ACCA (SBR) Strategic Business Reporting
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ACCA
Strategic
Business
Reporting
(SBR)
Valid for September 2025,
December 2025, March 2026
and June 2026
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Kaplan Publishing UK
9 781837 350117
Exam Kit
ISBN 978-1-83735-011-7
Exam Kit
ACCA
Strategic Professional
Strategic Business Reporting
(SBR)
EXAM KIT
SB R : S T RA TE GI C B US IN E SS RE P O RT IN G
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library.
Published by:
Kaplan Publishing UK
Unit 2 The Business Centre
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Wokingham
Berkshire
RG41 2QZ
ISBN: 978-1-83735-011-7
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Acknowledgements
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P. 2
KA PL AN P U BLI SH IN G
CONTENTS
Page
Index to questions and answers
P.5
Analysis of past exams
P.10
Exam technique
P.12
Paper specific information
P.14
Kaplan’s recommended revision approach
P.16
Kaplan’s detailed revision plan
P.20
Section
1
Practice questions
2
Answers to practice questions
139
3
Specimen exam paper 1 questions
557
4
Specimen exam paper 1 answers
567
5
Specimen exam paper 2 questions
589
6
Specimen exam paper 2 answers
597
7
References
611
1
Versions of some questions in this Exam Kit may also be available on the ACCA Practice Platform on
the ACCA website. They are a very useful reference, in particular to attempt using ACCA’s exam
software. However, you should be aware that ACCA will decide when those questions will be
amended for syllabus changes or replaced, so they may differ slightly from the versions in this
Exam Kit.
This document references IFRS® Accounting Standards, which are authored by the International
Accounting Standards Board (the Board), and published in the 2024 IFRS Accounting Standards Red
Book.
KA PL AN P U BLI SH IN G
P. 3
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Key features in this edition
In addition to providing a wide ranging bank of real past exam questions, we have also included
in this edition:
•
An analysis of all of the recent examinations.
•
Exam specific information and advice on exam technique.
•
Our recommended approach to make your revision for this particular subject as effective
as possible.
This includes step-by-step guidance on how best to use our Kaplan material (Study Text,
Pocket Notes and Exam Kit) at this stage in your studies.
•
Enhanced tutorial answers packed with specific key answer tips, technical tutorial notes
and exam technique tips from our experienced tutors.
•
Complementary online resources including full tutor debriefs and question assistance to
point you in the right direction when you get stuck.
You will find a wealth of other resources to help you with your studies on the following sites:
www.MyKaplan.co.uk
www.accaglobal.com/students/
Quality and accuracy are of the utmost importance to us so if you spot an error in any of our
products, please send an email to mykaplanreporting@kaplan.com with full details, or follow the
link to the feedback form in MyKaplan.
Our Quality Co-ordinator will work with our technical team to verify the error and take action to
ensure it is corrected in future editions.
P. 4
KA PL AN P U BLI SH IN G
INDEX TO QUESTIONS AND ANSWERS
INTRODUCTION
A number of the questions within this kit are past ACCA exam questions and are labelled as such in
the index. Note that if a question within this kit has been adapted or changed in any way from the
original version, this is indicated in the end column of the index below with the mark (A).
A number of the questions have also been modified to reflect the new format of the group financial
statement question in Section A. The questions in the new format are indicated in the end column
of the index below with the mark *.
Also included are the marking schemes for past ACCA examination questions to assist you in
understanding where marks are earned and the amount of time to spend on particular tasks. Note
that if a question has been changed from the original version, it will have also been necessary to
change the original ACCA marking scheme. Therefore, if a question is marked as ‘adapted’ you
should assume that this also applies to the marking scheme.
KEY TO THE INDEX
ANSWER ENHANCEMENTS
We have added the following enhancements to the answers in this Exam Kit:
Key answer tips
All answers include key answer tips to help your understanding of each question.
Tutorial note
Many answers include more tutorial notes to explain some of the technical points in more
detail.
Top tutor tips
For selected questions, we ‘walk through the answer’ giving guidance on how to approach the
questions with helpful ‘tips from a top tutor’, together with technical tutor notes.
These answers are indicated with the ‘footsteps’ icon in the index.
KA PL AN P U BLI SH IN G
P. 5
SB R : S T RA TE GI C B US IN E SS RE P O RT IN G
ONLINE ENHANCEMENTS
Answer debrief
For selected questions, we recommend that they are to be completed in full exam conditions
(i.e. properly timed in a closed book environment).
In addition to the examining team’s technical answer, enhanced with key answer tips and tutorial
notes in this exam kit, online you can find an answer debrief by a top tutor that:
•
works through the question in full
•
explains key elements of the answer
•
ensures that the easy marks are obtained as quickly as possible.
These questions are indicated with the ‘video’ icon in the index.
Answer debriefs will be available on MyKaplan at:
www.mykaplan.co.uk
P. 6
KA PL AN P U BLI SH IN G
IN DE X TO Q UE S T ION S A N D A N S WE R S
SECTION A QUESTIONS
Page number
Group financial statements
Question
Answer
Past exam
(Adapted)
1
Layout
1
139
Sep/Dec 24
2
Peony
4
146
Mar/Jun 24
3
Kabelo
7
155
Sep/Dec 23
4
Greer
9
163
Mar/Jun 23
5
Sterling
11
170
Sep/Dec 22
6
Luna
13
179
Mar/Jun 22
7
Columbia
15
190
Mar/Jun 21 (A)*
8
Sugar
19
199
Sep/Dec 20 (A)*
9
Hummings
22
206
Mar 20 (A)
10
Luploid
24
214
Sep/Dec 19 (A)
11
Carbise
26
220
Mar/Jun 19
12
Moyes
28
228
Dec 18 (A)
13
Banana
30
234
Sep 18 (A)*
14
Jocatt
34
241
*
15
Zippy
37
246
*
16
Ashanti
41
252
*
17
Joey
44
258
18
Parsley
47
263
19
Traveler
50
269
*
Reporting and ethical implications
20
Apaniiwa
53
277
Sep/Dec 24
21
Abasi
54
281
Mar/Jun 24
22
Dario
56
285
Sep/Dec 23
23
Cutherd
58
290
Mar/Jun 23
24
Jassie
59
295
Sep/Dec 22
25
Renshu
61
300
Mar/Jun 22
26
Agency Group
62
305
Sep/Dec 21
27
Bismuth
64
311
Mar/Jun 21
28
Calibra
66
316
Sep/Dec 20
29
Bagshot
67
320
Mar 20
30
Stent
68
326
Sep/Dec 19
31
Hudson
69
331
Mar/Jun 19 (A)
32
Fiskerton
70
337
Dec 18
33
Farham
72
341
Sep 18
KA PL AN P U BLI SH IN G
P. 7
SB R : S T RA TE GI C B US IN E SS RE P O RT IN G
SECTION B QUESTIONS
Page number
Question
Answer
Past exam
(Adapted)
34
Cial
74
345
Sep/Dec 24
35
Kimimila
75
351
Sep/Dec 24
36
Jobon
77
358
Mar/Jun 24
37
Maple
79
364
Mar/Jun 24
38
Jacinta
81
371
Sep/Dec 23
39
Benito
83
378
Sep/Dec 23
40
Fernanda
84
384
Mar/Jun 23
41
Eloa
86
391
Mar/Jun 23
42
Rubul
88
399
Sep/Dec 22
43
Juan
90
405
Sep/Dec 22
44
Bohai
92
411
Mar/Jun 22
45
Wing
94
417
Mar/Jun 22
46
Stem
95
424
Sep/Dec 21
47
Symbal
97
431
Sep/Dec 21
48
Sitka
99
438
Mar/Jun 21
49
Colat
100
442
Mar/Jun 21
50
Corbel
102
449
Sep/Dec 20
51
Handfood
103
455
Sep/Dec 20
52
Leria
105
459
Mar 20
53
Ecoma
106
464
Mar 20 (A)
54
Digiwire
108
469
Sep/Dec 19 (A)
55
Guidance
109
476
Sep/Dec 19 (A)
56
Crypto
111
481
Mar/Jun 19 (A)
57
Zedtech
112
486
Mar/Jun 19 (A)
58
Fill
113
491
Dec 18 (A)
59
Holls
114
494
Dec 18
60
Skizer
116
500
Sep 18 (A)
61
Toobasco
118
507
Sep 18 (A)
62
Player Two
120
512
63
Mehran
121
515
64
Carsoon
123
518
65
Whitebirk
124
521
P. 8
KA PL AN P U BLI SH IN G
IN DE X TO Q UE S T ION S A N D A N S WE R S
66
Business combinations
126
524
67
Margie
127
529
68
Kayte
129
534
69
Aron
130
537
70
Emcee
131
541
71
Gasnature
133
545
72
Lucky Dairy
134
550
73
Klancet
136
553
KA PL AN P U BLI SH IN G
P. 9
ANALYSIS OF PAST EXAMS
The table below summarises the key topics that have been tested in recent examinations.
