Company Accounting 9th Edition Ken Leo – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

Testbank

 

 

 

to accompany

 

Company Accounting 9e

by

Ken Leo, John Hoggett, John Sweeting and

 

 

 

Prepared by

Emma Holmes

 

 

John Wiley & Sons Australia, Ltd 2012

 

Chapter 5 Fair value measurement

 

True/False – 20 in total

 

1. One of the key reasons for issuing AASB 13 Fair Value Measurement was to establish a single source of guidance for all fair value measurements required or permitted by IFRSs to reduce complexity and improve consistency in their application.

 

The statement is True. This is one of the three key reasons given in the Exposure Draft that preceded AASB 13.

 

Feedback: Section 5.1 The need for a standard on fair value measurement

 

 

2. Fair value under AASB 13 is defined as “the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.”

 

The statement is False.  This is the old definition used in many accounting standards prior to 2011.

 

Feedback: Section 5.1 The need for a standard on fair value measurement

 

3. When determining fair value the exchange transaction considered is a hypothetical one.

 

The statement is True.  The measurement of fair value is not based on an actual transaction, but a hypothetical one.

 

Feedback: Section 5.2 The definition of fair value

 

4. Fair value is determined at the exchange date.

 

The statement is False.  Fair value is determined at the measurement date.

 

Feedback: Section 5.2 The definition of fair value

 

 

5. The price used to measure the fair value of an asset should be adjusted for transaction costs.

 

The statement is False.  The fair value should not be adjusted for transaction costs.

 

Feedback: Section 5.2 The definition of fair value

 

6. Fair value is measured by considering the highest and best use of the asset.

 

The statement is True.  This is required under paragraph 28 of AASB 13.

 

Feedback: Section 5.3 Application to non-financial assets

 

7. The “principal market” is defined in AASB 13 as the market that maximises the amount that could be received to sell the asset or minimise the amount that would be required to be paid to transfer the liability, after considering transactions costs and transportation costs

The statement is False.  This is the definition of the “mot advantageous market”.

 

Feedback: Section 5.3 Application to non-financial assets

 

8. Inputs to valuation techniques can only be used if they are observable.

 

The statement is False.  Inputs can be observable or unobservable, however observable inputs are preferred.

 

Feedback: Section 5.3 Application to non-financial assets

 

9. Price per square metre for a building derived from observable market data is an example of a level 2 input.

 

The statement is True.  Quoted prices for similar assets in active markets fall within level 2 of the fair value hierarchy.

 

Feedback: Section 5.3 Application to non-financial assets

 

10. To determine fair value of the particular asset being measured one must considering such factors for assets as the condition and location of the assets.

 

The statement is True.  These factors will affect the price that a market participant is willing to pay for the asset.

 

Feedback: Section 5.3 Application to non-financial assets

 

11. The use of the stand-alone valuation premise is appropriate when the market participant to whom the asset is being transferred would use the asset in conjunction with other assets.

 

The statement is False.  An in-combination valuation premise would be appropriate in this circumstance.

 

Feedback: Section 5.3 Application to non-financial assets

12. In the context of a liability, the fair value is the amount required to be paid to settle a liability.

 

The statement is False.  The fair value of a liability is the amount required to transfer the liability to another party.

 

Feedback: Section 5.4 Application to liabilities

 

13. AASB 13 considers that the fair value of a liability is equal to the fair value of a corresponding asset.

 

The statement is True.  In most, but not all cases, a liability will be held as an asset by another entity.

 

Feedback: Section 5.4 Application to liabilities

 

14. When valuing a liability and a corresponding asset is not held by another entity the fair value is typically determined by applying a present value technique.

 

The statement is True.  An example of where this may occur is in valuing a provision for decommissioning an offshore oil platform.

 

Feedback: Section 5.4 Application to liabilities

 

15. The fair value of an equity instrument is based on determining an entry price which may relate to the price paid for an entity to repurchase its shares.

 

The statement is False.  It is based on determining an exit price, not an entry price.

 

Feedback: Section 5.5 Application to measurement of equity instruments

 

16. AASB 13 does not apply to the measurement of equity instruments.

 

The statement is False.  Measurement of equity instruments may be needed in such circumstances where an entity undertakes a business combination and issues its own equity instruments in exchange for a business.

 

Feedback: Section 5.5 Application to measurement of equity instruments

 

17. AASB 13 applies to both financial and non-financial assets.

 

The statement is True.  Certain categories of financial assets are measured at fair value in accordance with AASB 139.

 

Feedback: Section 5.6 Issues relating to measurement of fair value of financial instruments

 

18. AASB 13 allows the offsetting of financial assets and liabilities where the assets and liabilities are managed as a group.

 

The statement is True.  This exception is allowed under paragraph 48 of AASB 13.

 

Feedback: Section 5.6 Issues relating to measurement of fair value of financial instruments

 

19. AASB 13 does not prescribe any disclosures as these are contained in other accounting standards

 

The statement is False. Paragraphs 91 – 99 contain the disclosures required under AASB 13.

