Testbank

to accompany

Applying
®
IFRS Standards 4e
Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad
Livne, Janice Loftus, Leo van der Tas

Prepared by
John Sweeting, Emma Holmes and
Elisabetta Barone
Test Bank to accompany Applying IFRS Standards 4e

John Wiley & Sons, Ltd 2016

© John Wiley & Sons, Ltd 2016 3.1

 Chapter 3: Fair value measurement

CHAPTER 3

Fair value measurement

Learning Objectives
3.1 Explain the need for an accounting standard on fair value measurement
3.2 Understand the key characteristics of the term ‘fair value’
3.3 Explain the steps in determining the fair value of non-financial assets
3.4 Understand how to measure the fair value of liabilities
3.5 Explain how to measure the fair value of an entity’s own equity instruments
3.6 Discuss issues relating to the measurement of the fair value of financial instruments
3.7 Prepare the disclosures required by IFRS 13 Fair Value Measurement
3.8 Discuss the issues associated with the measurement and use of fair values.

© John Wiley & Sons, Ltd 2016 3.2

Test Bank to accompany Applying IFRS Standards 4e

Multiple Choice Questions

1. Which of the following is not one of the key reasons given by the IASB for a standard on
fair value measurement?
Learning Objective 3.1 Explain the need for an accounting standard on fair value
measurement
a. to establish a single source of guidance for all fair value measurements required or
permitted by IFRSs to reduce complexity and improve consistency in their
application;
b. to clarify the definition of fair value and related guidance in order to communicate
the measurement objective more clearly;
*c. to require the use of fair value when accounting for all non-financial assets;
d. to enhance disclosures about fair value to enable users of financial statements to
assess the extent to which fair value is used and to inform them about the inputs
used to derive those fair values.

2. Which of the following documents issued alongside IFRS 13 do not form an integral part of
the standard?

I Basis for Conclusions

II Illustrative Examples
III Appendix A: Defined terms
IV Appendix B: Application guidance

Learning Objective 3.1 Explain the need for an accounting standard on fair value
measurement
*a. I and II;
b. II and III;
c. III and IV;
d. I and IV.

3. Which of the following is the definition of fair value per IFRS 13?
Learning Objective 3.2 Understand the key characteristics of the term ‘fair value’
a. The amount for which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s length transaction;
*b. The price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date;
c. The price that would be received to sell an asset or paid to transfer a liability;
d. A transaction that assumes exposure to the market for a period before the
measurement date to allow for marketing activities that are usual and customary for
transactions involving such assets or liabilities; it is not a forced transaction (eg a
forced liquidation or distress sale).

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 Chapter 3: Fair value measurement

4. At which date is fair value determined?

Learning Objective 3.2 Understand the key characteristics of the term ‘fair value’
*a. the measurement date;
b. the settlement date;
c. the transaction date;
d. the exchange date.

5. When determining the fair value of an asset its fair value is based on its:
Learning Objective 3.2 Understand the key characteristics of the term ‘fair value’
a. Current use;
b. Proposed use;
*c. Highest and best use;
d. Value in use.

6. Which of the following is not a valuation technique prescribed by IFRS 13?

Learning Objective 3.3 Explain the steps in determining the fair value of non-financial
assets
*a. the fair value approach;
b. the income approach;
c. the cost approach;
d. the market approach.

7. The market with the greatest volume and level of activity for the asset or liability is defined
as the:
Learning Objective 3.3 Explain the steps in determining the fair value of non-financial
assets
a. active market;
*b. principal market;
c. liquid market;
d. most advantageous market.

8. Valuation techniques that convert future amounts to a single current amount and
determines the fair value on the basis of the value indicated by current market
expectations about those future amounts is an example of:
Learning Objective 3.3 Explain the steps in determining the fair value of non-financial
assets
a. the fair value approach;
*b. the income approach;
c. the cost approach;
d. the market approach.

© John Wiley & Sons, Ltd 2016 3.4

Test Bank to accompany Applying IFRS Standards 4e

9. Unobservable inputs for the asset or liability are an example of:

Learning Objective 3.3 Explain the steps in determining the fair value of non-financial
assets
a. a Level 1 input;
b. a Level 2 input;
*c. a Level 3 input;
d. a Level 4 input.

