CIMA F2 Advanced Financial Reporting: mock exams and practice questions

Sample question 1 · A · Financing capital projects

Dunmore Co is considering issuing convertible bonds instead of straight (non-convertible) bonds with the same term. Which statement about convertible bonds is correct from Dunmore Co's point of view?

1. A If the holders convert, Dunmore Co's gearing increases, because new shares are issued in exchange for the bonds.
2. B The holders must convert into equity at maturity, so Dunmore Co never needs to repay the bonds in cash.
3. C They can usually carry a lower coupon rate than equivalent straight bonds, because investors also receive the option to convert into equity.
4. D The conversion value of each bond is its nominal value multiplied by the annual coupon rate.

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Answer: C. A convertible bond gives the holder the right, but not the obligation, to exchange the bond for a set number of equity shares.

- Because the conversion option is valuable, the issuer can usually pay a lower coupon than on straight debt.
- If holders convert, debt becomes equity, so gearing falls and the issuer avoids a cash repayment.
- If the share price stays low, holders keep the bond and the issuer must redeem it in cash.
- Conversion value = conversion ratio x current share price.

Sample question 2 · B · Financial reporting standards

Which feature, on its own, would normally lead a lessor to classify a lease as a finance lease under IFRS 16 Leases?

1. A The lease term is 3 years of the asset's 15-year economic life, and the lessor then re-leases the asset to others.
2. B The lessee can cancel at any time without penalty, and the lessor bears all changes in the asset's residual value.
3. C The present value of the lease payments is about 40% of the asset's fair value at the start of the lease.
4. D Legal title to the asset passes to the lessee at the end of the lease term.

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Answer: D. A lessor classifies a lease as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of the asset. Otherwise it is an operating lease.

IFRS 16 gives examples that normally lead to finance lease classification:

- ownership transfers to the lessee by the end of the term
- a purchase option is reasonably certain to be exercised
- the lease term is for the major part of the economic life
- the present value of lease payments is substantially all of the fair value
- the asset is so specialised that only the lessee can use it without major modification

Only the transfer of title meets one of these.

Sample question 3 · C · Group accounts

When translating the financial statements of a foreign subsidiary for consolidation under IAS 21 The Effects of Changes in Foreign Exchange Rates, at which rate is goodwill arising on the acquisition of that subsidiary translated in the consolidated statement of financial position?

1. A The closing rate at the reporting date
2. B The historical rate at the acquisition date
3. C The average rate for the reporting period
4. D The rate at the date of the most recent impairment review

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Answer: A. IAS 21 requires goodwill, and fair value adjustments arising on acquiring a foreign operation, to be treated as assets and liabilities of the foreign operation. They are expressed in its functional currency and translated at the closing rate.

The exchange difference from retranslating goodwill each year goes to other comprehensive income, along with the difference on the subsidiary's net assets.