Chapter 29 37

CHAPTER 29
BIOLOGICAL ASSETS
Questions:
Question 29-1 Define biological assets, agricultural
procedure and harvest.
Answer 29-1
Biological assets are living animals and living plats.
Agricultural produce is the harvested product of the entity’s
biological assets.
Harvest is the detachment of produce from a biological asset
or the cessation of a biological asset’s life processes.
Question 29-2 Give examples of biological assets, agricultural
procedure and products that are the result of processing after harvest.
Answer 29-2
Biological asset Agricultural produce Product after harvest

1. Sheep Wool Yarn, carpet
2. Trees in plantation forest Felled trees Logs, lumber
3. Sugar cane plant Harvested cane Sugar
4. Tobacco plant Picked leaves Cured tobacco
5. Dairy cattle Milk Cheese
6. Pigs Carcass Sausage, cured ham
The measurement of biological assets and agricultural produce is

covered by PAS 41 and the measurement of products after harvest
is covered by PAS 2 on inventories.
Question 29-3 Define agricultural activity.
Answer 29-3
Agricultural activity or simply agriculture is the management by an entity of
the biological transformation and harvest of biological assets for sale or for
conversion into agricultural produce or into additional biological assets.
Biological transformation comprises the processes of growth, degeneration,
Production and procreation that cause qualitative or quantitative changes in
a biological assets.
Agricultural activity covers a diverse range of activities such as the following:
1. Raising livestock
2. Annual or perennial cropping
3. Cultivating orchards and plantations
4. Floriculture
5. Aquaculture, including fish farming
Question 29-4 What are the conditions for the recognition of a biological
asset or agricultural produce?
Answer 29-4
An entity shall recognize a biological asset or an agricultural produce when:
1. The entity controls the asset as a result of past event.
2. It is probable that future economic benefits associated with the asset will
flow to the entity.
3. The fair value or cost of the asset can be measured reliably.
Question 29-5 Explain the measurements of biological asset.
Answer 29-5
A biological asset shall be measured on initial recognition and at the end of
each reporting period at fair value less cost of disposal.
Question 29-6 Explain the measurement and presentation of agricultural produce.
Answer 29-6
a. Agricultural produce as it grows
Agricultural produce growing on bearer plant is measure at fair value less cost of
disposal with changes recognized in profit or less as the produce grows.
The agricultural produce growing on bearer plant remains within the scope of IAS 41.
In other words, agricultural produce is measured at the end of each reporting period
prior to harvest at fair value less cost of disposal.
IAS 41 further provides that agricultural produce growing on bearer plant shall be
classified and presented as biological asset.
b. Harvested produce
Harvested produce is measured at fair value less cost of disposal at the point of
harvest.
The harvested product becomes an inventory and shall be measured subsequently at
the lower cost and net realizable value.
The harvested product is recorded by debiting inventory and crediting gain from
change in fair value.
Question 29-7 Explain the fair value measurement of biological asset.
Answer 29-7
There is a presumption that fair value can be measured reliably for a
biological asset.
However, this presumption can be rebutted only on initial recognition for
a biological asset for which market-determined prices are not available
or estimates of fair value are determined to be clearly unreliable.
In such case, the biological asset shall be measured at cost less
accumulated depreciation and any accumulated impairment loss.
However, once the fair value of such biological asset becomes clearly
measureable, the entity shall measure the biological asset at fair value
less cost of disposal.
Question 29-8 Explain the fair value measurement of agricultural produce.
Answer 29-8
In all cases, an entity shall measure agricultural produce at the point of harvest at fair value
less cost of disposal.
The prevailing view Is that the fair value of agricultural produce at the point of harvest can
always be measured reliably.
The fair value measurement of agricultural produce stops at the time of harvest, PAS 2 on
inventory shall apply.
Question 29-9 Define a bearer plant.
Answer 29-9
A bearer plant is a living plant that:
a. Is used in the production or supply of agricultural produce.
b. Is expected to bear produce for more than one period.
c. Has a remote likelihood of being sold as agricultural produce, except for incidental scrap
sales.
Question 29-10 Explain the accounting treatment for a bearer plant.
Answer 29-10
Bearer plants are originally considered as biological asset included
within the scope of IAS 41 and measured at fair value less cost of
disposal.
The IASB decided that bearer plants should now be accounted for in the
same way as property, plant and equipment in IAS 16 because the
operation of bearer plants os similar to that of manufacturing.
Bearer plants are used solely to grow agricultural produce over several
periods.
at the end of the productive life, the bearer plans are usually scrapped.
A bearer plant that no longer bears produce is commonly cut down and
sold as scrap at the end of the productive life.
Question 29-11 Give examples of bearer plants.
Answer 29-11
The typical examples of bearer plants are:
a. Trees that produce fruits are bearer plants while the fruits growing on the trees are
agricultural produce until harvested.
In an oil palm plantation, a coconut tree is the bearer plant and the fruit is the agricultural
produce.
When immature, the coconut fruit can be harvested for drinking, known as “buko” juice in
the vernacular.
When mature, the coconut fruit can be processed to give oil, charcoal from the hard shell
and copra from the dried coconut flesh.
b. In a vineyard, the grape vines are the bearer asset and the grapes are the agricultural
produce.
The following should not be considered bearer plants:
c. Trees grown to be harvested and sold as log or lumber are not bearer plants.
d. Annual crops which do not bear produce for more than one period and are held solely to
be harvested as agricultural produce such as corn and rice are not bearer plants.
Question 29-12 Explain the accounting treatment of a plant with dual use.
Answer 29-12
A plant with dual use is reported as biological asset and not as bearer plant.
A plant may have a dual use, namely:
a. The plant is cultivated for bearing agricultural produce.
b. The plant itself is being sold either as a living plant or an agricultural
produce.
For example, rubber trees may be cultivated to grow rubber milk as
agricultural produce and at the same time, may be sold as living plant or cut
down at the end of the productive life to be sold as lumber or wood.
In this case, the rubber trees are recognized as biological asset because of
the dual use.
However, the rubber trees are recognized as bearer plants when simply cut
down and sold for scrap upon maturity.
Question 29-13 Explain the treatment of bearer
animals.
Answer 29-13
Bearer animals, like bearer plants, may be solely for
the produce that they bear.
However, bearer animals will continue to be accounted
for under IAS 41 in accordance with IASB
pronouncement.
In other words, bearer animals shall be reported as
biological assets.
Question 29-14 Explain the treatment of animal-related
recreational activities.
Answer 29-14
Managing recreational activities, for example, game parks and
zoos, is not agricultural produce.
The reason is that there is no management of the transformation
of the biological asset but simply control of the number of animals.
The natural breeding that takes place is not a managed activity
and is incidental only to the main activity of providing a
recreational facility.
Animals related to recreational activities shall be accounted for in
accordance with PAS 16, Property, Plant and Equipment.
Question 29-15: Multiple Choice (PAS 41)
1. Biological assets
a. Are found only in Biotech entities.
b. Are living animals or living plants and must disclosed as a separate line item in
the statement of financial position.
c. Must be measured at cost.
d. Do not generally have future economic benefit.
2. Which statement is true about biological assets?
a. Biological assets are measured at fair value less cost of disposal.
b. When fair value cannot be determined reliably, the biological asset shall be
measured at cost less accumulated depreciation and impairment loss.
c. There is a presumption that the fair value of biological asset can be measured
reliably.
d. All of these statements are true about biological assets.
3. It is the management by an entity of the biological transformation
and harvest of biological assets for sale or for conversion into
agricultural produce or into additional biological asset.
a. Agricultural activity
b. Biological activity
c. Economic activity
d. Development activity
4. Biological transformation results from asset changes through all
the following, except
a. Growth
b. Degeneration
c. Procreation
d. Production of agricultural produce
5. Agricultural activity results in which of the following type of asset?
a. Biological asset
b. Agricultural produce
c. Biological asset and agricultural produce
d. Neither biological asset nor agricultural produce
6. Agricultural activity includes all the following, except
a. Raising livestock
b. Perennial cropping
c. Aquaculture
d. Ocean fishing
7. Agricultural produce is
a. The harvested product from biological asset.
b. Measured at the time of harvest at the cost of production.
c. Measured at each reporting period at fair value.
d. All of the choices are correct.
8. Agricultural produce as it grows on bearer plant is measured at year-end prior to
harvest at
a. Fair value
b. Fair value less cost of disposal
c. Fair value plus cost of disposal
d. Fair value less cost of disposal at the point of harvest
9. Agricultural produce harvested is measured at
a. Fair value
b. Fair value less cost of disposal at the point of harvest
c. Cost less cost of disposal
d. Fair value plus cost of disposal at the point of harvest
10. The harvested agricultural produce is
a. Accounted for as inventory.
b. Initially recognized at fair value less cost of disposal at the point of harvest.
c. Recorded as gain from change in fair value.
d. All of these are correct about harvested agricultural produce.
Question 29-16: Multiple Choice (IFRS)
1. A bearer plant is a living plant
a. Is used in the production or supply of agricultural produce.
b. Is used to bear produce for more than one period.
c. Has a remote likelihood o being sold as agricultural produce except for
incidental scrap sales.
d. Must possess all of these characteristics.
2. All of the following can be considered bearer plant, except
a. Coconut tree
b. Grape vine
c. Rubber tree
d. Tree in a forest plantation to be harvested and sold as log or lumber
3. A living plant with a dual use is classified as
a. Bearer plant
b. Biological asset
c. Investment property
d. Inventory
4. Which statement is true in relation to bearer plant?
a. The bearer plant and the related agricultural produce are
accounted as two separate assets.
b. The bearer plant is a noncurrent asset.
c. The agricultural produce is usually presented as current
asset unless it takes more than one year to mature.
d. All of these statements are true about bearer plant.
5. According to IASB, bearer plants are accounted for as
a. Biological assets with disclosure
b. Biological assets without disclosure
c. Plant, property and equipment
d. Noncurrent investment
6. Mature bearer plant is measured using
a. Cost model
b. Revaluation model
c. Either cost model or revaluation model
d. Either cost model or fair value model
7. According to IASB, bearer animals are accounted for as
a. Biological assets
b. Plant, property and equipment
d. Agricultural produce
8. Animals related to recreational activities are classified as
a. Biological assets
b. Plant, property and equipment
d. Intangible asset
9. Regarding to the choice of measurement basis used for biological assets, IFRS
a. Sets out several ways of measuring fair value
b. Recommends the use of historical cost
c. Recommends the use of current cost
d. Recommends the use of present value
10. Where the fair value of the biological asset cannot be determined reliably, the
biological asset is measured at
a. Cost
b. Cost less accumulated depreciation
c. Cost less accumulated depreciation and accumulated impairment loss
d. Net reliable value
1. Generally speaking, biological assets relating to agricultural activity shall be
measured using
a. Historical cost
b. Historical cost less depreciation less impairment
c. A fair value approach
d. Net realizable value
2. Which of the following is unlikely to be used in fair value measurement of
biological asset
a. Quoted market place
b. The most recent market transaction price
c. The present value of the expected net cash flows
d. External independent valuation
3. An entity had a plantation forest that is likely to be harvested and sold in 30 years.
The income shall be accounted for in which of the following?
a. No income shall reported annually until first harvest and sale in 30 years.
b. Income shall be measured annually and reported using a fair value approach
that recognizes and measures biological growth.
c. The eventual sale proceeds shall be estimated and recognized over the 30-year
period.
d. The plantation forest shall be valued over 5 years and the increase in value
shall be recognized as component of other comprehensive income.
4. Which statement is true regarding agricultural produce?
a. In all cases, an entity shall measure agricultural produce at fair value less cost
of disposal at the point of harvest.
b. The prevailing view is that the fair value of agricultural produce at the point of
harvest can always be measured reliably.
c. The fair value measurement of agricultural produce stops at the time of harvest.
d. All of these statements are true regarding agricultural produce.
5. Which of the following information shall be disclosed in relation to biological asset
and agricultural produce?
a. Separate disclosure of the gain or loss relating to biological asset and
agricultural produce.
b. The aggregate gain or loss arising on the initial regognition of biological asset
and agricultural produce and from the change in fair value less cost of disposal
of biological asset.
c. The total gain or loss from biological asset, agricultural produce, and from
changes in fair value less cost of disposal of biological asset.
d. There is no requirement in the standard to disclose separately any gain or loss.
6. A gain or loss arising on the initial recognition of a biological asset and from a
change in the fair value less cost of disposal of biological asset shall be included in
a. The profit or loss for the period
b. Other comprehensive income
c. A revaluation reserve
d. Retained earnings
7. Where there is a long aging or maturation process after
harvest, the accounting for such products shall be dealt with by
a. PAS 41, Agriculture
b. PAS 2, Inventories
c. PAS 16, Property, plant and equipment
d. PAS 40, Investment property
8. When agricultural produce is harvested, the harvest shall be
accounted for as inventory at
a. The fair value less cost of disposal at the point of harvest.
b. The historical cost of the harvest
c. The historical cost less impairment loss
d. Fair value
9. Which of the following criteria must not be satisfied before a
biological asset can be recognized?
a. The entity controls the asset as a result of past event.
b. It is probable that future economic benefits relating to the asset
will flow to the entity.
c. An active market for the asset exist.
d. The fair value can be measured reliably.
10. Land that is related to agricultural activity is measured
a. At fair value.
b. In accordance with PAS 16, Property, Plant, and Equipment, or
PAS 40, Investment Property.
c. At fair value in combination with the biological asset.
d. At the resale value separate from the biological asset.
1. All of the following would be classified as biological asset, except
a. Dairy cattle
b. Chicken
c. Egg
d. Tree
2. Which of the following would be classified as agricultural produce?
a. Lumber
b. Bush
c. Butter
d. Apple
3. All of the following would be classified as agricultural
produce, except
a. Sugar
b. Wool
c. Cotton
d. Milk
4. Which of the following would be classified as product that is
the result of processing after harvest?
a. Cotton
b. Wool
c. Bananas
d. Cheese
Answer 29-15: Answer 29-16:
Multiple Choice (PAS 41) Multiple Choice (IFRS)
1. B 1. D
2. D 2. D
3. A 3. B
4. D 4. D
5. C 5. C
6. D 6. C
7. A 7. A
8. B 8. B
9. B 9. A
1. A
Answer 29-17: 2. C
Multiple Choice (IFRS) 3. D
1. C Answer 29-18:
2. D Multiple Choice (IFRS)
3. B
4. D 4. C
5. B 5. D
6. A 6. A
7. B 7. D
CHAPTER 30
FINANCIAL INSTRUMENTS
Questions:
Question 30-1 Define a financial instrument.
Answer 30-1
PAS 32, paragraph 11, defines a financial instrument as any contract that gives rise
to both a financial asset of one entity and a financial liability or equity instrument of
another entity.
Thus, the term financial instrument encompasses a financial asset, a financial
liability and an equity instrument.
From the definition, the characteristics of a financial instrument are:
1. There must be a contract.
2. There are at least two parties to the contract.
3. The contract shall give rise to a financial asset of one party and financial liability
or equity instrument of another party.
Question 30-2 Define a financial asset.
Answer 30-2
A financial asset is any asset that is:
a. Cash
b. A contractual right to receive cash or another financial asset from another entity.
c. A contractual right to exchange financial instruments with another entity under conditions that are potentially favorable.
An example is an option to purchase shares of another entity at less than market price.
d. An entity instrument of another entity.
Financial assets
e. Cash or currency
f. A deposit of cash with a bank
g. Trade accounts receivable
h. Notes receivable
i. Loans receivable
j. Bonds receivable
k. Option to purchase shares at less than market price
l. Investment in shares or equity instruments
Nonfinancial asset
m. Physical assets, such as inventory and property, plant and equipment
n. Intangible assets, such as patent and trademark
o. Prepaid expense for which the future economic benefit is the receipt of goods or services, rather than he right to receive cash or another financial
asset.
p. Right to use asset is not a financial asset because control of the underlying asset does not give rise to a present right to receive cash or another
financial asset.
Question 30-3 Define a financial liability
Answer 30-3
A financial liability is any liability that is a contractual obligation:
a. To deliver cash or other financial asset to another entity.
b. To exchange financial instruments with another entity under conditions that are potentially unfavorable.
Common examples of financial liabilities representing a contractual obligation to deliver cash in the future are:
c. Trade accounts payable
d. Notes payable
e. Loans payable
f. Bonds payable
Nonfinancial liabilities
g. Deferred revenue and warranty obligations are not financial liabilities because the outflow of economic
benefits associated with them is the delivery of goods and services rather than a contractual obligation to
pay cash or another financial asset.
h. Income tax payable should not be considered financial liability because the obligation is imposed by law
rather than by contract.
The liability is created as a result of statutory requirement imposed by government.
i. Constructive obligations are not financial liabilities because such obligations do not arise from contract.
Question 30-4 Define an equity instrument.
Answer 30-4
The definition reflects the basic accounting equation that equity equals asset minus liability.
An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting
all of the liabilities.
Question 30-5 Explain the treatment of redeemable preference share.
Answer 30-5
a. A preference share that provides for mandatory redemption by the issuer for a fixed or determinable
amount at a future date.
This is a financial liability because the issuer has a contractual obligation to pay cash at some future time.
b. A preference share that give the holder the right to require the issuer to redeem the instrument at a
particular date for a fixed or determinable amount.
This is also a financial liability because the issuer has a contractual obligation to pay cash at some future
time.
Accordingly, dividends paid to holders of “mandatorily redeemable preference share” shall be accounted for as
interest expense as a component of financial cost.
The mandatorily redeemable preference share shall be classified as current or noncurrent liability depending
on the date of redemption.
Question 30-6 Explain the treatment of a contract that will or may settled by the entity’s own
shares. Is this is an equity or a financial liability?
Answer 30-6
PAS 32, paragraph 22, provides that the contract is an equity if it will be settled by the issuance
of a fixed number of shares in exchange for a fixed amount of cash.
An example is a share option to buy a fixed number of the entity’s shares for a fixed price.
On the other hand, PAS 32, paragraph 24, provides that the contract is a financial liability when:
a. It is settled by the issuance of a variable number of shares in exchange for a fixed amount of
cash.
An example is a contract that requires the entity to issue as many of the entity’s own shares
to equal a fixed amount of P500,000 at a future date.
b. It is settled by the issuance of a fixed number of shares in exchange for a variable amount of
cash.
An example is a contract that requires the entity to issue a fixed number of the entity’s own
shares in exchange for an amount of cash to equal 100 ounces of gold at a future date.
The price of 100 ounces of gold at a future date is variable.
As long as there is variability in either the number of shares or in the amount of cash, the contract
is a financial liability.
Question 30-7 What is the principle for the recognition of a financial asset and
financial liability?
Answer 30-7
PFRS 9, paragraph 3.1.1, provides that an entity shall recognize a financial asset or
a financial liability in the statement of financial position when and only when the
entity becomes a party to the contractual provisions of the instrument.
Question 30-8 Explain the degeneration of a financial asset?
Answer 30-8
PFRS 9, paragraph 3.2.3, provides that an entity shall derecognize a financial asset
when either on of the following criteria is met:
a. The contractual rights to the cash flows of the financial asset have expired.
b. The financial asset has been transfer and the transfer qualifies for
derecognition based on the extent of transfer of risks and rewards of ownership.
Question 30-9 Explain the degeneration of a financial liability?
Answer 30-9
PFRS 9, paragraph 3.3.1, provides that an entity shall remove a financial liability from the statement
of financial position when the financial liability is extinguished.
This simply means that the obligation is discharged or cancelled or has expired.
Question 30-10 Explain briefly the risks that re required to be disclosed in relation to financial
instruments.
Answer 30-10
The disclosures about risks arising from financial instruments focus on the following:
a. Credit risk-this is the risk that one party to a financial instrument will cause a financial loss for the
other party by failing to discharge an obligation.
b. Liquidity risk-this is the risk that an entity will encounter difficulty in meeting obligations
associated with a financial liability.
c. Market risk-this is the risk that the fair value or future cash flows of a financial instrument will
fluctuate because of change in market prices.
Market risk comprises three types of risk, namely currency risk, interest rate risk and price risk.
1. A financial instrument is any contract that gives rise to
a. A financial asset
b. A financial liability
c. A financial asset of one entity and a financial liability of another entity
d. A financial asset of one entity and a financial liability or equity instrument
of another entity
2. Is a contractual obligation to deliver cash or any asset to another entity.
a. Cash
b. A contractual right to receive cash or another financial asset from another
entity.
c. A contractual right to exchange financial instruments with another entity under
conditions that are potentially unfavorable.
d. An equity instrument of another entity.
3. A financial liability
a. Must be classified as noncurrent liability.
b. Is a contractual obligation to deliver cash or another financial asset to another
entity.
c. Is a contractual obligation to exchange financial assets or financial liabilities
with another entity under conditions that are potentially favorable to the entity.
4. It is any contract that evidences residual interest in the asset of an entity after
deducting all of the liabilities.
a. Equity instrument
b. Debt instrument
c. Loan and receivable
d. Financial asset with indeterminable fair value
5. Financial assets include all of the following, except
a. Prepaid expenses
b. Cash in bank
c. Trade accounts receivable
d. Loans receivable
6. Financial liabilities include all of the following, except
a. Trade accounts payable
b. Notes payable
c. Bonds payable
d. Income tax payable
7. How should preference shares that are redeemable mandatorily be presented in
the statement of financial position?
a. Noncurrent financial liability
b. Current financial liability
c. Equity
d. Either current or noncurrent financial liability depending on redemption date
8. What is the presentation of preference dividend on mandatory redeemable
preference shares?
a. Deducted from retained earnings
b. Deducted from share premium
c. Finance cost as component of profit or loss
d. Finance cost as component of other comprehensive income
1. What is the principle for recognition of a financial asset?
a. A financial asset is recognized when it is probable that
future economic benefits will flow to the entity.
b. A financial asset is recognized when the entity obtains
control of the instrument.
c. A financial asset is recognized when the entity obtains
the risk and rewards of ownership of the financial asset.
d. A financial asset is recognized when the entity
becomes a party to the contractual provisions of the
instrument.
2. In which of the following circumstances is derecognition of a financial asset
not appropriate?
a. The contractual rights to the cash flows of the financial asset have expired.
b. All the risks and rewards of ownership of the transferred assets have
transferred.
c. The entity has retained substantially all the risks and rewards of ownership
of the transferred asset.
d. The entity has lost control of the transferred asset.
3. Which of the following financial instruments would not be classified as
financial liability?
a. A preference share that must be redeemed by the issuer for cash on a
future date.
b. A contract for the delivery of as many of the entity’s ordinary shares as are
equal in value to a fixed amount of cash on a future date.
c. A written call option that gives the holder the right to purchase a fixed
number of the entity’s ordinary shares in return for a fixed price.
d. An issued perpetual debt instrument.
4. Which of the following is a financial liability?
a. Deferred revenue
b. A warranty obligation
c. A constructive obligation
d. An obligation to deliver own shares worth a fixed amount of
cash
5. Which of the following is not a relevant consideration whether to
derecognize a financial liability?
a. Whether the obligation has been discharged.
b. Whether the obligation has been cancelled.
c. Whether the obligation has expired.
d. Whether substantially all the risks and rewards of ownership
have been transferred.
1. Liquidity risk is defined as
a. The risk that an entity will encounter difficulty in meeting obligations associated
with financial liability.
b. The risk that an entity will encounter in disposing a financial asset due to lack of
market liquidity.
c. The risk that an entity will encounter in meeting cash flow needs due to cash flow
problems.
d. The risk that an entity’s cash inflows will not be sufficient to meet the entity’s cash
outflows.
2. The components of market risk are
a. Credit risk and liquidity risk
b. Currency risk and credit risk
c. Interest rate risk and currency risk
d. Liquidity risk and currency risk
3. Which of the following best describes credit risk?
a. The risk that one party to a financial instrument will cause a financial loss
for the other party by failing to discharge an obligation.
b. The risk that an entity will encounter difficulty in meeting obligations
associated with financial liability.
c. The risk that the fair value associated with an instrument will vary due to
change in the counterparty’s credit rating.
d. The risk that an entity’s credit facilities will be withdrawn due to cash flow
sensitivities.
4. Which information is not required to be disclosed about exposure to risk
arising from financial instruments?
a. Cost
b. Cost less accumulated depreciation
c. Cost less accumulated depreciation and accumulated impairment loss
d. Net reliable value
Answer 30-12:
Multiple Choice (IFRS)
Answer 30-11:
Multiple Choice (PAS 32) 1. D
2. C
3. C
1. D 4. D
2. C 5. D
3. B
4. A
5. A Answer 30-13:
7. D
8. C 6. A
7. C
CHAPTER 31
FINANCIAL ASSET
AT FAIR VALUE
Questions:
Question 31-1 What are the classifications of financial assets?
Answer 31-1
Using PFRS 9, paragraph 4.1.1, financial assets are classified into three, namely:
1. Financial assets at fair value through profit or loss.
2. Financial assets at fair value through other comprehensive income.
3. Financial assets at amortized cost.
Financial assets at fair value through profit or loss and through other comprehensive income
include both equity securities and debt securities.
Financial assets at amortized cost include only debt securities.
The classification depends on the business model for managing financial assets which may
be:
a. To hold investments in order to realize fair value changes
b. To hold investments in order to collect contractual cash flows.
Question 31-2 What financial assets are measured at fair value through profit or loss or FVPL?
Answer 31-2
1. Financial assets held for trading or popularity known as “trading securities”.
These financial assets are measured at fair value through profit or loss “by requirement,” meaning,
required by the standard.
2. All other investments in quoted equity instruments.
These financial assets are measured at fair value through profit or loss “by consequence” in
accordance with Application Guidance B5.1.14 of PFRS 9.
3. Financial assets that are irrevocably designated on initial recognition as at fair value through profit
or loss.
These financial assets are measured at fair value through profit or loss “by irrevocable designation” or
“by option”.
This fair value option is applicable to investments in bonds and other debt instruments which can be
irrevocably designated as at fair value through profit or loss even if the financial assets satisfy the
amortized cost measurement.’
This designation is the fair value option allowed in accordance with Paragraph 4.1.5 of PFRS 9.
4. All debt investments that do not satisfy the requirements for measurement at amortized cost and at
fair value through other comprehensive income.
These financial assets are measured at fair value through profit or loss “by default” in accordance with
PFRS 9, paragraph 4.1.4.
Question 31-3 Define a financial asset held for trading.
Answer 31-3
Appendix A of PFRS 9 provide that a financial asset is held for
trading when:
a. It is acquired principally for the purpose of selling or
repurchasing it in the near item.
b. On initial recognition, it is part of a portfolio of identified
financial assets that are managed together and for which there
is evidence of a recent actual pattern of short-term profit taking.
c. It is a derivative, except for the derivative that is a financial
guarantee contract or a designated and an effective hedging
instruments.
Question 31-4 Explain the measurement of equity investment “at fair value through
other comprehensive income” or FVOCI.
Answer 31-4
At initial recognition, PFRS 9, paragraph 5.7.5 provides that an entity may make an
irrevocable election to present in other comprehensive income subsequent changes
in fair value of an investment in equity instrument that is not held for trading.
The irrevocable approach is to impose discipline in accounting for nontrading equity
investment.
The amount recognized in other comprehensive income is not reclassified to profit or
loss under any circumstances.
However, on derecognition, the amount may be transferred to equity or retained
earnings.
If the investment in equity instrument is “held for trading”, the election to present
unrealized gains and losses in other comprehensive income is not allowed.
If the investment in equity instrument is held for trading, subsequent changes in fair
value are always included in profit or loss.
Question 31-5 Explain the measurement of debt investment at fair value through
other comprehensive income.
Answer 31-5
PFRS 9, paragraph 4.1.2A, provides that a financial asset shall be measured at fair
value through other comprehensive income if both of the following conditions are
met:
a. The business model is achieved both by collecting contractual cash flows and
by selling the financial asset.
b. The contractual cash flows are solely payments of principal and interest on the
principal outstanding.
Note that the business model includes selling the financial asset in addition to
collecting contractual cash flows.
In this case, interest income is recognized using the effective interest method as in
amortized cost management.
On derecognition, the cumulative gains and losses recognized in other
comprehensive income are reclassified to profit or loss.
Question 31-6 Explain the measurement of debt investment at
amortized cost.
Answer 31-6
PFRS 9, paragraph 4.1.2, provides that a financial asset shall be
measured at amortized cost if both of the following conditions are met:
a. The business model is to hold the asset in order to collect contractual
cash flows on specified date.
b. The contractual cash flows are solely payments of principal and
interest on the principal amount outstanding.
In other words, the business model is to collect contractual cash flows if
the contractual cash flows are solely payments of principal and
interest.
In such case, the financial asset shall be measured at amortized cost.
Question 31-7 What are the simple rules on the measurement of financial assets?
Answer 31-7
Measurements of equity investments
1. Held for trading – at fair value through profit or loss
2. Not held for trading – as a rule, at fair value through profit or loss
3. Not held for trading – at fair value through other comprehensive income by irrevocable election
4. All other investments in quoted equity instruments – at fair value through profit or loss
5. Investments in unquoted equity instruments – at cost
6. Investments of 20% to 50% - equity method of accounting
7. Investments of more than 50% - consolidation methods to be taken up in an advanced accounting course
Measurements of debt investments
8. Held for trading – at fair value through profit or loss
9. Held for collection of contractual cash flows – at amortized cost
10. Held for collection of contractual cash flows – at fair value through profit or loss by irrevocable
designation or fair value option
11. Held for collection of contractual cash flow and for sale of the financial asset – at fair value through
other comprehensive income
12. Held for collection of contractual cash flow and for sale of the financial asset – at fair value through
profit or loss by irrevocable designation or fair value option
Question 31-8 Explain reclassification of financial assets.
Answer 31-8
PFRS 9, paragraph 4.4.1, provides that an entity shall reclassify financial assets only when it changes its
business model for managing the financial assets.
Only debt investments can be reclassified because the change in business model applies appropriately to
debt investments.
However, debt investments measured at FVPL by irrevocable cannot be reclassified simply because the
election is irrevocable.
All equity investments cannot be reclassified.
Equity investment held for trading or measured at FVPL cannot be reclassified by reason of the
consequential requirement of PFRS 9.
Equity investment measured at FVOCI by irrevocable election ccannot be reclassified as simply because the
election is irrevocable.
where reclassification occurs, Paragraph 5.6.1 provides that an entity shall apply the reclassification
prospectively frm the reclassification date.
As defined as Appendix A of PFRS 9, the “reclassification date” is the first day of the reporting period
following the change in business model that results in an entity reclassifying financial asset.
This means that if the change in business model is in 2019, the reclassification date I January 1, 2020, the
first day of the next reporting period.
However, the entity must disclose the change in business model in the 2019 financial statements because
the change in the entity’s business model is a significant and demonstrable event.
Question 31-9 Explain the reclassification of financial asset from FVPL to
amortized cost.
Answer 31-9
PFRS 9, paragraph 5.6.3, provides the following when an entity
reclassifies a financial asset at fair value through profit or loss to financial
asset at amortized cost:
a. The fair value at the reclassification date becomes the new gross
carrying amount of the financial asset at mortized cost.
b. The difference between the new gross carrying amount of the
financial asset at amortized cost and the face amount of the financial
asset shall be amortized through profit or loss over the remaining life
of the financial asset using the effective interest method.
c. A new effective rate must be determined based on the fair value on
reclassification date.
Question 31-10 Explain the reclassification of financial asset from amortized cost to FVPL.
Answer 31-10
PFRS 9, paragraph 5.6.2, provides the following when an entity reclassifies a financial asset at
amortized cost to financial asset at fair value through profit or loss:
a. The financial asset is measured at fair value on reclassification date.
b. The difference between the previous carrying amount and fair value on reclassification
date is recognized in profit or loss.
Question 31-11 Explain the reclassification of financial asset from amortized cost to FVOCI.
Answer 31-11
PFRS 9, paragraph 5.6.2, provides the following if a financial asset is reclassified from
amortized cost to FVOCI:
c. The financial asset is measured at fair value on reclassification date.
d. The difference between the amortized cost carrying amount and the fair value at
reclassification date is recognized in other comprehensive income.
e. The original effective interest rate is not adjusted.
Question 31-12 Explain the reclassification of financial asset from
FVOCI to amortized cost.
Answer 31-12
PFRS 9, paragraph 5.6.5, provides the following if a financial asset
is reclassified from FVOCI to amortized cost:
a. The fair value at the reclassification date becomes the new
amortized cost carrying amount.
b. The cumulative gain or loss previously recognized in other
comprehensive income is eliminated and adjusted against the
fair value at reclassification date.
As a result, the investment is reverted back to amortized cost
measurement.
c. The original effective rate is not adjusted.
Question 31-13 Explain the reclassification of financial asset from FVPL to FVOCI.
Answer 31-13
PFRS 9, paragraph 5.6.6, provides the following if a financial asset is reclassified from FVPL to
FVOCI:
a. The financial asset continues to be measured at fair value.
b. The fair value at reclassification date becomes the new carrying amount.
c. A new effective interest rate must be determined based on the fair value at reclassification
date.
Question 31-14 Explain the reclassification of financial asset from FVOCI to FVPL.
Answer 31-14
PFRS 9, paragraph 5.6.7, provides the following if a financial asset is reclassified from FVOCI to
FVPL:
d. The financial asset continues to be measured at fair value.
e. The fair value at reclassification date becomes the new carrying amount.
f. The cumulative gain or loss previously recognized in other comprehensive income is
reclassified to profit or loss at reclassification date.
Question 31-15 Explain impairment of equity investments at fair value.
Answer 31-15
For financial assets measured at fair value, all gains and losses are either presented in profit or loss or in other
comprehensive income depending on whether the election to present gains and losses on equity investments in
other comprehensive income is taken or not.
Therefore, it is not necessary to assess financial assets measured at fair value through profit or loss and equity
investments at fair value through other comprehensive income for impairment.
Question 31-16 Explain impairment of debt investments at amortized cost and debt investment at fair value
through other comprehensive income.
Answer 31-16
PFRS 9, paragraph 5.5.1, provides that an entity shall recognized a loss allowance for expected credit loss on:
a. Financial asset measured at amortized cost
b. Debt investment measured at fair value through other comprehensive income
Paragraph 5.5.3 provides that an entity shall measure the loss allowance for a financial instrument at an amount
equal to the lifetime expected credit losses if the credit risk on that financial instrument has increased
significaly since initial recognition.
Credit losses are the present value of all cash shortfalls.
Expected credit losses are an estimate of credit losses over the life of the financial instrument.
Question 31-17: Multiple Choice (PFRS 9)
1. Depending on the business model for managing

