Specimen paper

Baltyk Detal S.A., a Polish retailer, holds a right under a supplier rebate agreement that has the potential to produce economic benefits, although an inflow is less likely than not at the reporting date. On what basis does the current Conceptual Framework decide whether an asset is recognised?

• A

  Whether an inflow of economic benefits is more likely than not at the reporting date.

  This is the 1989 Framework's probability threshold, and you reach it by carrying forward the criterion that older textbooks teach as the definition of recognition. It would be right only if the Board had retained that threshold at concepts level, or if you were applying a standard that sets its own, as IAS 37 does for contingent assets.

• B

  Whether the asset can be reliably measured at a single monetary amount at that date.

  This is the 1989 Framework's second criterion, reliable measurement, and the misconception behind it is that measurement uncertainty is fatal to recognition. Under the current Framework it is a factor to be weighed: it defeats recognition only where the estimate is so uncertain that the information is no longer a faithful representation, and disclosing the uncertainty may make recognition useful even then.

• C

  Whether an enforceable legal right arose from a past transaction with the supplier.

  This confuses the definition of an asset, a present economic resource controlled as a result of past events, with the separate question of whether that asset is recognised. Enforceability helps establish that the right exists; it does not establish that putting it on the balance sheet gives useful information. It would be the answer if you had been asked whether an asset exists rather than whether it is recognised.

• D

  Whether recognition gives relevant information that is faithfully represented.

  Correct: recognition turns on whether it yields relevant information that is faithfully represented, subject to cost.

Al Rayyan Contracting WLL, a Gulf construction group, has publicly announced a three-year programme of voluntary site safety upgrades. No law or contract requires the work and the group could stop it at any time, though stopping would damage its standing with major clients. Does the programme meet the Conceptual Framework's definition of a liability at the reporting date?

• A

  No: the group retains the practical ability to avoid the transfer.

  Correct: the group can still stop the programme, so no present obligation exists and no liability is recognised.

• B

  No: the programme is a contingent liability, disclosed rather than recognised.

  This reaches for the IAS 37 vocabulary of contingent liabilities before the analysis has produced anything to be contingent about. A contingent liability is either a possible obligation arising from a past event or a present obligation that fails the recognition tests, and here no past event has bound the group at all. It would be right if an obligating event had occurred and only its existence or amount were uncertain.

• C

  Yes: the group has no practical ability to avoid the reputational consequences.

  This is the commonest misreading of the test, sliding no practical ability to avoid the transfer into no practical ability to avoid the consequences of not transferring. Reputational damage is the price of a choice the group still holds, not evidence that the choice has gone. It would be right if the pressure genuinely removed the alternative, for example if withdrawal meant the group could no longer trade.

• D

  Yes: the public announcement creates a present obligation to the clients.

  This treats the announcement itself as the obligating event, importing the idea of a constructive obligation without its conditions. An announcement can create one, but only where it is specific enough to raise a valid expectation in the other party and the entity has no realistic alternative to settling. Here the group has told the market what it intends and retains the ability to change its mind.

Vistula Foods S.A. pays a supermarket chain PLN 2m a year for prominent shelf placement of Vistula's own products. Vistula receives nothing distinct that it could otherwise have bought from a third party. How should the payment be treated under IFRS 15?

• A

  Reduce revenue by PLN 2m, with profit for the year unchanged.

  Correct: nothing distinct is received, so the payment reduces the transaction price and profit for the year is unaffected.

• B

  Recognise a marketing expense of PLN 2m in the period.

  This is the treatment preparers reach for by default, because an expense protects both the revenue line and the reported gross margin. It analyses the payment as though it had gone to an advertising agency rather than to the customer who buys the goods. It would be right if the supermarket had supplied something distinct, such as data or advertising Vistula could have bought elsewhere, at no more than its fair value.

• C

  Capitalise PLN 2m as a cost of obtaining the contract.

