Chapter 7: Assets

True/False 1. Under the IASB standards all wholly executory contracts are recognised as assets. a. True *b. False Feedback: Under the IASB standards some wholly executory contracts are recognised as assets while others are not. For example a finance lease gives rise to an asset and liability while an operating lease does not. Section "Assets defined" 2. An asset must have future cash generating abilities according to the IASB (AASB) Framework definition. a. True *b. False Feedback: The IASB (AASB) Framework's definition of an asset is " a resource controlled by an entity as a result of past events and from which future economic benefits (not necessarily cash) are expected to flow to the entity". Section "Assets defined" 3. Exchangeability is a characteristic that supports the existence of an asset, however, it is not an essential characteristic. *a. True b. False Feedback: Exchangeability is a characteristic that supports the existence of an asset, however, it is not an essential characteristic. Section "Assets defined" 4. The IASB (AASB) Framework does refer to the conservatism (prudence) principle. *a. True b. False Feedback: The Framework states in paragraph 37 that 'Prudence is the inclusion of a degree of caution in the exercise of the judgment needed in making the estimates required under conditions

of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated. Section "Asset recognition" 5. The recognition rules for assets contained in the Framework are extensions of the subsidiary objectives (qualitative characteristics) of relevance and reliability of accounting information. *a. True b. False Feedback: The recognition rules for assets contained in the Framework are extensions of the subsidiary objectives (qualitative characteristics) of relevance and reliability of accounting information. (Framework, paras 26-28, 31-32) Section "Asset recognition" 6. IAS 16 and IAS 40 permit, but do not require, the use of a current value measurement model. *a. True b. False Feedback: IAS 16 and IAS 40 permit, but do not require, the use of a current value measurement model. Section "Asset measurement" 7. Barth and Kasznik reported that, between 1983 and 1995, in the United Kingdom, 20% of firms recorded an asset revaluation reserve. a. True *b. False Feedback: Barth and Kasznik reported that, between 1983 and 1995, in the United Kingdom, 43% of firms recorded an asset revaluation reserve. Section "Asset measurement" 8. IAS 39 created a separate category of assets and liabilities, financial assets and liabilities, and introduced associated measurement rules. *a. True b. False

Feedback: IAS 39 created a separate category of assets and liabilities, financial assets and liabilities, and introduced associated measurement rules. Section "Asset measurement" 9. The FASB and the IASB intend to address the issue of measurement of assets in Phase C of the conceptual framework project. *a. True b. False Feedback: The FASB and the IASB intend to address the issue of measurement of assets in Phase C of the conceptual framework project. Section "Challenges for standard setters" 10. Using fair values for assets could appear less attractive to management (and more risky for auditors) during periods of rising asset values. a. True *b. False Feedback: Using fair values for assets could appear more attractive to management (and less risky for auditors) during periods of rising asset values. Section "Issues for auditors" 11. Cairns argues that under the IASB standards fair value is used to measure assets on initial recognition but subsequent measurement at fair value is more rare. *a. True b. False Feedback: Cairns argues that under the IASB standards fair value is used to measure assets on initial recognition but subsequent measurement at fair value is more rare. Section "Challenges for standard setters" Multiple choice 12. To fulfil the IASB (AASB) Framework criteria that an asset must have 'future economic benefits' which of the following criteria must be met? i. It must be scarce ii. It must have utility iii. It must be capable of generating cash inflows to the entity

*a. i, ii, b. i, iii c. i, ii, ii d. iii Feedback: For a not-for-profit organisation the IASB (AASB) Framework recognises that cash flows is not always the objective, the principle is that the future economic benefit should qualify as helping the entity meet its objectives. The notion of future economic benefits relates to economic resources. There are two main characteristics of an economic resource: scarcity and utility. Section "Assets defined" 13. Which of these items would meet the asset criteria of 'having future economic benefits' for a local council? a. Air in the park b. A bank overdraft *c. A council park d. A and C Feedback: Even though the council park may not generate net cash inflows for the council it can be argued that it will assist the council in pursuing its objectives as a government agency. Air has no future economic benefits for the council as it is not scarce and so is not "economic". Section "Assets defined" 14. With respect to executory contracts it is true that: a. a. They arise when one party to a contract has performed proportionally more of the contract than the other party *b. They meet the criteria for an asset as defined by the IASB (AASB) Framework c. They are required to be recognised in the financial statements d. All of the above Feedback: While it is mostly agreed that executory contracts meet the definition of assets (and liabilities) according to the IASB (AASB) Framework, due to the controversy surrounding this issue it is not a requirement of the IASB (AASB) Framework that they all be recognised. The current situation is that some executory contracts are recognised as assets while other are not. Section "Assets defined" 15. Arguments in favour of including 'exchangeability' as an essential criterion for the identification of an asset under the IASB (AASB) Framework include which of the following? *a. That assets should be separable from the entity and have a separate disposal value
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b. That exchange is only one way to obtain the benefit of an asset c. That economic value depends upon scarcity and utility, but not on exchangeability d. None of the above are arguments in favour of including exchangeability as an essential characteristic of an asset. Feedback: Section "Assets defined" 16. The criteria that normally need to be recognised for a non-cancellable lease to be capitalised by a lessee IAS 17/AASB 117) is: a. The lease term is for the major part of the economic life of the asset b. At the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset c. Both A and B *d. Either A or B Feedback: For a non-cancellable lease to be normally capitalised by the lessee any one of a number of criteria, including those mentioned in A and B above need to be met. Section "Asset recognition" 17. The statement in relation to conservatism (prudence) that is true is: *a. Conservatism is inconsistent with the principle of neutrality b. Conservatism means recording assets early c. Conservatism means not depleting future resources d. All of the statements are true. Feedback: See discussion pages 236-237. Section "Asset recognition" 18. The statement concerning asset recognition that is not correct is: a. a. The accounting standards prohibit the recognition of internally generated goodwill as an asset *b. The accounting standards prohibit the recognition of internally generated assets arising from development expenditure c. The accounting standards prohibit the recognition of internally generated assets arising from research expenditure d. None of the statements is incorrect, i.e. all are correct statements Feedback: The accounting standards restricts the recognition of internally generated assets arising from development expenditure by providing strict criteria that must be met, but they do