financial assets, an entity shall classify financial
assets subsequent to initial recognition at
a. Fair value through profit and loss
b. Amortized cost
c. Fair value through other comprehensive income
d. All of there are used in measuring financial
assets
2. How does the standard distinguish between the measurement methods to be
used?
a. By reviewing the business model and the risks and rewards of the transaction.
b. By reviewing the business model and the contractual cash flow characteristics
of the instrument.
c. By reviewing the realizability and the contractual cash flow characteristics of
the instrument.
d. By reviewing the realizability of the instrument and risks and rewards of
ownership.
3. Which of the following is not a characteristics of a financial asset held for trading?
a. It is acquired principally for the purpose of selling or repurchasing it in the near
term.
b. On initial recognition, it is part of a portfolio of financial assets that are
managed together and for which there is evidence of a recent actual pattern of
short-term profit taking.
c. It is a derivative that is not designated as an effective hedging instrument.
d. It is a derivative that is designated as an effective hedging instrument.
4. All of the following financial assets shall be measured at fair value through profit or loss,
except
a. Financial assets held for trading
b. Financial assets designated on initial recognition as at fair value through profit or loss
c. Investments in quoted equity instruments
d. Financial assets at amortized cost
5. A debt investment shall be measured subsequently at amortized cost
a. By irrevocable election
b. When the debt investment is managed and evaluated n a document risk-management
strategy.
c. When the debt investment is held for trading
d. When the business model is to collect contractual cash flows that are solely payments
of principal and interest.
6. The irrevocable election to present subsequent changes in fair value in other
comprehensive income is applicable only to
a. Investment in equity instrument that is not held for trading.
b. Investment in equity instrument that is held for trading.
c. Financial asset measured at amortized cost.
d. Financial asset measured at fair value.
7. A debt investment shall be measured subsequently at fair value
through other comprehensive income
a. When the debt investment is held for trading.
b. When the debt investment is not held for trading.
c. By irrevocable designation
d. When the business model is to collect contractual cash flows
that are solely payments of principal and interest and also to sell
the financial asset.
8. Which is not a category of financial assets?
a. Financial assets at fair value through profit or loss
b. Financial assets at fair value through other comprehensive
income
c. Financial assets at amortized cost.
d. Financial asset held for sale
Question 31-18: Multiple Choice (IAA)
1. Under IFRS, the presumption is that equity investments are
a. Held for trading
b. Held to profit from price changes
c. Held for trading and held to profit from price changes
d. Held as financial assets at fair value through other comprehensive
income
2. Entities are required to measure financial asset based on all of the
following, except
a. The business model for managing financial asset.
b. Whether the financial asset is a debt or an equity investment.
c. The contractual cash flow characteristics of the financial asset.
d. All of the choices are required.
3. Debt investments that meet the business model and contractual cash flow tests are
reported at
a. Net realizable value
b. Fair value
c. Amortized cost
d. The lower the amortized cost and fair value
4. Debt investments not held for collection are reported at
a. Amortized cost
b. Fair value
c. The lower the amortized cost and fair value
d. Net realizable value
5. Debt investments reported at amortized cost are
a. Managed and evaluated based on a documented risk management strategy
b. Trading debt investments
c. Held for collection debt investments
d. All of these are correct
6. Equity investments irrevocably accounted for at FVOCI are
a. Nontrading investments of less than 20%.
b. Trading investments of less than 20%.
c. Investment of between 20% and 50%.
d. Investment of more than 50%.
7. What financial assets are assessed for impairment?
a. Equity investments at FVPL
b. Equity investments at FVOCI
c. Debt investments at FVPL
d. Debt investments at amortized cost and debt investments at FVOCI
8. Impairments of debt investments at amortized cost are
a. Based on discounted contractual cash flows.
b. Recognized as component of OCI.
c. Based on fair value for nontrading investments.
d. Evaluated at each reporting date.
9. An impairment loss is the excess of the carrying amount of the
debt investment over
a. Expected cash flows
b. Present value of the expected cash flows
c. Contractual cash flows
d. Present value of the contractual cash flows
10. Under IFRS, an entity
a. Should evaluate every investment for impairment.
b. Accounts for an impairment as component of OCI.
c. Calculates the impairment loss on debt investment as the
excess of carrying amount over the expected discounted future
cash flow.
d. All of the choices are correct.
1. Reclassification of investments between categories are
accounted for
a. Prospectively, at the end of the period after the change
in the business model.
b. Prospectively, at the beginning of the period after the
change in the business model.
c. Retrospectively, at the end of the period after the
d. Retrospectively, at the beginning of the period after the
2. Transfers of investments between categories
a. Result in omitting recognition of fair value in the year of the transfer.
b. Are accounted for at fair value for all transfers.
c. Are not recognized if investments are transferred from held for collection to fair
value.
d. Should always affect net income.
3. When a debt investment at amortized cost is reclassified to FVPL, the difference
between previous carrying amount and fair value at reclassification date is
a. Recognized in profit or loss
b. Not recognized
c. Recognized in other comprehensive income
d. Included in retained earnings
4. When a debt investment at FVPL is reclassified to amortized cost, what is the new
carrying amount at amortized cost?
a. Fair value at reclassification date
b. Face amount of the debt investment
c. Present value of the contractual cash flows
d. Original carrying amount of the debt investment
5. Which statement is true when a debt investment at amortized cost is
reclassified to FVOCI?
a. The debt investment is measured at fair value at reclassification date.
b. The difference between the previous carrying amount and fair value at
reclassification date is recognized in other comprehensive income.
d. All of these statements are true.
6. Which statement is true when a debt investment at FVOCI is reclassified
to amortized cost?
a. The fair value at reclassification date becomes a new carrying amount.
b. The cumulative gain or loss previously recognized in OCI is removed
from equity and adjusted against fair value at reclassification date.
7. When a financial statement at FVPL is reclassified to FVOCI, the
new carrying amount is equal to
a. Fair value at reclassification date
b. Original carrying amount
c. Present value of contractual cash flows
d. Present value of contractual cash flows representing principal
8. Which statement is true when a financial asset at FVOCI is
reclassified to FVPL?
a. The financial asset continues to be measure at fair value.
b. The fair value at reclassification date becomes the new carrying
amount.
c. The cumulative gain or loss previously recognized in OCI is
reclassified to profit or loss.
Question 31-20: Multiple Choice (PFRS 15)
1. Fair value of an asset should be based upon

