Chapter 28 - SMEs Liabilities

PROVISION

A provision is a liability of uncertain timing or amount.

Recognition of provision

An SME shall recognize a provision only when:

a. The entity has an obligation at the reporting date as a result of past

event.

b. It is probable that the entity will be required to transfer economic

benefits in settlement.

c. The amount of the obligation can be estimated reliably.

Measurement of provision

An SME shall measure a provision at the best estimate of the amount

required to settle the obligation at the reporting date.

The best estimate is the amount an entity would rationally pay to

settle the obligation at the end of reporting period or to transfer to a third
party at that time.

Where the effect of the time value of money is material, the amount of
the provision shall be the present value of the amount required to settle
the obligation

The discount rate shall be a pretax rate that reflects current market
assessment of the time value of money

When the provision involves a large population of items, the estimate

of the amount shall reflect the weighting of all possible oucomes by their
associated probabilities.

When the provision arises from a single obligation, the individual

most likely outcome maybe the best estimate of the amount required to
settle the obligation.
 Where there is a continuous range of possible outcomes and each
point in that range is as likely as any other, the midpoint of the range is
used.

Contingent liability

A contingent liability is either:

a. A possible but uncertain obligation.

b. A present obligation that is not recognized as a liability because it is

not probable that an outflow will occur OR the amount cannot be
measured reliably.

An SME does not recognize a contingent liability as liability unless it

has been acquired in a business combination.

Only a disclosure of a contingent liability is required.

When the possibility of an outflow of resources is remote, no disclosure

is necessary.

Contingent asset

A contingent asset is a possible asset that arises from past event and
whose existence will be confirmed only by the occurrence or
nonoccurrence of one or more uncertain future events not wholly within
the control of the entity.

An SME shall not recognize a contingent asset as an asset.

Only a disclosure of a contingent asset is required when an inflow of

economic benefits is probable.

However, when the inflow of future economic benefits to the entity is

virtually certain, the related asset is no longer contingent asset and its
recognition is appropriate.

Comparison with full PFRS

There are no significant differences between PFRS for SMEs and full
PFRS with respect to provisions and contingencies.

The PFRS for SMEs and full PFRS share the same principles for
accounting and reporting provision and for disclosing contingent liabilities
and contingent assets.
LEASE

The PFRS for SMEs defines lease as an agreement whereby the

lessor conveys to the lessee in return for payment or a series of payments
the right to use an asset for an agreed period of time.

The PFRS for SMEs applies to all leases, except the following:

a. Leases in the exploration industry

b. Licensing agreement for such items as motion picture films, video

recordings, plays, manuscripts, patents and copyrights

c. Investment property

d. Biological assets

e. Leases that could result in a loss to either party as a result of

contractual terms that are unrelated to changes in the price of leased
assets, changes in lease payments based on variable market interest
rate, changes in foreign exchange rate or a default by one of the
counterparties.

f. Onerous operating leases

Classification of leases

A lease is classified as a finance lease if it transfers to the lessee

substantially all of the risks and rewards incidental to ownership

A lease is classified as an operating lease if it does not transfer

substantially all of the risks and rewards incidental to ownership.

Whether a lease is a finance lease or an operating lease depends on

the substance of the transaction rather than its legal form.

Major criteria for a finance lease

A lease that satisfies any one of the following would normally lead to a
finance lease:

a. Transfer of ownership of the asset at the end of the lease term

b. There is a bargain purchase option.

c. Lease term is a major part of the economic life of the asset even if title
is not transferred.
 d. The present value of the minimum lease payments amounts to at
least substantially all of the fair value of the leased asset at the inception
of the lease.

Finance lease - lessee

1. At the commencement of the lease term, the lessee shall recognize an

asset and a liability equal to the lower between the fair value of the asset
and the present value of the minimum lease payments.

2. The present value of the minimum lease payments should be

calculated using the interest rate implicit in the lease. If this cannot be
determined, the lessee's incremental borrowing rate shall be used.

3. Any initial direct costs incurred by the lessee in negotiating and

arranging a lease are added to the cost the asset.

4. The lessee shall depreciate the leased asset over the useful life.

However, if there is no reasonable certainty that the lessee will obtain

ownership by the end of the lease term, the asset shall be depreciated
over the shorter between the useful life and lease term.

5. The minimum lease payments shall be apportioned between the

finance charge and the reduction of the outstanding liability using the
effective interest method.

