problem (such as declining product demand) that would otherwise be obscured if buried within an undifferentiated cost of sales figure

Your answer: B  |  Correct answer: D

IAS 2 requires separate disclosure of the amount of inventories recognised as an expense during the period (essentially, cost of sales arising from the ordinary sale of inventory) and the amount of any write-down of inventories recognised as an expense during the period (arising when inventory is written down to net realisable value below cost). This separation serves users' information needs by distinguishing the normal, recurring cost of trading activity from the effect of inventory impairments, which may be unusual, non-recurring, or symptomatic of a specific issue such as obsolete stock, declining demand, or damaged goods. If the two amounts were simply combined into a single cost of sales figure, users would be unable to assess how much of the period's cost reflects ordinary trading versus how much reflects a loss in the value of inventory below what was originally paid for it -- information that is often relevant to assessing the quality of earnings and the risks facing the business's inventory holdings.

IAS 2 Inventories, paragraph 36 - disclosure requirements

Q9. At the year end an entity tests a separately identifiable operating licence with a carrying amount of CU 2,600,000. A buyer has agreed a price of CU 2,350,000. Incremental costs of the sale are legal fees of CU 30,000, stamp duty of CU 20,000 and a regulator transfer fee of CU 10,000. After the sale the seller also expects redundancy payments of CU 60,000 and reorganisation costs of CU 40,000. The licence's value in use is CU 2,200,000. What impairment loss is recognised? Incorrect

A) Impairment loss CU 400,000: deducting all CU 160,000 of costs gives CU 2,190,000, so the higher value in use of CU 2,200,000 applies
B) Impairment loss CU 250,000: recoverable amount is the CU 2,350,000 agreed price, because costs of disposal are ignored in the comparison
C) Impairment loss CU 310,000: recoverable amount is fair value less costs of disposal of CU 2,290,000, after deducting only CU 60,000 of costs
D) Impairment loss CU 300,000: recoverable amount is CU 2,300,000 after deducting only the legal fees and stamp duty of CU 50,000, no regulator fee

Your answer: B  |  Correct answer: C

Recoverable amount is the higher of fair value less costs of disposal and value in use. Costs of disposal include legal costs, stamp duty and similar transaction taxes and the costs of transferring the asset, but IAS 36 excludes termination benefits and costs of reducing or reorganising the business after the disposal. Fair value less costs of disposal is therefore CU 2,350,000 - CU 60,000 = CU 2,290,000, which exceeds value in use of CU 2,200,000. The loss is CU 2,600,000 - CU 2,290,000 = CU 310,000. Deducting the excluded costs would wrongly push the figure below value in use.

IAS 36.28

Q10. A company sold a machine with a carrying amount of CU 240,000 at an agreed price of CU 300,000. It paid the auctioneer's commission of CU 12,000 and legal fees of CU 3,000 in cash on the sale. The profit on disposal was recognised in profit or loss after these costs. What investing cash inflow is shown and what profit adjustment is made in the operating reconciliation? Incorrect

A) Investing inflow of CU 315,000 (price plus costs); the profit on disposal of CU 45,000 is deducted from profit before tax
B) Investing inflow of CU 300,000 (the gross price); the profit on disposal of CU 45,000 is deducted from profit before tax
C) Investing inflow of CU 285,000 (price less costs); the profit on disposal of CU 60,000 is deducted from profit before tax
D) Investing inflow of CU 285,000 (price less costs); the profit on disposal of CU 45,000 is deducted from profit before tax

Your answer: B  |  Correct answer: D

The profit on disposal is net proceeds less carrying amount: (300,000 - 15,000) - 240,000 = CU 45,000. The cash actually received from the sale, after the costs the entity paid to achieve it, is CU 285,000, shown as an investing inflow (IAS 7.16(b)). The whole profit of CU 45,000 is then deducted from profit before tax so that the disposal is not counted in operating cash as well. Showing the gross price leaves the costs unrecorded in any section, while a profit of CU 60,000 ignores the costs that were charged within the profit figure.