a. The replacement cost of an asset.
b. The price that would be received to sell the asset at the measurement
date.
c. The original cost of the asset.
d. The price that would be paid to acquire the asset.
2. Which of the following describes a principal market for establishing fair
value of an asset?
a. The market that has the greatest volume and level of activity for the asset
b. Any broker or dealer market
c. The most observable market
d. The market in which the amount received would be maximized
3. Which statement is true for measuring an asset at fair value?
a. The price of an asset should be adjusted for transaction cost.
b. The fair value of the asset should be adjusted for cost of
disposal.
c. The fair value is based upon an entry price to purchase the
asset.
d. The price should be adjusted for cost to transport the asset to
the principal market.
4. Which of the following is an assumption used in fair value
measurement?
a. The asset must be in-use
b. The asset must be considered in-exchange
c. The most conservative estimate must be used
d. The asset is in the highest and best use
5. Which of the following would meet the qualifications as market participants?
a. A liquidation market in which sellers are compelled to sell.
b. A subsidiary of the reporting unit interested in purchasing assets similar to those
being valued.
c. An independent entity that is knowledgeable about the asset.
d. A broker or dealer that wishes to establish new market for the asset.
6. The fair value at initial recognition is
a. The price paid to acquire the asset.
b. The price paid to acquire the asset less transaction cost.
c. The price paid to transfer or sell the asset.
d. The carrying amount of the asset acquired.
7. Which of the following is not a valuation technique used in fair value measurement?
a. Income approach
b. Residual value approach
c. Market approach
d. Cost approach
8. Valuation techniques for fair value that include the Black-Scholes formula, a binomial
model, or discounted cash flow are examples of which valuation technique?
a. Income approach
b. Market approach
c. Cost approach
d. Exit value approach
9. The market approach for measuring fair value requires which of the following?
a. Present value of future cash flows
b. Prices and other relevant information of transactions from identical or comparable
assets
c. The price to replace the service capacity of the asset
d. The weighted average of the present value of future cash flows
10. Which of the following would be considered a Level 2 input for fair value measurement?
a. Quoted market price on a stock exchange for an identical asset
b. Quoted market price available from a business broker for a similar asset
c. Historical performance and return on the investment
d. All of these would be considered Level 2 input for fair value measurement
Question 31-21: Multiple Choice (ACP)
1. It is the date on which the stock and transfer book of the entity is closed
for registration.
a. Date of declaration
b. Date of record
c. Date of payment
d. Date of mailing the dividend check
2. At which of the following dates has the shareholder theoretically realized
income from dividend?
a. The date the dividend is declared
b. The date of record
c. The date the dividend check is mailed by the entity
d. The date the dividend check is received
3. Property dividends are recorded
a. As dividend income at carrying amount of the
property
b. As dividend income at fair value of the property
c. As return of investment
d. By means of memorandum only
4. Liquidating dividends are credited to
a. Income
b. Retained earnings
c. Investment account
d. Share capital
5. An investor that owns 10% of the ordinary shares has the
right to
a. Be paid 10% of the investee’s profit in cash each year.
b. Receive dividend equal to 10% of the par each year.
c. Receive dividend equal to 10% of the total dividend paid
by which the investee for the year to shareholders.
d. Keep investee from issuing any new shares unless the
investor is willing to buy 10% of the new shares.
6. What is the effect of share dividend of the same class?
a. Increase in investment and increase in cost per share
b. Decrease in investment and decrease in cost per share
c. No effect on investment but decrease in cost per share
d. No effect on investment but increase in cost per share
7. When share dividends of different class are received
a. No formal entry is made but only a memorandum
b. Cash is debited and dividend income is credited
c. A new investment account is debited and dividend income
is credited.
d. A new investment account is debited and the original
investment account is credited.
8. Shares received in lieu of cash dividend are recorded as
a. Income at fair value of the shares received
b. Income at par value of the shares received
c. Income at the cash dividend that would have been
received
d. Share dividends
9. Cash received in lieu of share dividends is recorded as
a. Dividend income
b. Return of investment
c. Partly income and partly return of investment
d. If the share dividends are received and subsequently sold at
the cash received and gain or loss is recognized
10.What is the effect of share split up
a. Increase in number of shares and increase in cost per share
b. Decrease in number of shares and decrease in cost per share
c. Increase in number of shares and decrease in cost per share
d. Decrease in number of shares and increase in cost per share
Answer 31-17: Answer 31-18: Answer 31-19:
Multiple Choice (PFRS Multiple Choice (IAA) Multiple Choice (IFRS)
9)
1. C 1. B
1. D 2. B 2. B
2. B 3. C 3. A
3. D 4. B 4. A
4. D 5. C 5. D
5. D 6. A 6. D
6. A 7. D 7. A
7. D 8. D 8. D
8. D 9. B
10. C
1. B
Answer 31-20: 2. A
Multiple Choice (PFRS 15) 3. B
4. B
1. B
2. A Fair value hierarchy
3. D 5. Level 1 – The quoted prices in an
4. D active market for identical assets.
5. C 6. Level 2 – The quoted prices for
similar assets in an active and
6. A
inactive market and quoted prices for
identical assets in an inactive
market.
7. Level 3 – The unobservable input
for the asset usually developed by
the entity using the best available
information from the entity’s own
Answer 31-21: 1. C
Multiple Choice (ACP) 2. C
3. D
1. B 4. A
2. A 5. D
3. B 6. C
4. C
CHAPTER 32
INVESTMENT ASSOCIATE
Questions:
Question 32-1 When does an investor have significant influence?
Answer 32-1
Significance influence is the power to participate in the financial and operating policy decisions of the investee but not control or
joint control over those policies.
If the investor hold, directly or indirectly through subsidiaries, 20% or more of the voting power of the investee, it is presumed
that the investor has significant influence, unless it can be clearly demonstrated that this is not the case.
Conversely, if the investor holds, directly or indirectly through subsidiaries, less than 20% of the voting power of the investee, it is
presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated.
A substantial or majority ownership by another investor does not necessarily preclude an investor from having significant
influence.
Beyond the mere 20% threshold of the ownership, PAS 28, paragraph 6, provides that the existence of significant influence by an
investor is usually evidence in one or more of the following ways:
a. Representation in the board of directors
b. Participation in policy making process
c. Material transactions between the investor and the investee
d. Interchange of managerial personnel
e. Provision of essential technical information
Question 32-2 Explain the equity method of accounting.
Answer 32-2
The equity method is based on the economic relationship between the investor and the investee.
The investor and the investee are viewed as a single economic unit.
The equity method is applicable when the investor has a significant influence over the investee.
Under the equity method, the investment is initially recorded at cost but it is subsequently increased by the
net income of the investee and decreased by the net loss of the investee.
Distributions or dividends received from the investee reduce the carrying amount of the investment.
Note that the investment must be in ordinary shares.
If the investment is in preference shares, the equity method is not appropriate regardless of the
percentage because the preference share is a nonvoting equity.
The investment in preference shares may be accounted for as at fair value through profit or loss or at fair
value through other comprehensive income or at cost.
Technically, if the investor has significant influence but not control over the investee, the investee is said to
be an associate or associated company.
Accordingly, under the equity method, the investment in ordinary shares shall be appropriately described
as investment in associate.
The investment in associate accounted for using the equity method shall be classified as noncurrent
asset.
Question 32-3 What do you understand by the “excess of cost over carrying amount” of interest
acquired?
Answer 32-3
If the cost of an investment exceeds the carrying amount of the underlying net assets acquired, the
difference is termed as “excess of cost over carrying amount”.
The excess of cost over carrying amount may be due to the following:
a. Undervaluation of the investee’s assets such as building, land and inventory.
b. Goodwill
In practice, it is often difficult to determine which specific identifiable assets are undervalued.
If the assets of the investee are fairly valued, accountants frequently attribute the excess of cost
over carrying amount of the underlying net assets to goodwill.
If the excess is attribute to undervaluation of depreciable asset, it is amortized over the remaining life
of the depreciable asset.
If the excess is attributable to inventory, the amount is expensed when the inventory is already sold.
The amortization of the excess of cost over carrying amount is recorded by debiting investment
income and crediting the investment account.
If the excess is attributable to goodwill, it is not amortized but the entire investment in associate
including goodwill is tested for impairment at each reporting date.
Question 32-4 What is the treatment of “excess
of net fair value over cost”?
Answer 32-4
PAS 28, paragraph 32, provides that the excess of
the investor’s share of the net fair value of the
associate’s identifiable assets and liabilities over
the cost of the investment is included as income in
the determination of the investor’s share of the
associate’s profit or loss in the period in which the
investment is acquired.
Question 32-5 Discuss the accounting procedure where the associate is with “heavy losses”.
Answer 32-5
PAS 28, paragraph 38, provides that if an investor’s share of losses of an associate equals or
exceeds the carrying amount of an investment, the investor discontinues recognizing its share of
further losses.
The investment is reported at nil or zero value.
The carrying amount of the investment in associate is not just the balance of the account
“investment in associate”.
The carrying amount of the investment in associate also includes other long-term interests in an
associate, such as long-term receivables, loans and advances and investment preference shares
of associate.
However, trade receivables and any long-term receivables for which adequate collateral exists,
such as secured loans, are excluded from the carrying amount of an investment in associate.
Additional losses are provided for or a liability is recognized to the extent that the investor has
incurred legal or constructive obligations or made payments on behalf of the associate.
If the associate subsequently reports income, the investor resumes including its share of such
income after its share of the income equals the share of losses not recognized.
Question 32-6 Explain the impairment of an investment in associate.
Answer 32-6
If there is an indication that an investment in associate may be impaired, PAS 28, paragraph 40 requires that an
impairment loss shall b recognized whenever the carrying amount of the investment in associate exceeds the
recoverable amount.
The recoverable amount is measured as the higher between fair value less cost of disposal and value in use.
Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at
the measurement date.
Value un use is the present value of the estimated future cash flows expected to arise from the continuing use of an
asset and from the ultimate disposal.
The value in use of an investment in associate is the investor’s share in either of the following:
a. Present value of estimated future cash flows expected to be generated by the investee, including cash flows from
operations of the investee and the proceeds from the ultimate disposal of the investment.
b. Present value of the estimated future cash flows expected to arise from dividends to be received from the
investment and from the ultimate disposal.
PAS 28, paragraph 42, states that since goodwill is not separately recognized from the investment account, the
impairment loss is applied to the investment as a whole.
The recoverable amount of an investment in associate is assessed for each individual associate.
An exception is when an individual associate does not generate cash flows from continuing use that are largely
independent of those from other assets of the reporting entity.
Question 32-7 Explain the treatment when the investee has an outstanding preference shares.
Answer 32-7
a. When an associate has outstanding cumulative preference shares, the investor shall compute its
share of earnings or losses after deducting the preference dividends, whether or not such dividends
are declared.
b. When an associate has outstanding noncumulative preference shares, the investor shall compute its
share of earnings after deducting the preference dividends only when declared.
Question 32-8 Explain the treatment of “other changes in the equity of the investee” that have not been
recognized in profit or loss.
Answer 32-8
Adjustments to the carrying amount of the investment in associate may be necessary for changes in the
investor’s proportionate interest in the investee arising from changes in the investee’s equity that have
not been recognized in the investee’s profit or loss.
Such changes include those arising from revaluation of property, plant and equipment and from foreign
exchange translation differences.
The investor’s share of those changes is recognized directly in equity of the investor.
Question 32-9 When shall an investor discontinue the equity method?
Answer 32-9
PAS 28, paragraph 22, provides that an investor shall discontinue the use of
the equity method from the date that it cease to have significant influence
over an associate.
Consequently, the investor shall account for the investment as financial asset
at fair value through profit or loss, or financial asset at fair value through other
comprehensive income or at cost.
PAS 28, Basis for Conclusion 18, requires an investor that continues to have
significant influence over an associate to apply the equity method even if the
associate is operating under severe long-term restrictions that significantly
impair its ability to transfer funds to the investor.
Significant influence must be lost before the equity method ceases to be
applicable.
Question 32-10 What is the measurement of the investment in associate on the
date significant influence is lost?
Answer 32-10
PAS 28, paragraph 22, provides that on the date the significant influence is lost,
the investor shall measure any retained investment in associate at fair value.
The difference between the carrying amount of the retained investment at the
date the significant influence is lost and the fair value of the retained investment
shall be included in profit or loss.
The difference between the net proceeds from disposal of part of the investment
and the carrying amount of the investment sold is also included in profit or loss.
Paragraph 22 further provides that the fair value of the investment at the date it
ceases to be an associate shall be regarded as fair value on initial recognition
as a financial asset.
Question 32-11 What are the specific circumstances when an investment in associate shall
not be accounted for using the equity method?
Answer 32-7
PAS 28, paragraph 17, provides that an investment in associate shall not be accounted for
using the equity method if the investor is a parent that is exempt from preparing consolidated
financial statements or if all of the following apply:
a. The investor is a wholly-owned subsidiary, or a partially-owned subsidiary of another entity
and the other owners do not object to the investor not applying the equity method.
b. The investor’s debt and equity instruments are not traded in a public market “over the
counter” market.
c. The investor did not file or it is not in the process of filing financial statements with the
regulatory authority for the purpose of issuing any class of instruments in a public market.
d. The ultimate or any intermediate parent of the investor produces consolidated financial
statements available for public use that comply with Philippine Financial Reporting
Standards.
In these circumstances, the investment is accounted for as at fair value through profit or loss, or
at fair value through other comprehensive income or at cost.
Question 32-12 Explain investment in associate achieved in stages.
Answer 32-12
An investor may acquire an ownership interest in an investee or a certain date but the investee may not be
classified as an associate until a later date.
For example, an investor holds a 10% interest in an investee on January 1, 2019.
The investor acquires additional 10% interest in the same investee on January 1, 2020 enabling the investor to
exercise significant influence over the investee.
In 2019, the investment is accounted for under the cost or fair value method.
However, in 2020, the investment is accounted for under the equity method because the investee is now an
associate.
The following accounting procedures should be followed for investment in associate achieved in stages:
a. The existing interest in the associate is premeasured at fair value with any change in fair value included in
profit or loss.
b. If the existing interest is accounted for at fair value through other comprehensive income, any unrealized
gain or loss at the date significant influence is obtained is reclassified to retained earnings.
c. The fair value of the existing interest plus the cost of the additional interest acquired constitutes the total cost
of investment for the initial application of the equity method.
d. The total cost of the investment for the initial application of the equity method minus the carrying amount of the
net assets acquired at the date significant influence is obtained equals excess of cost over carrying amount or
excess net fair value.
1. It is an entity over which the investor has significant influence
a. Associate
b. Investee
c. Venture capital organization
d. Mutual fund
2. Which statement best describes significant influence?
a. The holding of a significant proportion of the share capital in another entity.
b. The contractually agreed sharing of control over an economic entity.
c. The power to participate in the financial and operating policy decisions of
an entity.
d. The mutual sharing in the risks benefits of a combined entity.
3. Which statement is true concerning significant influence?
a. If an investor holds, directly or indirectly, less than 20% of the voting power
of the investee, it is presumed that the investor does not have significant
influence, unless such influence can be clearly demonstrated.
b. If an investor holds, directly or indirectly, 20% or more of the voting power of
the investee, it is presumed that the investor does have significant influence,
unless it can be clearly demonstrated that this is not the case.
c. A substantial or majority ownership by another investor does not necessarily
preclude an investor from having significant influence.
d. All of these statements are true about significant influence.
4. The equity method is not required when the associate has been acquired and
held with a view to disposal within what time period?
a. Six months from the end of reporting period
b. Twelve months from the end of reporting period
c. Twelve months from the date of classification as held for sale
d. In the near future
5. When an entity holds between 20% and 50% of the voting power of an
investee
a. The investor must use the equity method
b. The investor should use the equity method unless circumstances indicate
that it is unable to exercise significant influence over the investee.
c. The investor must use the fair value method unless it can be clearly
demonstrated that the investor has significant influence over the investee.
d. The investor must use the fair value method.
6. Which statement is incorrect concerning the equity method?
a. The investment is initially recorded at cost.
b. The investment in associate is increased or decreased by the investor’s
share of the profit or loss of the investee after the date of acquisition.
c. The investor’s share of the profit or loss of the investee is recognized in the
investor’s profit or loss.
d. Dividends received from the investee are accounted for as dividend income.
7. If an associate has outstanding cumulative preference shares held by
outside interest, the investor computes share of profit or loss
a. After adjusting for preference dividends which were actually paid
during the year.
b. Without regard for preference dividends.
c. After adjusting for the preference dividends only when declared.
d. After adjusting for the preference dividends, whether or not the
dividends have been declared.
8. Goodwill arising from an investment in associate is
a. Include in the carrying amount of the investment and amortized over
the useful life.
b. Included in the carrying amount of the investment and not amortized.
c. Charged to retained earnings.
d. Charged to expense immediately.
9. How is goodwill arising on the acquisition of an associate dealt with in the
financial statements?
a. It is amortized.
b. It is impairment tested individually.
c. It is written off as loss.
d. Goodwill is not recognized separately within the carrying amount of the
investment.
10. How is the impairment test carried out for an associate?
a. The goodwill is impaired tested individually.
b. The entire carrying amount of the investment is tested for impairment by
comparing the recoverable amount with the carrying amount.
c. The carrying amount of the investment shall be compared with the
market value.
d. The recoverable amounts of all investments in associates shall be
associated together.
1. An investor shall discontinue the use of the equity method when
a. The investor ceases to have significant influence over the associate.
b. The associate operates under severe long-term restrictions.
c. The investor ceases to have the control over the associate.
d. The business activities of the investor and associate are dissimilar.
2. When an investment ceases to be an associate and is accounted for in
accordance with IFRS, the fair value of the investment at the date when it
ceases to be an associate
a. Is regarded as its cost on initial recognition as a financial asset.
b. Is regarded as its fair value on initial recognition as a financial asset.
c. Is regarded as its fair value on initial recognition as a financial liability.
d. Is regarded as its amortized cost on initial recognition as an investment.
3. On the loss of significant influence, the investor shall recognize in
profit or loss any difference between
a. The initial carrying amount of any retained investment, any
proceeds from the disposing of the part interest and the carrying
amount of the investment at the date when significant influence
is lost.
b. The fair value of any retained investment and the carrying
amount of the investment at the date significant influence is lost.
c. Any proceeds from disposing of the part interest and the
carrying amount of the investment at the date significant
influence is lost.
d. The fair value of any retained investment, any proceeds from
disposing of the part interest and the carrying amount of the
investment at the date significant influence is lost.
4. The equity method is not applicable under all of the following circumstances, except
a. The investor is a wholly-owned subsidiary.
b. The investor's debt and equity instruments are not traded.
c. The investor is in the process of filing financial statements with a regulatory body
for the purpose of issuing debt and equity instruments in a public market.
d. The ultimate parent of the investor produces consolidated financial statements.
5. What is the accounting treatment when the financial statements of an associate are
not prepared as of the same date as the financial statements of the investor?
a. The associate shall prepare financial statements at the same date as that of the
investor.
b. The financial statements of the associate prepared up to a different date would
be used.
c. Any major transactions during the time gap of the financial statements shall be
accounted for.
d. As long as the gap is not greater than three months, there is no problem.
1. After the date of acquisition, the investment account using the equity method would
a. Not be affected by the share of the earnings or losses of the investee
b. Not be affected by the share of the earnings of the investee but be decreased by the
share of the of the losses of the investee
c. Be increased by the share of the earnings of the investee but not be affected by the
share of the of the losses of the investee
d. Be increased by the share of the earnings of the investee and decreased by the share
of the of the losses of the investee
2. Under the equity method of accounting for investments, an investor recognizes its share of
the earnings in the period in which the
a. Investor sells the investment
b. Investee declares a dividend
c. Investee pays dividend
d. Earnings are reported by the investee
3. When an investor uses the equity method to account for investment in
ordinary shares, the investment account is increased when the investor
recognizes
a. A proportionate interest in the net income of the investee
b. A cash dividend received from the investee
c. Periodic amortization of the goodwill
d. Depreciation related to the excess of market value over carrying amount of
the investee’s depreciable assets at the date of purchase by the investor.
4. When an investor uses the equity method to account for investment in
ordinary shares, cash dividends received by the investor from the investee
shall be recorded as
a. Dividend income
b. A deduction from investor’s share of the investee’s profit
c. A deduction from the investment account
d. A deduction from shareholders’ equity
5. An investor uses the equity method to account for investment in ordinary shares.
The purchase implies a fair value of the investee’s depreciable assets in excess of
the investee’s net asset carrying amount. The investor’s amortization of the excess
a. Decreases the investment account
b. Decreases the goodwill account
c. Increases the investment revenue account
d. Does not effect the investment account