6. The lessee shall charge contingent rent as expense in the period it is

incurred.

Finance lease - lessor

On the part of the lessor, a finance lease is classified either as direct

financing lease or sales type lease.

The main distinction is the presence or absence of a manufacturer's or

dealer's profit or loss.

A direct financing lease recognizes only interest income.

A sales type lease recognizes both interest income and gross profit on
sale.
Direct financing lease

1. The lessor shall recognize a receivable at an amount equal to the net

investment in the lease.

2. The net investment in the lease is equal to the cost of the asset plus
any initial direct cost incurred by the lessor.

The initial direct cost would effectively reduce the interest income over
the lease term.

3. The total interest income over the lease term is equal to the gross
investment in the lease minus the net investment in the lease.

4. The gross investment in the lease is equal to the gross rentals over
the lease term plus the residual value, whether guaranteed or
unguaranteed.

However, if the ownership of the asset will transfer to the lessee

upon the expiration of the lease term, the residual value is ignored in
computing gross investment in the lease.

5. The initial direct cost incurred by the lessor in a direct financing lease is
added to the cost of the asset to get the net investment in the lease.

Sales type lease

1. The lessor shall recognize a receivable equal to the net investment in

the lease.

2. The net investment in the lease is the present value of the gross
investment in the lease discounted at the implicit interest rate in the lease.

3. The gross investment in the lease is equal to the gross rentals over
the lease term plus the residual value, whether guaranteed or
unguaranteed.

However, if the ownership of the asset will transfer to the lessee

upon the expiration of the lease term, the residual value is ignored
in computing the gross investment in the lease.

4. The total interest income over the lease term is equal to the gross
investment in the lease minus the net investment in the lease.

5. The amount of sales is equal to the lower between the net investment
in the lease and the fair value of the asset at the commencement of the
lease.
6. The cost of goods sold is equal to the cost of the asset plus initial direct
cost incurred by the lessor.

In sales type lease, the initial direct cost incurred by the lessor is
expensed immediately as component of cost of goods sold.

7. The gross income is equal to sales minus cost of goods sold.

Operating lease - lessee

1. The lessee shall recognize rental payments under operating leases as

an expense on a straight line basis unless:

a. Another systematic basis is more representative of the pattern of the

lessee's benefit.

b. The payments to the lessor are structured to increase in line with the
expected inflation to compensate for the lessor's inflationary cost
increases.

2. Cost of services, such as insurance and maintenance, shall be

expensed when incurred but not included in rent expense.

Operating lease - lessor

1. The lessor shall recognize rent income from operating leases on a

straight line basis unless:

a. Another systematic basis is representative of the pattern of the

benefit from the leased asset.

b. The payments to the lessor are structured to increase in line with

expected inflation to compensate for the lessor's inflationary cost
increases.

2. The lessor shall present assets subject to operating leases according to

their nature.

3. The lessor shall recognize as an expense costs incurred in earning the

rent income, including depreciation of the leased asset.

4. Any initial direct cost incurred by the lessor in an operating lease is

amortized as expense over the lease term.

The unamortized initial direct cost is added to the carrying amount of

the leased asset in the statement of financial position.
COMPARISON WITH FULL PFRS

Lessor accounting

PFRS for SMEs and full PFRS are practically the same with respect to
lessor accounting.

Lessee accounting

However, with respect to lessee accounting, there seems to be a

significant difference between PFRS for SMEs and full PFRS.

Under PFRS for SMEs, the lessee shall classify the lease as operating
or finance based on the transfer of risks and rewards incidental to
ownership.

PFRS 16 is the new lease standard.

Under this new lease standard, the "transfer of risks and rewards"
approach is no longer applied in lessee accounting.

Under PFRS 16, a lessee is required to initially recognize a lease

liability for the obligation to make payments and a right of use asset for
the right to use the underlying asset over the lease term.

In other words, the lessee is required to account for the lease as a

finance lease under the new lease standard.

The lease liability is measured at the present value of the lease

payments to be made over the lease term.

The right of use asset is initially measured at the amount of lease

liability adjusted for lease prepayments, lease incentives received, initial
direct costs and an estimate of restoration, removal and dismantling cost.

The right of use asset is depreciated in accordance with the

depreciation requirements under PAS 16 Property, plant and equipment.

If the lease term is 12 months or less or if the underlying asset is of low

value, the lessee is permitted to make an accounting policy election to
apply the old operating lease accounting and not recognize a right of use
asset and lease liability.