 

Feedback: Section 5.7 Disclosure

 

20. One of the key concerns surrounding the increased use of fair value is the reliability of the data.

 

The statement is True.  Inputs into determining fair values (other than level 1 inputs) can be easily manipulated, hence reducing their reliability.

 

Feedback: Section 5.8 Some questions about fair value measurement

 

 

Multiple Choice – 20 in total

21.     Which of the following is not one of the key reasons given by the IASB for issuing a standard on fair value measurement?

1. to establish a single source of guidance for all fair value measurements required or permitted by IFRSs to reduce complexity and improve consistency in their application;
2. to clarify the definition of fair value and related guidance in order to communicate the measurement objective more clearly;
3. to require the use of fair value when accounting for all non-financial assets
4. to enhance disclosures about fair value to enable users of financial statements to assess the extent to which fair value is used and to inform them about the inputs used to derive those fair values.

 

The correct answer is c.

Feedback: Section 5.1 The need for a standard on fair value measurement

22.     Which of the following documents issued alongside AASB 13 do not form an integral part of the standard?

I      Basis for Conclusions

II     Illustrative Examples

III   Appendix A: Defined terms

IV   Appendix B: Application guidance

a.            I and II

b.            II and III

c.            III and IV

d.           I and IV

The correct answer is a.

Feedback: Section 5.1 The need for a standard on fair value measurement

 

 

23. Which of the following is the definition of fair value per AASB 13?

1. The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction
2. The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
3. The price that would be received to sell an asset or paid to transfer a liability.
4. A transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction (eg a forced liquidation or distress sale).

 

The correct answer is b.

Feedback: Section 5.2 The definition of fair value

24.       At which date is fair value determined?

a.            the measurement date

1. the settlement date
2. the transaction date
3. the exchange date

 

The correct answer is a.

Feedback: Section 5.2 The definition of fair value

 

25. When determining the fair value of an asset its fair value is based on its:

a.   Current use

1. Proposed use
2. Highest and best use
3. Value in use

 

The correct answer is c.

Feedback: Section 5.2 The definition of fair value

 

26. Which of the following is not a valuation technique prescribed by AASB 13?

 

1. the fair value approach
2. the income approach
3. the cost approach
4. the market approach

 

The correct answer is a.

Feedback: Section 5.3 Application to non-financial assets

 

27.     The market with the greatest volume and level of activity for the asset or liability is defined as the:

 

1. active market
2. principal market
3. liquid market
4. most advantageous market

 

The correct answer is b.

Feedback: Section 5.3 Application to non-financial assets

 

28. Valuation techniques that convert future amounts to a single current amount and determines the fair value on the basis of the value indicated by current market expectations about those future amounts is an example of:

 

1. the fair value approach
2. the income approach
3. the cost approach
4. the market approach

 

The correct answer is b.

Feedback: Section 5.3 Application to non-financial assets

 

29. Unobservable inputs for the asset or liability are an example of:

 

1. a Level 1 input
2. a Level 2 input
3. a Level 3 input
4. a Level 4 input

 

The correct answer is c.

Feedback: Section 5.3 Application to non-financial assets

 

30. Which of the following is not an example of a level 2 input?

 

1. a financial forecast of cash flow or earnings
2. quoted prices for identical or similar assets or liabilities in markets that are not active
3. inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves, volatilities, prepayment speeds, and credit risks
4. inputs that are derived from or corroborated by observable market data by correlation or other means.

 

The correct answer is a.

Feedback: Section 5.3 Application to non-financial assets

 

 

31. Trademarks would be measured primarily using which type of inputs?

 

1. Level 1 inputs
2. Level 2 inputs
3. Level 3 inputs
4. Level 4 inputs

 

The correct answer is c.

Feedback: Section 5.3 Application to non-financial assets

 

32.       Which of the following steps in not relevant when valuing liabilities?

1. the particular liability that is the subject of the measurement
2. the valuation premise that is appropriate for the measurement
3. the principal (or most advantageous) market for the liability
4. the valuation technique(s) appropriate for the measurement, considering the availability of data with which to develop inputs that represent the assumptions that market participants would use when pricing the asset or liability and the level of the fair value hierarchy within which the inputs are categorised.

 

The correct answer is b.

Feedback: Section 5.4 Application to liabilities

 

33. When measuring the fair value of a liability, which of the following is assumed?

 

1. the liability is settled by the holder
2. the liability will be settled by the market participant
3. the liability will not be settled
4. the liability is settled with the counterparty on measurement date

 

The correct answer is b.

Feedback: Section 5.4 Application to liabilities

 

34. Where a liability is held as a corresponding asset by another entity the fair value of the liability is determined by:

 

1. applying a present value technique to measure the liability
2. applying the cost approach to valuing the liability
3. measuring the fair value of the corresponding asset
4. determining the amount required to settle the present obligation

 

The correct answer is c.