6. An investor uses the equity method to account for the purchase of the entity’s
ordinary shares. On the date of acquisition, the fair value of the investee’s
inventory and land exceeded their carrying amount. How would inventory excess
and land excess affect respectively the investor’s equity in earnings of the
investee for the current year?
a. Decrease Decrease
b. Decrease No effect
c. Increase Increase
d. Increase No effect
7. The excess of the investor share of the net fair value of the associate’s net
assets over the cost of the investment is
a. Included in the determination of the investor’s share of the associate’s
profit or loss in the period in which the investment is acquired.
b. Credited to retained earnings directly.
c. Included in other comprehensive income.
d. A deferred gain.
8. An investor uses the equity method to account for 30% investment.
Amortization of the investor’s share of the excess of fair value over carrying
amount of depreciable asset at the date of the purchase shall be reported in
the investor’s income statement as part of
a. Other expense
b. Depreciation expense
c. Equity in earnings of investee
d. Amortization of goodwill
9. When an investor purchases sufficient ordinary shares to gain significant influence over the
investee, what is the proper treatment of any excess of cost over the carrying amount of the
net assets acquired?
a. The excess remains in the investment account until it is sold.
b. The excess is immediately expensed in the period in which ithe investment is made.
c. The excess is amortized over the time periodthat is reasonable in the light of the
underlying cause of the excess.
d. The excess is charged to retained earnings at the time the investor resells the
investment.
10. An investor uses the equity method of accounting for a 30% ownership in an investee. At
year-end, the investor has a receivable from the investee. How should the receivable be
reported in the investor’s financial statements for the current year?
a. Non of the receivable should be reported but the entire receivable should be offset
against investee’s payable to the investor.
b. Seventy percent of the receivable should be separately reported with the balance offset
against 30% of investee’s payable to the investor.
c. The total receivable should be disclosed separately.
d. The total receivable should be included as part of the investment in associate, without
separate disclosure
Question 32-16: Multiple Choice (AICPA
Adopted)
1. When an investor uses the fair value method to account
for investment in ordinary shares, cash dividends received
by the investor from the investee should be recorded as
a. Dividend income
b. An addition to the investor’s share of the investee’s
profit
c. A deduction from investor’s share of profit of the
investee
d. A deduction from the investment account
2. An investor uses the fair value method to account for an investment in ordinary shares.
A portion of the dividends received this year were in excess of the investor’s share of
investee’s earnings subsequent to the date of improvement. The amount of dividend
revenue that should e reported in the investor’s income statement for this year would be
a. Zero
b. The total amount of dividends received this year
c. The portion of the dividends received this year that were in excess of the investor’s
share of the investee’s earnings subsequent to the date of investment.
d. The portion of the dividends received this year that were not in excess of the
investor’s share of the investee’s earnings subsequent to the date of investment.
3. An investor uses the fair value method to account for investment in ordinary shares.
Dividends received in excess of the investor's share of investee's earnings subsequent
to the date of investment
a. Increase other comprehensive income
b. Decrease the investment account
c. Increase the investment account
d. Increase dividend revenue
4. An investor uses the fair value method to account for a 15% ownership in an investee. At
year-end, the investor has a receivable from the investee. How hould the receivable be
reported?
a. The total receivable should be reported separately.
b. The total receivable should be included as part of the investment, without separate
disclosure.
c. Eighty-five percent of the receivable should be reported separately, with the balance offset
against the investee’s payable to the investor.
d. The total receivable should be offset against the investee’s payable to the investor.
5. On January 1 of the current year, an entity purchased 10% of another entity’s ordinary shares.
The entity purchased additional shares bringing the ownership up to 40% of the investee’s
ordinary shares outstanding on August 1 of the current year. During October of the current year,
the investee declared and paid a cash dividend on all of the outstanding ordinary shares. How
much income from the investment should be reported for the current year?
a. 10% if investee’s income from January 1 to July 31, plus 40% of investee’s income from
August 1 to December 31
b. 40% of investee’s income from August 1 to December 31
c. 40% of investee’s income for the current year
d. Amount equal to dividend received from the investee
Answer 32-13:
Multiple Choice (IFRS) Answer 32-14:
1. A
2. C 1. A
3. D 2. B
4. C 3. D
5. B 4. C
6. D 5. A
7. D
8. B
9. D
Answer 32-15:
Multiple Choice (AICPA
1. D Adopted)
2. D
3. A 1. A
4. C 2. B
5. A 3. D
6. B 4. A
7. A 5. B
8. C
9. C
CHAPTER 33
FINANCIAL ASSET
AT AMORTIZED COST
Questions:
Question 33-1 Explain the measurement of financial asset at amortized cost.
Answer 33-1
PFRS 9, paragraph 4.1.2, provides that a financial asset shall be measured at amortized cost if both of the
following conditions are met:
a. The business model is to hold the financial asset in order to collect contractual cash flows on specified
dates.
b. The contractual cash flows are solely payments of principal and interest on the principal amount
outstanding.
PFRS 9, paragraph 4.1.4, further provides that by residual definition or by default, financial assets that do not
met the conditions for amortized cost measurement shall be measured at fair value.
In the simplest language, debt investment held for collection are measured at amortized cost and debt
investments not held for collections are measured at fair value.
Amortized cost is the initial recognition amount of the investment minus repayments plus amortization of
the discount, minus amortization of premium, and minus reduction for impairment or uncollectibility.
Financial assets measured at amortized cost include investment in bonds and other debt instruments.
Financial assets at amortized cost are classified as noncurrent assets.
Question 33-2 What is a bond?
Answer 33-2
A bond is a formal unconditional promise made under seal to pay a specified sum of money at a determinable future date
and to make periodic interest payments at a stated rate until the principal sum is paid.
In simple language, a bond is a contract of debt whereby one party called the issuer borrows fund from another party
called the investor.
Thus, a bond is a debt security because the bondholder is a creditor and the issuer is a debtor.
A bond is evidenced by a certificate and the contractual agreement between the issuer and the investor is contained in
another document known as “bond indenture”.
Question 33-3 Explain the classification of bond investments.
Answer 33-3
Bonds may be acquired as current or noncurrent investment depending on the business model of managing financial
assets.
Accordingly, bond investments are classified and accounted for as follows:
a. Financial assets held for trading
b. Financial assets at amortized cost
c. Financial assets at fair value through profit or loss by irrevocable designation or fair value option
d. Financial assets at fair value through other comprehensive income if the business model is collecting contractual
cash flows and selling the financial assets.
Question 33-4 Explain the measurement of bond investment.
Answer 33-4
In accordance with PFRS 9, paragraph 5.1.1, bond investment are recognized initially at fair value plus transaction
costs that are directly attributable to the acquisition.
However, transaction costs attributable to the acquisition of “trading” bond investments are expensed immediately.
Subsequent to the initial recognition, bond investments are measured and accounted for as follows:
a. At fair value through profit or loss
b. At amortized cost
c. At fair value through other comprehensive income
Question 33-5 Discuss a bond premium and bond discount.
Answer 33-5
If the acquisition cost of the bonds is different from the face amount, the bonds are said to be acquired at a premium
or discount.
If the acquisition cost is more than the face amount, the difference is a bond premium.
If the acquisition cost is less than the face amount, the difference is a bond discount.
If the bond investments are classified as financial assets at amortized cost, the bond premium or discount is amortized
over the life of the bonds using the effective interest method.
On the part of the bondholder, the life of the bonds is from the date of acquisition to the date of maturity.
Question 33-6 Why amortized bond premium or bond discount?
Answer 33-6
The reason for amortization of bond premium or discount is to bring the carrying amount of the investment to
face amount on the date of maturity.
When the bonds are redeemed on the date of maturity, the entry will simply be a debit to cash and a credit to
investment in bonds at face amount.
The bondholder is a creditor and will collect on the date of maturity an amount equal only to the face amount
of the bonds and no more and no less.
Conceptually, bond premium is a loss on the part of the investor because the investor paid more than what
can be collected on the date of maturity which is equal to the face amount.
Such loss is not recognized outright but allocated or amortized over the life of the bond to be deducted from
the interest income derived from the bond investment.
Thus, the periodic amortization of bond premium is recorded by debiting interest income and crediting the
investment account.
On the other hand, bond discount is a gain on the part of the investor because the investor paid less than
what can be collected on the date of maturity.
Such gain is not recognized outright but allocated or amortized over the life of the bond to be added to the
interest income derived from the bond investment.
Thus, the periodic amortization of bond discount is recorded by debiting investment account and crediting
interest income.
Question 33-7 Define callable bonds, convertible bonds, serial bonds and term bonds.
Answer 33-7
Callable bonds are those which may be called in or redeemed by the issuer prior to the date of maturity.
Usually, the call price or redemption price is at a premium or more than the face amount of the bonds.
Convertible bonds are those which give the bondholders the right to exchange their bonds for share capital of
the issuing entity at any time prior to maturity.
Serial bonds are those which have a series of maturity dates or those bonds which are payable in installments.
Term bonds are those bonds that mature on a single date.
Callable and convertible bonds can be classified as term bonds despite their special features.
Question 33-8 What is market price of bonds?
Answer 33-8
The market price of the bonds is equal to the sum of the following:
a. Present value of principal – principal multiplied by the “PV of 1 factor” for the number of interest periods
using the “effective rate”.
b. Present value of interest payments – periodic interest payment multiplied by the “PV of an ordinary of 1
factor” for the number of interest periods using the “effective rate”.
Question 33-9 Explain effective rate and nominal rate.
Answer 33-9
The nominal rate is the coupon rate or stated rate appearing on the face of the bond.
The effective rate is the yield rate or market rate which is the actual or true rate of
interest which the bondholder earns on the bond investment.
The effective rate and the nominal rate are the same if the cost of the bond investment
is equal to the face amount.
When the bonds are acquired at a premium, the effective rate is lower than nominal
rate.
The reason is that the premium is a loss on the part o the bondholder.
On the other hand, when the bonds are acquired at a discount, the effective rate is
higher than nominal rate.
The reason is that the discount is a gain on the part o the bondholder.
The effective rate and nominal rate are necessary in applying the effective interest
method.
Question 33-10 Explain the effective interest method of amortizing bond discount and bond premium.
Answer 33-10
The effective interest method simply requires the comparison between the interest earned or interest income and
the interest received.
The difference of the two represents the premium or discount amortization.
Interest earned or interest income is computed by multiplying the effective rate by the carrying amount of the
bond investment.
Interest received is computed by multiplying the nominal rate by the face amount of the bond.
The carrying amount of bond investment is the initial cost gradually increased by the periodic amortization of
discount or gradually decreased by the periodic amortization of premium.
Question 33-11 Explain the fair value option of measuring investment in bonds and other debt instruments.
Answer 33-11
PFRS 9, paragraph 4.1.5, provides that an entity at initial recognition may irrevocably designate a financial asset
as measured at fair value through profit or loss even if the financial asset satisfies the amortized cost or FVOCI
measurement.
Under the fair value option, all changes in fair value are recognized in profit or loss.
Moreover, the interest income is recognized using the nominal interest rate rather than the effective interest
rate.
1. Trading bond investments are reported at
a. Amortized cost
b. Face amount
c. Fair value
d. Maturity
2. Which statement is correct in regard to trading bond investments?
a. Trading bond investments are held with the intention of selling
them in a short period of time.
b. Unrealized gains and losses are reported as part of net income.
c. Any discount or premium is not amortized.
d. All of these statements are correct.
3. Accrued interest on bonds that are purchased between interest dates
a. Is ignored by both the seller and the buyer.
b. Increases the amount a buyer must pay.
c. Is recorded as a loss on the sale of the bonds.
d. Decreases the amount a buyer must pay.
4. The interest income for the year would be higher if the bond was purchased
at
a. Quoted price
b. Face amount
c. A discount
d. A premium
5. The interest income for the year would be lower if the bond was purchased at
a. Quoted price
b. Face amount
c. A discount
d. A premium
1. The actual interest earned by the bondholder is
a. Effective rate
b. Yield rate
c. Market rate
d. Effective rate, yield rate or market rate
2. The interest rate written on the face of bond is known as
a. Nominal rate
b. Coupon rate
c. Stated rate
d. Nominal rate, coupon rate or stated rate
3. To compute the price to pay for a bond, what present value concept is used?
a. The present value of 1
b. The present value of an ordinary annuity of 1
c. The present value of 1 and present value of an ordinary annuity of 1
d. The future value of 1
4. Bonds usually sell at a discount when investors are willing to invest in bonds
a. At the stated interest rate.
b. At rate lower than the stated interest rate.
c. At rate higher than the stated interest rate.
d. Because a capital gain is expected.
5. Bonds usually sell at a premium
a. When market price is greater than stated rate.
b. When stated price is greater than market rate.
c. When the price of the bonds is greater than maturity amount.
d. In none of these cases.
6. The effective interest rate on bond is lower than the stated rate when bond sells
a. At maturity date
b. Above face amount
c. Below face amount
d. At face amount
7. The effective interest rate on bond is higher than the stated rate when bond
sells
a. At face amount
b. Above face amount
c. Below face amount
d. At maturity date
8. The interest method of amortizing discount provides for
a. Increasing amortization and increasing interest income
b. Increasing amortization and decreasing interest income
c. Decreasing amortization and increasing interest income
d. Decreasing amortization and decreasing interest income
9. The interest method of amortizing premium provides for
a. Increasing amortization and increasing interest income
b. Increasing amortization and decreasing interest income
c. Decreasing amortization and decreasing interest income
d. Decreasing amortization and increasing interest income
10.When the interest payment dates of a bond are May 1 and
November 1, and a bond is purchased on June 1, the amount
of cash paid by the investor would be
a. Decreased by accrued interest from June 1 to November
1.
b. Decreased by accrued interest from May 1 to June 1.
c. Increased by accrued interest from June 1 to November 1.
d. Increased by accrued interest from May 1 to June 1.
1. Which statement is true about the interest method?
a. The interest method does not use a constant rate.
b. Amortization of discount decreases each period.
c. Amortization of premium decreases each period.
d. The interest method applies the effective interest rate to the
beginning carrying amount.
2. The fair value option
a. Must be applied to all debt instruments.
b. May be selected as a valuation method at any time.
c. Reports all gains and losses in income.
d. All of these choices are correct.
3. The fair value option allows an entity to
a. Record income when the fair value increases.
b. Measure bond investments at fair value in some years.
c. Report most financial instruments at fair value.
d. All of these statements are correct.
4. A bond investment that satisfies the amortized cost measurement may be
designated
a. Irrevocably at fair value through profit or loss
b. Revocably at fair value through profit or loss
c. Irrevocably at fair value through OCI
d. Irrevocably at amortized cost
5. Under what condition can an entity classify financial asset that meets the
amortized cost criteria at FVPL?
a. Where the instrument is held to maturity
b. Where the business model approach is adopted
c. Where the financial asset passes the contractual cash flow characteristics test
d. If doing so eliminates or reduces an accounting mismatch
1. D
Answer 33-12:
Multiple Choice (IAA) Answer 32-13:
Multiple Choice (IAA) Answer 33-14:
1. C Multiple Choice
2. D (IFRS)
1. D
3. B 2. D
4. C 3. C 2. D
5. D 4. C 3. C
5. B 4. A
6. B 5. A
7. C 6. D
8. A
CHAPTER 34
INVESTMENT
PROPERTY
Questions:
Question 34-1 Define an investment property.
Answer 34-1
Investment property is defined as property (land or building or part of a building or
both) held by an owner or by the lessee under a finance lease to earn rentals or
for capital appreciation or both.
In other words, only land and building can qualify as investment property. An
equipment or any movable property cannot qualify as investment property.
And investment property is not held:
a. For use in the production or supply of goods or services for administrative
purposes.
b. For sale in the ordinary course of business.
Question 34-2 Define an owner-occupied property.
Answer 34-2
An owner-occupied property is property held by an owner or by the lessee under a finance
lease for use in the production or supply of goods or services, or for administrative
purposes.
Question 34-3 Give examples of investment property.
Answer 34-3
a. Land held for long-term capital appreciation
b. Land held for a currently undetermined use
c. Building owned by the entity, or held by the entity under a finance lease, and leased out
under an operating lease
d. Building that is vacant but is held to be leased out under an operating lease
e. Property that is being constructed or developed for future use as investment property
Question 34-4 Give examples assets not considered as investment property.
Answer 34-4
a. Owner-occupied property or property held for use in the production or supply
of goods or services or for administrative purposes
b. Property held for future use as owner-occupied property
c. Property held for future development and subsequent use as owner-occupied
property
d. Property occupied by employees, whether or not the employees pay rent at
market rate
e. Owner occupied property awaiting disposal
f. Property held for sale in the ordinary course of business or in the process of
construction or development for such sale
g. Property being constructed or developed on behalf of third parties
h. Property that is leased to another entity under a finance lease
Question 34-5 Explain the treatment of property that is partly investment and partly owner-occupied.
Answer 34-5
Certain properties may include a portion that is held to earn rentals or for appreciation and another
portion that is held for manufacturing or administrative purposes.
If these portions could be sold or leased out separately, an entity shall account the portions separately
as investment property and owner-occupied property.
If the portions could not be sold separately, the property is investment property if only an insignificant
portion is held for manufacturing or administrative purposes.
When ancillary services are provided by the entity to the occupants of the of the property and these
services are a relatively insignificant component of the arrangement, the property is treated as
investment property.
An example would be where the owner of an office building provides security and maintenance
services to the lessees. The building being leased out as offices is investment property.
However, if the services provided are a more significant component of the arrangement, the property is
treated as owner-occupied property.
For example, if an entity owns and manages a hotel, services provided to guests are a significant
component of the arrangement as a whole.
Therefore, the hotel is treated as owner-occupied property, rather than investment property.
Question 34-6 Explain the treatment of property leased to an affiliate.
Answer 34-6
From the perspective of the individual entity that owns it, the property leased to
another subsidiary or its parent is considered an investment property.
However, from the perspective of the group as a whole and for purposes of
consolidated financial statements, the property is treated as owner-occupied property.
Question 34-7 What are the conditions for the recognition of investment property?
Answer 34-7
Investment property shall be recognized as an asset when and only when:
a. It is probable that the future economic benefits that are associated with the
investment property will flow to the entity.
b. The cost of the investment property can be measured reliably.
Question 34-8 Explain the initial measurement of investment property.
Answer 34-8
An investment property shall be measured initially at cost. Transaction
costs shall be included in the initial measurement.
The cost of a purchased investment property comprises the purchase
price and any directly attributable expenditure.
Directly attributable expenditure includes professional fees for legal
services, property transfer taxes and other transaction costs.
If payment for an investment property is deferred, the cost is the cash
price equivalent.
The difference between cash price and the total payments is recognized
as interest expense over the credit period.
Question 34-9 Explain the subsequent measurement of investment property.
Answer 34-9
An entity shall choose either of the following models as accounting policy and shall apply that policy to all of its investment property:
a. Fair value model
The investment property is carried at fair value with changes in fair value are included in profit or loss.
No depreciation is recorded for the investment property.
b. Cost model
The investment property is carried at cost less any accumulated depreciation and any accumulated impairment losses.
Fair value of the investment property shall be disclosed.
Question 34-10 Explain the fair value of investment property.
Answer 34-10
Fair value of an asset is the price that would be received to sell the asset in an orderly transaction between market participants at the
measurement date.
The price in the principal market used to measure fair value of the investment property shall not be adjusted for transaction cost that
may be incurred upon disposal.
Equipment such as lift or air-conditioning is often an integral part of a building and is generally included in the fair value of the
investment property.
If an office is leased on a furnished basis, the fair value of the office generally includes the fair value of the furniture because the
rental income relates to the furnished office.
The fair value of investment property excludes prepaid or accrued operating lease income.
Question 34-11 What is the treatment if there is inability t determine fair value?
Answer 34-11
In exceptional cases, the fair value of the investment property is not reliably determinable on a continuing basis.
Under such exceptional cases, PAS 40, paragraph 54, mandates that the entity shall measure such investment
property using the cost model until the disposal of the investment property.
Moreover, under such exceptional cases only, the residual value of the investment property shall be assumed to be
zero.
Paragraph 54 further states that an entity that uses the fair value model shall continue to measure the other
investment property at fair value.
This is not withstanding the fact that one investment property is carried using the cost model due to exceptional
cases.
Question 34-12 Explain the derecognition of investment property.
Answer 34-12
An investment property shall be derecognized:
a. On disposal.
b. When the investment property is permanently withdrawn from use.
c. When no future economic benefits are expected from the investment property.
Question 34-13 Explain the condition and measurement of transfer to and from investment
property.
Answer 34-13
Transfer to and from investment property shall be made when there is change of use.
1. When the entity uses the cost model, transfer between investment property, owner-
occupied property and inventory shall be made at carrying amount.
2. A transfer from investment property carried at fair value to owner-occupied property or
inventory shall be accounted for at fair value which becomes the deemed cost for
subsequent accounting.
3. If owner-occupied property is transferred to investment property that is to be carried at
fair value, the difference between the fair value and the carrying amount of the property
shall be accounted for as revaluation of property, plant and equipment.
4. If an inventory is transferred to investment property that is to be carried at fair value, the
remeasurement to fair value shall be included in profit or loss.
5. When an investment property under construction is completed and to be carried at fair
value, the difference between fair value and carrying amount shall be included in profit or
loss.
1. Which statement best describes investment property?