In other words, the lessee is allowed to follow the rental approach for
low value lease or if the lease term is one year or less.
EMPLOYEE BENEFITS

Employee benefits are all forms of consideration given by an entity in

exchange for service rendered by employees, including directors and
management, or for the termination of employment.

Employee benefits include:

a. Short-term employee benefits, such as wages, salaries, profit sharing

and bonuses.

b. Postemployment benefits, such as retirement benefit plans and

pensions.

c. Other long-term employee benefits, such as long-term service leave

and jubilee leave.

d. Termination benefits, such as severance and redundancy pay.

e. Share-based payments.

Short-term employee benefits

Short-term employee benefits are employee benefits other than

termination benefits which are expected to be settled wholly within twelve
months after the end of the period in which the employees render the
related service.

Short-term employee benefits include the following:

a. Salaries, wages and social security contributions.

b. Short-term paid absences such as paid annual leave and paid sick
leave.

c. Profit sharing and bonuses payable within twelve months.

d. Nonmonetary benefits, such as medical care, housing, car and free or

subsidized goods.

Post-employment benefits

Post-employment benefits are employee benefits, other than

termination benefits and short-term employee benefits, which are payable
after completion of employment.
 Post-employment benefits are usually embodied in an arrangement
known as “postemployment benefit plan”.

Post-employment benefit plan is classified either as defined

contribution plan and defined benefit plan.

Defined contribution plan

A defined contribution plan is a post-employment benefit plan under

which an entity pays fixed contribution into a separate entity known as the
fund.

The entity will have no legal or constructive obligation to pay further

contributions if the fund does not hold sufficient assets to pay all
employee benefits relating to employee service in the current and prior
periods.

The contribution is definite but the benefit is indefinite.

The amount of benefit received by the employee is determined by the

amount of contributions paid by the entity to a benefit plan or to a trustee,
together with investment returns from the contributions.

Defined benefit plan

PFRS for SMEs simply defines a defined benefit plan as a post-

employment plan other than a defined contribution plan.

Under a defined benefit plan, an entity’s obligation is to provide the

agreed benefits to employees.

In other words, an employee is guaranteed specific or definite amount

of benefit based on a formula which is usually related to the salary and
years of service.

The benefit is definite but the contribution is indefinite.

Measurement of defined contribution plan

An SME shall recognize the contribution payable for a period:

a. As an expense, unless another provision of the PFRS for a SMEs

requires the contribution to be recognized as part of the cost of an asset,
such as inventory or property, plant and equipment.
 b. As a liability, after deducting any amount already paid.
If the contribution payments exceed the contribution due at the
reporting date, the entity shall recognize that excess as an asset.
Measurement of defined benefit plan

An SME shall measure a defined benefit liability as the net amount of the
following:

a. The present value of the defined benefit obligation at the reporting

date.
b. Minus the fair value of the plan assets at the reporting date.
The plan assets represent the fund out of which the defined benefit
obligations are to be paid directly.

Actuarial gains and losses

An SME is required to recognize all actuarial gains and losses in the

period in which they occur.

However, the SME has an accounting policy choice of recognizing all

actuarial gains and losses either:

a. In profit or loss
b. In other comprehensive income

Other long-term employee benefits

Other long-term employee benefits are all employee benefits, other

than post-employment benefits, short-term employee benefits and
termination benefits.

Examples of other long-term employee benefits

a. Long-term paid absences such as long service or sabbatical leave

b. Jubilee or other long-service benefit
c. Long-term disability benefit
d. Profit sharing and bonuses
e. Deferred compensation
Termination benefits

Termination benefits are payments made by an entity to employees when

it terminates their employment as required:

a. By legislation, contractual or other agreement with employees or their

representatives.
b. By constructive obligation based on business practice, custom or a
desire to act equitably.

The entity shall recognize termination benefits as expense and liability

when the entity is demonstrably committed to either:

a. Terminate the employment of an employee or group of employees

before the normal retirement date.
b. Provide termination benefits as a result of an offer made in order to
encourage voluntary redundancy.

Comparison with full PFRS (PAS 19R)

Full PFRS and PFRS for SMEs share the same principles for the
recognition and measurement of the following:

a. Short-term employee benefits

b. Defined contribution plans
c. Other long-term employee benefits
d. Termination benefits
Full PFRS and PFRS for SMEs also share many of the principles for the
recognition and measurement of defined benefit plans.