10. Which of the following is not an example of a level 2 input?

Learning Objective 3 Explain the steps in determining the fair value of non-financial assets
*a. a financial forecast of cash flow or earnings;
b. quoted prices for identical or similar assets or liabilities in markets that are not
active;
c. inputs other than quoted prices that are observable for the asset or liability, such as
interest rates and yield curves, volatilities, prepayment speeds, and credit risks;
d. inputs that are derived from or corroborated by observable market data by
correlation or other means.

11. Trademarks would be measured primarily using which type of inputs?

Learning Objective 3.3 Explain the steps in determining the fair value of non-financial
assets
a. Level 1 inputs;
b. Level 2 inputs;
*c. Level 3 inputs;
d. Level 4 inputs.

12. Which of the following steps in not relevant when valuing liabilities?
Learning Objective 3.4 Understand how to measure the fair value of liabilities
a. the particular liability that is the subject of the measurement;
*b. the valuation premise that is appropriate for the measurement;
c. the principal (or most advantageous) market for the liability;
d. the valuation technique(s) appropriate for the measurement, considering the
availability of data with which to develop inputs that represent the assumptions that
market participants would use when pricing the asset or liability and the level of the
fair value hierarchy within which the inputs are categorised.

13. When measuring the fair value of a liability, which of the following is assumed?
Learning Objective 3.4 Understand how to measure the fair value of liabilities
a. the liability is settled by the holder;
*b. the liability will be settled by the market participant;
c. the liability will not be settled;
d. the liability is settled with the counterparty on measurement date.

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 Chapter 3: Fair value measurement

14. Where a liability is held as a corresponding asset by another entity the fair value of the
liability is determined by:
Learning Objective 3.4 Understand how to measure the fair value of liabilities
a. applying a present value technique to measure the liability;
b. applying the cost approach to valuing the liability;
*c. measuring the fair value of the corresponding asset;
d. determining the amount required to settle the present obligation.

15. In which circumstance will it be necessary to determine the fair value of an entity’s own
equity instruments?
Learning Objective 3.5 Explain how to measure the fair value of an entity’s own equity
instruments
a. where the entity is preparing for listing;
*b. where the entity undertakes a business combination and issues its own equity
instruments in exchange for a business;
c. where the entity undertakes a share buy-back;
d. where there is a change in the shareholding of the entity.

16. Which of the following is not assumed when measuring the fair value of an equity
instrument?
Learning Objective 3.5 Explain how to measure the fair value of an entity’s own equity
instruments
a. The market participant transferee will take on the rights and responsibilities
associated with the instrument;
*b. An entity’s own equity instruments are transferred to a market participant at transfer
date;
c. An entity’s own equity instrument would remain outstanding;
d. The instrument would not be cancelled or otherwise extinguished on the
measurement date.

17. Where a market has both a bid and an ask process, the price used in measuring fair value
is:
Learning Objective 3.6 Discuss issues relating to the measurement of the fair value of
financial instruments
a. the bid price;
b. the ask price;
c. the bid-ask spread;
*d. the most representative price for the transaction.

© John Wiley & Sons, Ltd 2016 3.6

Test Bank to accompany Applying IFRS Standards 4e

18. An entity holding both financial assets and liabilities is allowed to offset and determine fair
value on the net position as long as:

I they hold a net long position

II they hold a net short position
III they have a documented risk management strategy
IV the manage the group of net financial assets and liabilities on a net exposure basis
V. transactions are conducted in an orderly market
Learning Objective 3.6 Discuss issues relating to the measurement of the fair value of
financial instruments
a. I and III;
b. II and IV;
*c. III and IV;
d. II and V.

19. Which of the following disclosures are not required under IFRS 13?
Learning Objective 3.7 Prepare the disclosures required by IFRS 13 Fair Value
Measurement
a. the valuation techniques used to measure fair value;
b. the inputs used to measure fair value;
c. the level of the fair value hierarchy within which the fair value measurements are
categorised;
*d. quantitative information about all unobservable inputs used in the fair value
measurement.