Note that the references are to the number of the question in this edition of the exam kit.
Mar/Jun
2022
Groups question
Goodwill calculations
Goodwill impairments
Step acquisitions
Disposals
Control-to-control
Overseas subsidiaries
Definition of a
business
Definition of control
Acquisition accounting
Associates
Joint arrangements
Statement of cash
flows
Ethical issues
Sep/Dec
2022
Mar/Jun
2023
Q5
Q4
Q5
Q5
Q4
P. 10
Mar/Jun
2024
Sep/Dec
2024
Q2
Q2
Q6
Q2
Q6
Q2
Q1
Q2
Q1
Q4
Q6
Q25
Q5
Q5
Q24
Q4,Q41
Q40
Q3
Q23
Q22
Conceptual
Framework
Accounting
standards
IAS 2
IAS 7
IAS 8
IAS 10
IAS 12
IAS 16
IAS 19
IAS 20
IAS 21
IAS 23
IAS 24
IAS 27
IAS 28
IAS 32
IAS 33
IAS 34
IAS 36
IAS 37
Sep/Dec
2023
Q20
Q21
Q20
Q37
Q25, Q45
Q42
Q37
Q36
Q36
Q44
Q42
Q2
Q35
Q34
Q1
Q34
Q21
Q5
Q25 Q44
Q45
Q43
Q42 Q43
Q40
Q37
Q23
Q40
Q36
KA PL AN P U BLI SH IN G
AN A L YS IS OF P AS T E XA M S
IAS 38
IAS 40
IAS 41
IFRS 1
IFRS 2
IFRS 3
IFRS 5
IFRS 7
IFRS 8
IFRS 9
IFRS 10
IFRS 11
IFRS 12
IFRS 13
IFRS 15
IFRS 16
IFRS 18
IFRS 19
SMEs Standard
Mar/Jun
2022
Q6 Q25
Sep/Dec
2022
Mar/Jun
2023
Q23
Sep/Dec
2023
Mar/Jun
2024
Q34
Q35
Q6 Q25
Q5
Q5
Q4
Q41
Q4,Q40
Q44
Q22
Q3, Q38
Q38
Q36
Q34
Q37
Q34
Q21
Q34
Q34
Q5
Q45
Q6 Q44
Q44
Q24 Q42
Q38
Q39
Q21
IFRS S1
IFRS S2
Analysis
APMs
Ratios
Disclosures
Sustainability
Changes and
developments in
financial reporting
KA PL AN P U BLI SH IN G
Sep/Dec
2024
Q35
Q35
Q39
Q45
Q43
Q41
Q37
Q20, Q35
Q45
Q43
Q21
Q35
P. 11
EXAM TECHNIQUE
In addition to reading the tips contained here, we recommend that you review the resources
available on the ACCA Global website before sitting the CBE. Here you will find guidance documents,
videos and a link to the CBE question practice platform.
•
Before the exam starts you will be given ten minutes to read the introductory page and the
four pages of instructions. These will be the same for each SBR exam and therefore it is
important to familiarise yourself with these (using the ACCA practice exams) during your
revision. The exam time (3 hours and 15 minutes) will start automatically at the end of the
10 minutes or earlier if actioned by you.
•
Decide the order in which you think you will attempt each question.
•
–
This is a personal choice and you have time during your revision to try out different
approaches, for example, if you sit a mock exam.
–
A common approach is to tackle the question you think is the easiest and that you are
most comfortable with first.
–
Others may prefer to tackle the longest question first, or conversely leave it till last.
–
You should decide upon your approach before the exam itself.
–
Whatever your approach, you must make sure that you leave enough time to attempt
all questions fully and be very strict with yourself in timing each question.
Divide the time you spend on questions in proportion to the marks on offer.
–
Read each question carefully, reviewing the format and content of the requirements
so that you understand what you need to do.
–
If 15 minutes are spent reading the exam, this leave three hours to attempt the
questions, so your time allocation should be 1.8 minutes per mark (180 minutes/
100 marks).
–
If you do not allow a specific amount of time for reading and planning, your time
allocation will be 1.95 minutes per mark (195 minutes/100 marks).
–
With either option, try to allow time at the end of each question to review your
answers and address any obvious issues.
–
If you plan to spend more or less than 15 minutes reading the exam, your time
allocation per mark will be different.
Whatever happens, always keep your eye on the clock and do not over run on any part of
any question!
•
P. 12
Planning your answers:
–
Within the background information for each question you will find brief summary
bullet points outlining the topics covered, which will help you identify what is being
tested. Each question will also include a number of exhibits breaking down the
scenario into relevant sections and the detailed requirements and an option to
complete your answer in a word processing document and/or a spreadsheet
document. For part of question 1 you will need to use the pre-populated spreadsheet.
–
You can move around and resize the windows that you open to lay the screen out in a
format that suits you.
KA PL AN P U BLI SH IN G
E XA M TE CHN I Q UE
–
•
Firstly, copy and paste the specifics of the requirement into your answer document,
perhaps highlighting in bold the different parts of the requirement and the verbs used.
The requirements screen can then be closed down. Then review the exhibits in detail,
highlighting and making notes as you do so and copy and pasting any relevant
information into your answer document. Notes can be made directly in your answer
screen under the relevant requirement. These steps will help with your planning and
structure but will also enable you to minimise the number of windows you have open.
Written questions:
Your answer should have a clear structure, using headings and sub-headings.
Be concise. It is better to write a little about a lot of different points than a great deal about
one or two points.
For answers that are mostly written you may find the word processor most useful.
•
•
If you get completely stuck with a question:
–
move on
–
return to it later.
Stick to the question and tailor your answer to what you are asked.
–
•
pay particular attention to the verbs in the question.
If you do not understand what a question is asking, state your assumptions.
Even if you do not answer in precisely the way the examiner hoped, you should be given
some credit, if your assumptions are reasonable.
•
You should do everything you can to make things easy for the marker.
The marker will find it easier to identify the points you have made if you leave plenty of space
between the points that you are making.
•
Discursive questions:
Your answer should have a clear structure. Use headings and paragraphs to provide focus.
Be concise and stay on topic. You will score no marks if you do not answer the question.
•
Calculations:
You may find it easier to use the spreadsheet response for any calculations performed, unless
they are very simple.
•
Workings:
It is essential to include all your workings in your answers – method marks are available even
if your final answer is incorrect.
Make sure you reference any calculations performed in the spreadsheet.
•
Scratch pad:
You will be able to make notes in the scratch pad to help with your planning. Please be aware
that anything in the scratch pad will not be seen by the marker, and will therefore not score
any marks. If you are sitting your exam via remote invigilation then you will not be permitted
to use scrap paper, so the scratch pad or your answer screen will be the only ways to carry
out your planning. The scratch pad is available in the ACCA Practice Platform for you to
practise using.
KA PL AN P U BLI SH IN G
P. 13
PAPER SPECIFIC INFORMATION
THE EXAM
FORMAT OF THE EXAM
Section A: Two compulsory questions
Section B: Two compulsory questions of 25 marks each
Total time allowed:
3 hours 15 minutes.
Number of marks
50
50
––––
100
––––
Note that:
•
•
•
•
The first question in Section A will be worth 30 marks. It will always test group accounting
and will include a pre-populated spreadsheet that contains a draft consolidated financial
statement. One of the requirements will be to correct this spreadsheet for a range of issues,
which will be worth between 10-14 marks. In addition to this requirement, a discussion and
explanation of these numbers will be required. This question will also test other areas of the
syllabus.
The second question in Section A will be worth 20 marks. It requires consideration of (i) the
reporting implications and (ii) the ethical implications of specific events in a given scenario.
Two professional marks will be awarded in this question for the application of ethical
principles to the scenario.
Section B consists of two questions, which will be scenario-based and will contain both
discursive and computational elements. Section B could deal with any aspect of the syllabus
but will always include either a full question, or part of a question, that tests the analysis
section of the syllabus. Two professional marks will be awarded in the Section B question
that requires analysis.
For the two questions with professional marks, guidance will be given within the question to
specify how these professional marks will be awarded.