not prohibit recognition. A and C are correct statements. Pages 237. Section "Asset recognition" 19. The extent and timing of recognition of assets are important because: a. They can affect the decision making for users of financial statements b. They can affect the calculation of ratios which are important inputs for debt covenants c. They can affect management compensation *d. All of the above Feedback: See summary L02 page 250. Section "Why recognition and measurement criteria are both important and controversial". Section "Asset recognition" 20. Which of these is not an argument in favour of restricting the recognition of internally generated goodwill? a. Good will is not separable from other assets b. There are difficulties in identifying whether and when goodwill will generate future economic benefits *c. Goodwill cannot be sold d. All of the above Feedback: Internally generated goodwill can be sold as part of the sale of an entity as a going concern, so this is not an argument in favour of restricting its recognition. Section "Asset recognition" 21. The statement concerning the measurement of tangible assets that is not true is: a. The traditional approach has been to measure tangible assets at historical cost *b. IAS 16 requires the use of the revaluation model for subsequent measurement of tangible assets c. IAS 16 permits the use of a current value measurement model for tangible assets d. None of the statements are untrue, i.e. all are true statements Feedback: IASB 16 allows the use of the revaluation model for subsequent measurement of tangible assets but it does not require it. A and C are true. Section "Asset measurement" 22. The use of a current value model for intangible assets is: a. Common
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b. Mandatory *c. Rare d. Prohibited Feedback: The use of a current value model for intangible assets is rare. Section "Asset measurement" 23. The statement concerning the measurement of financial instruments that is not true is: a. The decision usefulness objective is an argument for valuation at fair value b. Since the 1980's the FASB has required fair value measurement *c. The FASB has followed the IASB's lead in standard setting for financial instruments d. IAS 39 is the standard on financial instruments Feedback: It is the other way around; the IASB has followed the FASB's lead in standard setting for financial instruments. Section "Asset measurement" 24. The FASB and IASB have concluded that derivatives should be measured at: *a. Fair value b. Cost c. The lower of cost or fair value d. Cost less accumulated amortisation Feedback: The FASB and the IASB have concluded that derivatives should be measured at fair value rather than cost. See IAS 39 (para 9). Section "Asset measurement" 25. Which of these is correct regarding the IASB's requirements in relation to the measurement of various types of financial assets? *a. Originated loans and receivables - Amortised cost b. b. Held-to-maturity investments - Fair value c. Available-for-sale securities - Fair value with gains and losses arising on remeasurement taken to profit and loss d. Financial assets held for trading - Fair value with gains and losses from remeasurement recognised in equity Feedback: See Table 7.1 Section "Asset measurement"

26. The order of the 'fair value hierarchy' nominated by the FASB's SFAS 157 is: i. Quoted prices for similar assets or liabilities in active markets, adjusted ii. Quoted prices for identical assets and liabilities in active reference markets, unadjusted iii. Multiple valuation techniques consistent with the market, income and cost approaches *a. Levels ii, i, iii b. b. Levels i, ii, iii c. Levels iii, ii, i d. Levels ii, iii, i Feedback: Order of the levels: ii. Quoted prices for identical assets and liabilities in active reference markets, unadjusted, i, Quoted prices for similar assets or liabilities in active markets, adjusted as appropriate for differences, iii, Where the information required for levels I and 2 is not available multiple valuation techniques consistent with the market, income and cost approaches shall be used to determine fair value. Section "Challenges for standard setters" 27. Which approach does the FASB's SFAS 157 'Fair value measurements' recommend to be used in determining fair value? a. The market approach b. The income approach c. The cost approach *d. All are possible approaches which the standard suggests could be used to determine fair value Feedback: The FASB's SFAS 157 'Fair value measurements' suggests that all of the above are possible approaches that could be used to determine fair value. Section "Challenges for standard setters" 28. A valuation approach used by current IASB standards is: i. Written down historical cost ii. Fair values based on exit values iii. Fair values based on value in use a. i, ii b. i, iii c. ii, iii *d. i, ii, iii Feedback: Section "Challenges for standard setters"

29. The statement concerning auditing and fair value that is true is: a. Using fair values for assets could appear more attractive to management and more risky for auditors during periods of rising asset values *b. Further research is needed on the auditing of fair values c. Auditors will have to become valuers d. All of the above are true Feedback: A is untrue as using fair values for assets could appear more attractive to management and less risky for auditors during periods of rising asset values, C is untrue as auditors will have to acquire a greater understanding of valuation models but will not themselves have to become valuers. Section "Issues for auditors"