Question 1

In relation to applying an amount due from a third party in a "set-off" situation, AASB 132 notes:

Accepted Answer

A)  That it is never permitted. 
B)  That it is permitted only where the third party is a subsidiary of one of the other two parties. 
C)  That it is permitted where there exists an agreement between the three parties that clearly establishes the right to set off. 
D)  That it is only permitted where all three parties are part of the same consolidated group. 
E)  That it is permitted only under circumstances where the third party is in administration and it is part of a debt forgiveness program. 
A)  That it is never permitted. 
B)  That it is permitted only where the third party is a subsidiary of one of the other two parties. 
C)  That it is permitted where there exists an agreement between the three parties that clearly establishes the right to set off. 
D)  That it is only permitted where all three parties are part of the same consolidated group. 
E)  That it is permitted only under circumstances where the third party is in administration and it is part of a debt forgiveness program.

Question 2

Pump It Up Ltd owes Under Ground Oil $170 000 and Under Ground Oil owes Pump It Up Ltd $350 000. Pump It Up Ltd's financial position before these amounts are set-off is:
 
What is the debt/equity ratio for Pump It Up Ltd before and after set-off?

Accepted Answer

A)  Before set-off: 75 per cent; after set-off: 47 per cent 
B)  Before set-off: 43 per cent; after set-off: 27 per cent 
C)  Before set-off: 134 per cent; after set-off: 210 per cent 
D)  Before set-off: 43 per cent; after set-off: 32 per cent 
E)  None of the given answers. 
A)  Before set-off: 75 per cent; after set-off: 47 per cent 
B)  Before set-off: 43 per cent; after set-off: 27 per cent 
C)  Before set-off: 134 per cent; after set-off: 210 per cent 
D)  Before set-off: 43 per cent; after set-off: 32 per cent 
E)  None of the given answers.

Question 3

AASB 132 only allows assets and liabilities to be offset against one another if a legally recognised right to set-off exists for these items:

Accepted Answer

A) True 
 B)False

Question 4

Insubstance debt defeasance was defined in the former AASB 1014 as:

Accepted Answer

A)  A type of legal defeasance in which a designated third entity assumes responsibility for the debt or a suitable legal arrangement is created to ensure that the debt is serviced and this is guaranteed by the debtor entity. 
B)  A defeasance, other than a legal defeasance, in which the debtor effectively achieves release from the primary obligation for a debt by placing in trust assets that are adequate to meet the servicing requirements (both interest and principal) of the debt or by having a suitable entity assume responsibility for those servicing requirements. 
C)  A defeasance, including a legal defeasance, in which the debtor effectively achieves release from the requirement to meet the interest and principal repayments on a debt by arranging for a suitable entity to assume the debt. 
D)  A defeasance where the substance of the arrangement is equivalent to a legal defeasance in that the primary obligation for the debt is assumed by a designated third party with the knowledge and permission of the lender. 
E)  None of the given answers. 
A)  A type of legal defeasance in which a designated third entity assumes responsibility for the debt or a suitable legal arrangement is created to ensure that the debt is serviced and this is guaranteed by the debtor entity. 
B)  A defeasance, other than a legal defeasance, in which the debtor effectively achieves release from the primary obligation for a debt by placing in trust assets that are adequate to meet the servicing requirements (both interest and principal) of the debt or by having a suitable entity assume responsibility for those servicing requirements. 
C)  A defeasance, including a legal defeasance, in which the debtor effectively achieves release from the requirement to meet the interest and principal repayments on a debt by arranging for a suitable entity to assume the debt. 
D)  A defeasance where the substance of the arrangement is equivalent to a legal defeasance in that the primary obligation for the debt is assumed by a designated third party with the knowledge and permission of the lender. 
E)  None of the given answers.

Question 5

A right of set-off may still be applied in the case of Insubstance Debt Defeasance (ISDD) if the entity intends to settle on a net basis, or to realise the asset and settle the liability simultaneously.

Accepted Answer

A) True 
 B)False

Question 6

The term defeasance means the setting off of one thing against another:

Accepted Answer

A) True 
 B)False

Question 7

Cartoons and Co's balance sheet is shown below.
 
Assuming a right to set-off exist with Ink Drawings Ltd, the balance sheet after set-off will be:

Accepted Answer

A)    
B)    
C)    
D)    
E)  None of the given answers. 
A)    
B)    
C)    
D)    
E)  None of the given answers.

Question 8

"Legal defeasance":

Accepted Answer

A)  Is not permitted under AASB 132. 
B)  Is a term explicitly used in AASB 132. 
C)  Is still acceptable under AASB 132. 
D)  Is not defined in the former AASB 1014. 
E)  All of the given answers. 
A)  Is not permitted under AASB 132. 
B)  Is a term explicitly used in AASB 132. 
C)  Is still acceptable under AASB 132. 
D)  Is not defined in the former AASB 1014. 
E)  All of the given answers.

Question 9

One of the requirements for setting off in AASB 132 is the intention to offset. Which of the following statements about the "intention to set off" is correct?