a. Property held for sale in the ordinary course of business
b. Property held for use in the production and supply of goods or services and
property held for administrative purposes
c. Property held to earn rentals or for capital appreciation
d. Property held for capital appreciation
2. Which of the following statements best describes owner-occupied property?
a. Property held for sale in the ordinary course of business
b. Property held for use in the production and supply of goods or services and
property held for administrative purposes
c. Property held to earn rentals
d. Property held for capital appreciation
3. Investment property includes all of the following, except
a. Land held for long-term capital appreciation
b. Land held for currently undetermined use
c. Building owned by the reporting entity or held by a finance
lessee leased out under an operating lease.
d. Property held for sale in the ordinary course of business.
4. Which of the following is an investment property?
a. Property being constructed or developed on behalf of third party
b. Property that is being constructed and developed as investment
property
c. Property held for future development and subsequent use as
owner-occupied property
d. Owner-occupied property awaiting disposal
5. Which statement is true if the property is partly investment and
partly owner-occupied?
I. If the investment and owner-occupied portions could be sold or
leased out separately, the portions shall be accounted for
separately as investment property and owner-occupied property.
II. If the investment and owner-occupied portions could not be sold
or leased out separately, the property is invested property if only
an insignificant portion is held for manufacturing or
administrative purposes.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
6. If an entity owns and manages a hotel and services provided to guests are a
significant component of the arrangement as a whole, the hotel is classified as
a. Investment property
b. Owner-occupied property
c. Partly investment property and partly owner-occupied property
d. Neither investment property nor owner-occupied property
7. Which statement is true concerning property leased to an affiliate?
I. From the perspective of the individual entity that owns it, the property leased
to an affiliate is considered an investment property.
II. From the perspective of the affiliates as a group and for purposes of
consolidated financial statements, the property is treated as owner-
occupied property.
a. Both I and II
b. Neither I nor II
c. I only
d. II only
8. Directly attributable expenditures related to investment property include
a. Professional fees for legal services, property transfer taxes and other transaction cost.
b. Start up cost
c. Initial operating losses incurred before the investment property achieves the planned level of
occupancy.
d. Abnormal amount of wasted material, labor and other resources incurred in constructing or
developing the property.
9. Which statement is incorrect in the determining the fair value of an investment property?
a. An entity shall determine the fair value of investment property by deducting transaction cost that may
be incurred upon disposal.
b. The fair value of investment property shall reflect market conditions at the end of the reporting
period.
c. If an office is leased on a furnished basis, the fair value of the office generally includes the fair value
of the furniture because the rental income relates to the furnished office.
d. The fair value of investment property excludes prepaid or accrued opening lease income.
10. Gain or loss from disposal of the investment property shall be determined as the difference between the
a. Net disposal proceeds and carrying amount.
b. Gross disposal proceeds and carrying amount.
c. Fair value and carrying amount of the asset.
d. Gross disposal proceeds and fair value of the asset.
1. Subsequent to initial recognition, the investment property shall be measured using