Feedback: Section 5.4 Application to liabilities

 

 

35. In which circumstance will it be necessary to determine the fair value of an entity’s own equity instruments?

 

1. where the entity is preparing for listing
2. where the entity undertakes a business combination and issues its own equity instruments in exchange for a business
3. where the entity undertakes a share buy-back
4. where there is a change in the shareholding of the entity.

 

The correct answer is b.

Feedback: Section 5.5 Application to measurement of equity instruments

 

36. Which of the following is not assumed when measuring the fair value of an equity instrument?

 

1. The market participant transferee will take on the rights and responsibilities associated with the instrument
2. An entity’s own equity instruments are transferred to a market participant at transfer date
3. An entity’s own equity instrument would remain outstanding
4. The instrument would not be cancelled or otherwise extinguished on the measurement date.

 

The correct answer is b.

Feedback: Section 5.5 Application to measurement of equity instruments

 

37. Where a market has both a bid and an ask process, the price used in measuring fair value is:

 

1. the bid price
2. the ask price
3. the bid-ask spread
4. the most representative price for the transaction.

 

The correct answer is d.

Feedback: Section 5.6 Issues relating to measurement of fair value of financial instruments

 

 

38. An entity holding both financial assets and liabilities is allowed to offset and determine fair value on the net position as long as:

 

I    they hold a net long position

II  they hold a net short position

III they have a documented risk management strategy

IV     the manage the group of net financial assets and liabilities on a net exposure basis

1. transactions are conducted in an orderly market

 

1. I and III
2. II and IV
3. III and IV
4. II and V

 

The correct answer is c.

Feedback: Section 5.6 Issues relating to measurement of fair value of financial instruments

 

39. Which of the following disclosures are not required under AASB 13?

 

1. the valuation techniques used to measure fair value
2. the inputs used to measure fair value
3. the level of the fair value hierarchy within which the fair value measurements are categorised
4. quantitative information about all unobservable inputs used in the fair value measurement

 

The correct answer is d.

Feedback: Section 5.7 Disclosure

40. Which of the following does Whittington (2008) see as a main feature of the fair value view?

 

1. Stewardship, defined as accountability to present shareholders, is a distinct objective, ranking equally with decision usefulness.
2. Reliability is less important and is better replaced by representational faithfulness, which implies a greater concern for capturing economic substance, and less with statistical accuracy.
3. Present shareholders of the holding company have a special status as users of financial statements.
4. Future cash flows may be endogenous: feedback from shareholders and markets in response to accounting reports may influence management decisions.

 

The correct answer is b.

Feedback: Section 5.8 Some questions about fair value measurement

 

OTHER ASSESSMENT QUESTIONS

 

41. Easy

Explain the three key objectives of AASB 13 Fair Value Measurement

 

The objectives of AASB 13 Fair Value Measurement are succinctly stated in paragraph 1:

 

• to define fair value
• to set out in a single standard a framework for measuring fair value
• to require disclosure about fair value measurement.

 

42. Medium

Explain the four steps that an entity needs to undertake to make a fair value measurement of a non-financial asset.

 

An entity has to determine:

 

(a)  the particular asset that is the subject of the measurement (consistent with its unit of account)

(b)  the valuation premise that is appropriate for the measurement (consistent with its highest and best use)

(c)  the principal (or most advantageous) market for the asset

(d) the valuation technique(s) appropriate for the measurement, considering the availability of data with which to develop inputs that represent the assumptions that market participants would use when pricing the asset or liability and the level of the fair value hierarchy within which the inputs are categorised.

 

43. Medium

The use of level 1 inputs in calculating fair value requires the existence of an active market.  Provide four examples where a market is not considered to be active.

 

A market would not be considered active if:

 

• there has been a significant decrease in the volume and level of activity for the asset or liability when compared with normal market activity
• there are few recent transactions
• price quotations are not based on current information
• price quotations vary substantially over time or among market-makers.

 

 

44. Hard

Identify the valuation techniques available when determining fair value and explain the factors that an entity must consider when selecting an appropriate valuation technique.

 

Three possible valuation techniques are noted in paragraph 62, namely:

 

1. the market approach
2. the cost approach
3. the income approach.

 

AASB 13 does not propose a hierarchy of valuation techniques. Some valuation techniques are

better in some circumstances than others. Judgement is required in selecting the appropriate valuation technique for the situation. However, some guidance in the choice of technique is provided in AASB 13:

 

• The technique must be appropriate to the circumstances (paragraph 61).
• There must be sufficient data available to apply the technique (paragraph 61).
• The technique must maximise the use of observable inputs and minimise the use of unobservable inputs (paragraph 61).
• In some cases, multiple techniques are used with the results being weighed and evaluated

(paragraph 63).

• Valuation techniques used to measure fair value must be consistently applied. Paragraph 65

provides examples of situations where a change in technique may be appropriate, such as

when new markets develop or new information becomes available.

 

45. Hard

Explain the levels of the fair value hierarchy

 

There are three levels to the fair value hierarchy as follows:

 

Level 1 inputs – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.

Level 2 inputs – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 inputs – Unobservable inputs for the asset or liability.