PASS MARK
The pass mark for all ACCA Qualification examinations is 50%.
P. 14
KA PL AN P U BLI SH IN G
PAPE R SPE CI FI C I N F OR M A TION
FORMAT OF QUESTION 1
Note that:
•
In question one, candidates will be provided with a word processing document and a prepopulated spreadsheet only. There will be no blank spreadsheet. A space for workings will
be provided on the pre-populated spreadsheet.
•
The financial statements in the pre-populated spreadsheet will be replicated in one of the
exhibits. This is important information for candidates. If candidates accidentally delete some
of the numbers in the spreadsheet response, the lost content can be easily located and
replaced from within the exhibit.
•
In this exam kit, the requirements have been presented in such a way that reflects the real
exam format, however no pre-populated spreadsheets are provided. The data that would be
contained in the pre-populated spreadsheet is provided in one of the exhibits. When
attempting this type of question, you should use the information provided in the relevant
exhibit alongside your own spreadsheet software or the ACCA practice software.
DETAILED SYLLABUS
The detailed syllabus and study guide written by the ACCA can be found at:
www.accaglobal.com/student
KA PL AN P U BLI SH IN G
P. 15
KAPLAN’S RECOMMENDED REVISION
APPROACH
QUESTION PRACTICE IS THE KEY TO SUCCESS
Success in professional examinations relies upon you acquiring a firm grasp of the required
knowledge at the tuition phase. In order to be able to do the questions, knowledge is essential.
However, the difference between success and failure often hinges on your exam technique on the
day and making the most of the revision phase of your studies.
The Kaplan Study Text is the starting point, designed to provide the underpinning knowledge to
tackle all questions. However, in the revision phase, pouring over text books is not the answer.
Kaplan Online progress tests help you consolidate your knowledge and understanding and are a
useful tool to check whether you can remember key topic areas.
Kaplan Pocket Notes are designed to help you quickly revise a topic area, however you then need
to practice questions. There is a need to progress to full exam standard questions as soon as
possible, and to tie your exam technique and technical knowledge together.
The importance of question practice cannot be over-emphasised.
The recommended approach below is designed by expert tutors in the field, in conjunction with
their knowledge of the examining team and their recent real exams.
The approach taken for the Applied Skills exams is to revise by topic area. However, with the
Strategic Professional exams, a multi topic approach is required to answer the scenario based
questions.
You need to practice as many questions as possible in the time you have left.
OUR AIM
Our aim is to get you to the stage where you can attempt exam standard questions confidently, to
time, in a closed book environment, with no supplementary help (i.e. to simulate the real
examination experience).
Practising your exam technique on examination-style questions, in timed conditions, is also vitally
important for you to assess your progress and identify areas of weakness that may need more
attention in the final run up to the examination.
In order to achieve this we recognise that initially you may feel the need to practice some questions
with open book help and exceed the required time.
The approach below shows you which questions you should use to build up to coping with exam
standard question practice, and references to the sources of information available should you need
to revisit a topic area in more detail.
P. 16
KA PL AN P U BLI SH IN G
KA PL AN ’S RE CO M ME N DE D RE VI SI ON APP R OA CH
EXAMINER’S COMMENTS
We have included many of the examiner’s comments to the examination questions in this kit for
you to see the main pitfalls that students fall into with regard to technical content.
However, too many times in the general section of the report, the examiner comments that
students had failed due to:
•
‘misallocation of time’
•
‘running out of time’ and
•
showing signs of ‘spending too much time on an earlier question and clearly rushing the
answer to a subsequent question’.
Good exam technique and time management is vital.
The examiners have also stressed the importance of carrying forward knowledge from FR. This is
highlighted as a common weakness in candidate’s scripts and is often the difference between a pass
and a fail. Do not neglect the financial reporting topics and skills garnered within FR as they are
imperative to SBR success.
Another regularly raised point by the examiner’s team is the need to apply knowledge to the
scenarios. It is not enough to merely state the required rules and knowledge learnt from the study
material. Application to the scenario carries a substantially greater number of marks than just
knowledge of the relevant rules.
STRATEGIC PROFESSIONAL COMPUTER BASED EXAMINATIONS
We advise consulting the ACCA Global website for additional CBE revision resources. On the ACCA
website there is a CBE demonstration. It is ESSENTIAL that you attempt this before your real CBE.
You will become familiar with how to move around the SBE screens and the way that questions are
formatted, increasing your confidence and speed in the actual exam.
Be sure you understand how to use the software before you start the exam. If in doubt, ask the
assessment centre staff to explain it to you.
Questions are displayed on the screen and answers are entered using keyboard and mouse.
For additional support with your studies please also refer to the ACCA Global website.
KA PL AN P U BLI SH IN G
P. 17
SB R : S T RA TE GI C B US IN E SS RE P O RT IN G
THE KAPLAN SBR REVISION PLAN
Stage 1: Assess areas of strengths and weaknesses
Review the topic listings in the revision table plan below
Determine whether or not the area is one with which you are comfortable
Comfortable
with the technical content
Not comfortable
with the technical content
Read the relevant chapter(s) in
Kaplan’s Study Text
Attempt the Test your understanding
examples if unsure of an area
Attempt appropriate Online
Progress Tests
Review the Pocket Notes on this area
Stage 2: Practice questions
Follow the order of revision of topics as recommended in the revision table plan below and attempt
the questions in the order suggested.
Try to avoid referring to text books and notes and the model answer until you have completed your
attempt.
Try to answer the question in the allotted time.
Review your attempt with the model answer and assess how much of the answer you achieved in
the allocated exam time.
P. 18
KA PL AN P U BLI SH IN G
KA PL AN ’S RE CO M ME N DE D RE VI SI ON APP R OA CH
Fill in the self-assessment box below and decide on your best course of action.
Comfortable with question attempt
Not comfortable with question attempts
Only revisit when comfortable with
questions on all topic areas
Focus on these areas by:
•
Reworking test your understanding
examples in Kaplan’s Study Text
•
Revisiting the technical content from
Kaplan’s pocket notes
•
Working any remaining questions on
that area in the Exam Kit
•
Reattempting an exam standard
question in that area, on a timed,
closed book basis
Note that:
The ‘footsteps questions’ give guidance on exam techniques and how you should have
approached the question.
Stage 3: Final pre-exam revision
We recommend that you attempt at least one full mock examination containing a set of previously
unseen exam standard questions.
It is important that you get a feel for the breadth of coverage of a real exam without advanced
knowledge of the topic areas covered – just as you will expect to see on the real exam day.
Ideally this mock should be sat in timed, closed book, real exam conditions and could be:
•
a mock examination offered by your tuition provider, and/or
•
one of the specimen exams.
KA PL AN P U BLI SH IN G
P. 19
1
2
Topic
The financial reporting
framework
Ethical and professional
principles
3, 4
5, 6
Performance reporting
and revenue
Non-current assets,
agriculture and
inventories.
P. 20
1
Fair value measurement
Reporting financial
performance
Study
Text
Chapter
5, 6
3, 4
1
2
1
Pocket
Note
Chapter
KAPLAN’S DETAILED REVISION PLAN
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Q25
Q34(b) Q36 (a)
Q50 Q52
Q71(b)
Q6(a)
Q15(c) Q24(a)
Q34(a) Q54(a)
Q36(b)
Q10(a)
Q34(c)
Q48(c)
Q63(a)
Q20 – 33
Q37(a)
Q58 Q59(a)
Q60(a)
Questions to
attempt
There are several reporting standards
within this heading. In particular, issues
around property, plant and equipment,
intangible assets, and impairment are
regularly examined. Don’t forget smaller
areas, like investment property and
government grants.
This could include revenue recognition or
the presentation of discontinued
activities.
You must know the definition of fair value
and be able to apply it. Make sure that you
know the markets used to measure fair
value and the levels of inputs to fair value
measurement.
Ensure that you can apply the ACCA Code
of Ethics and Conduct to practical
scenarios.
Ensure that you know the contents of the
Conceptual Framework and that you are
able to apply it to transactions.