IAS 7.16(b)

Q11. A company holds a patented manufacturing process that remains legally valid and technically effective. After the reporting date, but before the financial statements are authorised for issue, a new law is enacted banning the future use of this specific process on environmental grounds, with no prior indication of this change before the year end. How should this development be treated in the financial statements for the year just ended? Incorrect

A) No disclosure of any kind is required, since the event occurred after the year end and relates only to a future period
B) The patent must be reclassified as held for sale in the financial statements for the year just ended as a direct result of this subsequent legal change
C) The patent's carrying amount must be written off immediately in full within the financial statements for the year just ended, since the process can no longer be used going forward
D) Since the change in law was enacted only AFTER the reporting date and there was no indication of any such change existing at the year end, this is a non-adjusting event under IAS 10: the patent's carrying amount at the year end itself is not written down retrospectively, but the nature and estimated financial effect of the subsequent change in law (likely triggering an impairment or derecognition in the FOLLOWING period) must be disclosed, given its clear materiality to users' understanding of the entity's future prospects

Your answer: C  |  Correct answer: D

A condition that did not exist at the reporting date and arises only afterwards is a non-adjusting event under IAS 10; the year-end figures are not adjusted retrospectively for it. Here, the process was legally valid and effective at the year end, with no indication of the change in law existing at that date, so the patent's carrying amount at the year end itself is not written down. However, given the clear materiality of the subsequent ban to users' understanding of the entity's future prospects, its nature and estimated financial effect must be disclosed as a non-adjusting subsequent event.

IAS 10 Events after the Reporting Period; IAS 36/IAS 38 impairment of intangible assets

Q12. A project to develop a new product cost CU 90,000 up to 30 April, before technical feasibility was shown, and CU 210,000 from 1 May to 30 September, when all the criteria for recognising development costs were met. The product was ready for use on 1 October. The entity capitalised all CU 300,000 and amortised it over five years from 1 October, charging CU 15,000 for the year ended 31 December. What are the corrected carrying amount of the asset and the effect on profit? Correct

A) Asset nil, and profit falls by CU 285,000, as all the project costs are expensed because development is uncertain
B) Asset CU 195,000, and profit falls by CU 90,000, as the pre-feasibility costs are expensed but amortisation stays at CU 15,000
C) Asset CU 182,000, and profit falls by CU 103,000, as amortisation starts on 1 May when the criteria are met
D) Asset CU 199,500, and profit falls by CU 85,500, as CU 90,000 is expensed and amortisation falls to CU 10,500

Your answer: D  |  Correct answer: D

Research costs, and development costs incurred before all the recognition criteria are demonstrated, are expensed (IAS 38.54 and 38.57), so CU 90,000 is removed from the asset. Amortisation starts when the asset is available for use, 1 October (IAS 38.97), on the CU 210,000 cost: 210,000 / 5 x 3/12 = CU 10,500. The carrying amount is therefore 210,000 - 10,500 = CU 199,500. Profit falls by 90,000 less the CU 4,500 of amortisation no longer charged (15,000 - 10,500) = CU 85,500. Expensing everything ignores the criteria met, and starting amortisation in May ignores when use begins.

IAS 38.54, 38.57, 38.97

Q13. A business installs a new item of production machinery. The invoice from the supplier totals CU45,000, comprising CU40,000 for the machine itself and CU5,000 for delivery and professional installation costs necessary to bring the machine into working condition. In its first month of operation, the machine also requires CU800 of routine lubrication and minor adjustment, carried out by the business's own maintenance staff. How should the CU45,000 initial invoice and the CU800 routine maintenance cost each be classified? Incorrect

A) Both the CU45,000 invoice and the CU800 routine maintenance cost are classified as revenue expenditure, since only cash paid directly to a supplier for the base cost of an asset, excluding any related service costs, can ever be treated as capital expenditure
B) The full CU45,000 (both the CU40,000 machine cost and the CU5,000 delivery/installation cost) is classified as capital expenditure, capitalised as part of the cost of the non-current asset, since installation costs necessary to bring an asset into working condition are treated as part of its acquisition cost; the CU800 routine lubrication and adjustment cost, by contrast, is revenue expenditure, expensed to profit or loss as incurred, since it maintains the asset's existing operating condition rather than bringing a new asset into use or enhancing its future economic benefits
C) The CU40,000 machine cost is capital expenditure, but the CU5,000 delivery and installation cost is always classified as revenue expenditure, being treated identically to routine running costs regardless of its connection to bringing the asset into working condition
D) The full CU45,000 invoice and the CU800 routine maintenance cost are both classified as capital expenditure, since both relate to the same machine and are therefore treated identically

Your answer: D  |  Correct answer: B

Capital expenditure comprises the cost of acquiring a non-current asset and bringing it into a location and condition ready for its intended use, which includes not only the purchase price but also directly attributable costs such as delivery and installation -- so the full CU45,000 is capitalised as the cost of the machine. Revenue expenditure, by contrast, comprises costs incurred in the day-to-day running of the business, including routine repairs and maintenance that simply restore or maintain an asset's existing operating condition rather than enhancing it or bringing a new asset into use -- the CU800 routine lubrication and adjustment cost falls into this category and is expensed to profit or loss as incurred, rather than added to the machine's capitalised cost.