Accepted Answer

A)  The intention to offset is only required where the legal right to set-off is disputed. 
B)  Without the intention to offset the past cash flows of the entity will not be affected. 
C)  The intention of both parties to settle is insufficient unless a legal right exists. 
D)  Must be stipulated in writing for it to apply under ASB 132. 
E)  None of the given answers. 
A)  The intention to offset is only required where the legal right to set-off is disputed. 
B)  Without the intention to offset the past cash flows of the entity will not be affected. 
C)  The intention of both parties to settle is insufficient unless a legal right exists. 
D)  Must be stipulated in writing for it to apply under ASB 132. 
E)  None of the given answers.

Question 10

A futures contract is an example of a financial instrument where the net amount of a financial asset and a financial liability may be presented in the statement of financial position.

Accepted Answer

A) True 
 B)False

Question 11

The former AASB 1014 required that if a trust was established to assume the responsibility for a debt in an insubstance debt defeasance, that trust must:

Accepted Answer

A)  Be under the control of the debtor entity and have enough securities issued by a credit-worthy government to ensure that there is a very low probability that the debtor entity will have any further obligation in relation to the debt. 
B)  Be a company set up under the relevant state and federal statutes to administer the risk-free assets that are to be used to release the debtor entity from the primary obligation for the debt. 
C)  Have risk-free assets irrevocably transferred to it, which are of a type suited to the amount and timing so as to meet the servicing requirements of the debt.. 
D)  Be a government-guaranteed financial institution that is required to report annually to the Australian Securities and Investments Commission. 
E)  None of the given answers. 
A)  Be under the control of the debtor entity and have enough securities issued by a credit-worthy government to ensure that there is a very low probability that the debtor entity will have any further obligation in relation to the debt. 
B)  Be a company set up under the relevant state and federal statutes to administer the risk-free assets that are to be used to release the debtor entity from the primary obligation for the debt. 
C)  Have risk-free assets irrevocably transferred to it, which are of a type suited to the amount and timing so as to meet the servicing requirements of the debt.. 
D)  Be a government-guaranteed financial institution that is required to report annually to the Australian Securities and Investments Commission. 
E)  None of the given answers.

Question 12

Claudia Ltd's statement of financial position is shown below.
 
The above balances include a receivable from Jeremy Ltd for an amount of $100,000 and a payable to Jeremy Ltd for $50,000. A debt contract with ABC Bank signed by Claudia Ltd requires a debt equity ratio of no more than 50%.
Assuming a right to set-off exists with Jeremy Ltd, what is the debt to equity ratio of Claudia Ltd?

Accepted Answer

A)  13% 
B)  40% 
C)  45% 
D)  50% 
E)  All of the given answers. 
A)  13% 
B)  40% 
C)  45% 
D)  50% 
E)  All of the given answers.

Question 13

Legal defeasance is not addressed in AASB 132 and will no longer be used in Australia.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following is not one of the advantages that were previously available when the insubstance defeasance of debt was allowable?

Accepted Answer

A)  It provided a tool to 'manage' company earnings. 
B)  Restrictive limitations imposed by the trustee for debenture holders can be relaxed by reducing the amount of debt. 
C)  It allowed debt to be retired with reference to specific individual debt-holders. 
D)  It allowed strategic rethinking of business policies. 
E)  The effect of forcing up the market price of desired securities, when a company attempts to buy back debt, can be reduced. 
A)  It provided a tool to 'manage' company earnings. 
B)  Restrictive limitations imposed by the trustee for debenture holders can be relaxed by reducing the amount of debt. 
C)  It allowed debt to be retired with reference to specific individual debt-holders. 
D)  It allowed strategic rethinking of business policies. 
E)  The effect of forcing up the market price of desired securities, when a company attempts to buy back debt, can be reduced.

Question 15

A debt cannot be considered extinguished, and therefore removed from the balance sheet, unless:

Accepted Answer

A)  It is not likely that the reporting entity will be required to assume the debt-servicing requirements of the loan and it has not otherwise guaranteed the servicing of the debt. 
B)  The probability that the reporting entity will be required to repay the principal and interest remaining under the conditions of the debt is so low as to be considered virtually impossible. 
C)  It is highly improbable that the reporting entity will be required to assume again the primary obligation for the debt-servicing requirements or to satisfy any guarantee, indemnity or similar relating to such requirements. 
D)  The possibility of the reporting entity being required to assume responsibility for the debt is considered remote. 
E)  None of the given answers. 
A)  It is not likely that the reporting entity will be required to assume the debt-servicing requirements of the loan and it has not otherwise guaranteed the servicing of the debt. 
B)  The probability that the reporting entity will be required to repay the principal and interest remaining under the conditions of the debt is so low as to be considered virtually impossible. 
C)  It is highly improbable that the reporting entity will be required to assume again the primary obligation for the debt-servicing requirements or to satisfy any guarantee, indemnity or similar relating to such requirements. 
D)  The possibility of the reporting entity being required to assume responsibility for the debt is considered remote. 
E)  None of the given answers.