Tutor guidance
Date
attempted
KA PL AN P U BLI SH IN G
Self-assessment
8
9
10
11
12
Leases
Employee benefits
Share-based payment
Provisions and events
after the reporting
period
Financial instruments
KA PL AN P U BLI SH IN G
7
Study
Text
Chapter
Foreign currency
transactions
Topic
12
11
10
9
8
7
Pocket
Note
Chapter
Q34(a) Q37(c)
Q38, Q39, Q41,
Q54(c), Q56(a),
Q69
Q36(c)
Q40 Q42(b)
Q43(b) Q49(c)
Q63(b)
Q10(c)
Q35(c)
Q67(a)
Q1(b) Q7(b),
Q31(a), Q47(d),
Q53(b), Q54(c)
Q39
Q44(c) Q46(a)
Q52(a)
Q2(a)
Q9(a)
Questions to
attempt
Ensure that you understand and can apply
recognition,
measurement
and
classification rules relating to financial
instruments per IAS 32 and IFRS 9.
Ensure that you know when a legal or
constructive obligation arises, and that
you can apply the definition of an
adjusting and non-adjusting event per
IAS 10.
Ensure that you understand how to
account for both cash-settled transactions
and equity-settled transactions.
Ensure that you understand how to
account for defined benefit and defined
contribution schemes.
Ensure that you know how to determine
when a contract contains a lease. You
must be able to account for leases from
the perspective of the lessee and the
lessor, as well as sale and leaseback
transactions.
Ensure that you know how to account for
exchange differences arising on overseas
transactions within an individual
company’s financial statements.
Tutor guidance
Date
attempted
Self-assessment
P. 21
KA PL AN ’S DE T AILE D RE V ISI ON P LA N
15
17
Related parties
Small entities
P. 22
16, 23
14
Segment reporting
Changes in accounting
regulation
13
Study
Text
Chapter
Income taxes
Topic
16, 23
17
15
14
13
Pocket
Note
Chapter
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Q21(a)
Q43(a) Q57(b)
Q65(b)
Q51(a)
Q65(a)
Q29(a)
Q22
Q41
Q30(a)
Q35 (b) Q36(c)
Q44(b)
Q59(b)
Questions to
attempt
You must be able to discuss the
implications of adopting new accounting
regulation. You should also ensure you are
up-to-date with changes in the profession.
Ensure that you know the key differences
between full IFRS Accounting Standards
and the IFRS for SMEs Standard.
Ensure you can identify related parties per
IAS 24, and the implications for any
transactions which they may enter into.
Ensure that you can define a reportable
segment and apply the definition to
information provided. It is also important
to know whether two segments can be
aggregated.
The main focus is likely to be the
recognition and measurement of deferred
tax assets and liabilities.
Tutor guidance
Date
attempted
KA PL AN P U BLI SH IN G
Self-assessment
19
20
21
22
Changes in group
structure
Foreign currency
subsidiaries
Statements of cash flows
Interpretation for
stakeholders
22
21
20
19
18
Pocket
Note
Chapter
Ensure that you know the format of a
statement of cash flows and can deal with
changes in group structure within the
statement.
Q3, Q8
Q14
Q20(a)
Q35(a) Q37(b)
Ensure that you are happy with the
Q49(a) Q51(a),
interpretation of financial and nonQ55(b)Q59(b)Q61 financial information, including additional
performance measures. You must also be
able to discuss sustainability reporting
standards.
Ensure that you can consolidate a foreign
subsidiary and can calculate the exchange
differences that arise on its net assets, profit
and goodwill.
Ensure that you know how to account for
share transactions where control is either
gained, lost or retained.
Ensure that you understand the standard
workings required for subsidiaries in
group financial statements, as well as key
definitions – such as ‘control’, ‘joint
control’ and ‘significant influence’.
Tutor guidance
Q2
Q9
Q11
Q4, Q5
Q6
Q15
Q1
Q4 Q5
Q10
Q13
Questions to
attempt
Date
attempted
Self-assessment
KA PL AN P U BLI SH IN G
P. 23
Note that not all of the questions are referred to in the programme above. The remaining questions in the Exam Kit are for extra practice for those who require more
questions on some areas.
18
Study
Text
Chapter
Basic groups, including
associates and joint
arrangements
Group financial
statements
Topic
KA PL AN ’S DE T AILE D RE V ISI ON P LA N
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
P. 24
KA PL AN P U BLI SH IN G
Section 1
PRACTICE QUESTIONS
SECTION A QUESTIONS – GROUP FINANCIAL STATEMENTS
1
LAYOUT (SEP/DEC 2024)
Walk in the footsteps of a top tutor
Answer debrief
Background
Layout Co is a manufacturing company. It has the financial year end of 31 December 20X7.
The following exhibits provide information relevant to the question:
1
Brassioc Co – provides information about the ownership and board of directors of
Brassioc Co.
2
Pension plan – provides information about the defined benefit pension plan of Layout Co.
3
Acquisition of Brassioc Co – sets out the details regarding the acquisition of Brassioc Co.
4
Draft consolidated SOFP – the draft consolidated statement of financial position (SOFP)
of the Layout Group as at 31 December 20X7.
This information should be used to answer the question requirements.
1 – Brassioc Co
On 1 January 20X7, Layout Co acquired 45% of the equity share capital in Brassioc Co, a
private company. On the acquisition of the 45% equity capital, Layout Co could appoint five
of Brassioc Co’s executive directors and four of Brassioc Co’s non-executive directors. There
are 12 executive directors and seven non-executive directors which comprise Brassioc Co’s
board of directors. The executive directors make all key business decisions by simple
majority. The non-executive directors help in the strategic development of the company and
provide advice to the executive directors but cannot vote on business decisions. The directors
appointed by Layout Co always vote in line with Layout Co’s policies.
The other 55% of the shares are owned by a single private investor who can appoint the
remaining seven executive directors and three non-executive directors.
During the year ended 31 December 20X7, Layout Co entered into a forward contract to
purchase an additional 10% of the equity capital of Brassioc Co in October 20X8. When
exercised, this will not change the number of directors which Layout Co can appoint.
KA PL AN P U BLI SH IN G
1
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Layout Co believes that it controls Brassioc Co and has accounted for Brassioc Co as a
subsidiary in its draft consolidated financial statements for the year ended 31 December
20X7.
2 – Pension plan
At 1 January 20X7, the defined benefit pension plan of Layout Co had a net deficit of
$24 million. The actuary has provided the following information for the year ended
31 December 20X7:
Current service cost
Cash contributions into plan on 31 December 20X7
Net deficit at 31 December 20X7
$m
6
4
32
At 1 January 20X7, the interest rate on high quality corporate bonds was 5%.
On 31 December 20X7, the pension plan extinguished its obligation to 250 ex-employees by
paying $60 million out of its plan assets to another pension provider. This reduced the
present value of the plan obligation by $50 million.
After the above events, the actuary valued the net deficit at $40 million as at 31 December
20X7.
The only accounting entry in respect of this pension plan was to recognise the cash
contributions as an expense in the operating section of the statement of profit or loss.
3 – Acquisition of Brassioc Co
On 1 January 20X7, Layout Co acquired 45% of the 10 million $1 equity shares of Brassioc Co.
This gave Layout Co significant influence over Brassioc Co. However, the investment was
incorrectly classified as a subsidiary and accounted for using the acquisition method in the
consolidated financial statements. When calculating goodwill on 1 January 20X7, the noncontrolling interest was measured at a fair value of $51 million and the fair value of the
identifiable net assets acquired was $83 million. The purchase consideration comprised cash
of $35 million.
On 1 January 20X7, Brassioc Co had retained earnings of $39 million and other components
of equity of $3 million. The difference between the fair value of the net assets and the
carrying amounts in the individual financial statements was attributable to property, plant
and equipment with a remaining useful life of five years at the acquisition date.
The individual statement of financial position of Brassioc Co as at 31 December 20X7 is
presented below:
$m
Assets
Non-current assets
Property, plant and equipment
Current assets
Total assets
2
32
47
––––
79
––––
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
Equity
Share capital
Other components of equity
Retained earnings
Total equity
Liabilities
Current liabilities
Total equity and liabilities
10
3
55
––––
68
11
––––
79
––––
4 – Draft consolidated SOFP
Layout Group
$m
Assets
Non-current assets
Property, plant and equipment
Investments in associates
Goodwill
Current assets
Total assets
Equity
Share capital
Other components of equity
Retained earnings
Non-controlling interest
Total equity
Liabilities
Non-current liabilities
Net defined benefit deficit
Current liabilities
Total liabilities
Total equity and liabilities
KA PL AN P U BLI SH IN G
634
51
81
––––––
766
––––––
1,456
––––––
2,222
––––––
135
189
1,506
299
––––––
2,129
––––––
24
69
––––––
93
––––––
2,222
––––––
3
SB R : S T RA TE GI C B US IN E SS RE P O RT IN G
Required:
(a)
Using exhibit 1, and in accordance with IFRS 10 Consolidated Financial Statements,
explain why Layout Co does not control Brassioc Co as at 31 December 20X7.