1. Under both full PFRS and PFRS for SMEs, all past service costs are
now recognized as expense immediately regardless of vesting.

2. Under full PFRS, all remeasurements of defined benefit plan, including

actuarial gain and loss are recognized through other comprehensive
income.
However, amounts recognized in other comprehensive income are
not subsequently recycled to profit or loss but may be transferred
within equity or retained earnings.

Under PFRS for SMEs, actuarial gain and loss are:

a. Recognized immediately in profit or loss.

 b. Recognized immediately in other comprehensive income.
The SME has an accounting policy choice.

If the SME elected to recognize such actuarial gain and loss in other
comprehensive income, the amount is not subsequently recycled to
profit or loss but transferred to retained earnings.

3. Under full PFRS, the projected unit credit method must be used in
measuring the defined benefit liability.
Under PFRS for SMEs, the projected unit credit method is used in
measuring the defined benefit liability if the information that is needed to
make such a calculation is already available or can be obtained
without undue cost or effort.

If this is not the case, an alternative method is permitted in which

future salary, future service and possible mortality between the reporting
date and the date employees are expected to begin receiving
postemployment benefits are not considered.

4. Under both PFRS for SMEs and full PFRS, the defined benefit liability
is the net total of the following:
a. Present value of benefit obligation at year-end
b. Minus the fair value of plan assets at year-end

5. Under both PFRS for SMEs and full PFRS, there is no more concept of
expected return.

Under PFRS for SMEs, all changes in the fair value of plan assets
are recognized in profit or loss.

Under full PFRS, the interest income on the fair value of plan assets
at the beginning of the period is included in profit or loss as component
of employee benefit expense.

The difference between actual return on plan assets and the interest
income is recognized as a remeasurement of plan assets accounted for
as component of other comprehensive income.

INCOME TAX

The PFRS for SMEs provides that income tax includes all domestic
and foreign taxes that are based on taxable profit.
 Income tax also includes taxes, such as withholding taxes, that are
payable by a subsidiary, associate or joint venture as distributions to the
reporting entity.

Current tax asset or liability

An SME shall recognize a current tax liability for tax payable based on
taxable profit for the current and past periods.

If the amount already paid for the current and prior periods exceeds
the amount payable for those periods, the excess is recognized as a
current tax asset. Actually, a current tax asset is a prepaid income tax.

Measurement of current tax asset or liability

Current tax asset and liability and related tax expense are measured at
the amount expected to be paid or recovered, using the tax rate that has
been enacted or substantively enacted at the reporting date.

Deferred tax liability

A deferred tax liability is the amount of income tax payable in future

periods with respect to a taxable temporary difference.

In other words, a deferred tax liability is the deferred tax consequence

of a future taxable amount.

A deferred tax liability is presented as a noncurrent liability.

Deferred tax asset

A deferred tax asset is the amount of income tax recoverable in future

periods with respect to a deductible temporary difference.

In other words, a deferred tax asset is the deferred tax consequence of

a future deductible amount and operating loss carryforward.

A deferred tax asset is presented as a noncurrent asset.

Temporary differences

Temporary differences are differences between the carrying amount of

an asset or liability and the tax basis.

The temporary differences that will result to future taxable amount are
known as taxable temporary differences.

The temporary differences that will result to future deductible amount

are known as deductible temporary differences.

Recognition of deferred asset or liability

a. A deferred tax liability shall be recognized for all temporary

differences that are expected to increase taxable profit in the future.

b. A deferred tax asset shall be recognized for all temporary differences

that are expected to reduce taxable profit in the future.

c. A deferred tax asset shall be recognized for the carryover of net

operating loss.

d. A deferred tax asset shall be recognized to the extent that it is

probable that taxable income will be available against which the
deductible temporary difference can be utilized.

Measurement of deferred tax asset or liability

Deferred tax asset and liability are measured using the tax rate that
has been enacted by the end of the reporting period and expected to
apply in the period when the asset is recovered or the liability is settled.

In other words, the future enacted tax rate is used in measuring a

deferred tax asset or deferred tax liability.

Deferred tax asset and deferred tax liability are not discounted.

Allocation of tax expense

An entity shall recognize tax expense in the same component of total

comprehensive income or equity as the transaction or other event that
resulted in the tax expense.
 For example, the presentation should be income from continuing
operations, net of tax, income from discontinued operations, net of tax and
other comprehensive income, net of tax.