Question 16

Release from the primary obligation for a debt may be achieved by replacement by another debt:

Accepted Answer

A) True 
 B)False

Question 17

In a set-off, the gearing ratio of the entity is usually increased.

Accepted Answer

A) True 
 B)False

Question 18

The "Offsetting" in AASB 132 "Financial Instruments: Presentation" is similar to "derecognition" in AASB 139.

Accepted Answer

A) True 
 B)False

Question 19

Insubstance debt defeasance refers to an arrangement where assets are placed in trust, meaning that the creditor has now been paid in full:

Accepted Answer

A) True 
 B)False

Question 20

Insubstance debt defeasance is no longer allowed under AASB 132:

Accepted Answer

A)  Because this form of defeasance is no longer used in Australia. 
B)  Because the new standard takes a form over substance approach. 
C)  Because it is inappropriate to extinguish a debt where the discharge of the obligation has been accepted by the creditor. 
D)  Because this type of action requires the offsetting of financial assets and liabilities in circumstances not allowed under AASB 1014. 
E)  None of the given answers. 
A)  Because this form of defeasance is no longer used in Australia. 
B)  Because the new standard takes a form over substance approach. 
C)  Because it is inappropriate to extinguish a debt where the discharge of the obligation has been accepted by the creditor. 
D)  Because this type of action requires the offsetting of financial assets and liabilities in circumstances not allowed under AASB 1014. 
E)  None of the given answers.

Exam 12: Set-Off and Extinguishment of Debt

In relation to applying an amount due from a third party in a "set-off" situation, AASB 132 notes:

Pump It Up Ltd owes Under Ground Oil $170 000 and Under Ground Oil owes Pump It Up Ltd $350 000. Pump It Up Ltd's financial position before these amounts are set-off is: What is the debt/equity ratio for Pump It Up Ltd before and after set-off?

AASB 132 only allows assets and liabilities to be offset against one another if a legally recognised right to set-off exists for these items:

Insubstance debt defeasance was defined in the former AASB 1014 as:

A right of set-off may still be applied in the case of Insubstance Debt Defeasance (ISDD) if the entity intends to settle on a net basis, or to realise the asset and settle the liability simultaneously.

The term defeasance means the setting off of one thing against another:

Cartoons and Co's balance sheet is shown below. Assuming a right to set-off exist with Ink Drawings Ltd, the balance sheet after set-off will be:

"Legal defeasance":

One of the requirements for setting off in AASB 132 is the intention to offset. Which of the following statements about the "intention to set off" is correct?

A futures contract is an example of a financial instrument where the net amount of a financial asset and a financial liability may be presented in the statement of financial position.

The former AASB 1014 required that if a trust was established to assume the responsibility for a debt in an insubstance debt defeasance, that trust must:

Legal defeasance is not addressed in AASB 132 and will no longer be used in Australia.

Which of the following is not one of the advantages that were previously available when the insubstance defeasance of debt was allowable?

A debt cannot be considered extinguished, and therefore removed from the balance sheet, unless:

Release from the primary obligation for a debt may be achieved by replacement by another debt:

In a set-off, the gearing ratio of the entity is usually increased.

The "Offsetting" in AASB 132 "Financial Instruments: Presentation" is similar to "derecognition" in AASB 139.

Insubstance debt defeasance refers to an arrangement where assets are placed in trust, meaning that the creditor has now been paid in full:

Insubstance debt defeasance is no longer allowed under AASB 132:

An Overview of the Australian External Reporting Environment

The Conceptual Framework of Accounting and Its Relevance to Financ

Theories of Financial Accounting

An Overview of Accounting for Assets

Depreciation of Property, Plant and Equipment

Revaluation and Impairment Testing of Non-Current Assets

Inventory

Accounting for Intangibles

Accounting for Heritage Assets and Biological Assets

An Overview of Accounting for Liabilities

Accounting for Lease

Accounting for Employee Benefits

Share Capital and Reserves

Accounting for Financial Instruments

Revenue Recognition Issues

The Statement of Comprehensive Income and Statement of Changes in E

Accounting for Share-Based Payments

Accounting for Income Taxes

Cash-Flow Statements

Accounting for the Extractive Industries

Accounting for General Insurance Contracts

Accounting for Superannuation Plans

Events Occurring After Balance Sheet Date

Segment Reporting

Related-Party Disclosures

Earnings Per Share

Accounting for Group Structures

Further Consolidation Issues I: Accounting for Intragroup Transact

Further Consolidation Issues Ii: Accounting for Minority Interests

Further Consolidation Issues Iii: Accounting for Indirect Ownershi

Further Consolidation Issues Iv: Accounting for Changes in the Deg

Accounting for Equity Investments

Accounting for Equity Investments

Accounting for Foreign Currency Transactions

Translation of the Accounts of Foreign Operations

Accounting for Corporate Social Responsibility

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