  This confuses the incremental costs of obtaining a contract, costs that would not have been incurred had the contract not been won and which are capitalised if recoverable, with a payment made to the customer itself. A sales commission can be an asset; money handed to the buyer cannot, because it reduces what you are entitled to receive. It would be right for a recoverable commission paid for winning the contract.

• D

  Reduce revenue by the excess over the placement's fair value.

  This applies the second limb of the rule, which nets only the excess over the fair value of what is received, and it is the most sophisticated wrong answer here. That limb operates only where a distinct good or service is in fact received and its fair value can be estimated. Nothing distinct is received, so there is no fair value to deduct and the whole amount reduces revenue.

Danube Infrastruktur AG has a single performance obligation satisfied over time, measured by costs incurred against total expected costs of EUR 10.0m, on a contract price of EUR 12.5m. In November it buys a switchgear unit from a third party for EUR 3.0m, having taken no part in its design or manufacture. The unit is not distinct from the installation Danube provides, and the customer obtains control of it on delivery to site, months before installation. What revenue arises on the switchgear?

• A

  EUR 3.0m, with no margin attaching to the switchgear unit.

  Correct: the uninstalled materials adjustment recognises revenue equal to cost, so no margin arises on the bought-in unit.

• B

  EUR 3.75m, being 30% of the contract price on the cost method.

  This is the cost method run without the adjustment: EUR 3.0m of EUR 10.0m is 30 per cent of expected costs, applied to the EUR 12.5m price, awarding the full contract margin for buying something in. It is precisely the outcome the adjustment exists to prevent. It would be right if Danube had designed or manufactured the unit, or if its cost were not significant, so that the cost genuinely depicted its own progress.

• C

  EUR nil, because the unit is not distinct from the installation.

  The observation is correct and the conclusion does not follow from it. Distinctness settles how many performance obligations there are, not whether progress towards satisfying one of them has been made. The customer already controls the unit, so recognising nothing understates performance. It would be right if control did not pass until installation, in which case the cost would simply sit in inventory.

• D

  EUR 3.0m, deferred until the unit is installed at the site.

  This defers the whole amount to installation, treating a cost that does depict a transfer as though it depicted none at all, so the error is timing rather than measurement. It is the mirror image of the unadjusted cost method. It would be right if the customer did not obtain control on delivery to site, for example where the goods remain at the entity's risk and no bill and hold conditions are met.

Rift Valley Telecom Ltd holds 90 mast site leases, each a rolling contract for 12 months. It has renewed every site for seven years, each mast carries transmission equipment costing more to relocate than a year's rent, and no alternative sites are available. Finance proposes the short-term lease exemption for all 90. Is it available?

• A

  Yes: the non-cancellable period of each contract is 12 months at commencement.

  This reads the non-cancellable period as though it were the lease term, the error the short-term exemption most often conceals, and it is attractive because it is what the contract says on its face. The definition adds renewals the lessee is reasonably certain to exercise. It would be right if renewal were genuinely uncertain: alternative sites available, equipment cheap to relocate and no history of renewing.

• B

  No: the exemption is closed to a lessee holding more than one site of a class.

  This invents a restriction that IFRS 16 does not contain. Nothing bars a lessee from applying the exemption across many assets, and the election is made by class of underlying asset precisely because entities hold such assets in populations. No change to these facts would make the statement true, because the rule it states does not exist anywhere in the standard.

• C

  No: renewals that are reasonably certain push the term beyond 12 months.

  Correct: renewals that are reasonably certain extend the lease term past twelve months, so the exemption is not available.

• D

  Yes: the exemption is elected by class of asset and these 90 form one class.

  Every word is a true statement about IFRS 16, which makes it the most tempting wrong answer, and it is still wrong because it addresses how the choice is made rather than whether the choice exists. The class election distributes an exemption for which each lease must first qualify on its own term. It would be the right answer if these leases had a term of twelve months or less.

