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MULTIPLE-CHOICE QUESTIONS

1. Which of the following accounting


methods must
be applied to all business combinations
under IFRS 3,
Business Combinations?
(a) Pooling of interests method.
(b) Equity method.
(c) Proportionate consolidation.
(d) Purchase method.
Answer: (d)
2. Purchase accounting requires an acquirer
and an
acquiree to be identified for every business
combinations.
Where a new entity (H) is created to acquire
two preexisting entities, S and A, which of
these entities
will be designated as the acquirer?
(a) H.
(b) S.
(c) A.
(d) A or S.
Answer: (d)
3.A. IFRS 3 requires all identifiable
intangible assets
of the acquired business to be recorded at
their fair
values. Many intangible assets that may
have been
subsumed within goodwill must be now
separately
valued and identified. Under IFRS 3, when
would an
intangible asset be identifiable?
(a) When it meets the definition of an asset
in
the Framework document only.
(b) When it meets the definition of an
intangible
asset in IAS 38, Intangible Assets, and its
fair value can be measured reliably.
(c) If it has been recognized under local
generally
accepted accounting principles even
though it does not meet the definition in IAS
38.
(d) Where it has been acquired in a business
combination.
Answer: (a)
B. Which of the following examples is
unlikely to
meet the definition of an intangible asset for
the purpose
of IFRS 3?
(a) Marketing related, such as trademarks
and
internet domain names.

(b) Customer related, such as customer lists


and
contracts.
(c) Technology based, such as computer
software
and databases.
(d) Pure research based, such as general
expenditure
on research.
Answer: (d)
C. An intangible asset with an indefinite life
is one
where
(a) There is no foreseeable limit on the
period
over which the asset will generate cash
flows.
(b) The length of life is over 20 years.
(c) The directors feel that the intangible
asset
will not lose value in the foreseeable future.
(d) There is a contractual or legal
arrangement
that lasts for a period in excess of five years.
Answer: (a)
D. An intangible asset with an indefinite life
is accounted
for as follows:
(a) No amortization but annual impairment
test.
(b) Amortized and impairment tests annually.
(c) Amortize and impairment tested if there
is a
trigger event.
(d) Amortized and no impairment test.
Answer: (a)
4. An acquirer should at the acquisition date
recognize
goodwill acquired in a business combination
as
an asset. Goodwill should be accounted for
as follows:
(a) Recognize as an intangible asset and
amortize
over its useful life.
(b) Write off against retained earnings.
(c) Recognize as an intangible asset and
impairment
test when a trigger event occurs.
(d) Recognize as an intangible asset and
annually
impairment test (or more frequently if
impairment is indicated).
Answer: (d)
5. If the impairment of the value of goodwill
is seen
to have reversed, then the company may

(a) Reverse the impairment charge and


credit
income for the period.
(b) Reverse the impairment charge and
credit
retained earnings.
(c) Not reverse the impairment charge.
(d) Reverse the impairment charge only if
the
original circumstances that led to the
impairment
no longer exist and credit retained
earnings.
Answer: (c)
6. On acquisition, all identifiable assets and
liabilities, including goodwill, will be
allocated to
cash-generating units within the business
combination.
Goodwill impairment is assessed within the
cash-generating units. If the combined
organization
has cash-generating units significantly below
the level
of an operating segment, then the risk of an
impairment
charge against goodwill as a result of IFRS 3
is
(a) Significantly decreased because goodwill
will be spread across many cash-generating
units.
(b) Significantly increased because poorly
performing
units can no longer be supported by
those that are performing well.
(c) Likely to be unchanged from previous
accounting
practice.
(d) Likely to be decreased because goodwill
will be a smaller amount due to the greater
recognition of other intangible assets.
Answer: (b)
7. Goodwill must not be amortized under
IFRS 3.
The transitional rules do not require
restatement of
previous balances written off. If an entity is
adopting
IFRS for the first time, and it wishes to
restate all
prior acquisitions in accordance with IFRS 3,
then it
must apply the IFRS to
(a) Those acquisitions selected by the entity.
(b) All acquisitions from the date of the
earliest.
(c) Only those acquisitions since the issue of
the

