ACCA FR · Chapter 3
Intangible assets, impairment and assets held for sale MCQs with Answers
12 multiple-choice questions on Intangible assets, impairment and assets held for sale for ACCA FR Financial Reporting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under IAS 38, which of the following internally generated items may be recognised as an intangible asset?
- A) Development expenditure that meets all of the IAS 38 recognition criteria
- B) An internally generated brand name
- C) Expenditure in the research phase of a project
- D) Costs of training staff to use new software
Show answer & explanation
Answer: A) Development expenditure that meets all of the IAS 38 recognition criteria
IAS 38 requires development expenditure to be capitalised once the entity can show technical feasibility, intention and ability to complete and use or sell the asset, probable future economic benefits, adequate resources, and reliable measurement. Research costs must be expensed. Internally generated brands, mastheads, customer lists and training costs can never be recognised as intangible assets.
Question 2
During the year Sanderling Co spent $120,000 on the research phase of a project. Development started on 1 March and all IAS 38 capitalisation criteria were first met on 1 June. Development costs were $90,000 from March to May and $210,000 from June to December. What amount should be recognised as an intangible asset at the year end?
- A) $300,000
- B) $210,000
- C) $420,000
- D) $330,000
Show answer & explanation
Answer: B) $210,000
Only development costs incurred after the recognition criteria are met can be capitalised, so the intangible asset is $210,000. Research costs of $120,000 and the $90,000 of development costs incurred before 1 June are expensed. Costs already expensed cannot be reinstated later.
Question 3
Turnstone Co has capitalised development costs of $500,000. Commercial production of the related product started on 1 July 20X7, and the product is expected to sell for 4 years. Amortisation is straight-line, and the year end is 31 December. What is the carrying amount of the development asset at 31 December 20X7?
- A) $437,500
- B) $375,000
- C) $500,000
- D) $400,000
Show answer & explanation
Answer: A) $437,500
Amortisation starts when the asset is available for use, which is when production starts on 1 July 20X7. Charge for 20X7 = $500,000 / 4 x 6/12 = $62,500. Carrying amount = $500,000 - $62,500 = $437,500.
Question 4
How does IAS 38 require a purchased intangible asset with an indefinite useful life to be accounted for after initial recognition?
- A) It is not amortised, but it is tested for impairment every year and whenever there is an indication of impairment
- B) It is amortised over a maximum period of 20 years
- C) It is amortised over 10 years unless a longer life can be demonstrated
- D) It is neither amortised nor tested for impairment until it is sold
Show answer & explanation
Answer: A) It is not amortised, but it is tested for impairment every year and whenever there is an indication of impairment
An intangible asset with an indefinite useful life is not amortised. IAS 36 instead requires an annual impairment test, plus a test whenever there is an indication of impairment. Its useful life must also be reviewed each period to check that it is still indefinite.
Question 5
Under IAS 36 Impairment of Assets, how is an asset's recoverable amount defined?
- A) The higher of fair value less costs of disposal and value in use
- B) The lower of fair value less costs of disposal and value in use
- C) The higher of carrying amount and value in use
- D) Fair value less costs of disposal only
Show answer & explanation
Answer: A) The higher of fair value less costs of disposal and value in use
Recoverable amount is the higher of fair value less costs of disposal and value in use. An asset is impaired when its carrying amount is higher than its recoverable amount. The 'higher of' rule reflects that a rational entity would either sell the asset or keep using it, whichever gives more benefit.
Question 6
At the year end a machine owned by Redshank Co has a carrying amount of $900,000. It could be sold for $820,000, with disposal costs of $20,000. The present value of the future cash flows expected from using it is $760,000. What impairment loss should be recognised?
- A) $140,000
- B) $80,000
- C) Nil
- D) $100,000
Show answer & explanation
Answer: D) $100,000
Fair value less costs of disposal = $820,000 - $20,000 = $800,000. Value in use = $760,000. Recoverable amount is the higher of the two, $800,000. Impairment loss = $900,000 - $800,000 = $100,000.
Question 7
A cash-generating unit of Whimbrel Co contains goodwill of $150,000, a brand of $100,000 and property, plant and equipment of $400,000. None of these assets has an individually determinable recoverable amount. The unit's recoverable amount is $450,000. What is the carrying amount of the property, plant and equipment after the impairment loss is allocated?