Capital expenditure versus revenue expenditure - classification of installation costs and routine maintenance costs

Q14. A company's year ended 31 December Year 5, and its financial statements are authorised on 10 March Year 6. On 15 January Year 6 it issued 1,000,000 shares for cash at a fair price, and on 20 February Year 6 it made a 1-for-4 bonus issue. How are the two events reflected in the Year 5 financial statements? Incorrect

A) Neither changes year-end equity; the cash issue is disclosed only, while the bonus issue is disclosed and EPS is restated for it
B) Neither affects EPS, since events after the reporting period never alter reported EPS, and both are disclosed as non-adjusting events
C) The cash issue is weighted into Year 5 EPS from 1 January and the bonus issue is ignored, as it was a non-adjusting event
D) Both are adjusting events, so year-end equity includes the new shares and the bonus issue, since they occurred before authorisation

Your answer: C  |  Correct answer: A

A share issue after the reporting period does not provide evidence about conditions at the year end, so equity is not changed; a major ordinary share transaction is a non-adjusting event disclosed under IAS 10. A bonus issue is also not recognised in year-end equity, but IAS 33 specifically requires basic and diluted EPS for the period, and for comparatives, to be restated when a bonus issue occurs after the reporting period and before authorisation, with that fact disclosed. A fair-price cash issue brings in resources only from its date, so it never enters Year 5 weighted shares.

IAS 10.21-22, IAS 33.64

Q15. A business sells goods with a normal cash selling price of CU48,400 to a corporate customer, but agrees to interest-free credit terms allowing the customer 2 years to pay, rather than the business's normal 30-day credit terms. This extended interest-free period is a significant financing benefit to the customer, and an appropriate discount rate reflecting the time value of money over the 2 years is 10% per year, giving a present value of the CU48,400 due in 2 years of approximately CU40,000. How should revenue and the receivable be initially recognised for this sale? Incorrect

A) Because the extended 2-year interest-free credit period represents a significant financing component within the transaction, revenue is initially recognised at the CU40,000 present value of the future cash flows (reflecting the cash selling price adjusted for the significant financing benefit provided to the customer), with the receivable also initially recognised at CU40,000 -- the CU8,400 difference between the CU48,400 nominal amount ultimately received and the CU40,000 initially recognised is then recognised separately as finance income over the 2-year credit period as the financing component unwinds, rather than being recognised entirely as revenue at the point of sale
B) Revenue of CU40,000 is recognised at the point of sale, but the remaining CU8,400 is permanently excluded from both revenue and finance income, recognised instead as a reduction of the cost of the goods sold
C) The transaction cannot be recognised as a sale at all until the CU48,400 cash is actually received in full at the end of the 2-year credit period, with no receivable recognised at the point of sale
D) Revenue of the full CU48,400 is recognised immediately, with the receivable also initially recognised at CU48,400, exactly as if the sale had been made on the business's normal 30-day credit terms, since the total cash amount to be received is unaffected by the length of the credit period

Your answer: C  |  Correct answer: A

Where a contract with a customer includes a significant financing component -- such as an extended period of interest-free (or below-market-rate) credit that provides the customer with a significant financing benefit -- revenue is adjusted for the effects of the time value of money, and is recognised at the amount that reflects the price a customer would have paid for the goods if payment had been made at the normal, much shorter credit terms (here, approximated by the CU40,000 present value). The receivable is correspondingly initially recognised at this same discounted amount, with the difference between the discounted amount and the total cash ultimately to be received (CU8,400) recognised separately as finance income over the credit period, as the financing component unwinds, reflecting that part of what the customer is paying is, in substance, a return for the financing provided to them, not consideration for the goods themselves.

Significant financing component in a contract with a customer - revenue recognised at present value, discount unwound as finance income

Q16. A manufacturing company holds two categories of spare parts at the year end: (i) low-value lubricants, filters and consumable fittings that are routinely used up and replaced within the normal production cycle, and (ii) a single large replacement turbine that can only be used with one specific item of major production machinery and is expected to be held in reserve for several years before it is needed, if at all. How should these two categories be classified? Incorrect

