CAF-6 · Chapter 9

Consolidation (IFRS 10, IFRS 3) MCQs with Answers

15 multiple-choice questions on Consolidation (IFRS 10, IFRS 3) for CAF-6 Corporate Reporting. Try each one before revealing the answer and explanation.

1. Question 1

   According to IFRS 10, an investor 'Controls' an investee if and only if they have:

   • A) More than 51% of the shares.
   • B) Power over the investee, exposure/rights to variable returns, and the ability to use power to affect returns.
   • C) A seat on the Board of Directors.
   • D) A signed agreement stating they are the parent.
   Show answer & explanation

   Answer: B) Power over the investee, exposure/rights to variable returns, and the ability to use power to affect returns.

   The three elements of control under IFRS 10 are: power, exposure to returns, and the link between power and returns.

2. Question 2

   Under IFRS 3 Business Combinations, the 'Acquisition Method' requires:

   • A) Adding the book values of the parent and subsidiary.
   • B) Recognizing the identifiable assets and liabilities of the subsidiary at their fair values at the acquisition date.
   • C) Recognizing all assets of the subsidiary at historical cost.
   • D) Deducting the subsidiary's debt from the parent's cash.
   Show answer & explanation

   Answer: B) Recognizing the identifiable assets and liabilities of the subsidiary at their fair values at the acquisition date.

   Key to the acquisition method is the fair valuation of the subsidiary's assets and liabilities at the date control is obtained.

3. Question 3

   What is 'Non-Controlling Interest' (NCI)?

   • A) The part of the subsidiary's profit that belongs to the parent company.
   • B) The equity in a subsidiary not attributable, directly or indirectly, to a parent.
   • C) The debt owed by the subsidiary to external banks.
   • D) The voting rights held by the CEO of the parent company.
   Show answer & explanation

   Answer: B) The equity in a subsidiary not attributable, directly or indirectly, to a parent.

   NCI represents the portion of the subsidiary owned by shareholders other than the parent company.

4. Question 4

   How is 'Goodwill' calculated on acquisition?

   • A) Fair value of consideration + NCI - Fair value of net identifiable assets.
   • B) Fair value of consideration - Book value of net assets.
   • C) Total Assets - Total Liabilities.
   • D) Purchase price minus Parent's share capital.
   Show answer & explanation

   Answer: A) Fair value of consideration + NCI - Fair value of net identifiable assets.

   Goodwill is the excess of (Consideration + NCI) over the fair value of net identifiable assets acquired.

5. Question 5

   If the fair value of net identifiable assets acquired is HIGHER than the sum of consideration and NCI, the difference is recognized as:

   • A) Negative Goodwill (Asset).
   • B) Gain on a Bargain Purchase (Profit or Loss).
   • C) Other Comprehensive Income.
   • D) A Liability.
   Show answer & explanation

   Answer: B) Gain on a Bargain Purchase (Profit or Loss).

   A 'bargain purchase' occurs when the acquisition cost is less than the fair value of net assets acquired. It is recognized as a gain in profit or loss.

6. Question 6

   A parent company owns 80% of a subsidiary. During the year, the subsidiary sells goods to the parent for Rs. 100,000 at a 20% markup on cost. All goods are still in parent's inventory. What is the Provision for Unrealized Profit (PURP)?

   • A) Rs. 16,667
   • B) Rs. 20,000
   • C) Rs. 80,000
   • D) Rs. 0
   Show answer & explanation

   Answer: A) Rs. 16,667

   Profit included in inventory = 100,000 x (20/120) = Rs. 16,667. This unrealized profit must be eliminated during consolidation.

7. Question 7

   When eliminating intra-group dividends, which of the following is correct?

   • A) Both investment income in the parent and the dividend paid by the subsidiary are eliminated.
   • B) Intra-group dividends are added together.
   • C) Only the parent's dividend is eliminated.
   • D) Dividends are never eliminated.
   Show answer & explanation

   Answer: A) Both investment income in the parent and the dividend paid by the subsidiary are eliminated.

   Dividends paid by the subsidiary to the parent are purely internal and must be cancelled out so they don't appear in the consolidated financials.

