IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

Chapter 211 1l/vestmel/ts in Associates (lAS 28)

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MULTIPLE·CHOICE QUESTIONS l. An entity has bought a 25% share in another entity with a view to selling that investment within six months. The investment has been classified as held for sale in accordance with [FRS 5. How should the investment be treated in the final year accounts? (a) It should be equity accounted. (b) The assets and liabilities should be presented separately from other assets in the balance sheet under IFRS 5. (c) The investment should be dea lt with under lAS 29. (d) Purchase accounting should be used for this investment. Answer: (b) 2. The Standard does not require the equity method to be applied when the associate has been acquired and held with a view to its disposal within a certain time period. What is the period within which the as– sociate must be disposed of? (a) Six months. (b) Twelve months. (c) Two years. (d) In the near future . Answe r : (Il) 3. 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 against profit or loss. (d) Goodwill is not recognized separately within the carryi ng amount of the investment. Answer: (d) 4. An investor must apply the requirements of lAS 39 in determining whether it is necessary to recognize any impairment loss in the investment in an associate. How is the impairment test carried out? (a) The goodwill is separated from the rest of the investment and is impairment tested in– dividually. (b) The entire carrying amount of the invest– ment is tested for impairment under lAS 36 by comparing its recoverable amount with its carrying amount. (c) The carrying value of the investment should be compared with its market value. (d) The recoverable amounts of all investments Answe r: (Il) 5. What should happen when the financial state– ments of an associate are not prepared to the same date as the investor' s accounts? (a) The associate should prepare financial state– ments for the use of the investor at the same date as those of the investor. (b) The financial statements of the associate prepared up to a diffe rent accounting date will be used as normal. in associate s should be assessed together to determine whether there has been an im– pairment on all investments.

(c) Any major transactions between the date of the financial statements of the investor and that of the associa te should be accounted for. (d) As long as the gap is not greater than three months, there is no problem . Answer : (a) 6. If the inves tor ceases to have significant influ– ence over an associa te. how should the investment be treated? (a) It should still be treated using equity ac– counting. (b) It should be treated in accordance with lAS 39. (c) The investment should be frozen at the date at which the investor ceases to have signifi– cant influence. (d) The investment should be treated at cos t. Answer : (b) 7. If there is any excess of the investor's share of the net fair value of the associate' s identifiable assets and contingent liabiliti es over the cost of the invest– ment, that is, negative goodwill, how should that ex– cess be treated ? (a) It should be included in the carrying amount of the investment. (b) It should be written off against retained earnings. (c) It should be included as income in the deter– mination of the investor' s share of the asso– ciate's profit or loss for the period . (d) It should be disclosed separately as part of the investor ' s equity. Answe r: (c) 8. What accounting method should be used for an investment in an assoc iate where it is operating under severe long-term restrictions-for example where the government of a company has temporary control over the associate? (a) [AS 39 should be applied. (b) The equity method should be applied if sig– nificant influence can be exe rted. (c) The assoc iate should be shown at cost. (d) Proportionate consolidation should be used. Answer: (b) 9. An investor sells inventory for cash to a 25% associate. The inventory cost the investor $6 million and is sold to the associate for $ 10 million. None of the inventory has been sold at year-end . How much of the profit on the transaction would be reporte d in the group accounts?

(a) $4 million. (b) $1 million . (c) $3 million. (d) Zero.

Answer: (c)