IFRS 3 and IAS 22, Business Combinations,


to the earlier ones.
(d) Only past and present acquisitions of
entities
that have previously and currently prepared
their financial statements using IFRS.
Answer: (b)
8. The excess of the acquirers interest in
the net
fair value of acquirees identifiable assets,
liabilities,
and contingent liabilities over cost (formerly
known
as negative goodwill) should be
(a) Amortized over the life of the assets
acquired.
(b) Reassessed as to the accuracy of its
measurement
and then recognized immediately
in profit or loss.
(c) Reassessed as to the accuracy of its
measurement
and then recognized in retained
earnings.
(d) Carried as a capital reserve indefinitely.
Answer: (b)
9. Which one of the following reasons would
not
contribute to the creation of negative
goodwill?
(a) Errors in measuring the fair value of the
acquirees
net identifiable assets or the cost of
the business combination.
(b) A bargain purchase.
(c) A requirement in an IFRS to measure net
assets
acquired at a value other than fair value.
(d) Making acquisitions at the top of a bull
market for shares.
Answer: (d)
10. The management of an entity is unsure
how to
treat a restructuring provision that they wish
to set up
on the acquisition of another entity. Under
IFRS 3,
the treatment of this provision will be
(a) A charge in the income statement in the
postacquisition period.
(b) To include the provision in the allocated
cost of acquisition.
(c) To provide for the amount and, if the
provision
is overstated, to release the excess to
the income statement in the postacquisition
period.
(d) To include the provision in the allocated

cost of acquisition if the acquired entity


commits itself to a restructuring within a
year of acquisition.
Answer: (a)
11. IFRS 3 requires that the contingent
liabilities of
the acquired entity should be recognized in
the balance
sheet at fair value. The existence of
contingent
liabilities is often reflected in a lower
purchase price.
Recognition of such contingent liabilities will
(a) Decrease the value attributed to
goodwill,
thus decreasing the risk of impairment of
goodwill.
(b) Decrease the value attributed to
goodwill,
thus increasing the risk of impairment of
goodwill.
(c) Increase the value attributed to goodwill,
thus decreasing the risk of impairment of
goodwill.
(d) Increase the value attributed to goodwill,
thus increasing the risk of impairment of
goodwill.
Answer: (d)
12. IFRS 3 is mandatory for all new
acquisitions
from March 31, 2004. Entities have to cease
the amortization
of goodwill arising from previous
acquisitions.
The balance of goodwill arising from those
acquisitions is
(a) Written off against retained earnings.
(b) Written off against profit or loss for the
year.
(c) Tested for impairment from the beginning
of
the next accounting year.
(d) Tested for impairment on March 31,
2004.
Answer: (c)
13. Entity A purchases 30% of the ordinary
share
capital of Entity B for $10 million on January
1, 2004.
The fair value of the assets of Entity B at
that date
was $20 million. On January 1, 2005, Entity A
purchases
a further 40% of Entity B for $15 million,
when the fair value of Entity Bs assets was
$25 million.
On January 1, 2004, Entity A does not have
significant

influence over Entity B. What value would be


recognized for goodwill (before any
impairment test)
in the consolidated financial statements of A
for the
year ended December 31, 2005?
(a) $11 million.
(b) $7.5 million.
(c) $9 million.
(d) $14 million.
Answer: (c)
Goodwill
At January 1, 2004: cost $10 million
30% of $20 million =
4
At January 1, 2005: cost $15 million
40% of $25 million =
5
9

(Entity A has not accounted for the


initial purchase
as an associate.)
14. Corin, a private limited company, has
acquired
100% of Coal, a private limited company, on
January
1, 2005. The fair value of the purchase
consideration was $10 million ordinary
shares of $1
of Corin, and the fair value of the net assets
acquired
was $7 million. At the time of the acquisition,
the
value of the ordinary shares of Corin and the
net
assets of Coal were only provisionally
determined.
The value of the shares of Corin ($11 million)
and the
net assets of Coal ($7.5 million) on January
1, 2005,
were finally determined on November 30,
2005.
However, the directors of Corin have seen
the value
of the company decline since January 1,
2005, and as
of February 1, 2006, wish to change the
value of the
purchase consideration to $9 million. What
valueshould be placed on the purchase
consideration and
net assets of Coal as at the date of
acquisition?
(a) Purchase consideration $10 million, net
asset
value $7 million.
(b) Purchase consideration $11 million, net
asset

value $7.5 million.


(c) Purchase consideration $9 million, net
asset
value $7.5 million.
(d) Purchase consideration $11 million, net
asset
value $7 million.
Answer: (b)
15. Mask, a private limited company, has
arranged
for Man, a public limited company, to
acquire it as a
means of obtaining a stock exchange listing.
Man
issues 15 million shares to acquire the whole
of the
share capital of Mask (6 million shares). The
fair
value of the net assets of Mask and Man are
$30 million
and $18 million respectively. The fair value
of
each of the shares of Mask is $6 and the
quoted market

price of Mans shares is $2. The share capital


of
Man is 25 million shares after the
acquisition. Calculate
the value of goodwill in the above
acquisition.
(a) $16 million.
(b) $12 million.
(c) $10 million.
(d) $6 million.
Answer: (d)
Cost of acquisition (Masks
shareholders own 60%
of equity of Man)
In order for 40% of Masks shares to be
owned by
shareholders of Man, Mask needs to
issue 4 million
shares. Therefore, cost of acquisition is
4 million $6 each $24 million
Fair value of assets of
Man ($18 million)
Goodwill $6 million