Strategic Business
Reporting
September 2024
Time allowed:
3 hours 15 minutes
The paper is divided into two sections:
SECTION A:
BOTH questions are compulsory and MUST be
attempted
SECTION B:
BOTH questions are compulsory and MUST be
attempted
Do NOT open this paper until instructed by the supervisor.
This question paper must not be removed from the examination
hall.
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SBR (INT & UK)
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2
KA PLAN PUBLISHING
MO CK B QUES TIONS
SECTION A
BOTH questions are compulsory and MUST be attempted
1
Stone background
Stone is a public limited company which has investments in several other companies. All of
these companies prepare their financial statements in accordance with IFRS® Standards. The
following exhibits, available below, provide information relevant to the question:
1
Sale of equity interests in Chamber
2
Purchase of equity interests in Fire
3
Draft group statement of profit or loss and other comprehensive income for the year
ended 30 June 20X8
4
Overseas property.
Extracts from the draft statements of profit or loss for Stone, Chamber and Fire for the year
ended 30 June 20X8 are presented below. The group has a presentation currency of dollars
($). Fire has a functional currency of dinar.
Stone
Chamber
Fire
$m
$m
Dinar m
Profit before taxation
188
111
51
Taxation
(33)
(23)
(10)
––––
––––
––––
Profit for the period
155
88
41
––––
––––
––––
Sale of equity interests in Chamber
Stone purchased 80% of the equity interests of Chamber on 1 July 20X5. The non‐controlling
interest at the acquisition date was measured at its fair value of $87 million and the fair value
of Chamber’s net assets at the acquisition date was $400 million. Goodwill of $40 million
arose on the acquisition of Chamber.
On 31 March 20X8, Stone disposed of a 50% equity interest in Chamber for $300 million. The
net assets of Chamber, excluding goodwill, were carried in the consolidated financial
statements at $500 million at this date. The goodwill that arose on the acquisition had been
impaired by $10 million in the year ended 30 June 20X7. On 31 March 20X8, Stone’s
remaining 30% equity interest had a fair value of $160 million and was sufficient to give it
significant influence over Chamber.
Chamber is considered a major line of business for the Stone group as it operates in a
different market place to the other members of the group. The Group Financial Controller,
Loretta Sanchez, was unsure how to deal with the disposal of Chamber.
Purchase of equity interests in Fire
On 1 July 20X7, Stone purchased 60% of the equity interests of Fire for 180 million dinar.
At the acquisition date, Fire had share capital and retained earnings of 50 million dinar and
150 million dinar respectively. The fair value of Fire’s identifiable net assets at the acquisition
date was 260 million dinar. Any excess of the fair value of the net assets over the carrying
amounts was attributed to production machinery with a remaining useful life of 5 years at
the acquisition date. The non‐controlling interest in Fire at the acquisition date was
measured at its fair value of 112 million dinar. No goodwill impairments arose in the current
year.
KA PLAN PUBLISHING
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S B R (IN T & U K ) : S TRA TE G IC BUSINES S RE POR TIN G
The following exchange rates are relevant:
1 July 20X7
30 June 20X8
Average rate for year ended 30 June 20X8
Dinar: $1
2.2
1.8
2.0
The Group Financial Controller is seeking help with some of the financial reporting issues
involved.
Draft group statement of profit or loss and other comprehensive income for the year ended
30 June 20X8
The Group Financial Controller prepared a draft consolidated statement of profit or loss and
other comprehensive income for the year ended 30 June 20X8. The Financial Controller
advised that she has omitted the disposal of Chamber from the draft entirely. For Fire, she
has correctly consolidated the subsidiary within the draft but has omitted the fair value
adjustment and any foreign currency gains or losses arising on translation whilst waiting for
advice as to how to calculate and account for them. The Finance Director has confirmed this.
