CIMA F1 Regulatory environment of financial reporting: practice questions with answers

Question 1

Within the IFRS Foundation, which body's main role is to give the IASB and the Trustees broad strategic advice from a wide range of interested parties, such as users, preparers, regulators and academics?

1. A The IFRS Advisory Council
2. B The IFRS Interpretations Committee
3. C The IFRS Foundation Monitoring Board
4. D The IFRS Foundation Trustees

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Answer: A. The IFRS Foundation structure: the Monitoring Board (public authorities) oversees the Trustees, who are responsible for governance, funding and appointments. The IASB sets IFRS Accounting Standards. The IFRS Interpretations Committee addresses application issues and issues interpretations ratified by the IASB. The IFRS Advisory Council provides strategic advice to the IASB and Trustees and represents a wide range of stakeholders.

Question 2

According to the IASB's Conceptual Framework for Financial Reporting, which of the following is a fundamental qualitative characteristic of useful financial information?

1. A Faithful representation
2. B Comparability
3. C Timeliness
4. D Verifiability

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Answer: A. The Conceptual Framework has two fundamental qualitative characteristics: relevance and faithful representation. The four enhancing characteristics, which make information that is already relevant and faithfully represented more useful, are comparability, verifiability, timeliness and understandability.

Question 3

Several national corporate governance codes operate on a 'comply or explain' basis. Which of the following statements best describes this approach?

1. A Companies are expected to follow the code's provisions, but may depart from them if they disclose the departure and give their reasons to shareholders
2. B Companies must comply with every provision of the code, and any breach is a criminal offence for the directors
3. C Companies may choose whether to follow the code and need not disclose whether they have done so
4. D Companies must comply with the code, except that the external auditor may grant exemptions from individual provisions

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Answer: A. Under a principles-based 'comply or explain' regime (as in many corporate governance codes), companies should apply the code's principles and either comply with its detailed provisions or explain in the annual report why they have not done so. Shareholders then judge whether the explanation is acceptable. A rules-based regime (for example, governance requirements written into law) makes compliance compulsory.

Question 4

Which of the following statements about the IASB's due process for developing a new IFRS Accounting Standard is correct?

1. A Every new standard must first be published as a discussion paper and then as an exposure draft before it can be issued
2. B Once issued, a new standard automatically becomes legally binding on companies in every country that uses IFRS
3. C A new standard must be approved by a vote of the IFRS Advisory Council before the IASB can issue it
4. D Publishing an exposure draft for public comment is a mandatory step, whereas publishing a discussion paper is optional

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Answer: D. Under the IFRS Foundation's Due Process Handbook, some steps are mandatory and others are optional ('comply or explain'). Publishing an exposure draft for public comment is mandatory before a new standard is issued. A discussion paper, which sets out a problem and possible approaches at an earlier stage, is not mandatory. The IASB itself votes on issuing a standard (the Advisory Council only gives strategic advice), and a standard becomes legally binding in a country only through that country's law or endorsement process.

Question 5

The board of Tolworth plc wants one of its committees to review the size, structure and balance of skills of the board regularly, plan for the succession of directors, and lead the process of identifying candidates and recommending them to the board for appointment. Under most corporate governance codes, which committee should carry out this role?

1. A The remuneration committee
2. B The audit committee
3. C The risk committee
4. D The nomination committee

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Answer: D. Governance codes expect the board to delegate certain tasks to committees made up mainly or wholly of independent non-executive directors. The nomination committee leads the process for board appointments, keeps the board's size, structure, skills and diversity under review and plans for succession, so that appointments are made on merit and the board is not dominated by an individual. The audit, remuneration and risk committees have different remits.

Question 6

Under the Integrated Reporting Framework (now maintained by the IFRS Foundation), an organisation's value depends on six 'capitals'. Kinloss Co's patents, licences, internally developed software and well-documented operating procedures are examples of which capital?

1. A Manufactured capital
2. B Intellectual capital
3. C Human capital
4. D Social and relationship capital

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Answer: B. The six capitals are financial, manufactured, intellectual, human, social and relationship, and natural. Intellectual capital is organisational, knowledge-based intangibles: intellectual property (patents, copyrights, software, licences) and 'organisational capital' such as tacit knowledge, systems, procedures and protocols.