a. Fair value model or revaluation model
b. Fair value through profit or loss model
c. Cost model or fair value model
d. Cost model or revaluation model
2. If the entity uses the fair value model for the investment property, which statement
is true?
a. Changes in fair value are reported in profit or loss in the current period.
b. Changes in fair value are reported as an extraordinary gain.
c. Changes in fair value are reported in other comprehensive income for the
period.
d. Changes in fair value are reported as deferred revenue for the period.
3. If the uses the fair value model for investment property, which is true?
a. The entity should value the property at cost less accumulated
depreciation and impairment.
b. The entity should report the increase in fair value in other
comprehensive income for the period.
c. The entity depreciates the equipment using normal depreciation
method.
d. The entity does nor record depreciation on the investment property.
4. Transfer from investment property to property, plant and equipment are
appropriate
a. When there is change of use.
b. Based the discretion of management.
c. Only when the entity adopts the fair value model.
d. The entity can never transfer property into another classification once it
is classified as investment property.
5. When the entity uses the cost model, transfer between investment
property, owner-occupied property and inventory shall be
accounted for at
a. Fair value
b. Carrying amount
c. Cost
d. Assessed value
6. A transfer from investment property carried at fair value to owner-
occupied property shall be accounted for at
a. Fair value, which becomes the deemed cost
b. Carrying amount
c. Historical cost
d. Fair value less cost of disposal
7. If owner-occupied property is transferred to investment property
that is to be carried at fair value, the difference between the
carrying amount of the property and the fair value shall
a. Included in profit or loss
b. Included in retained earnings
c. Included in equity
d. Accounted for as revaluation of property, plant and equipment
8. If an inventory is transferred to investment property that is to be
carried at fair value, the remeasurement to fair value is
a. Included in profit or loss
b. Included in equity
c. Included in retained earnings
d. Accounted for as revaluation of inventory
1. An investment property shall be measured initially at
a. Cost
b. Cost less impairment
c. Depreciable amount less impairment
d. Fair value less impairment
2. An investment property is derecognize when
a. It is disposed to a third party.
b. It is permanently withdrawn from use.
c. No future benefits are expected from the disposal.
d. In all of these cases.
3. Which additional disclosure must be made when an entity chooses the cost
model?
a. The fair value of the property
b. The present value of the property
c. The value in use of the property
d. The net realizable value of the property
4. Which disclosure shall be made when the fair value model has been adopted?
a. Depreciation method used
b. The amount of impairment loss recognized
c. Useful life
d. Net gain or loss from fair value adjustments
5. Under IFRS, assets classified as investment property are
a. Held for rental income
b. To be sold for quick profit
c. Held for rental income or to be sold for quick profit
d. Held for sale in the ordinary course of business
Answer 34-14: 1. A 1. A
Multiple Choice
(PAS 40) Answer 34-15:
Multiple Choice Answer 34-16:
1. C (PAS 40) Multiple Choice
2. B (IFRS)
3. D 2. C
4. B 3. A 2. A
5. C 4. D 3. D
6. B 5. A 4. A
7. A 6. B 5. D
8. A 7. A 6. C
CHAPTER 35
DERIVATIVES
Questions:
Question 35-1 What is derivative?
Answer 35-1
A derivative is simply a financial instrument that derives its value from the movement in
commodity price, foreign exchange rate and interest rate of an underlying asset or financial
instrument.
Actually, a derivative is an executory contract, meaning, it is nit a transaction but an
exchange of promises about future action.
On inception, derivative financial instruments give one party a contractual right to exchange
financial asset or financial liability with another party under conditions that are potentially
favorable, while the other party has a contractual obligation to exchange under
unfavorable conditions.
Expressed in the simplest terms, parties to the derivative financial instrument are taking bets
on what will happen to the “underlying” financial instrument in the future.
Question 35-2 What are the characteristics of a derivative?
Answer 35-2
1. A derivative must contain an underlying and a notional.
An underlying is a specified interest rate, commodity price, foreign exchange rate, index of prices
or rates and other variable.
A notional is an amount of currency, a number of shares or a number of units and volume.
2. The derivative requires either no initial net investment or an initial small net investment.
Simply stated, initially, there is no payment or there is only a small payment for the derivative on
the date of contract.
3. The derivative is readily settled at a future date by a net cash payment.
Question 35-3 Explain the measurement of derivatives.
Answer 35-3
An entity shall recognize all derivatives as either assets or liabilities.
All derivatives are measured at fair value.
The fair value and the notional amount shall be fully disclosed.
Question 35-4 Explain the common forms of derivatives.
Answer 35-4
a. Interest rate swap is a contract whereby two parties agree to exchange cash flows for future payments based on
a contract of loan.
b. A forward contract is a commitment to purchase or sell a specified commodity at some future date at a specified
price.
c. A futures contract is a contract to purchase or sell a specified commodity at some future date at a specified price.
d. An option is contract that gives the holder the right to purchase or sell an asset at a specified price during a
definite period at some future time.
Question 35-5 What do you understand by an embedded derivative?
Answer 35-5
PAS 39, paragraph 10, defines an embedded derivative as a component of a hybrid or combined contract known
as the host contract with the effect that some of the cash flows of the combined contract vary in a way similar to a
stand-alone instrument.
An embedded derivative is not a separate contract.
Both the embedded derivative and the host contract are combined in one combined contract.
The contract into which is the embedded is referred to as a host contract.
Question 35-6 Explain the accounting for an embedded derivative.
Answer 35-6
PFRS 9, paragraph 4.3.3, provides that an embedded derivative shall be separated
from the host contract and accounted for like any other stand-alone derivative.
Technically, the process of separating the embedded derivative from the host
contract is known as bifurcation.
PFRS 9 requires the following conditions for bifurcation:
a. A separate instrument with the same terms as the embedded derivative would
meet the definition of a derivative.
b. The combined contract is not measured at fair value through profit or loss or
FVPL.
c. The economic characteristics and risks of the embedded feature are not closely
related to the economic characteristics and risks of the host contract.
d. The host contract is outside the scope of PFRS 9.
Question 35-7 Explain the accounting for an embedded derivative if the host
contract is within the scope of PFRS 9.
Answer 35-7
PFRS 9, paragraph 4.3.3, provides that if the host contract is within the scope of
PFRS 9, the classification requirements of PFRS 9 are applied to the combined
contract in its entirety.
Simply stated, if the host contract is a financial asset, the embedded derivative
is not separated.
Depending on the business model, the host contract in its entirety is measured
at:
a. Amortized cost
b. Fair value through profit or loss
1. A derivative instrument is best described as
a. A contract that conveys to a second entity a right to future collections on accounts
receivable from a first entity.
b. Evidence of an ownership interest in an entity.
c. A contract that has its settlement value tied to an underlying and notional amount.
d. A contract that conveys to a second entity a right to receive cash from a first
entity.
2. All of the following are characteristics of a derivative, except
a. It is acquired for the purpose of generating a profit from short-term fluctuation in
market price.
b. The value changes in response to an underlying.
c. It required no initial investment or an initial small investment.
d. It is settled at a future date.
3. All of the following are characteristics of a derivative experiment, except
a. The instrument has one or more underlying an identified payment provisions.
b. The instrument requires a large investment at the inception of the contract.
c. The instrument requires or permits net settlement.
d. All of these are characteristics.
4. Which is not a characteristics of a derivative?
a. Terms requires or permit net settlement
b. Must be highly effective throughout the life
c. No initial net investment
d. An underlying and notional amount
5. Which of the following instruments is not considered a derivative instrument?
a. Currency futures
b. Share index option
c. Bank certificate of deposit
d. Interest rate swap
6. Which of the following is not a derivative instrument?
a. Futures contract
b. Credit indexed contract
c. Interest rate swap
d. Variable annuity contract
7. Which of the following is not a derivative financial instrument?
a. Option contract
b. Trade accounts receivable
c. Foreign currency swap
d. Outstanding loan commitment written
8. The basic purpose of derivative instrument is to manage some kind of risk such as
all of the following, except
a. Share price movement
b. Interest rate variation
c. Currency fluctuation
d. Uncollectibility of accounts receivable
1. Any financial or physical variable that has either observable changes or
objectively verifiable changes qualifies as
a. Notional amount
b. Hedge
c. Financial instrument
d. Underlying
2. Which of the following is an underlying?
a. An investment rate index
b. A security price
c. An average daily temperature
d. All of these could be an underlying
3. Which of the following would not qualify as an underlying?
a. Insurance index
b. Equity shares
c. Exchange rate
d. Commodity price
4. An example of a notional is
a. Number of barrels of oil
b. Interest rate
c. Currency rate
d. Share price
5. Derivatives derive their from change in a benchmark based on any of the following,
except
a. Share price
b. Mortgage and currency rate
c. Commodity price
d. Discount on accounts receivable
1. Which type of contact is unique in that it protects the owner against unfavorable
movement in the price while allowing the owner to benefit from favorable movement?
a. Interest rate swap
b. Forward contract
c. Futures contract
d. Option
2. Which of the following provides the holder the right to sell at an exercise or strike
price anytime during a specified period a gain accrues to the holder as the market
price of the underlying falls below the strike price?
a. Forward contract
b. Put option
c. Swap option
d. Call option
3. What is the amount initially paid for a call option?
a. Option premium
b. Notional amount
c. Strike price
d. Intrinsic value
4. In exchange for the right inherent in a option contract, the owner of the option will typically
pay a price
a. Only when a call option is exercised.
b. Only when a put option is exercised.
c. When either a call option or a put option is exercised.
d. At the time the option is received regardless of whether the option is exercised or not.
5. Which statement is incorrect concerning an option?
a. A call option is the right to purchase an asset at a specified price at some future time.
b. A put option is the right to sell an asset at a specified price during a definite period at
some future time.
c. An option is a right and not an obligation.
d. An option requires no payment.
6. It is a contract giving the owner the right but not the obligation
to buy an asset at a specified price in the future.
a. Interest rate swap
b. Forward contract
c. Futures contract
d. Call option
7. If the market price is greater than the strike or exercise price,
the call option is
a. At the money
b. In the money
c. On the money
d. Out of the money
8. If the market price is lower than the option price, the call option is
a. At the money
b. In the money
c. On the money
d. Out of the money
9. If the market price is equal to the option price, the call option is
a. Out of the money
b. On the money
c. In the money
d. At the money
10.All of the following are based on a highly probable forecast transaction, except
a. Forward contract
b. Futures contract
c. Option
d. Interest rate swap
1. Which term best describes a component of a hybrid instrument?
a. Financial asset at fair value through other comprehensive income
b. An embedded derivative
c. Held for collective investment
d. Financial asset held for trading
2. The process of bifurcation
a. Protects an entity for loss.
b. Includes entering into an agreement between two counterparties to
exchange cash flows.
c. Is the measurement of an embedded derivative.
d. Separates an embedded derivative from the host contract.
3. An embedded derivative shall be bifurcated from the host contract when all
of the following conditions are satisfied, except
a. The economic characteristics and risks of the host contract and the
embedded derivative are not closely related.
b. A separate instrument with the same terms as the embedded feature
would meet the definition of a derivative.
c. The host contract is measured at fair value through other
comprehensive income.
d. The host contract is measured at fair value through profit or loss.
4. If not separated, the host contract in its entirety is measured at
a. Amortized cost
b. Fair value through profit or loss
d. Amortized cost, fair value through profit or loss or fair value through
other comprehensive income
Answer 35-8:
1. C
2. A 1. D
3. B 2. D
4. B 3. B
5. C 4. A
6. D 5. D
7. B
Answer 35-8: 1. D
Answer 35-9:
2. B
3. A 2. B
4. D 3. D
5. D 4. D
6. D 5. D
7. B
8. D
CHAPTER 36
PROPERTY, PLANT
AND EQUIPMENT
Questions:
Question 36-1 Define property, plant and equipment.
Answer 36-1
Property, plant and equipment are tangible assets
which are held by an entity for use in production or
supply of goods and services, for rental to others, or
for administrative purposes, and are expected to be
used during more than one period.
Question 36-2 What are the major characteristics of property, plant and equipment?
Answer 36-2
a. The property, plant and equipment are tangible assets, meaning with physical substance.
b. The property, plant and equipment are used in business, meaning used in production or supply
of goods and services, for rental purposes and for administrative purposes.
c. The property, plant and equipment are expected to be used over a period of more than one year.
Question 36-3 Explain the treatment of spare parts and servicing equipment.
Answer 36-3
Most spare parts and servicing equipment are usually carried as inventory and recognized as an
expense when consumed.
However, major spare parts and standby equipment qualify as property, plant and equipment when
the entity expects to use them during more than one period.
Spare parts and servicing equipment that can be used only in connection with an item of property,
plant and equipment are accounted for as property, plant and equipment and depreciated over a
time period not exceeding the useful life of the related asset.
Question 36-4 Explain the measurement of property, plant and equipment
after initial recognition.
Answer 36-4
An item of property, plant and equipment that qualifies for recognition as an
asset shall be measured initially at cost.
After recognition, an entity shall choose either the cost model or the
revaluation model as the accounting policy and shall apply that policy to an
entire class of property, plant and equipment.
The cost model means that property, plant and equipment are carried at cost
less any accumulated depreciation and any accumulated impairment loss.
The revaluation model means that property, plant and equipment are
carried at revalued amount, being the fair value at the date of revaluation less
any subsequent accumulated depreciation and subsequent accumulated
impairment loss.
Question 36-5 What are the elements of cost of an item of property, plant and equipment ?
Answer 36-5
The cost of an item of property, plant and equipment comprises.
a. Purchase price, including import duties and nonrefundable purchase taxes, after deducting trade discounts and rebates.
b. Cost directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in
the manner intended by management.
c. Initial estimate of the cost of dismantling and removing the item and restoring the site on which it is located, the obligation
for which an entity incurs.
The present obligation must exist when the item is acquired.
Question 36-6 Give examples of directly attributable costs.
Answer 36-6
Examples of directly attributable costs include:
d. Cost of employee benefits arising directly from the acquisition of property, plant and equipment
e. Cost of site preparation
f. Initial delivery and handling cost
g. Installation and assembly cost
h. Professional fees
i. Cost of testing whether the asset is functioning properly
Question 36-7 Give examples of cost that are expensed rather than recognized as element of cost of property, plant and
equipment.
Answer 36-7
Examples of cost that are expensed rather than recognized as element of cost of property, plant and equipment are:
a. Cost of opening a new facility
b. Cost of introducing a new product or service, including cost of advertising and promotion
c. Cost of conducting business in anew location or with a new class of customer, including cost of staff training
d. Administration and other general overhead cost
e. Cost incurred while an item capable of operating in the manner intended by management has yet to be brought into
use or is operated at less than full capacity
f. Initial operating loss
g. Cost of relocating or reorganizing part or all of an entity’s operations.
Question 36-8 What are the elements of cost of an item of property, plant and equipment?
Answer 36-8
The cost of property acquired by direct cash purchase includes the cash paid plus all directly attributable costs of bringing
the asset to the location and condition for the intended use, such as freight, installation and testing cost.
when various assets are acquired for a lump sum price, the total cost is allocated to the individual assets based on their
relative fair value.
Question 36-9 What is the cost of asset acquired on credit or on account?
Answer 36-9
The cost of property acquired on credit is equal to the invoice price minus the discount
regardless of whether the discount is taken or not.
If the discount is not taken, it is charged to purchased discount lost which is shown as other
expense.
Cash discounts and rebates are generally considered as reduction of cost and not as income.
Question 36-10 What is the cost of asset acquired by installment?
Answer 36-10
The cost of property acquired by installment is equal to the cash price equivalent.
The excess of the installment price over the cash price is recognized as interest expense over
the credit period.
When there is no established cash price, the cost of the asset is equal to the present value of
all installment payments using the market rate of investment.
Question 36-13 What is the cost of new asset acquired under a cash purchase?
Answer 36-13
If an asset is acquired in an exchange with commercial substance the cost of the asset is
equal to the following:
a. Fair value of asset given plus cash payment – on the part of the payor.
b. Fair value of asset given minus the cash received – on the part of the recipient.
If the exchange transaction lacks commercial substance, the cost of the acquired
asset is measured at:
c. Carrying amount of asset given plus cash payment on the part of payor.
d. Carrying amount of asset given minus cash received on the part of the recipient
No gain or loss is recognized when the exchange lacks commercial substance.
Commercial substance is a new notion and is defined as the event or transaction causing
the cash flows of the entity to change significantly by reason of the exchange.
An exchange transaction has commercial substance when the cash flows of the asset
received differ significantly from the cash flow of the asset transferred.
Question 36-14 Explain the accounting for acquisition of property, plant and
equipment by donation.
Answer 36-14
At present, IFRS does not address donation or contribution. However, IFRS explicitly
addresses government grant.
Philippine GAAP provides that contributions received from shareholders shall be
recorded at the fair value with the credit going to donated capital.
Expenses incurred in connection with the donation, like payment of registration fees
and legal fees shall be charged to the donated capital account.
The reason is that such expenses do not increase or enhance the value of the asset.
However, directly attributable costs incurred necessary to bring the donated asset to
the location and condition for the intended use shall be capitalized.
Philippine GAAP further provides that donations of property, plant and equipment
from nonshareholders are generally considered subsidiaries and therefore
recognized as income.
Question 36-15 Explain the cost of self-constructed property,
plant and equipment.
Answer 36-15
The cost of self-constructed property, plant and equipment shall
include direct cost of materials, direct labor and incremental
overhead specially identifiable or traceable to the construction.
PAS 16, paragraph 22, provides that the cost of abnormal
amount of wasted material, labor or overhead incurred in the
production of self-constructed asset is not included in the cost of
the asset.
Any internal profit or saving on construction is eliminated in
arriving at the cost of self-constructed asset.
1. Property, plant and equipment are defined as
a. Tangible assets held for sale in the ordinary course of business.
b. Tangible assets held to earn rentals or for capital appreciation.
c. Tangible assets held for use in the production or supply of goods or services or for
administrative purposes.
d. Tangible assets held for use in the production or supply of goods or services, for rentals
to others, or for administrative purposes and expected to be used during more than one
reporting period.
2. Which of the following is not a characteristic of property, plant and equipment?
a. The property, plant and equipment are tangible assets.
b. The property, plant and equipment are used in business.
c. The property, plant and equipment are expected to be used over a period of more than
one year.
d. The property, plant and equipment are subject to depreciation.
3. Spare parts and servicing equipment that can be used only in
connection with an item of property, plant and equipment are
accounted for as property, plant and equipment and depreciated over
a. Their useful life
b. The useful life of the related asset
c. Their useful life of the related asset, whichever is longer
d. Their useful life of the related asset, whichever is shorter
4. What valuation model should an entity use to measure property,
plant and equipment?
a. The revaluation model or the fair value model
b. The cost model or the revaluation model
c. The cost model or the fair value through profit or loss model
d. The cost model or the fair value model
5. The cost of property, plant and equipment comprises all the following,
except
a. Purchase price
b. Import duties and nonrefundable purchase taxes
c. Any cost directly attributable in bringing the asset to the location and
condition for the intended use
d. Initial estimate of the cost of dismantling the asset for which the entity
has no present obligation.
6. Cost directly attributable to bring the asset to the location and condition for
the intended use include all, except
a. Cost of employee benefit not arising directly from the acquisition of
property, plant and equipment
b. Cost of site preparation
c. Initial delivery and handling cost
d. Installation and assembly cost
7. Which cost should be expensed immediately?
a. Cost of opening new facility
b. Cost of introducing a new product or service, including cost of
advertising and promotional activities
c. Cost of conducting business in a new location
d. All of these are expensed immediately
8. Which cost should be expensed immediately?
a. Administrative overhead
b. Initial operating loss
c. Cost of relocating or reorganizing part or all of an entity's
operation
d. All of these are expensed immediately
1. A nonmonetary exchange is recognized at fair value of the asset
exchange unless
a. Exchange has commercial substance
b. Fair value is not determinable
c. The assets are similar in nature
d. The assets are dissimilar
2. In an exchange with commercial substance
a. Gain or loss is recognized entirely.
b. Gain or loss is not recognized.
c. Only gain should be recognized.
d. Only loss should be recognized.
3. The cost of property, plant and equipment acquired in an exchange is measured at the
a. Fair value of the asset given plus cash payment.
b. Fair value of the asset received plus cash payment.
c. Carrying amount of the asset given plus cash payment.
d. Carrying amount of the asset received plus cash payment.
4. Which exchange has commercial substance?
a. Exchange of assets with no difference in future cash flows.
b. Exchange by entities in the same line of business.
c. Exchange of assets with difference in future cash flows.
d. Exchange of assets that causes the entities to remain in essentially the same
economic position.
5. For a nonmonetary exchange, the configuration of cash flows includes which of the
following?
a. The implicit rate, maturity date of loan and amount of loan
b. The risk, timing and amount of cash flows of the assets
c. The entity-specific value of the asset
d. The estimated present value of the assets exchanged
6. If an entity is able to determine reliably the fair value of the asset received and the
fair value of the asset given in an exchange transaction, the cost is measured at
a. Fair value of the asset given
b. Fair value of the asset received
c. Either the Fair value of the asset received or the fair value of the asset given
d. Either the Fair value of the asset received nor the fair value of the asset given
7. Which of the following is true concerning acquisition of property, plant and
equipment by self-construction?
a. The cost of self-constructed asset is determined using the same principles as
for an acquired asset.
b. Any internal profit is eliminated in arriving at the cost of self-constructed asset.
c. The cost of abnormal amount of wasted material is not included in the cost of
the asset.
d. All of the statements are true.
8. Which term best describes the removal of the carrying amount of
property, plant and equipment from the statement of financial position?
a. Derecognition
b. Impairment
c. Writeoff
d. Depreciation
9. The carrying amount of property, plant and equipment shall be
derecognized
a. On disposal
b. When no future economic benefits are expected from the use of the
asset
c. On acquisition
d. On disposal and when no future economic benefits are expected
from the use of the asset.
Answer 36-16: Answer 36-17:
Multiple Choice (PAS 16) Multiple Choice (IAA)
1. D 1. B
2. D 2. A
3. D 3. A
4. B 4. C
5. D 5. B
6. A 6. A
7. D 7. D
8. D 8. A
9. D
CHAPTER 37
GOVERNMENT GRANT
Questions:
Question 37-1 Define government grant.
Answer 37-1
PAS 20, paragraph 3, defines government grant as assistance by
government in the form of transfer of resources to an entity in return for part
or future compliance with certain conditions relating to the operating activities
of the entity.
Government grant is sometimes called subsidy, subvention or premium.
Technically, to qualify as a government grant, it is a prerequisite that the grant
shall be provided by the government to an entity in return for past or future
compliance with conditions relating to the operating activities of the entity.
Question 37-2 Explain the recognition and measurement of government grant.
Answer 37-2
Government grant, including nonmonetary grant at fair value, shall be recognized when there is reasonable
assurance that:
a. The entity will comply with the conditions attaching to the grant.
b. The grant will be received.
Receipt of a grant does not of itself provide conclusion evidence that the conditions attaching to the grant have
been or will be fulfilled.
Government grant shall not be recognized on a cash basis as this is not consistent with generally accepted
accounting practice.
Question 37-3 What are the two Classifications of government grant?
Answer 37-3
1. Grant related asset
This is government grant whose primary condition is that an entity qualifying for the grant should purchase,
construct or otherwise acquire long-term asset.
2. Grant related income
By residual definition, this is government grant other than grant related to asset.
Question 37-4 What are the rules for the recognition of government grant as
income?
Answer 37-4
a. Grant in recognition of specific expenses shall be recognized as income
over the period of the related expense.
b. Grant related to depreciable asset shall be recognized as income over the
periods and in proportion to the depreciation of the related asset.
c. Grant related to nondepreciable asset requiring fulfillment of certain
conditions shall be recognized as income over the periods which bear the
cost of meeting the conditions.
d. A government grant that becomes receivable as compensation for
expenses or losses already incurred or for the purpose of giving
immediate financial support to the entity with no further related costs shall
be recognized as income of the period in which it becomes receivable.
Question 37-5 Explain the presentation of government grant related to asset
in the financial statements.
Answer 37-5
Government grant related to asset shall be presented in the statement of financial
position in either of two ways:
a. By setting the grant as deferred income.
b. By deducting the grant in arriving at the carrying amount of the asset.
The first approach means that the grant is recognized as deferred income
initially and systematically and rationally recognized as income over the useful life
of the asset.
The second approach means that the grant is “netted” against the initial carrying
amount of the asset.
This netting approach will have the effect of equally recognizing the grant in profit
or loss over the useful life of the asset by way of reduced depreciation charge.
Question 37-6 Explain the presentation of government grant
related to income.
Answer 37-6
Government grant related to income may simply defined as one
not related to an asset.
Such grant shall be recognized as income when the conditions
attached to the recognition have been satisfied.
Government grant related to income is presented as follows:
a. The grant is presented in the income statement, either
separately or under the general heading “other income”.
b. Alternatively, the grant is deducted from the related expense.
Question 37-7 Explain the treatment of repayment of government grant.
Answer 37-7
A government grant that becomes repayable because conditions of
receipt have not been met shall be accounted for as a change in
accounting estimate.
1. Repayment of a grant related to income shall be applied first against
any unamortized deferred income and any excess shall be
recognized immediately as an expense.
2. Repayment of a grant related to an asset shall be recorded by
increasing the carrying amount of asset.
The cumulative additional depreciation that would have been
recognized to date in the absence of the grant shall be recognized
immediately as an expense.
Question 37-8 Define government assistance.
Answer 37-8
Government assistance is action by government designed to provide as economic benefit specific to an
entity or range of entities qualifying under certain criteria.
The essence of government assistance is that no value can reasonably be placed upon it.
Examples of government assistance are:
a. Free technical or marketing advice
b. Provision of guarantee
c. Government procurement policy that responsible for portion of the entity's sales.
Question 37-9 Give example which cannot be considered government assistance.
Answer 37-9
Government assistance does not include the following indirect benefits:
d. Infrastructure in development areas such as improvement to the general transport and communication
network.
e. Imposition of trading constraints on competitors.
f. Improved facilities such as irrigation for the benefit of an entire local
Question 37-10 What are the disclosures related to government grant?
Answer 37-10
a. The accounting policy adopted for the government grant, including
the method of presentation adopted in the financial statements.
b. The nature and extent of government grant recognized in the
financial statements and an indication of other forms of government
assistance from which the entity has directly benefited
c. Unfulfilled conditions and other contingencies attaching to the
government assistance that has been recognized.
It is not required to disclose the name of the government agency that
gave the grant along with the date of sanction of the grant by such
government agency and the date when cash was received in case of
monetary grant.
1. This is defined as assistance by government in the form of transfer of resources