Group
$m
Continuing operations
Revenue
1432
–––––
Cost of sales
–816
Gross profit
616
–––––
Operating expenses
–115
Operating profit
501
Share of profits from associates
10
Investment income
12
–––––
Finance costs
–8
Profit before tax
515
–––––
Income tax expense
–46
Profit for the year from continuing operations
469
Discontinued operations
–––––
30
Profit from discontinued operations
–––––
Profit for the year
499
Other comprehensive income
Gain on property revaluations
10
Gain on translation of foreign subsidiary
–––––
Total comprehensive income
509
Total comprehensive income attributable to:
Shareholders of the parent
431
–––––
Non‐controlling interests
78
–––––
509
–––––
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KA PLAN PUBLISHING
MO CK B QUES TIONS
Overseas property
On 1 July 20X7, Stone purchased a property overseas to earn rental income. Stone measures
assets at fair value whenever permitted by an accounting standard.
Stone provides the tenants of this property with ancillary services, such as security and
maintenance, but these were deemed to be insignificant to the arrangement as a whole.
Total expenditure on the property was 2.5 million dinar and this has been expensed to profit
or loss using the exchange rate on the purchase date. A breakdown of this amount is as follows:
Purchase price
Legal fees
Allocated administrative overheads
Dinar m
1.5
0.5
0.5
––––
2.5
––––
Stone expects the building to have a useful life of approximately 50 years. On 30 June 20X8,
when the fair value of the property was 3.0 million dinar, Stone agreed to increase the level
of ancillary services offered to its tenants to include housekeeping, causing the ancillary
services to constitute a significant part of the overall arrangement.
Required:
(a)
Discuss, with calculations, the impact of the sale of the equity interests in Chamber
on the consolidated statement of profit or loss and other comprehensive income for
the year ended 30 June 20X8
(7 marks)
(b)
Discuss the impact of the purchase of the equity interests in Fire on the consolidated
statement of profit or loss and other comprehensive income for the year ended 30
June 20X8.
(6 marks)
(c)
Using the adjustments required from parts (a) and (b), prepare revised extracts to
the consolidated statement of profit or loss and other comprehensive income as at
30 June 20X8 for the Stone Group using the pre‐populated spreadsheet response
option in exhibit 3.
(10 marks)
(d)
Discuss, with calculations, the correct accounting treatment of the overseas property
in the year ended 30 June 20X8. Provide the adjustments needed to correct the
consolidated financial statements.
(7 marks)
(Total: 30 marks)
KA PLAN PUBLISHING
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2
Mash is a public limited entity that prepares financial statements in accordance with
International Financial Reporting Standards and has a reporting date of 30 June 20X8. Mash
has won a tender to provide significant amounts of goods and services to a new customer.
Before signing the contract the new customer wants to review Mash’s financial statements
for the year ended 30 June 20X8 in order to assess its financial security and stability. The
financial controller is usually responsible for the preparation of the financial statements.
However, this year, the finance director has played an active role in preparing them.
Cash and cash equivalents
During the reporting period, Mash purchased 5% of the ordinary shares of Egg Shell, a public
limited company. The share price of Egg Shell has risen significantly over the year and the fair
value of the shares at the reporting date is $20 million. Egg Shell is listed on a stock exchange,
and so Mash can sell the shares quickly if it experiences short‐term cash flow shortages. The
finance director has included the investment at $20 million as part of the ‘cash and cash
equivalents’ balance in the statement of cash flows.
(4 marks)
Preference shares
On 1 July 20X7, Mash issued preference shares for their nominal value of $50 million. The
transaction was at fair value. No annual dividends are payable. The finance director has
recorded the instrument as equity at a value of $50 million. No further entries have been
posted. The preference shares must be redeemed at a substantial premium in three years’
time. The effective rate of interest is 15%.
(4 marks)
Mower
During the reporting period, Mash purchased goods from Mower for significantly less than
their fair value. The husband of Mash’s finance director owns 80% of the ordinary shares of
Mower. The finance director has stipulated that no explicit reference to these purchases
should be made in Mash’s financial statements.
(3 marks)
Required:
(a)
Discuss the correct treatment of the above three issues in Mash’s financial
statements for the year ended 30 June 20X8.
(11 marks)
Note: The mark allocation is shown against each of the three issues.
(b)
Discuss the ethical issues that arise from the finance director’s proposed accounting
treatments and behaviour.
(7 marks)
Professional marks will be awarded in question 2(b) for the application of ethical
principles.