20. Which of the following does Whittington (2008) see as a main feature of the fair value
view?
Learning Objective 3.8 Discuss the issues associated with the measurement and use of
fair values.
a. Stewardship, defined as accountability to present shareholders, is a distinct
objective, ranking equally with decision usefulness;
*b. Reliability is less important and is better replaced by representational faithfulness,
which implies a greater concern for capturing economic substance, and less with
statistical accuracy;
c. Present shareholders of the holding company have a special status as users of
financial statements;
d. Future cash flows may be endogenous: feedback from shareholders and markets in
response to accounting reports may influence management decisions.

21. Which are the two most common measures used by IFRS?
Learning Objective 3.1 Explain the need for an accounting standard on fair value
measurement.

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 Chapter 3: Fair value measurement

a. fair value less costs to sell and cost;

b. value in use and cost;
*c. cost and fair value;
d. net realisable value and fair value.

22. Which of the following is the definition of exit price per IFRS 13?
Learning Objective 3.2 Understand the key characteristics of the term ‘fair value’.
a. A transaction that assumes exposure to the market for a period before the
measurement date to allow for marketing activities that are usual and customary for
transactions involving such assets or liabilities; it is not a forced transaction (e.g. a
forced liquidation or distress sale);
b. The amount for which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s length transaction;
c. The price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date;
*d. The price that would be received to sell an asset or paid to transfer a liability.

23. Which of the following is not a characteristic of a market participant under IFRS 13?
Learning Objective 3.2 Understand the key characteristics of the term ‘fair value’.
a. Buyers and sellers that are able to enter into a transaction for the asset or liability;
b. Buyers and sellers that are willing to enter into a transaction for the asset or liability;
*c. Buyers and sellers that are dependent on each other;
d. Buyers and sellers that are knowledgeable, having a reasonable understanding
about the asset or liability and the transaction using all available information.

24. Which of the following is an indication of an active market?

Learning Objective 3.3 Explain the steps in determining the fair value of non-financial
assets.
a. there are few recent transactions;
b. price quotations vary substantially over time;
c. price quotations vary substantially among market-makers;
*d. price quotations are based on current market information.

25. Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity
can access at the measurement date are an example of:
Learning Objective 3.3 Explain the steps in determining the fair value of non-financial
assets.
a. a Level 2 input;
*b. a Level 1 input;
c. a Level 3 input;
d. a Level 4 input.

© John Wiley & Sons, Ltd 2016 3.8

Test Bank to accompany Applying IFRS Standards 4e

26. Non-performance risk refers to the risk that:

Learning Objective 3.4 Understand how to measure the fair value of liabilities.
a. a market participant will not fulfil an obligation;
*b. the holder of the liability will not fulfil an obligation;
c. the counterparty will not fill an obligation;
d. the holder of a corresponding asset will not fulfil an obligation.

27. Which of the following is an example of a liability where there is no corresponding asset?
Learning Objective 3.4 Understand how to measure the fair value of liabilities
*a. a provision for decommissioning;
b. a debenture issued by a listed company;
c. a loan owing to a financial institution;
d. a provision for warranties.

28. In measuring an equity instrument at fair value the objective is to estimate an exit price at
measurement date from the perspective of:
Learning Objective 3.5 Explain how to measure the fair value of an entity’s own equity
instruments.
a. the issuer of the equity instrument;
b. the party to whom the instrument will be transferred;
c. the party who intends to repurchase the instrument;
*d. a market participant who holds the instrument as an asset.

29. The fair value of an equity instrument is based on determining a/an _________ price
which may relate to the price paid for an entity to repurchase its shares.
Learning Objective 3.5 Explain how to measure the fair value of an entity’s own equity
instruments.
a. transfer;
b. settlement;
c. entry;
*d. exit.

30. Which of the following disclosure are required under IFRS 13?
Learning Objective 3.7 Prepare the disclosures required by IFRS 13 Fair Value
Measurement.
a. the valuation techniques used to measure fair value
b. the level of the fair value hierarchy within which the fair value measurements are
categorised
c. quantitative information about the significant unobservable inputs used in the fair
value measurement
*d. all of the options are correct.

© John Wiley & Sons, Ltd 2016 3.9