- A) $360,000
- B) $350,000
- C) $240,000
- D) $276,923
Show answer & explanation
Answer: A) $360,000
Impairment loss = $650,000 - $450,000 = $200,000. Goodwill is written off first ($150,000). The remaining $50,000 is spread across the other assets in proportion to their carrying amounts: PPE share = $50,000 x $400,000/$500,000 = $40,000. PPE carrying amount = $400,000 - $40,000 = $360,000. Figures are rounded to the nearest dollar.
Question 8
Which of the following statements about reversing impairment losses under IAS 36 is correct?
- A) Any impairment loss can be reversed up to the asset's original cost
- B) A reversal for an asset carried at cost is always recognised in other comprehensive income
- C) Impairment losses on assets other than goodwill can never be reversed
- D) An impairment loss recognised for goodwill must never be reversed
Show answer & explanation
Answer: D) An impairment loss recognised for goodwill must never be reversed
IAS 36 prohibits reversing an impairment loss on goodwill, because any later increase is likely to be internally generated goodwill. For other assets a reversal is allowed, but only up to the carrying amount the asset would have had, net of depreciation, if no impairment had been recognised. For assets carried at cost, the reversal goes to profit or loss.
Question 9
Which of the following is NOT a condition for classifying a non-current asset as held for sale under IFRS 5?
- A) The asset must be available for immediate sale in its present condition
- B) A binding sale agreement must have been signed with a buyer by the reporting date
- C) The sale must be highly probable, with management committed to a plan to sell
- D) The sale should be expected to be completed within one year of classification
Show answer & explanation
Answer: B) A binding sale agreement must have been signed with a buyer by the reporting date
IFRS 5 requires the asset to be available for immediate sale in its present condition and the sale to be highly probable. High probability means management is committed to a plan, an active programme to find a buyer has begun, the price is reasonable and completion is expected within 12 months. A signed binding agreement is not required.
Question 10
On 1 October Godwit Co classified a building as held for sale. Its carrying amount was then $1,200,000. Its fair value was $1,050,000 and estimated costs to sell were $30,000. At what amount should the building be measured on classification, and how is it treated afterwards?
- A) $1,200,000, and depreciation continues until the sale
- B) $1,050,000, and depreciation stops
- C) $1,020,000, and depreciation stops
- D) $1,020,000, and depreciation continues until the sale
Show answer & explanation
Answer: C) $1,020,000, and depreciation stops
IFRS 5 measures held-for-sale assets at the lower of carrying amount and fair value less costs to sell. Fair value less costs to sell = $1,050,000 - $30,000 = $1,020,000, which is lower than $1,200,000, so an impairment loss of $180,000 is recognised. Assets classified as held for sale are not depreciated.
Question 11
Which of the following would be presented as a discontinued operation under IFRS 5?
- A) The closure of one of the 60 shops in a national retail chain
- B) The sale of surplus manufacturing machinery
- C) A decision taken by the board after the reporting date to close a major division
- D) The sale during the year of a hotel division that was one of the group's three major business lines
Show answer & explanation
Answer: D) The sale during the year of a hotel division that was one of the group's three major business lines
A discontinued operation is a component that has been disposed of or is classified as held for sale and represents a separate major line of business or geographical area of operations. Closing one shop out of 60 or selling surplus machinery is not a major line of business. A decision taken after the reporting date cannot cause classification at the reporting date.
Question 12
Lapwing Co's leisure division is a discontinued operation. For the year its revenue was $4.0m and its expenses were $4.6m, and the related tax credit was $0.1m. On classification as held for sale, the division's assets were written down by $0.3m to fair value less costs to sell (no tax effect). What single amount should be presented as 'loss from discontinued operations' in the statement of profit or loss?
- A) $0.9m
- B) $0.5m
- C) $0.6m
- D) $0.8m
Show answer & explanation
Answer: D) $0.8m
IFRS 5 requires one figure on the face of the statement: the post-tax profit or loss of the discontinued operation plus the post-tax loss on remeasurement to fair value less costs to sell. Post-tax trading loss = 4.0 - 4.6 + 0.1 = -$0.5m. Adding the remeasurement loss of $0.3m gives a total loss of $0.8m.