(8 marks)
(b)
Using exhibit 2, explain, with appropriate calculations, how the defined benefit plan
should be accounted for in the year ended 31 December 20X7.
(8 marks)
(c)
Using exhibits 2 and 3, adjust the pre-populated spreadsheet response option to
correct the draft consolidated statement of financial position as at 31 December
20X7 for the following facts:
•
Brassioc Co is an associate, and not a subsidiary, of Layout Co, and
•
the defined benefit pension plan has not been correctly accounted for.
(14 marks)
(Total: 30 marks)
Calculate your allowed time, allocate the time to the separate parts……………
2
PEONY (MAR/JUN 2024)
Walk in the footsteps of a top tutor
Background
Peony Co is the parent company of a group with one overseas subsidiary and a financial year
end of 31 December 20X2. The functional currency of Peony Co and the presentation
currency of the Peony Group is the dollar ($).
The following exhibits provide information relevant to the question:
1
Functional currency – provides information used to determine the functional currency
of Nomstra Co, an overseas subsidiary.
2
Three issues – describes three issues relating to the acquisition of Nomstra Co, an
overseas subsidiary.
3
Changes in government regulations – describes changes in government regulations in
the country in which Nomstra Co operates.
4
Draft consolidated SOFP – Draft consolidated statement of financial position (SOFP)
for the Peony Group.
This information should be used to answer the question requirements.
1 – Functional currency
Nomstra Co is a foreign subsidiary of Peony Co with a functional currency of Ny. Nomstra Co’s
sales and related costs are predominantly denominated and settled in Ny. Peony Co had
previously provided a supporting loan in dollars to Nomstra Co, which had been settled
during the year and funds from financial activities are currently generated in Ny. Nomstra Co’s
board of directors is free to determine its decisions independently from the board of
Peony Co.
4
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
2 – Three issues
On 1 January 20X2, Peony Co acquired 75% of the 1.5 million Ny1 ordinary shares of
Nomstra Co for $1.1 million, when the retained earnings of Nomstra Co were Ny4.8 million.
There were no other components of equity. Peony Co determined that the non-controlling
interests (NCI) in Nomstra Co had a fair value of Ny2.7 million at the acquisition date.
During the year ended 31 December 20X2, Nomstra Co reported a loss of Ny900,000. No
dividends were paid or proposed. On 31 December 20X2, Nomstra Co’s reported total equity
(net assets) was Ny5.4 million.
Exchange rates were as follows:
1 January 20X2
31 December 20X2
Weighted average rate for the year ended 31 December 20X2
$1 =
Ny12.0
Ny18.0
Ny15.0
Three issues
(i)
Goodwill arising on the acquisition of Nomstra Co was calculated incorrectly as
$725,000. This is also the amount included in the draft consolidated SOFP. In arriving
at this figure, the NCI at acquisition was translated and recognised using the exchange
rate at 31 December 20X2. The calculation was as follows:
Consideration
NCI at acquisition (Ny2.7m/18)
Fair value of identifiable net assets (Ny6.3m/12)
Goodwill at acquisition
$000
1,100
150
525
–––––
725
–––––
(ii)
At 31 December 20X2, a goodwill impairment of Ny3.3 million was calculated but not
recognised in relation to Nomstra Co. The group policy is to translate goodwill
impairments at the average rate of exchange.
(iii)
Nomstra Co’s assets and liabilities (excluding goodwill) were translated into dollars
using the exchange rate as at 31 December 20X2. The same exchange rate was used
to translate Nomstra Co’s loss for the year ended 31 December 20X2. The resulting
total exchange loss of $175,000 has been included in the translation reserve in the
draft consolidated SOFP with no entry made to the NCI reserve.
3 – Changes in government regulations
Near the beginning of the following year (the year ended 31 December 20X3), changes were
made to government regulations in the country in which Nomstra Co is located. This has
significantly impacted Nomstra Co’s operations and caused a fall in the value of the Ny.
The directors are aware that, due to the changes in government regulations, Nomstra Co is
no longer permitted to transfer funds to Peony Co. Moreover, government restrictions have
been enacted which limit the extent to which Peony Co can exercise rights or governance
over Nomstra Co.
KA PL AN P U BLI SH IN G
5
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
4 – Draft consolidated SOFP
Peony Group
$000
Assets
Non-current assets
Property, plant and equipment
Goodwill
Current assets
Total assets
Equity
Share capital
Retained earnings
Translation reserve (OCE)
Non-controlling interest
Total equity
Liabilities
Non-current liabilities
Current liabilities
Total liabilities
Total equity and liabilities
18,500.0
725.0
–––––––
19,225.0
–––––––
3,200.0
–––––––
22,425.0
–––––––
6,000.0
15,462.5
(175.0)
–––––––
21,287.5
137.5
–––––––
21,425.0
–––––––
200.0
800.0
–––––––
1,000.0
–––––––
22,425.0
–––––––
Required:
(a)
Using exhibit 1, and in accordance with IAS 21 The Effects of Changes in Foreign
Exchange Rates, explain why Nomstra Co’s functional currency is the Ny. (5 marks)
(b)
With regards to the three issues outlined in exhibit 2:
(c)
(i)
Discuss, with calculations, how to correct the treatment of Nomstra Co in the
consolidated financial statements of the Peony Group for the year ended
31 December 20X2.
(10 marks)
(ii)
Adjust the prepopulated spreadsheet response option to correct the draft
consolidated statement of financial position of the Peony Group as at
31 December 20X2.
(10 marks)
Using exhibit 3, discuss the potential impact of the changes in government regulation
on the accounting treatment of Nomstra Co in the consolidated financial statements
for the year ended 31 December 20X3.
(5 marks)
(Total: 30 marks)
6
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
3
KABELO (SEP/DEC 2023)
Walk in the footsteps of a top tutor
Background
Kabelo Co is the parent company of a group whose financial year end is 31 December 20X5.
The following exhibits provide information relevant to the question:
1
Acquisition of Trudos Co – provides information regarding the acquisition of Trudos Co
and other information relevant to complete the consolidated statement of cash flows.
2
Financial instruments – contains information about a number of financial instruments
held by the Kabelo Group.
3
Consolidated statements – this includes the draft extracts for the consolidated
statement of cash flows together with extracts from the finalised consolidated
statement of financial position for the year ended 31 December 20X5 including
comparative figures.
This information should be used to answer the question requirements.
1 – Acquisition of Trudos
Kabelo Co acquired 80% of the 100,000 equity shares of Trudos Co on 30 June 20X5. The
consideration consisted of a cash payment of $5 per share acquired and an issue of one
Kabelo Co $1 equity share for every four shares acquired in Trudos Co. Kabelo Co’s policy is
to value non-controlling interest at fair value at the date of acquisition. The fair value of
Kabelo Co’s and Trudos Co’s shares on 30 June 20X5 were $13 and $8 respectively.
The carrying amount of the net assets reported by Trudos Co on 30 June 20X5 were as
follows:
Property, plant and equipment
Inventories
Trade receivables
Cash and cash equivalents
Trade payables
$
421,000
256,800
220,300
24,900
(175,400)
–––––––
747,600
–––––––
The only fair value adjustment on acquisition related to plant which had a fair value of
$50,000 above its carrying amount.
The group pays tax at 30% and deferred tax was correctly accounted for within the
consolidated statement of financial position. The taxation figure in the statement of profit or
loss for the year ended 31 December 20X5 is $385,600 and this figure has been included as
taxation paid within the draft statement of cash flows.
KA PL AN P U BLI SH IN G
7
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
The group’s financial controller has accurately completed the consolidated statement of
financial position and consolidated statement of profit or loss and other comprehensive
income but the consolidated statement of cash flow is in draft. The financial controller has
not yet considered the impact of the acquisition of Trudos Co on the consolidated statement
of cash flow.
The statement of cash flows figures for movements in inventories, trade receivables, trade
payables and property, plant and equipment have been calculated by considering simply the
differences in the year-end balances in the consolidated statement of financial position from
31 December 20X4 and 31 December 20X5.
Goodwill of Trudos Co was impaired during the year. There were no other goodwill
impairments within the group.
The depreciation charge of the group for the year ended 31 December 20X5 was $625,060.
There were no disposals of non-current assets by the group during the year although there
were some additions paid for by cash.
2 – Financial instruments
The Kabelo Group has a number of financial instruments presented within its consolidated
statement of financial position. Some group entities which had surplus cash resources had
acquired debentures in other non‑group entities to increase returns. Other group entities
had raised finance by issuing bonds.