to an entity in return for the past or future compliance with certain conditions
relating to the operating activities of the entity.
a. Government grant
b. Government assistant
c. Government donation
d. Government aid
2. Government grant shall be recognized when there is reasonable assurance that
a. The entity will comply with the conditions of the grant.
b. The entity will be received.
c. The entity will comply with the conditions of the grant and will be received.
d. The entity must have been received.
3. It is government grant whose primary condition is that an entity qualifying for it should
purchase, construct or otherwise acquire long-term asset
a. Grant related to asset
b. Grant related to income
c. Government gift
d. Government appropriation
4. Government grant in recognition of specific costs is recognized as income
a. Over the same period as the relevant expense.
b. Immediately.
c. Over a maximum of 5 years using straight line.
d. Over a maximum of 5 years using sum of digits.
5. Government grant related to depreciable asset is usually recognized as income
a. Immediately.
b. Over a useful life of the asset using straight line.
c. Over a useful life of the asset using sum of digits.
d. Over a useful life of the asset and in proportion to the depreciation of the asset.
6. Government grant related to nondepreciable asset requires fulfillment of certain conditions
a. Should not be recognized as income.
b. Should be recognized as income immediately.
c. Should be recognized as income over 40 years.
d. Should be recognized as income over the periods which bear the cost of meeting the
conditions.
7. A government grant that becomes receivable as compensation for expenses or losses
already incurred or for the purpose of giving immediate financial support to the entity with no
future related costs should be recognized as income
a. When received.
b. Of the period in which it becomes receivable.
c. Over the maximum of 5 years using straight line.
d. Over the maximum of 10 years using straight line.
8. A government grant that becomes repayable shall be accounted for as
a. Change in accounting estimate.
b. Change in accounting policy.
c. Both change in accounting estimate and change in accounting policy.
d. Neither change in accounting estimate and change in accounting policy.
9. Repayment of grant related income shall be
a. Recognized as component of other comprehensive income
b. Charged to retained earnings
c. Expensed immediately
d. Applied first against the deferred income balance and any excess shall be
recognized immediately as an expense.
10. Repayment od grant related to an asset shll be recorded by
a. Increasing the carrying amount of the asset if the deduction approach is
used.
b. Recognizing as expense the cumulative additional depreciation that would
have been recorded to date in the absence of the grant if the deduction
approach is used.
c. Reducing the deferred income balance to zero if the deferred income is
used.
d. All of these are correct about repayment of grant related to asset.
1. This is an action by a government designed to provide an economic benefit specific