A) The consumable lubricants and filters are property, plant and equipment because they are essential to keeping machinery running, while the major standby turbine is inventory because it has not yet been installed or brought into use
B) Both categories are classified as inventory under IAS 2, because all spare parts and servicing equipment held by a manufacturing entity are inventory regardless of their expected useful life or how specialised they are
C) The lubricants, filters and consumable fittings are classified as inventory under IAS 2, since they are consumed within the normal operating cycle in the ordinary course of business; the major standby turbine, expected to be used over more than one period and usable only in conjunction with a specific item of machinery, is instead classified as property, plant and equipment under IAS 16
D) Both categories are classified as property, plant and equipment under IAS 16, because any item that supports the ongoing use of major machinery is, by definition, part of that machinery's asset base

Your answer: D  |  Correct answer: C

IAS 16 paragraph 8 states that spare parts, stand-by equipment and servicing equipment are usually carried as inventory and recognised in profit or loss as consumed, but major spare parts and stand-by equipment qualify as property, plant and equipment when an entity expects to use them for more than one period, or when they can be used only in connection with a specific item of property, plant and equipment. Routine, low-value consumables used up within the normal operating cycle remain inventory under IAS 2, while a major, long-lived, machine-specific standby item such as the turbine meets the IAS 16 definition and is classified as PP&E even though it has not yet been installed, since it is held for use over more than one period.

IAS 16 Property, Plant and Equipment, paragraph 8; IAS 2 Inventories, general scope

Q17. A development partner proposes a PEFA (Public Expenditure and Financial Accountability) assessment of a country's public financial management. Which statement best describes what the assessment provides? Incorrect

A) A sovereign credit rating that measures the probability of default on public debt and sets the interest rate at which the government can borrow
B) A scored, standardised diagnostic of PFM system performance in areas such as budget reliability and transparency, not a judgement on policies
C) A formal opinion on whether the government's annual financial statements give a true and fair view, issued by an independent external assessor
D) A review of whether the budget's spending priorities are the most effective use of resources for the country's economic and social objectives

Your answer: C  |  Correct answer: B

PEFA is an internationally recognised framework that scores PFM performance against standard indicators grouped in pillars such as budget reliability, transparency, asset and liability management, policy-based budgeting, predictability and control, accounting and reporting, and external scrutiny and audit. It assesses systems and processes. It is not an audit opinion, a credit rating, or an evaluation of whether policy priorities are the right ones.

Public financial management

Q18. A business prepares a list of individual customer balances from its receivables ledger to reconcile against the receivables control account. One customer has an unusual credit balance (an overpayment) of 800, but when totalling the list, the member of staff preparing it mistakenly adds this 800 as a further debit balance rather than correctly treating it as a deduction (a credit). What effect does this have, and how should it be corrected? Incorrect

A) This has no effect on the reconciliation at all, since the list of balances is only a memorandum schedule with no bearing on the control account
B) This is a compensating error, requiring no adjustment at all, since the impact fully offsets itself over time as the customer's balance normally reverts to a debit balance
C) The control account itself must be adjusted by 800 to agree with the incorrectly totalled list of balances, since the list of balances is assumed to be the more reliable of the two figures
D) The list of individual balances is overstated by 1,600 (the 800 credit balance being added as a positive 800 instead of being deducted as negative 800, an 1,600 swing), causing a discrepancy against the correctly stated control account; this is a sign/side error in aggregating the list, corrected by re-totalling the list with the credit balance properly deducted rather than added, distinguished from a value-based transposition or casting error, which involves an incorrect digit or addition rather than an incorrect sign

Your answer: C  |  Correct answer: D

A list of individual balances should reflect each balance according to its actual nature: an ordinary debit balance (amount owed by the customer) added as a positive figure, and an unusual credit balance (an overpayment or return, effectively an amount owed back to the customer) deducted as a negative figure when arriving at the overall list total. Treating a genuine 800 credit balance as if it were a further positive 800 debit balance produces a total that is 1,600 too high (the 800 that should have been subtracted is instead added, an 800 understatement becomes an 800 overstatement, a full 1,600 swing), causing a discrepancy against the correctly stated control account. This is a sign or side error in aggregation, a distinct category of mistake from a value-based transposition error (where digits are swapped, producing a difference divisible by 9) or an ordinary casting (addition) error; it is corrected simply by re-totalling the list of balances with the credit balance properly deducted rather than incorrectly added. Option A incorrectly dismisses the list of balances as irrelevant, when it must genuinely reconcile to the control account. Option C incorrectly assumes the erroneous list total should instead override the correctly stated control account. Option B incorrectly and inaccurately labels this a self-correcting compensating error, when it is a straightforward aggregation mistake requiring a specific, identifiable correction.