Kabelo Co financed the acquisition of Trudos Co by acquiring a bank loan.
Kabelo Co also had an overdrawn bank balance as at 31 December 20X5. The overdrawn bank
balance fluctuates regularly from an in-funds balance to an overdrawn balance.
3 – Consolidated statements
The extracts below would have been replicated in the pre-populated spreadsheet response
option.
Draft extracts from the consolidated statement of cash flows for the Kabelo Group for the
year ended 31 December 20X5:
Cash inflow from operating activities:
Operating profit
Depreciation
$
1,318,100
625,060
Increase in inventories
Increase in trade and other receivables
Increase in trade and other payables
Cash from operating activities before income
taxes
Taxation paid
(658,100)
(211,500)
93,900
Cash inflow from operating activities
Cash-flow from investing activities
Acquisition of property, plant and equipment
Consideration paid for acquisition of Trudos Co
Cash outflow from investing activities
8
1,167,460
(385,600)
781,860
(543,600)
(not yet calculated)
(543,600)
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
Extracts from the consolidated statement of financial position of the Kabelo Group:
Property, plant and equipment
Goodwill
Deferred tax liability
Current tax liability
31 December
20X5
$
3,668,900
447,400
130,000
364,300
31 December
20X4
$
3,125,300
441,100
250,000
256,900
Required:
(a)
(b)
Using exhibit 1,
(i)
adjust the pre-populated spreadsheet to prepare revised extracts for the
operating and investing activities of the consolidated statement of cash flows
for the Kabelo Group for the year ended 31 December 20X5, and (14 marks)
(ii)
explain the adjustments required to correct the operating and investing
activities of the consolidated statement of cash flows for the Kabelo Group for
the year ended 31 December 20X5.
(10 marks)
Using exhibit 2, advise the financial controller as to how the various financial
instruments, including the overdraft, should be presented in the consolidated
statement of cash flows.
(6 marks)
(Total: 30 marks)
4
GREER (MAR/JUN 2023)
Walk in the footsteps of a top tutor
Tutorial note
This question differs from the current exam style that you will see in question one as no
adjustments to any financial statements via the pre-populated spreadsheet is needed.
However, it still provides useful revision of a range of consolidation and other financial
reporting issues.
Background
Greer Co is a listed parent company of a manufacturing group. Greer Co is preparing the
group financial statements for the year ended 31 December 20X7.
The following exhibits provide information relevant to the question:
1
Acquisition of Layout Co – describes a business combination.
2
Goodwill on acquisition of Layout Co – describes the values attributed to the
calculation of goodwill on the business combination with Layout Co.
3
Investment in Gae Co – describes an additional investment in the year.
4
Loan agreement – describes the terms of a bank loan agreement.
This information should be used to answer the question requirements.
KA PL AN P U BLI SH IN G
9
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
1 – Acquisition of Layout
Greer Co whose shares are listed on a stock exchange and Layout Co, an unlisted company,
entered into a business combination in two stages. On 1 January 20X7, Greer Co purchased
35% of the share capital and voting rights of Layout Co for cash. On 1 April 20X7, Greer Co
acquired the remaining 65% of the share capital by issuing new shares to Layout Co’s
shareholders.
On 1 April 20X7, Greer Co had a market value of $70 million and Layout Co had a value of
$90 million. Greer Co’s business represents 44% and Layout Co’s business 56% of the total
value of the combined businesses. After 1 April 20X7, the former shareholders of Greer Co
owned 51% and the former shareholders of Layout Co owned 49% of the voting rights of the
combined entity.
On 1 April 20X7, the purchase agreement provided for a new board of directors of the
combined entity comprising six board members of Greer Co and two board members of
Layout Co. The CEO of Layout Co is the CEO of the combined entity. The board of directors
nominates the members of the management team but the CEO has significant influence over
the selection of the team. The management team comprises the CEO and five other
members, three from Greer Co and two from Layout Co.
2 – Goodwill on acquisition of Layout
On 1 January 20X7, Greer Co paid $34 million cash for 35% of the share capital of Layout Co.
On 1 April 20X7, Greer Co issued 25 million shares of $1 to Layout Co’s shareholders in order
to acquire the remaining 65% of the share capital. The shares of Greer Co were quoted on
the stock exchange at $2.85 on 1 April 20X7.
On 1 April 20X7, Greer Co had a market value of $70 million and Layout Co had a value of
$90 million. Greer Co had treated its 35% holding as an associate and its carrying amount on
1 April 20X7 was $36 million. The fair value of the identifiable net assets of Layout Co was
$87 million on 1 April 20X7.
3 – Investment in Gae Co
Greer Co acquired a 10% interest in Gae Co, a listed company, on 1 January 20X7 for $23 million.
Greer Co elected at initial recognition to measure it at fair value through other comprehensive
income (FVTOCI) as the investment was not held for trading.
On 1 July 20X7, Greer Co acquired an additional 12% interest in Gae Co for $30 million and
achieved significant influence. On 1 July 20X7, the fair value of a 10% interest in Gae Co was
$26 million. Gae Co made profits of $20 million before dividends for the year to 31 December
20X7. Greer Co received a dividend of $0.2 million on 31 March 20X7. This was the only
dividend paid in the year. Greer Co uses fair value as the ‘deemed cost approach’ in its
financial statements.
4 – Loan agreement
Greer Co took out a $27 million bank loan on 1 January 20X6, repayable after five years.
Interest is charged at 5% per annum, payable annually on 31 December. Transaction costs of
$675,000 were paid on 1 January 20X6. The effective interest rate was calculated as 5.6%.
Greer Co has negotiated a change to the terms of its loan on 31 December 20X7 at no cost.
This has resulted in the waiver of the interest payment due on that date with all other
contractual cash flows remaining payable. The modification to the financial terms of the
original bank loan is not considered substantive. The present value of the modified
contractual cash flows at the original effective interest rate is $26,841,000.
10
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
Required:
(a)
Using exhibit 1, evaluate the reasons why Greer Co, rather than Layout Co, can be
identified as the acquirer in the business combination.
(10 marks)
(b)
Using exhibit 2, explain, with calculations, how the goodwill on the acquisition of
Layout Co on 1 April 20X7 will be determined within the consolidated financial
statements of the Greer Group for the year ended 31 December 20X7.
(5 marks)
(c)
Using exhibit 3, explain, with calculations, how the Greer Group would account for
the investment in Gae Co in the consolidated financial statements for the year ended
31 December 20X7.
(9 marks)
(d)
Using exhibit 4, calculate and briefly outline, in accordance with IFRS 9 Financial
Instruments, how the loan would be accounted for during the period 1 January 20X6
to 31 December 20X7.
(6 marks)
(Total: 30 marks)
5
STERLING (SEP/DEC 2022)
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Tutorial note
This question differs from the current exam style that you will see in question one as no
adjustments to any financial statements via the pre-populated spreadsheet is needed.
However, it still provides useful revision of a range of consolidation and other financial
reporting issues.
Background
Sterling Co is currently preparing its individual and consolidated financial statements for the
year ended 31 March 20X9 in accordance with International Financial Reporting Standards.
The following exhibits, available below, provide information relevant to the question:
1
Acquisition of Berthold Co – describes the purchase of 40% of Berthold Co on 1 January
20X7 and the further acquisition of 35% on 1 December 20X8.
2
Investment in Malting Co – describes the purchase of 30% of Malting Co on 1 July 20X8.
3
Batch Co: discontinued operation – describes the acquisition of Batch Co that Sterling Co
decides to sell on 1 January 20X9.
This information should be used to answer the question requirements.
KA PL AN P U BLI SH IN G
11
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
1 – Acquisition of Berthold Co
Sterling Co paid $25 million for 40% of Berthold Co’s 10 million $1 ordinary shares on
1 January 20X7 when Berthold Co’s retained earnings were $18 million. Berthold Co has no
other reserves. Sterling Co exercised significant influence over Berthold Co’s financial and
operating policy decisions.
A further 35% stake in Berthold Co was acquired on 1 December 20X8 for $41 million, when
the fair value of Berthold Co’s identifiable assets and liabilities was $55.3 million, and
Berthold Co’s retained earnings were $42.3 million. The difference between the fair value of
the identifiable assets and liabilities of Berthold Co and their carrying amounts related to
non-depreciable land. The market price of Berthold Co’s shares immediately prior to
1 December 20X8 was $9.20 per share. Sterling Co measures non-controlling interest at fair
value at the date of acquisition. Goodwill at 31 March 20X9 is not impaired.
