Free CFA Level II Financial Statement Analysis Practice Questions

Under IAS 36, goodwill must be tested for impairment at least annually, regardless of whether there are indicators of impairment. Additional testing is required whenever there are specific indicators suggesting the goodwill may be impaired.

This is consistent with US GAAP (ASC 350), which also requires at least annual impairment testing.

B is correct. Both IFRS and US GAAP require at least annual goodwill impairment testing.

A is incorrect. A triggering-event-only approach applies to most other long-lived assets under IFRS (IAS 36), but goodwill receives special treatment with mandatory annual testing.

C is incorrect. There is no two-year testing cycle for goodwill under any standard. Annual testing is the minimum frequency.

The interest burden ratio is $\frac{\text{EBT}}{\text{EBIT}}$. A lower ratio means that a larger portion of EBIT is being consumed by interest expense before arriving at earnings before tax (EBT).

$$\text{Interest burden} = \frac{\text{EBT}}{\text{EBIT}} = \frac{\text{EBIT} - \text{Interest expense}}{\text{EBIT}}$$

A decrease in this ratio means interest expense has increased relative to EBIT.

A is correct. A lower interest burden ratio means more of the company's operating income is being absorbed by interest payments, indicating higher financial leverage costs.

B is incorrect. The effective tax rate affects the tax burden ratio (Net Income / EBT), not the interest burden ratio. These are separate components in the DuPont decomposition.

C is incorrect. Operating profit margin (EBIT / Revenue) is also a separate component. Improvement in operating margin would affect the EBIT margin component, not the interest burden.

Actuarial losses recorded in accumulated other comprehensive income (AOCI) have already reduced total equity (since AOCI is a component of equity). If these losses were reclassified from OCI to the income statement:

- Net income would decrease (losses now recognized in P&L)
- BUT: The offset would be a corresponding increase in AOCI (removing the OCI debit)
- Total equity would remain unchanged because the reclassification is between two equity components (retained earnings decreases, AOCI increases)

This is a reclassification within equity — from AOCI to retained earnings via the income statement.

A is correct. Since the losses are already reflected in total equity through AOCI, reclassifying them to net income changes the composition of equity (less AOCI, less retained earnings) but not the total. Net income would decrease, but total equity is unchanged.

C is incorrect because it suggests equity would decrease, but equity already reflects these losses in AOCI.

B is incorrect for the same reason — equity has already absorbed the impact through AOCI.