Control account and list of balances reconciliation technique (no single IFRS applies)

Q19. A company received a government grant two years ago toward the cost of a machine and has been amortising the related deferred income over the machine's 10-year useful life (net method not used; gross presentation adopted). During the current year, the company breaches a condition attached to the grant (a minimum employment level was not maintained), and the grant becomes wholly repayable. How should this repayment obligation be accounted for? Incorrect

A) No adjustment is made until the grant is actually physically repaid in cash; the deferred income balance continues to be amortised over the machine's remaining useful life as before, with the repayment simply recognised as a payable at the point cash changes hands
B) The repayment is treated as a prior period error under IAS 8, requiring restatement of the two previous years' financial statements as if the grant had never been received
C) The repayment is deducted directly from retained earnings as a distribution, because it relates to a grant originally credited to equity rather than income
D) The repayment is accounted for as a change in accounting estimate: the deferred income balance remaining on the statement of financial position is written off first, and any excess of the repayable amount over that remaining deferred income balance is recognised immediately as an expense in profit or loss

Your answer: C  |  Correct answer: D

IAS 20 paragraph 32 requires a government grant that becomes repayable to be accounted for as a revision to an accounting estimate. Where the grant relates to income, the repayment is applied first against any unamortised deferred credit (deferred income) recognised in respect of the grant, and any excess is recognised immediately as an expense. This is not treated as a prior period error, since the original recognition of the grant was correct based on the information available at the time; the change in circumstances (the condition breach) is a current-period event affecting the estimate going forward, requiring immediate recognition rather than deferral until cash actually changes hands.

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance, paragraph 32

Q20. A trial balance fails to balance, with total debits exceeding total credits by CU850. The bookkeeper opens a suspense account and posts the CU850 difference to it as a credit entry to force the trial balance to balance, intending to investigate later. On investigation, TWO errors are found: (1) a cash payment of CU600 for office repairs was correctly entered in the cash book but was never posted to the repairs expense account at all (a one-sided error); and (2) the sales day book was overcast (added up too high) by CU250, causing sales revenue and the receivables control account to both be overstated by CU250 (a two-sided error, but with both sides wrong in the same direction). Assess which of these two errors would actually have caused the original trial balance imbalance requiring the suspense account, and how each should now be corrected. Incorrect

A) Neither error is relevant to the suspense account; the entire CU850 must instead be written off directly to retained earnings without further investigation
B) Both errors would have caused a trial balance imbalance, since any error in the accounting records always causes an imbalance regardless of whether one or both sides of the double entry were affected
C) Only error (1), the omitted posting of CU600 to repairs expense, is a ONE-SIDED error (only the credit entry in the cash book was made; the corresponding debit to repairs expense was never posted at all) and would cause the trial balance to be out of balance by CU600 of the CU850 total difference -- correction: DEBIT repairs expense CU600, CREDIT suspense account CU600. Error (2), the sales day book overcast, is a TWO-SIDED error in that BOTH sides of the double entry (receivables debit and sales credit) were overstated by the same CU250, so debits and credits remain EQUAL even though both are wrong -- this type of error does NOT cause a trial balance imbalance and would NOT have contributed to the suspense account balance at all; correcting it requires reducing BOTH sales revenue and receivables by CU250 directly (DEBIT sales CU250, CREDIT receivables CU250), with NO entry through the suspense account, since the suspense account only clears the CU600 one-sided error (and the remaining CU250 of the original CU850 difference must relate to a separate, as yet unidentified, one-sided error)
D) Only error (2) would have caused the imbalance, and error (1) requires no correcting entry of any kind since cash payments are self-balancing by nature

Your answer: D  |  Correct answer: C

A suspense account balance can only arise from errors that cause debits and credits to be UNEQUAL -- these are 'one-sided' errors (where only one side of a transaction is posted, or the two sides are posted for different amounts) such as error (1): the CU600 repairs payment was credited to cash but never debited to repairs expense, leaving debits CU600 short -- correcting this requires DEBIT repairs expense CU600, CREDIT suspense account CU600, which would account for CU600 of the original CU850 suspense balance. Errors where BOTH sides of the double entry are affected equally -- such as error (2), where the sales day book overcast inflated both the sales credit and the receivables debit by the same CU250 -- do NOT cause any imbalance between total debits and total credits (both are still equal, just both wrong), so such errors are NEVER cleared through the suspense account; they are corrected by a direct journal entry between the two accounts affected (DEBIT sales CU250, CREDIT receivables CU250), with no impact on the suspense account balance. Since the suspense account originally held CU850 but only CU600 of it is explained by error (1), a further CU150 one-sided error remains to be identified elsewhere before the suspense account can be fully cleared.

Suspense accounts and correction of errors