This is known as intraperiod tax allocation.

In other words, intraperiod tax allocation means that the income tax
should be deducted from the related income that brought about the tax.

The recognition of deferred tax asset or liability is known as interperiod

tax allocation.

Offsetting

An SME shall offset current tax asset and current tax liability or offset
deferred tax asset and deferred tax liability when all of the following
conditions are present:

a. When the entity has a legally enforceable right to set off the amounts.
b. When the entity intends either to settle on a net basis or to realize the
asset and settle the liability simultaneously.

Comparison with full PFRS

Full PFRS and the amended PFRS for SMEs are now the same in the
matter of accounting for income tax.
QUESTIONS

1. Define a provision.

2. Explain the recognition of a provision,

3. Explain the measurement of a provision.

4. Define a contingent liability.

5. What is the treatment of contingent liability?

6. Define a contingent asset.

7. What is the treatment of contingent asset?

8. Compare PFRS for SMEs and full PFRS with respect to provision and
contingencies.

9. Define a lease.

10. What are the major criteria for a lease to be classified as finance
lease?

11. Explain the accounting for a finance lease on the part of lessee.

12. Explain the accounting for a direct financing lease on the part of
lessor.

13. Explain the accounting for a sales type lease on the part of lessor.

14. Explain operating lease on the part of lessee and lessor.

15. Compare PFRS for SMEs and full PFRS with respect to accounting
and reporting for leases.

16. Define employee benefits.

17. What are short-term employee benefits?

18. Define postemployment benefits.

19. Explain a defined contribution plan.

20. Explain a defined benefit plan.

21. Explain the measurement of defined benefit contribution plan.

22. Explain the mesurement of defined benefit plan.

23. Explain the treatment of actuarial gain and loss under PFRS for
SMEs.
24. Define other long-term employee benefits.

25. Define termination benefits.

26. Compare full PFRS and PFRS for SMEs with respect to the following:

a. Past service cost

b. Actuarial gain and loss

c. Projected unit credit method

d. Defined benefit liability

e. Return on plan assets

27. Define income tax.

28. Explain a deferred tax liability and deferred tax asset.

29. Explain the recognition and measurement of deferred tax asset or

liability.

30. Compare PFRS for SMEs and full PFRS in relation to accounting for
income tax.

PROBLEMS

Problem 28-1 (IFRS)

An SME gives warranties at the time of sale to purchasers of its product.

Under the terms of the sale, the SME undertakes to make good, by repair
or replacement, manufacturing defects that become apparent within one
year from the date of sale.

On the basis of experience, it is probable that there will be some claims

under the warranties.

Sales of P10,000,000 were made evenly throughout 2019.

The expenditures for warranty repairs and replacements for the products
sold in 2019 are expected to be made 50% in 2019 and 50% in 2020.

The 2020 outflows of economic benefits related to the warranty will take
place on June 30, 2020.

Experience indicates that 95% of products sold require no warranty

repairs, 3% of products sold require minor repairs costing 10% of the sale
price, and 2% of products sold require major repairs or replacement
costing 90% of sale price.

The appropriate discount factor for cash flows expected to occur on June
30, 2020 is 0.95238.

Furthermore, an appropriate risk adjustment factor to reflect the

uncertainties in the cash flow estimates is an increment of 6% to the
probability weighted expected cash flows.

What is the warranty provision on December 31, 2019?

a. 210,000

b. 222,600

c. 111,300

d. 106,000

Problem 28-2 (IFRS)

During 2019, an SME is the defendant in a patent infringement lawsuit.

The entity's lawyers believe there is a 30% chance that the court will
dismiss the case and the entity will incur no outflow of economic benefits.

However, if the court rules in favor of the claimant, the lawyers believe
that there is a 20% chance that the entity will be required to pay damages
of P200,000 and an 80% chance that the entity will be required to pay
damages of P100,000. Other outcomes are unlikely.

The court is expected to rule in late December 2020. There is no

indication that the claimant will settle out of court.

A 7% risk adjustment factor to the probability weighted expected cash

flows is considered appropriate to reflect the uncertainties in the cash flow
estimates.

An appropriate discount rate is 5% per year. The present value of 1 at 5%

for one period is.95.