8. Question 8

   In the Consolidated Statement of Financial Position, 'Share Capital' should reflect:

   • A) The sum of Parent's and Subsidiary's share capital.
   • B) Only the Parent's share capital.
   • C) The Parent's share capital minus the Subsidiary's share capital.
   • D) Only the Subsidiary's share capital.
   Show answer & explanation

   Answer: B) Only the Parent's share capital.

   The consolidated share capital always represents the capital of the parent company only.

9. Question 9

   IFRS 3 allows NCI at the date of acquisition to be measured at either Fair Value (Full Goodwill) or:

   • A) Historical Cost.
   • B) Proportionate share of the subsidiary's identifiable net assets.
   • C) Disposal Value.
   • D) Tax Base.
   Show answer & explanation

   Answer: B) Proportionate share of the subsidiary's identifiable net assets.

   IFRS 3 provides an option to measure NCI at acquisition either at fair value or at NCI's proportionate share of the subsidiary's identifiable net assets.

10. Question 10

    At the reporting date, NCI in the Statement of Financial Position is calculated as:

    • A) NCI at acquisition + NCI's share of post-acquisition retained earnings.
    • B) NCI at acquisition minus NCI's share of losses.
    • C) Just the NCI at acquisition.
    • D) NCI share of Parent's retained earnings.
    Show answer & explanation

    Answer: A) NCI at acquisition + NCI's share of post-acquisition retained earnings.

    The carrying amount of NCI changes over time as the subsidiary earns profits (or incurs losses) after the acquisition.

11. Question 11

    How are 'Intra-group balances' (like a loan from parent to subsidiary) treated on consolidation?

    • A) They are added together as a large asset.
    • B) They are eliminated in full.
    • C) They are shown as a separate line item called 'Internal Debt'.
    • D) They are ignored for consolidation purposes.
    Show answer & explanation

    Answer: B) They are eliminated in full.

    To avoid double counting assets and liabilities of the group as a single economic entity, all intra-group receivables and payables must be eliminated.

12. Question 12

    Consolidated Retained Earnings include 100% of the Parent's retained earnings plus:

    • A) 100% of Subsidiary's retained earnings.
    • B) Parent's share of Subsidiary's pre-acquisition retained earnings.
    • C) Parent's share of Subsidiary's post-acquisition retained earnings.
    • D) Subsidiary's total assets.
    Show answer & explanation

    Answer: C) Parent's share of Subsidiary's post-acquisition retained earnings.

    Consolidated retained earnings effectively represent what is 'owned' by the parent's shareholders: Parent's own earnings + their share of what the sub earned while under their control.

13. Question 13

    Which of the following is NOT an 'Identifiable' asset for IFRS 3 purposes?

    • A) A specific brand name owned by the subsidiary.
    • B) Goodwill already sitting in the subsidiary's own books.
    • C) A patent held by the subsidiary.
    • D) Customer lists that can be sold separately.
    Show answer & explanation

    Answer: B) Goodwill already sitting in the subsidiary's own books.

    When calculating consolidated goodwill, any existing goodwill in the subsidiary's own books is ignored (it is not an identifiable asset).

14. Question 14

    'Acquisition-related costs' (like legal and accounting fees for the merger) should be:

    • A) Capitalized as part of the cost of investment.
    • B) Added to goodwill.
    • C) Expensed in profit or loss in the period they occur.
    • D) Deducted from equity.
    Show answer & explanation

    Answer: C) Expensed in profit or loss in the period they occur.

    IFRS 3 requires that acquisition-related costs be expensed, except for costs to issue debt or equity securities.

15. Question 15

    In a Consolidated Statement of Profit or Loss, the 'Profit for the year' is:

    • A) Attributed entirely to the Parent shareholders.
    • B) Split/Allocated between the Parent shareholders and the NCI.
    • C) Shown net of all subsidiary expenses.
    • D) Only the Parent's individual profit.
    Show answer & explanation

    Answer: B) Split/Allocated between the Parent shareholders and the NCI.

    The total group profit is shown first, and then it is allocated between the owners of the parent and the non-controlling interests.