Nordhavn Terminals A/S sells a quayside store to a pension fund on 1 January 2027 for DKK 45m, its fair value, when its carrying amount is DKK 30m, and leases it back for eight years. The transfer meets the IFRS 15 criteria for a sale. The present value of the leaseback payments is DKK 18m. What gain does Nordhavn recognise?

• A

  DKK 15.0m: the whole excess of the sale price over carrying amount

  This recognises the entire gain, which was correct practice for an operating leaseback before IFRS 16, when the leaseback left no asset on the seller's balance sheet to measure. It overstates profit by the gain attributable to rights the seller still holds. It would be right only where no rights are retained in substance, for instance a leaseback so short that the present value of its payments is negligible.

• B

  DKK 6.0m: the gain on the 40% of the rights the seller has retained

  This uses the correct method with the two proportions transposed, taking the gain on the 40 per cent retained instead of the 60 per cent transferred, so it marks a candidate who understood the principle and reversed the fraction. It would be right if the leaseback payments had a present value of DKK 27m, leaving 60 per cent of the rights retained and 40 per cent transferred.

• C

  DKK 9.0m: the gain on the 60% of the rights transferred to the buyer

  Correct: gain is recognised only on the 60 per cent of the rights transferred to the buyer, giving DKK 9m.

• D

  DKK 15.0m: deferred in full and released over the eight-year leaseback

  This is the IAS 17 treatment of a finance leaseback, under which the whole gain was deferred and released across the term. IFRS 16 creates no deferred gain: the amount relating to retained rights is not a gain awaiting release but a measurement of the right-of-use asset, carried at the old carrying amount rather than at fair value. It would be right under the superseded standard.

Al Rufaa Contracting PJSC, a Gulf construction group, issues shares that must be redeemed for cash if a change of control occurs. The directors present the shares in equity, noting that the founding shareholders have no intention of selling and that a change of control is very unlikely. How should the shares be classified under IAS 32?

• A

  As a liability, because the issuer cannot unconditionally avoid paying cash

  Correct: the change of control trigger lies outside the issuer's control, so the obligation to deliver cash cannot be avoided.

• B

  As equity, because the probability of the trigger operating is judged remote

  This substitutes a probability test for the avoidability test, and it is the reasoning the directors have adopted. IAS 32 does have an exception for a contingency that is not genuine, but it is confined to terms that are extremely rare, highly abnormal and very unlikely to occur. A change of control in an operating group is a normal commercial event, so only a trigger of that artificial kind would make this right.

• C

  As equity, because no dividend is payable unless the directors declare one

  This identifies a feature that genuinely matters in many classifications, since discretion over distributions is what keeps a great deal of preference capital in equity, and that is what makes it plausible. It answers only half the instrument, because discretion over the dividend cannot cure an obligation to repay the principal. It would be right if the shares carried no obligation to deliver cash at all.

• D

  As a liability only from the date on which a change of control is probable

  This postpones a classification that the contract settled on the day it was written, letting probability back in through the timing rather than the test. An instrument is not reclassified between liability and equity because the likelihood of a contingency has changed; reclassification follows a change in the terms themselves. It would be right if the contract were modified to introduce the redemption feature at that later date.

Nordkapp Shipping ASA holds a bond in a hold to collect and sell portfolio. At 31 December the amortised cost carrying amount is NOK 4,120,000, fair value is NOK 3,960,000, and the twelve-month expected credit loss is NOK 45,000. There was no loss allowance and no fair value difference at the start of the year. Which presentation is correct?

• A

  Balance sheet NOK 3,960,000; NOK 45,000 charged to profit; NOK 115,000 in the reserve

  Correct: fair value on the balance sheet, the amortised cost impairment charge in profit, and the residual NOK 115,000 in the reserve.