1. What is the undiscounted provision after risk adjustment?

a. 200,000

b. 100,000

C. 84,000
 d. 89,880

2. What is the measurement of the provision for lawsuit?

a. 79,800

b. 95,000

c. 67,410

d. 85,386

Problem 28-3 Multiple choice (IFRS)

1. A provision is

a. A liability of uncertain timing or amount.

b. A possible obligation as a result of past event.

c. An adjustment to the carrying amount of asset.

d. A liability of certain timing or amount.

2. An SME shall recognize a provision only when

a. The entity has a present obligation as a result of a past event.

b. It is probable that the entity will be required to transfer economic

benefits in settlement.

c. The obligation can be estimated reliably.

d. All of these are required in recognizing a provision.

3. Which term is associated with a provision?

a. Possible

b. Likely

c. Remote

d. Probable

4. Provisions are accrued because the likelihood of an unfavorable

outcome is

a. Virtually certain

b. Greater than 50%

 c. At least 75%

d. Possible

5. No single amount within a range is a better estimate than any other

amount or each point in the range is as likely as any other. What is the
amount of accrual?

a. Zero

b. The midpoint of the range

c. The minimum of the range

d. The maximum of the range

Problem 28-4 Multiple choice (IAA)

1. A contingent liability

a. Definitely exists as a liability

b. Is accrued even though not reasonably estimated.

c. Is the result of a loss contingency.

d. Is not recognized in the financial statements.

2. Which of the following is not a contingent liability?

a. A possible but uncertain obligation

b. A present obligation that is not probable but measurable

c. A present obligation that is probable but not measurable

d. A liability of uncertain timing or amount

3. Which of the following is the proper way to report a probable contingent

asset?

a. As an asset

b. As deferred revenue

c. As a disclosure only

d. No disclosure or no accrual

4. Contingent assets need not be disclosed when

 a. Virtually certain

b. Probable

c. Likely

d. Possible

5. Which is the proper way to report a contingent asset, receipt of which is

virtually certain?

a. As an asset

b. As unearned revenue

c. As a disclosure only

d. No disclosure or no accrual

Problem 28-5 Multiple choice (IFRS)

1. Which of the following arrangements should be accounted for in

accordance with PFRS for SMEs on leases?

a. Licensing agreements for such items as motion picture films, video

recordings, plays, manuscripts, patents and copyrights
b. Agreements that transfer the right to use assets even though
substantial services by the lessor may be called for in connection with
the operation or maintenance of such assets
c. Leases to explore for or use minerals, oil, natural gas and similar
nonregenerative resources
d. Onerous operating leases
2. An SME entered, as lessee, into a five-day noncancelable lease of a
motor vehicle that has an economic life of five years and nil residual
value. Lease payments are on a daily basis. At the end of the lease term,
the lessee returns the motor vehicle to the lessor. What is the accounting
treatment of the lease?

a. A finance lease
b. An operating lease
c. Neither a finance lease nor an operating lease
d. Either a finance lease or an operating lease

3. Depreciation of a leased machine is

 I. Recognized by the lessee where the lessor and the lessee have
classified the lease as finance lease.

Il. Recognized by the lessor where the lessor and the lessee have
classified the lease as an operating lease.

a. I only
b. Il only
c. Either I or Il
d. Neither I nor Il
4. A lessee that paid a certain amount to a broker for arranging a finance
lease must

a. Account for the fee as an expense in the period in which the fee was
incurred.
b. Include the fee in the cost of the leased asset
c. Defer recognition of the expense and recognize the fee on the straight
line method over the lease term
d. Include the fee in the principal lease liability
5. An SME enters as lessee into a two-year lease in respect of a machine
that has an economic life of 4 years with nil residual value. Rent per year
is payable yearly in advance.

The lessee holds an option to acquire the machine for a nominal

amount. The option is exercisable at the end of the lease term when the
fair value of the machine is expected to be very much higher than the
nominal amount.

