International Accounting Standards: Quiz!

A finance lease is a type of lease that is typically long term and transfers all the risks and rewards of ownership to the lessee. In a finance lease, the lessee is responsible for maintaining and insuring the leased asset, as well as bearing any costs associated with its use, such as repairs and maintenance. At the end of the lease term, the lessee usually has the option to purchase the asset at a predetermined price. This type of lease is commonly used for assets that have a long economic life and are expected to retain their value over time.

When the carrying amount of an asset is below its recoverable amount, it indicates that the asset is impaired, meaning its value has significantly decreased. The difference between the carrying amount and the recoverable amount is referred to as an impairment loss. This loss is recognized in the financial statements as an expense, reflecting the decrease in the asset's value.

This definition is describing the "recoverable amount" of an asset or cash-generating unit. The recoverable amount is the higher value between the fair value less costs to sell and the value in use of the asset or unit. It represents the amount that can be recovered from the asset or unit, either through its sale or through its continued use.

IAS8, Accounting Policies; Changes in Accounting Estimates; and Errors

Remember intangible non-current assets include capitalised development costs

Some non-current assets are not depreciated.

Value in use refers to the present value of future net cash inflows that an entity is expected to derive from a cash-generating unit (CGU) or a group of CGUs. It represents the higher of the fair value less costs of disposal and the value in use of an asset. Therefore, the correct answer is "Value in use" as it aligns with the definition provided in the question.

IAS 38, Intangible Assets, states that research costs should be expensed as incurred. This means that all research costs should be treated as revenue costs and recorded as expenses on the Income Statement. On the other hand, capital costs are treated as non-current assets and are capitalized on the balance sheet. Therefore, the correct answer is that revenue costs are treated as expenses on the Income Statement, while capital costs are treated as non-current assets.

An item of property, plant & equipment can be recognized as an asset when it can be reliably measured, meaning its value can be accurately determined. Additionally, it must be probable that economic benefits will flow to the entity from the asset, indicating that the asset will generate future value or income for the organization. These two criteria ensure that the item meets the requirements to be classified as an asset on the organization's financial statements.

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When determining the recoverable amount, it is necessary to consider a cash generating unit (CGU) rather than an individual non-current asset because individual assets often do not generate cash inflows on their own. The cash inflows are usually generated by a group of assets working together as a unit. By considering the CGU, we can assess the future cash inflows and determine the recoverable amount more accurately. Additionally, it is not economically viable to work out the future cash inflows from an individual asset, as it may not provide a complete picture of the overall cash-generating potential of the group of assets. Materiality is also a factor to consider, as individual assets may not have a significant impact on the overall financial position of the entity.

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In 1961 Rolls Royce changed accounting policy and capitalised its development costs so it could show a profit. (Matching Concept) It then had to borrow money to pay dividends out of the "profits". Rolls Royce was liquidated in 1971.

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