to an entity and for which the government cannot reasonably place a value
a. Government grant
c. Government takeover
d. Subvention
2. Government assistance includes all of the following, except
a. Free technical advise
b. Provision of guarantee
c. Government procurement policy that is responsible for a portion of the entity’s
sales.
d. Improved irrigation water system for the benefit of an entire local community.
3. Which is included in government assistance?
a. The construction of infrastructure in developing areas
b. The imposition of trading constraints on competitors
c. Improvement to the general transport and communication network
d. Non of these can be included
4. A forgivable loan from a government or the benefit of a government loan at NIL or below
market interest rate is accounted for as
a. Government grant
c. Both government grant and government assistant
d. Neither government grant nor government assistant
5. The amount of benefit in a zero-governmental loan is measured as the difference
between
a. Face amount and present value of loan
b. Face amount and fair value of loan
c. Fair value and present value of loan
d. Fair value and face amount of loan
1. In the case of a nonmonetary grant, which of the following accounting treatment is prescribed?
a. Record the asset at replacement cost and the grant at a nominal value
b. Record the grant at a value estimated by management
c. Record both grant and the asset at fair value of the nonmonetary asset
d. Record only the asset at fair value and not recognize the fair value f the grant
2. In the case of grant related to an asset, which of the following accounting treatment is
prescribed?
a. Record the grant at a nominal value in the first year and write it off in the subsequent year.
b. Either set up the grant as deferred income or deduct it in arriving at the carrying amount of
the asset.
c. Record the grant at a fair value in the first year and take it to income in the subsequent
year.
d. Take it to the income statement and disclose it as an extraordinary gain.
3. In the case of grant related to income, which of the following accounting
treatment is prescribed?
a. Credit the grant to equity.
b. Present the grant in the income statement as other income or as a
separate line item, or deduct it from the related expense.
c. Credit the grant to retained earnings.
d. Credit the grant to sales.
4. Which disclosure is not required about government grant?
a. The accounting policy adopted for government grant
b. Unfulfilled condition and other contingency attaching to government
assistance
c. The name of the government agency that gave the grant
d. The nature and extent of the government grant recognized in the financial
statements
1. The deferred grant income is classified as
a. Separate component of shareholders’ equity
b. Noncurrent liability
c. Other income
d. Partly current and partly noncurrent liability
2. If the cost of the asset is recorded net of the grant
a. Equity is overstated.
b. Liability is overstated.
c. Asset is understated.
d. Net income is understated.
3. Which statement is incorrect when a government provides an interest-free loan to an
entity?
a. No interest expense is recognized.
b. The loan payable is initially reported at the present value.
c. The interest element is amortized over the term of the loan using the effective
interest method.
d. The deferred grant income is amortized over the term of the loan using the straight
line method.
4. Which statement is true regarding the accounting for government grant related to an
asset?
a. Depreciated is higher and net income lower if the grant is recorded as deferred
income.
b. Depreciated is higher and net income lower if the grant is accounted for as an
adjustment to the asset.
c. Depreciation is higher if the grant is recorded as deferred income but net income is
the same under the deferred income approach and deduction from asset approach.
d. Depreciation is higher if the grant is recorded as an adjustment to the asset.
Answer 37-13:
Answer 37-11: Multiple Choice (IFRS)
Multiple Choice (PAS 20) Answer 37-12:
Multiple Choice (PAS 20) 1. B
1. A 2. D
2. C 1. B 3. D
3. A 2. D 4. A
4. A 3. D 5. A
5. D 4. A
6. D 5. A Answer 37-14:
7. B Multiple Choice (IAA)
8. A
9. D 6. D
10. D 7. C
8. D
9. C

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CHAPTER 29

Biological asset Agricultural produce Product after harvest

The measurement of biological assets and agricultural produce is

Question 29-5 Explain the measurements of biological asset.

Question 29-9 Define a bearer plant.

Question 30-5 Explain the treatment of redeemable preference share.

Question 30-8 Explain the degeneration of a financial asset?

1. Depending on the business model for managing

1. Fair value of an asset should be based upon

Question 33-3 Explain the classification of bond investments.

Question 33-5 Discuss a bond premium and bond discount.

Question 33-8 What is market price of bonds?

Question 34-3 Give examples of investment property.

Question 34-10 Explain the fair value of investment property.

Question 34-12 Explain the derecognition of investment property.

1. Which statement best describes investment property?

1. Subsequent to initial recognition, the investment property shall be measured using

Question 35-3 Explain the measurement of derivatives.

Question 35-5 What do you understand by an embedded derivative?

Question 36-6 Give examples of directly attributable costs.

Question 36-10 What is the cost of asset acquired by installment?

Question 37-3 What are the two Classifications of government grant?

Question 37-9 Give example which cannot be considered government assistance.

1. This is defined as assistance by government in the form of transfer of resources

1. This is an action by a government designed to provide an economic benefit specific

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