At the commencement of the lease term, the lessor should

I. Derecognize the machine and recognize a lease receivable.

II. Continue to recognize the carrying amount of the machine subject to

the lease as an item of property, plant and equipment.

a. I only
b. II only
c. Both I and II
d. Neither I or II

Problem 28-6 Multiple choice (IFRS)

1. Employee benefits are all forms of consideration given by an entity in

exchange for service rendered by employees or for termination of
employment and include all of the following, except
 a. Short-term employee benefits
b. Postemployment benefits
c. Termination benefits
d. Dividend payments to shareholders
2. The employees are each entitled to 20 days of paid holiday leave per
calendar year. Unused holiday leave cannot be carried forward and does
not vest. What is the treatment of the holiday leave?

a. A short-term employee benefit

b. A postemployment benefit
c. Other long-term employee benefit
d. A termination benefit
3. Which statement best describes the simplified method of calculating a
defined benefit obligation for an SME?

a. It measures the pension obligation on the basis of the plan formula

applied to years of service to date and existing salary levels.
b. It measures the pension obligation on the basis of the plan formula
applied to years of service to date and future salary levels.
c. It estimates the total benefit at retirement and then computes the cost
that will be sufficient, together with interest expected to accumulate at
the assumed rate, to provide the total benefit at retirement.
d. It measures the pension obligation and pension cost on the basis of
the shortest possible period for funding to maximize the tax deduction.
4. The employees are entitled to 10 days holiday leave per calendar year.
Unused holiday leave may be carried forward until the employee leaves
the employment of the entity, at which time the entity will pay the
employee for all unused holiday leave. What is the treatment of the
holiday leave?

a. A short-term employee benefit

b. A postemployment benefit
c. Other long-term employee benefit
d. A termination benefit
5. An entity reimburses 50% of past employee’s postemployment medical
cost if the employee provides 25 years of service or more to the entity.
What is the treatment of the obligation to pay 50% of qualifying past
employee’s postemployment medical cost?

a. A short-term employee benefit

b. A postemployment benefit
c. Other long-term employee benefit
d. A termination benefit
6. A profit-sharing plan requires an entity to pay a specified proportion of
cumulative profit for a five-year period to employees who serve throughout
the five-year period. What is the profit-sharing plan?

a. A short-term employee benefit

b. A postemployment benefit
c. Other long-term employee benefit
d. A termination benefit
7. A profit-sharing plan requires an entity to pay a specified proportion of
cumulative profit for the year to employees who serve the entity
throughout the year. What is the profit-sharing plan?

a. A short-term employee benefit

b. A postemployment benefit
c. Other long-term employee benefit
d. A termination benefit
8. An entity made a public announcement of a commitment to a voluntary
redundancy plan. The entity has an obligation to pay employees that
choose voluntary redundancy a lump sum equal to twice their gross
annual salary. What is the obligation to pay employees that choose
voluntary redundancy?

a. A short-term employee benefit

b. A postemployment benefit
c. Other long-term employee benefit
d. A termination benefit
9. Under IFRS for SMEs, which of the following statements is incorrect?

a. Past service costs are recognized as expense immediately when

incurred.
b. Actuarial gain or actuarial loss must be recognized as component of
other comprehensive income.
c. Any reimbursement of the amount required to settle a defined benefit
obligation shall be recognized as an asset.
d. The projected unit credit method is used if the information needed is
already available or can be obtained without undue cost and effort.

10. The defined benefit liability of an SME is measured at

a. The present value of benefit obligation minus the fair value of the plan
assets.
b. The fair value of plan assets minus the present value of benefit
obligation.
 c. The present value of benefit obligation plus net actuarial gain not
recognized minus fair value of plan assets.
d. The present value of benefit obligation plus net actuarial gain not
recognized minus fair value of plan assets minus unrecognized past
service cost.

Problem 28-7 Multiple choice (IFRS)

1. Which is included in the term income tax?

a. Domestic tax based on taxable profit

b. Foreign tax based on taxable profit
c. Tax payable by a subsidiary, associate or joint venture as distribution
to the reporting entity.
d. All of these are included in income tax.
2. In computing deferred tax asset or liability, which tax rate is used?

a. Current tax rate

b. Estimated future tax rate
c. Enacted future tax rate
d. Prior tax rate
3. Which statement is true regarding reporting deferred income taxes in
the financial statements?

a. Deferred tax asset is always netted against deferred tax liability.

b. Deferred taxes of one jurisdiction are offset against another
jurisdiction in the netting process.
c. Deferred tax asset and liability may only be classified as noncurrent.
d. Deferred tax asset and liability are classified as current and
noncurrent based on expiration date.
4. Which statement is correct about the presentation of deferred tax asset
and liability?

a. Current deferred tax asset is netted against current deferred tax

liability.
b. Noncurrent deferred tax asset is netted against noncurrent deferred
tax liability.
c. Deferred tax asset is never netted against deferred tax liability.
d. Deferred tax asset is netted against deferred tax liability if they relate
to the same tax authority.