IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Wiley lFRS: Practical Implementation Guide and Workbook

MULTIPLE-CHOICE QUESTIONS 1. X has control over the compo sition of Y's board of directors. X owns 49% of Y and is the largest shareholder. X has an agreement with Z. which owns 10% of Y. whereby Z will always vote in the same way as X. Can X exercise control over Y? (a) X cannot exercise control because it owns only 49% of the voting rights. (b) X cannot exercise control because it can control only the makeup of the board and not necessarily the way the directors vote. (c) X can exercise control solely because it has an agreement with Z for the voting rights to be used in whatever manner X wishes. (d) X can exercise control because it controls Answer: (d) 2. X owns 50% of Y' s voting shares. The board of directors consists of six members ; X appoints three of them an.d Y appoints the other three. The casting vote at meetmgs always lies with the directors appointed by X. Does X have control over Y? (a) No. control is equally split between X and Z. (b) Yes. X holds 50% of the voting power and has the casting vote at board meetings in the event that there is not a majority deci sion. (c) No. X owns only 50% of the entity' s shares and therefore does not have control. (d) No. control can be exercised only through voting power. not through a casti ng vote. Answer: (b) 3. Z has sold all of its shares to the public. The company was formerly a state-owned entity . The na– tional regulator has retained the power to appoint the board of directors. An overseas entity acquires 55% of the voting shares. but the regulator still retains its power to appoint the board of directors. Who has control of the entity? (a) The national regulator. (b) The overseas entit y. (c) Neither the national regulator nor the over– seas entity. (d) The board of directors. Answer: (c) 4.. A has acquired an investment in a subsidiary. B. with the view to dispose of this investment within six months. The investment in the subsidiary has been classified as held for sale and is to be accounted for in accordance with lFRS 5. The subsidiary has never been consolidated. How should the investment in the subsidiary be treated in the financial statements? (a) Purchase accounting should be used. (b) Equity accounting should be used. (c) The subsidiary should not be consolidated but IFRS 5 should be used. (d) The subsidiary should remain off balance sheet. Answer: (c) more than 50% of the voting power. and it can govern the financial and operating poli– cies of Y through its control of the board of directors.

5. A manufacturin g group has just acquired a con– trollin g interest in a football club that is listed on a stock exchange. The management of the manufactur– ing gro up wishes to exclude the football club from the consolidated financial statements on the grounds that its activities are dissimilar. How should the football club be accounted for? (a) The entity should be consolidated as there is no exemption from consolidation on the grounds of dissimilar activities. (b) The entity should not be consolidated using the purchase method but should be consoli– dated using equity accounting. (c) The entity should not be consolidated and should appear as an investment in the group accounts. (d) The entity should not be consolidated; de– tails should be disclosed in the financial stateme nts. Answer: (a) 6.. In the separate financial statements of a parent entity, inve stments in subsidiaries that are not classi– fied as held for sale should be accounted for (a) At cost. (b) In acco rdance with lAS 39. (c) At cost or in acco rdance with lAS 39. (d) Using the equity method. An swer: (c) 7. Which of the following is not a valid condition that will exempt an entity from preparing consoli– dated financial statements? (a) The parent entity is a wholly owned subsidi– ary of another entity. (b) The parent entity' s debt or equity capital is not traded on the stock exchange. (c) The ultimate parent entit y produce s consoli– dated financial statements available for pub– lic use that comply with IFRS. (d) The parent entity is in the process of filing its financial stateme nts with a securities commission . Answer: (d) 8. Entity X controls an overseas entity Y. Because of exchange controls. it is difficult to transfer funds out of the country to the parent entity. X owns 100% of the voting power of Y. How should Y be accoun ted for? (a) It should be excl uded from consolidation and the equity method should be used. (b) It should be excluded from consolidation and stated at cost. (c) It should be excluded from consolidation and accoun ted for in accordance with lAS 39. (d) It is not permitt ed to be excl uded from con– solidation becau se control is not lost. Answer: (d)