Chartered Institute of Management Accountants (CGMA) · Advanced Financial Reporting
CIMA F2 Group accounts: practice questions with answers
6 free exam-style questions on Group accounts for CIMA F2 Advanced Financial Reporting. Try each one, then open the answer to read the explanation. Fincora has 60 original questions on this syllabus area.
Question 1
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?
- A The closing rate at the reporting date
- B The historical rate at the acquisition date
- C The average rate for the reporting period
- 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.
Question 2
Malham Co has investments in four companies, none of which it controls. In which case does Malham Co have significant influence, so that the investee is an associate under IAS 28?
- A Malham Co holds all of Ouse Co's non-voting preference shares, which make up 40% of Ouse Co's share capital.
- B Malham Co holds share options over 25% of Rye Co's equity shares, which cannot be exercised until 20X9. It holds no shares now.
- C Malham Co holds 15% of Nidd Co's equity shares and appoints two of its eight directors, who take part in all policy decisions.
- D Malham Co is Swale Co's main lender, and the loan agreement includes covenants restricting Swale Co's borrowing.
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Answer: C. Significant influence is the power to participate in the financial and operating policy decisions of an investee, without control or joint control. A holding of 20% or more of the voting power is presumed to give significant influence, but the presumption can be overcome either way. IAS 28 indicators include:
- representation on the board of directors
- participation in policy-making, including decisions about dividends
- material transactions between the investor and investee
- interchange of managerial personnel
- provision of essential technical information
Malham Co's board seats and role in policy decisions give significant influence over Nidd Co despite its 15% holding. Potential voting rights count only if they are currently exercisable.
Question 3
In the consolidated statement of changes in equity, which of the following is shown as a separate movement in equity that is NOT part of total comprehensive income for the year?
- A The group's share of an associate's revaluation gain on property for the year
- B The exchange difference on translating a foreign subsidiary's net assets for the year
- C A remeasurement gain on the group's defined benefit pension plan for the year
- D The non-controlling interest recognised on the acquisition of a new subsidiary during the year
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Answer: D. The consolidated statement of changes in equity separates total comprehensive income (profit or loss plus other comprehensive income) from other movements in equity, such as share issues, dividends, changes in ownership interests in subsidiaries and the NCI recognised when a subsidiary is acquired. The NCI arising on an acquisition is not income or expense: it is the outside shareholders' interest in the net assets brought into the group, so it is shown as a separate line in the NCI column.
The associate's revaluation gain, the translation difference and the pension remeasurement are all items of other comprehensive income, so they are included in total comprehensive income.
Question 4
Which of the following statements about disclosures under IAS 24 Related Party Disclosures is correct?
- A A subsidiary must disclose the relationship with its parent even if there were no transactions between them during the year.
- B Transactions with related parties need to be disclosed only if they were not made on arm's length terms.
- C In the consolidated financial statements, sales between the parent and its subsidiaries must be disclosed as related party transactions.
- D Directors may state that related party transactions were made on arm's length terms whenever they believe this to be the case.
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Answer: A. Key IAS 24 disclosure points:
- Parent-subsidiary relationships are disclosed even when there have been no transactions, with the name of the parent and the ultimate controlling party.
- Transactions with related parties (and outstanding balances) are disclosed whether or not a price is charged and whatever the terms.
- Intra-group transactions are eliminated in the consolidated financial statements, so they are not disclosed there, though they are disclosed in the subsidiary's own financial statements.
- A statement that transactions were made on terms equivalent to arm's length may be made only if those terms can be substantiated.
Question 5
Godwit Co's sales director is one of its key management personnel. Which of the following is a related party of Godwit Co under IAS 24 Related Party Disclosures?
- A Marten Co, which shares joint control of a joint venture with Godwit Co and has no other link with it
- B The government department that regulates Godwit Co's industry and grants its operating licences
- C Linnet Co, in which the sales director's cousin holds 10% of the equity shares
- D Hobby Co, a packaging supplier that is wholly owned by the sales director's wife
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Answer: D. Under IAS 24 a person's close family members are those who may be expected to influence, or be influenced by, that person, including the person's spouse or domestic partner, children and dependants. An entity that is controlled or jointly controlled by a close family member of a member of key management personnel is a related party of the reporting entity, so Hobby Co is related to Godwit Co.
IAS 24 specifically excludes two joint venturers that simply share joint control, and government departments and agencies in their normal dealings. Linnet Co is not controlled or significantly influenced by a close family member.
Question 6
Ruff Co is calculating diluted earnings per share for the year ended 31 December 20X6. The average market price of its equity shares during 20X6 was $4.20. Which of the following potential ordinary shares should be EXCLUDED from the calculation?
- A Convertible bonds, in issue all year, whose conversion would reduce earnings per share
- B Employee share options granted on 1 October 20X6, with an exercise price of $3.00
- C Share warrants, in issue all year, that allow the holders to subscribe for shares at $5.00 each
- D Shares to be issued to the vendors of a subsidiary if its 20X6 profit exceeds a target, which it did
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Answer: C. IAS 33 includes only dilutive potential ordinary shares in diluted EPS:
- Options and warrants are dilutive only when the average market price exceeds the exercise price, because only then are shares treated as issued for no consideration. Warrants at $5.00 when the average price is $4.20 are anti-dilutive and excluded.
- Convertible bonds that reduce EPS are dilutive and included.
- Options granted during the year at $3.00 are dilutive and included, weighted from the grant date.
- Contingently issuable shares are included if the conditions are satisfied at the end of the period.
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