Berthold Co reported a profit for the year ended 31 March 20X9 of $11.1 million.
2 – Investment in Malting Co
On 1 July 20X8, Sterling Co paid cash of $2.5 million and issued loan notes with a nominal
value of $1.1 million and a fair value of $1.3 million, to acquire 30% of the equity interest of
Malting Co. The remaining 70% of the equity in Malting Co is owned equally between two
unrelated companies. All key operating decisions require unanimous consent of all three
investing parties. Each of the three investing parties has the right to its share of the net assets
of Malting Co via a contractual agreement. Malting Co reported a loss of $0.8m for the year
ending 31 March 20X9 and a dividend was neither paid nor proposed. All three investing
parties provided separate guarantees to Malting Co’s bank because of Malting Co’s poor
performance in the year.
3 – Batch Co: discontinued operation
On 1 January 20X9, Sterling Co announced a plan to dispose of Batch Co, which operates in a
significantly different business sector to the rest of the group.
Sterling Co first acquired 70% of the equity shares in Batch Co on 1 January 20X7, for
consideration of $3.1 million, when the fair value of the identifiable net assets acquired was
$3.6 million. The ordinary share capital and retained earnings of Batch Co were $0.5 million
and $2.1 million respectively. The excess of the fair value of the identifiable net assets was
due to a building with an estimated useful life of 10 years at the acquisition date. The fair
value of the non-controlling interest (NCI) in Batch Co was $0.9 million on 1 January 20X7.
Sterling Co uses fair values to measure NCI.
On 1 January 20X9, Batch Co reported retained earnings of $2.9 million, with no change in
ordinary share capital, or impairment of goodwill, since acquisition.
Sterling Co decided to treat Batch Co as a disposal group held for sale in accordance with IFRS
5 Non-current Assets Held for Sale and Discontinued Operations. Assets and liabilities of
Batch Co require no remeasurement to meet applicable IFRS Accounting Standards prior to
restating as a disposal group, and the total fair value less costs to sell of the disposal group
at 1 January 20X9 was estimated to be $4.4 million.
12
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
Required:
(a)
Using exhibit 1:
(i)
explain how Berthold Co will be accounted for, including calculations, in
Sterling Co’s consolidated statement of profit or loss for the year ended
31 March 20X9, and
(8 marks)
(ii)
explain and show how the goodwill in Berthold Co would be calculated at
1 December 20X8.
(6 marks)
(b)
Using exhibit 2, advise the directors of Sterling Co, with illustrative calculations, how
the 30% investment in Malting Co should be accounted for in Sterling Co’s individual
and consolidated financial statements.
(7 marks)
(c)
Using exhibit 3, explain to the directors of Sterling Co how to account for Batch Co as
a discontinued operation at 1 January 20X9 in Sterling Co's consolidated financial
statements. Your answer should include:
•
a calculation of the goodwill at 1 January 20X7, and
•
a calculation of how the investment in Batch Co should be measured prior to
disposal.
(9 marks)
(Total: 30 marks)
6
LUNA (MAR/JUN 2022)
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Tutorial note
This question differs from the current exam style that you will see in question one as no
adjustments to any financial statements via the pre-populated spreadsheet is needed.
However, it still provides useful revision of a range of consolidation and other financial
reporting issues.
Background
Luna Co is the parent company of a group that operates in the pharmaceutical industry. All
entities in the group have a financial year end of 31 March. The current year end is 31 March
20X6.
The following exhibits, available below, provide information relevant to the question:
1
Sale of shares in Starlight Co – provides information regarding a disposal of shares by
Luna Co in Starlight Co during the year ended 31 March 20X6.
2
Sale of goods to Starlight Co – provides information regarding a sale of goods between
Luna Co and Starlight Co shortly before the reporting date.
3
Roquet Co – provides information about the creation of Roquet Co including details of
a sale of property from Luna Co to Roquet Co.
4
Eclip Co – provides information about the acquisition of Eclip Co.
This information should be used to answer the question requirements.
KA PL AN P U BLI SH IN G
13
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
1 – Sale of shares in Starlight Co
Luna Co acquired its 80% equity interest in Starlight Co on 1 April 20X2. Starlight Co had in
issue 1,000,000 ($1) equity shares and has not issued any shares for many years. Goodwill on
acquisition was correctly calculated as $320,000 but had subsequently been impaired by 15%
in 20X4. Luna Co values the non-controlling interest at fair value. The fair value of the net
assets of Starlight Co at acquisition exceeded their carrying amount by $200,000. This all
related to non-depreciable land which is still owned by Starlight Co at 31 March 20X6.
On 1 January 20X6, Luna Co sold 100,000 equity shares in Starlight Co for $7 a share. The only
reserve within equity in the individual statement of financial position of Starlight Co is
retained earnings. The balance of this reserve at 1 April 20X5 was $4,658,000. Starlight Co
generated a profit for the year ended 31 March 20X6 of $165,056 which accrued evenly
throughout the year.
2 – Sale of goods to Starlight Co
On 20 March 20X6, Luna Co sold 5,000 units to Starlight Co at an initial transaction price of
$200 per unit and control of the goods passed from Luna Co to Starlight Co on that date.
Payment is only due when Starlight Co sells the goods on to the end consumer which typically
takes around six months. Starlight Co had not yet sold any goods on to the final consumer as
at 31 March 20X6.
The goods have a high risk of obsolescence and therefore price concessions are regularly
granted in order that the goods can be easily transferred on within the distribution channel.
On the basis of past practice, Luna Co anticipates that it will grant Starlight Co a price
concession of between 8% and 38%. Current market data suggests that a maximum price
concession of 35% may be necessary to enable Starlight Co to distribute the goods to the
final consumer.
The initial cost of the goods to Luna Co was $80 per unit. Luna Co has recorded the sale at
the initial transaction price of $200 per unit. Starlight Co has included the goods within their
closing inventory at a value of $1,000,000. Revenue and cost of sales for the respective
entities for the year ended 31 March 20X6 are as follows:
Revenue
Cost of sales
Luna Co
$
29,812,540
(18,154,020)
Starlight Co
$
14,185,160
(11,042,120)
3 – Roquet Co
On 1 April 20X4, Luna Co and an unconnected third party established a joint arrangement
involving the creation of a joint venture, Roquet Co. Each venturer paid $6 million in cash to
the newly created entity, Roquet Co, in exchange for a 50% interest in the equity shares.
Roquet Co has earned profits for the year of $73,450 and $126,980 in the years ended
31 March 20X5 and 31 March 20X6 respectively. Additionally, Roquet Co paid dividends to
both Luna Co and the other venturer of $15,000 each in the current year. This was the first
time Roquet Co had paid dividends to its investors.
On 31 March 20X6, Luna Co transferred a property to Roquet Co for proceeds of $8 million
which is agreed to be equal to the market value of the property on that date. The carrying
amount of the property in the financial statements of Luna Co at this date was $10 million.
14
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
4 – Eclip Co
Eclip Co is an entity which has a sole purpose of producing a new medicine to fight various
diseases, having secured a licence to do so following successful initial trials. Eclip Co’s
employees consist of a highly skilled team of scientists. There is also a small support team
under contract who carry out various administrative and accounting functions. Clinical tests
undertaken by the team of scientists have been extremely encouraging and it is expected
that the medicine will be on the market sometime within the next year.
On 31 March 20X6, Luna Co acquired 100% of Eclip Co. It was also decided that it would be
important to retain the contracts of the team of scientists (although not the administrative
employees) as there was considerable specialised knowledge and experience within the
team. The only assets recognised in the individual financial statements of Eclip Co at
31 March 20X6 consisted of the licence to manufacture the medicine and related
development costs. However, Luna Co estimated it was worth paying an extra $1,5 million in
consideration in order to secure the skills and experience of the team of scientists.
Required:
(a)
(i)
Explain, with calculations, how the disposal of shares in Starlight Co should be
accounted for in the consolidated financial statements of the Luna group for
the year ended 31 March 20X6.
(7 marks)
(ii)
Discuss the principles that should be considered by Luna Co in recording the
sale of the goods to Starlight Co in Luna Co’s INDIVIDUAL financial statements
for the year ended 31 March 20X6. Conclude on whether the accounting
treatment currently adopted is correct.
(6 marks)
(iii)
Using exhibits 1 and 2 only, present extracts that should be included in the
consolidated statement of profit or loss of the Luna group for the year ended
31 March 20X6. Your answer should include revenue, cost of sales and the
profit of Starlight attributable to the non-controlling interest.