(2 marks)
(Total: 20 marks)
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KA PLAN PUBLISHING
MO CK B QUES TIONS
SECTION B
BOTH questions are compulsory and MUST be attempted
3
INT SYLLABUS
Glaze is a company that prepares its financial statements in accordance with International
Financial Reporting Standards. It is currently preparing financial statements for the year
ended 31 March 20X8.
Vessels
One of Glaze’s ordinary activities is to provide services to the oil and gas industries. It owns
a number of vessels that are rented out to customers and which are correctly classified as
property, plant and equipment. At the start of the current period, the directors of Glaze
noticed that its contracts with customers were becoming shorter in duration and that
contract tendering was becoming more competitive. It was therefore deemed appropriate
to change the depreciation policy for its vessels to one based on the number of days of usage.
As a result, straight‐line depreciation over the useful life of the asset is charged in periods of
operation, but if the vessel is not in active use then no depreciation is charged. The directors
justify this on the grounds that the economic benefits of the inactive vessels are not being
consumed. Some vessels can remain inactive for many years, although money is spent
maintaining them during these periods. In Glaze’s industry, regulatory changes can require
significant modifications to the vessels.
The directors require advice as to whether this new depreciation policy is in accordance with
IAS 16 Property, Plant and Equipment.
Double
On the reporting date, Glaze purchased all of the share capital of Double, an entity that used
to develop computer games. Double’s assets comprise trademarks, computer equipment and
a building. The fair value of each of these assets is relatively similar. Double has not
developed any new computer games for over a year and has no employees.
The directors of Glaze are unsure if the purchase of Double’s share capital should be
accounted for using the acquisition method. They wish to apply the optional concentration
test, as outlined in IFRS 3 Business Combinations.
Employee benefits
On 1 January 20X8, the directors of Glaze decided to close one of its operating locations. Due
to commitments with key clients, trading will continue from this location until 31 December
20X8 at which point any remaining employees will be made redundant. On top of the usual
salary for any months worked, Glaze has informed its 500 affected employees of the
following:

Employees will receive a bonus of $5,000 if they remain in employment until
31 December 20X8 but only $1,000 if they leave before this date.

Employees accrue 1% of final salary, payable each year on retirement, for every year
worked but those still employed at 31 December 20X8 will receive an improved accrual
rate of 1.5% of final salary in respect of all prior years worked.
As at the reporting date, it is expected that 300 employees will stay until 31 December 20X8.
The directors are unsure how to account for the above employee benefits.
KA PLAN PUBLISHING
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S B R (IN T & U K ) : S TRA TE G IC BUSINES S RE POR TIN G
Required:
(a)
Advise whether the vessel depreciation policy is in accordance with IAS 16 Property,
Plant and Equipment.
(8 marks)
(b)
Advise whether the purchase of the share capital of Double should be accounted for
using the acquisition method.
(8 marks)
(c)
Advise on the correct accounting treatment of the employee benefits.
(9 marks)
(Total: 25 marks)
3
UK SYLLABUS
Vessels
Glaze provides services to the oil and gas industries. It owns a number of vessels that are
rented out to customers and which are correctly classified as property, plant and equipment.
At the start of the current period, the directors of Glaze noticed that its contracts with
customers were becoming shorter in duration and that contract tendering was becoming
more competitive. It was therefore deemed appropriate to change the depreciation policy
for its vessels to one based on the number of days of usage. As a result, straight‐line
depreciation over the useful life of the asset is charged in periods of operation, but if the
vessel is not in active use then no depreciation is charged. The directors justify this on the
grounds that the economic benefits of the inactive vessels are not being consumed. Some
vessels can remain inactive for many years, although money is spent maintaining them during
these periods. In Glaze’s industry, regulatory changes can require significant modifications to
the vessels.
The directors require advice as to whether this new depreciation policy is in accordance with
IAS 16 Property, Plant and Equipment.
UK GAAP
Glaze wishes to purchase all of the ordinary share capital of Tots, a company that is
incorporated in the United Kingdom. Tots prepares financial statements in accordance with
FRS 102 The Financial Reporting Standard Applicable in the UK and Republic of Ireland rather
than in accordance with IFRS Standards. Tots is a lessee and leases a significant number of
buildings for periods of between 10 and 15 years.