• B

  Balance sheet NOK 3,915,000; NOK 45,000 charged to profit; NOK 160,000 in the reserve

  This deducts the loss allowance from the carrying amount as well as marking the asset to fair value, counting the credit loss twice: once inside the price the market has already set, and once again as a separate deduction. It is the amortised cost habit of presenting an asset net of its allowance, carried into a category where the allowance never touches the carrying amount. It would be right if the bond were measured at amortised cost.

• C

  Balance sheet NOK 3,960,000; NOK 205,000 charged to profit; nothing in the reserve

  This treats the whole fall in fair value as impairment, the incurred loss instinct applied to a market movement, and it empties the reserve of the very difference the category exists to carry. Fair value has moved for reasons that include interest rates and liquidity, not credit alone. It would be right only if the measured expected credit loss were itself NOK 205,000, in which case the reserve would indeed be nil.

• D

  Balance sheet NOK 4,120,000; NOK 45,000 charged to profit; NOK 160,000 in the reserve

  This gets profit or loss right but presents the wrong figure on the face, leaving the asset at amortised cost while still reporting a fair value reserve, which is internally inconsistent: the reserve exists only because the balance sheet has moved to fair value. Without the reserve it would be right for a bond held in a hold to collect portfolio, where no fair value difference is recognised at all.

Nairobi Signal Ltd, a Kenyan telecoms operator, holds 43 per cent of the voting shares of Rift Tower Services Ltd. The remaining shares are held by about 900 investors, none with more than 1 per cent, and attendance at the last four general meetings has never exceeded 12 per cent of those shares. Nairobi Signal has carried every resolution it has put forward. How should the holding be accounted for?

• A

  Consolidate Rift Tower as a subsidiary, because Nairobi Signal directs its relevant activities.

  Correct: on these facts Nairobi Signal has de facto control of Rift Tower and consolidates it.

• B

  Equity account Rift Tower as an associate, because the holding is below the 50 per cent mark.

  This applies a fifty per cent bright line, the rule IFRS 10 deliberately replaced with a control model so that de facto control would be captured rather than avoided. A majority of votes is sufficient evidence of power in most cases but has never been necessary. It would be right if the remaining shares sat with a small number of holders able to combine and outvote Nairobi Signal, or if resolutions had in fact been defeated.

• C

  Equity account Rift Tower as an associate, because IAS 28 presumes influence above 20 per cent.

  This applies the IAS 28 presumption of significant influence to a holder who in fact has control, treating a floor as though it were a ceiling. IAS 28 applies only where the investee is not a subsidiary, so the presumption cannot be reached until control has been ruled out. It would be right if the facts showed influence without the ability to direct, such as a concentrated register or a record of losing votes.

• D

  Measure the holding at fair value, because voting patterns cannot give a minority holder power.

  This denies as a matter of principle that a dispersed register can give a minority holder power, when voting patterns at previous shareholder meetings are named in IFRS 10 as evidence to be weighed. It also passes over significant influence on its way to fair value. It would be right for a small holding conferring neither control nor significant influence, such as a few per cent with no board access.

Selangor Palm Refining Bhd is 80 per cent owned by a listed parent. During 2025 Selangor sold processed oil to the parent for MYR 30m at a mark-up of 25 per cent on cost. Goods with a transfer price of MYR 9m were still held in the parent's inventory at 31 December 2025. What is the effect on the non-controlling interest?

• A

  Reduced by MYR 0.45m, being its share of the MYR 2.25m eliminated from inventory.

  The method is right and the measurement is not: MYR 2.25m is 25 per cent of the MYR 9m transfer price, which reads a mark-up on cost as though it were a margin on selling price. A 25 per cent mark-up is a 20 per cent margin, and that difference is exactly the gap between this answer and the key. It would be right if the question had described a margin of 25 per cent on the sales value.

• B

  Reduced by MYR 1.80m, being the whole unrealised profit removed from inventory.

  This charges the entire elimination to the minority, as though the unrealised profit belonged to it alone rather than to the subsidiary whose results it shares. The non-controlling interest takes its 20 per cent and no more, with the balance falling on group retained earnings. It would be right only if the non-controlling interest held the whole of the subsidiary, which is a contradiction in terms.