Required:
(a)
Advise whether the vessel depreciation policy is in accordance with IAS 16 Property,
Plant and Equipment.
(8 marks)
(b)
(i)
Discuss the differences between FRS 102 and IFRS Standards with respect to
lessee accounting. Include in your discussion the likely impact of these
differences when comparing the financial statements of Tots with a similar
company that uses IFRS Standards.
(10 marks)
(ii)
Discuss why a UK entity might choose to prepare its financial statements in
accordance with FRS 102 rather than in accordance with IFRS Standards.
(7 marks)
(Total: 25 marks)
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KA PLAN PUBLISHING
MO CK B QUES TIONS
4
Slick, a public limited company with a reporting date of 31 March 20X8, prepares financial
statements in accordance with IFRS Standards.
Fresh fruit bunches
Slick operates in the palm oil market and owns a plantation of oil palm trees. The harvested
produce from these trees is called fresh fruit bunches (FFB). Slick steams and presses the FFB
to extract palm oil. The palm oil is then sold to manufacturers in the food and beverage
industry. Slick determines the fair value of FFB at the point of harvest by estimating the
quantity of palm oil that will be extracted and multiplying this by the quoted price of palm
oil at the harvest date. Estimated costs to convert the FFB into palm oil are then deducted.
The amount of palm oil obtained from FFB can vary dramatically, depending on factors such
as climate and the delay between harvesting and processing. There is an active market for
FFB.
Some FFB held at the reporting date were harvested several days previously. Such delays
cause fatty acids to build up in the FFB, diminishing the quality of the palm oil extract. These
FFB cannot be processed or sold.
The directors require advice about the accounting treatment of the FFB.
Retail stores
Slick also operates in the retail industry. It owns and operates 30 stores, which sell a range of
decorative products for homes and gardens. These stores were purchased through a business
combination several years ago, giving rise to goodwill. The stores are all located in different
cities. Slick’s management monitor the performance of each store separately. Pricing,
marketing, advertising and human resource policies are, however, all decided centrally.
The directors of Slick need to conduct an impairment review of the retail business. Because
of the large number of centralised activities, they intend to treat the 30 stores and the central
assets as a single cash generating unit. The directors require advice as to whether this
treatment is correct.
Laksa
Laksa was incorporated two years ago and prepares its financial statements in accordance
with International Financial Reporting Standards. Laksa operates from leased office space,
uses leased technical equipment, and employs a team of highly‐skilled IT developers. It
currently earns no revenues. For the past two years it has been researching and developing
an application for mobile devices (‘app’) called ‘EthiBuy’.
The popularity of online shopping has increased exponentially over the past decade, but
many consumers are vocal in questioning its ethics (whether in terms of tax avoidance, the
decline of the high‐street, or workers’ rights). The directors of Laksa believe that Ethibuy will
fill a gap in the market. Through Ethibuy, users will be able to quickly and easily purchase a
whole range of goods (such as food, computer games, CDs, books) from a network of
independent retailers, with delivery guaranteed within 48 hours. All retailers on Ethibuy are
scored on various ethical attributes (such as transparency of reporting, effective tax rate,
animal testing, and gender pay gap) and Ethibuy users can prioritise which attributes are
most important to them.
Ethibuy will be available to download within the next month. It will be free to download but
Laksa will earn a royalty on all purchases made through the app. Ethibuy has received positive
coverage in the mainstream media and in specialist magazines aimed at ethics‐conscious
consumers. Laksa’s business goal is to make a significant return on their investment in the
Ethibuy app by selling it to a larger digital company within two years of launch.
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Required:
(a)
With regards to the fresh fruit bunches, respond to the directors’ request.
(7 marks)
(b)
With regards to the impairment review of the retail stores, respond to the directors’
request.
(5 marks)
(c)
(i)
Discuss why Laksa’s financial statements may be of limited use to current and
potential investors.
(8 marks)
(ii)
Discuss one form of additional reporting that would help Laksa to provide
more useful information to its current and potential investors.
(3 marks)
Professional marks will be awarded in question 4 (c) for clarity and quality of
discussion.
(2 marks)
(Total: 25 marks)
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