• C

  Reduced by MYR 0.36m, being its share of the MYR 1.8m eliminated from inventory.

  Correct: MYR 1.8m of unrealised profit is eliminated and the non-controlling interest bears its 20 per cent share, MYR 0.36m.

• D

  Not reduced at all, because the elimination falls on group retained earnings.

  This is the correct answer to a different question. Where the parent is the seller the sale is downstream, the unrealised profit sits in the parent's own result and the whole elimination falls on group retained earnings, leaving the minority untouched. Choosing it means reading the direction of the sale backwards. It would be right if the parent had sold the oil to the subsidiary.

Al Nakheel Contracting LLC breached the leverage covenant on its AED 200m term loan at 31 December. On 18 December the lender had already agreed in writing to a fifteen-month period of grace during which it will not demand repayment. Scheduled amortisation of AED 8m falls due within twelve months of the reporting date. How is the loan classified at 31 December?

• A

  AED 8m current and AED 192m non-current, the grace period being sufficient.

  Correct: the pre-year-end grace period preserves the right to defer, leaving only the AED 8m instalment current.

• B

  AED 200m current, the breach having removed the right to defer settlement.

  This applies the breach rule without noticing when the waiver was agreed, and it is the commonest slip on this topic because the breach is the loudest fact in the question. It would be right if the grace period had been agreed after the reporting date, a non-adjusting event that cannot restore a right the entity did not hold at the year end, or if the period granted ran for less than twelve months from that date.

• C

  AED 200m non-current, the lender having agreed in writing not to demand it.

  This handles the waiver correctly and then forgets the AED 8m of scheduled amortisation, treating a loan that is not repayable on demand as though it were not repayable at all. Contractual instalments falling due within twelve months are current whatever the covenant position. It would be right if the facility were repayable in a single bullet at the end of its term.

• D

  AED 8m current and AED 192m non-current, if compliance at the next test is likely.

  The split is right and the reasoning is not, which is what makes this the most instructive wrong answer. It classifies by management's expectation of passing a future test rather than by the rights held at the reporting date, which the amendments to IAS 1 effective from 1 January 2024 make explicitly irrelevant. Expectations belong in the disclosure of that risk; no forecast can drive the classification.

Cordillera Ingeniería SpA, a Chilean engineering group, presents "adjusted operating profit before restructuring and acquisition costs" in bold at the head of its statement of profit or loss, above and in larger type than the IFRS subtotals, for the fourth consecutive year and with no reconciliation to a statutory measure. Which criticism is correct under IAS 1?

• A

  A subtotal must not be shown more prominently than the ones IAS 1 requires.

  Correct: the adjusted subtotal is displayed more prominently than the subtotals IAS 1 requires, which the standard forbids.

• B

  Additional subtotals are not permitted on the face of the primary statements.

  This turns a set of conditions into a prohibition, which is the instinct of a reader who has seen adjusted measures abused. IAS 1 expressly allows additional line items, headings and subtotals where relevant to understanding financial performance, and the requirements govern how they are presented rather than whether they may appear at all. It would be right only if the standard banned them outright.

• C

  Restructuring costs may be excluded from a subtotal only when they are immaterial.

  This invents a materiality condition and inverts the role materiality plays. Materiality decides whether an item is presented separately or merely disclosed; it has no bearing on whether an amount may sit outside a subtotal, and an immaterial restructuring charge would hardly be worth excluding. No version of these facts makes immateriality the operative test.

• D

  Adjusted measures may appear only in the notes and only where they are audited.

  This anticipates the management performance measure regime IFRS 18 brings in for periods beginning on or after 1 January 2027, under which specified measures are disclosed in a single note with reconciliations. It is not the requirement in force here, and adjusted measures may still appear on the face today provided the four conditions are met. Even for a later period the audit condition it states is not the test.