(4 marks)
(b)
Discuss, with calculations, how the investment in Roquet Co and the sale of the
property should be accounted for in the consolidated financial statements of the
Luna group in the year ended 31 March 20X6.
(7 marks)
(c)
Discuss whether the acquisition of Eclip Co should be treated as a business
combination in accordance with IFRS 3 Business Combinations. Your answer should
consider whether the skills and experience of the team of scientists can be
recognised as a separate identifiable asset.
(6 marks)
(Total: 30 marks)
7
COLUMBIA (MAR/JUN 2021)
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Background
Columbia Co is the parent of a listed group which operates within the telecommunications
industry. On 31 December 20X5, Columbia Co acquired a new subsidiary. The company also
has a defined benefit pension scheme which has not yet been updated in Columbia’s
individual financial statements. The group’s current year end is 31 December 20X5.
The following exhibits, available below, provide information relevant to the question:
1
Acquisition of Peru Co – purchase of 50% of Peru Co.
KA PL AN P U BLI SH IN G
15
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
2
Peru Co: net assets at 31 December 20X5.
3
Columbia Co: Pension scheme – defined benefit pension scheme.
4
Draft consolidated statement of financial position at 31 December 20X5.
This information should be used to answer the question requirements.
1 – Acquisition of Peru Co
Brazil Co is a competitor of Columbia Co. On 31 December 20X5, both Brazil Co and Columbia Co
acquired 50% of the 5 million ordinary $1 shares of Peru Co. The consideration paid by
Columbia Co consisted of cash of $8 per share and also a 1 for 20 share exchange when the
market price of Columbia Co’s shares was $10 each. Brazil Co also paid $8 per share for their
interest but did not issue any shares to the original shareholders of Peru Co. The ordinary
shares of Peru Co have one voting right each.
Following the acquisition, Columbia Co had the contractual right to appoint 60% of the board
of Peru Co with the remaining 40% appointed by Brazil Co. Brazil Co has veto rights over any
amendments to the articles of incorporation and also over the appointment of auditors.
Brazil Co and Columbia Co each appointed one member to Peru Co’s senior management
team. It is the senior manager appointed by Columbia Co who makes the key decisions
regarding the development of Peru Co’s new technologies, its principal revenue stream, the
markets that it will operate in and how it is financed. The senior manager appointed by
Columbia Co also provides a supervisory role and has the right to request that significant
activities get board approval, such as imposing restrictions on Peru Co from undertaking
activities that would significantly increase credit risk.
2 – Peru Co: net assets at 31 December 20X5
The net assets of Peru Co reported in the individual financial statements had a carrying
amount of $32 million on 31 December 20X5. However, on the acquisition of Peru Co, the
directors of Columbia Co discovered the following:
On 1 July 20X5, Peru Co acquired 6 million 6% coupon bonds for $6 million in an unquoted
company at par ($1). Bond interest is paid annually on 30 June. Due to a premium on
redemption the effective rate of interest was 8%. Peru Co has a business model to collect the
contractual cash flows from the bonds and therefore measures them at amortised cost.
Columbia Co holds similar unquoted assets but has a business model whereby they may
either collect the contractual cash flows or sell the asset. Bonds with a similar risk profile for
a similar quoted company were trading at $2 per bond on 31 December 20X5. A discount of
30% is considered reasonable to reflect the difference in liquidity of the two types of bonds.
One of the identifiable intangible assets of Peru Co at acquisition was a brand. The brand had
a carrying amount of $4 million on 31 December 20X5 and is part of other non-current assets.
Columbia Co has a similar branded product and is, therefore, planning to discontinue the
trade of Peru Co’s branded product with immediate effect. The future cash-flows from the
Peru Co’s product post-acquisition are therefore considered to be $nil. If the trade of the
branded product were to be sold to a competitor in order to continue the trade, it is
estimated that it could be sold for around $5 million.
Peru Co has several technical support service contracts for which there are outstanding
performance obligations at 31 December 20X5. Included in contract liabilities (deferred
income) at this date is a balance of $2.8 million in respect of these contracts. It is estimated
that these contracts will cost $1.7 million for Peru co (and any other market participants) to
complete. A mark-up of 30% is considered reasonable for this type of contract.
Columbia Co has a policy of measuring the non-controlling interest at fair value.
16
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
3 – Columbia Co: Pension scheme
Columbia Co has, for many years, operated a defined benefit pension scheme. At 1 January
20X5, the fair value of the pension scheme assets were estimated to be $260 million and the
present value of the pension scheme liabilities were $200 million. The total of the present
value of future refunds and reductions in future contributions (asset ceiling) was $20 million
at 1 January 20X5. This table provides details of the scheme for the year ended 31 December
20X5.
Discount rate on good quality corporate bonds
5%
$m
30
21
25
Current service costs
Cash contributions
Benefits paid during the year
The finance assistant was unsure how to record the contributions paid, so incorrectly
recorded them within other receivables as part of current assets.
At 31 December 20X5, the fair value of the pension scheme assets were estimated to be
$242 million and the present value of the pension scheme liabilities were $195 million. The
total of the present value of future refunds and reductions in future contributions (asset
ceiling) was $25 million at 31 December 20X5.
4 – Draft consolidated statement of financial position at 31 December 20X5
Columbia’s directors have prepared a spreadsheet of the consolidated statement of financial
position as at 31 December 20X5, on the assumption that Columbia is deemed to be the
acquirer in the acquisition of the shares in Peru Co. The cash and share consideration for the
investment in Peru Co have been included at fair value. The net assets of Peru Co have been
included at their carrying amounts and the equity of Peru Co as a balancing figure. Goodwill
is still to be calculated.
$m
Assets
Non-current assets
Property, plant and equipment
Financial assets
Investment in subsidiary
Goodwill
Defined benefit pension surplus
Other non-current assets
Current assets
Total assets
KA PL AN P U BLI SH IN G
417.0
23.0
21.3
20.0
47.0
––––––
528.3
––––––
115.0
––––––
643.3
––––––
17
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Equity
Equity attributable to equity holders of the company
Share capital
Other components of equity
Retained earnings
Non-controlling interest
Peru 's equity
Total equity
Liabilities
Non-current liabilities
Loans
Current liabilities
Contract liabilities
Other current liabilities
Total liabilities
Total equity and liabilities
40.0
92.0
288.0
––––––
420.0
0.0
32.0
––––––
452.0
––––––
50.0
––––––
50.0
––––––
55.0
86.3
––––––
141.3
––––––
191.3
––––––
643.3
––––––
Required:
Draft an explanatory note to the directors of Columbia Co to address the following issues:
(a)
(i)
whether Columbia Co should be considered the acquirer in a business
combination with Peru Co
(8 marks)
(ii)
a brief explanation of how the fair value of the net assets of Peru Co at
31 December 20X5 should be determined when calculating goodwill, and
(5 marks)
(b)
how the defined benefit pension scheme should be accounted for in the year ended
31 December 20X5.
(7 marks)
(c)
On the assumption that Columbia Co is considered to be the acquirer, adjust the draft
consolidated statement of financial position at 31 December 20X5 using the prepopulated spreadsheet response option. Adjust the spreadsheet for your answers to
(a)(ii) and (b). The spreadsheet should take into account the following:
•
the fair value adjustments on acquisition
•
the defined benefit pension scheme
•
goodwill using the fair value method to calculate non-controlling interest.
Ignore deferred taxation.
Work to one decimal place.
(10 marks)
Note: The requirement above reflects the format of the real exam, however no
spreadsheet is provided with this exam kit. You should use the data contained in the
relevant exhibit along with your own spreadsheet software or the ACCA software.
(Total: 30 marks)
18
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
8
SUGAR (SEP/DEC 2020)
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Background
At 30 June 20X7, Sugar Co has investments in several associate companies, including Flour Co.
On 1 July 20X7 Sugar Co acquired additional shares in Flour Co and obtained control. On
1 October 20X7 Sugar Co also acquired an associate, Butter Co. The group is preparing the
consolidated statement of cash flows for the year ended 30 June 20X8.
The following exhibits, available below, provide information relevant to the question:
1
Acquisition of Flour Co – provides information on the acquisitions of shares in Flour up
to 1 July 20X7.
2
Further information – provides further information about the draft consolidated
statement of cash flow (included in the pre-formatted response option and exhibit 5).
3
Asset acquisitions and share issues – provides information on the acquisitions of noncurrent assets made by Sugar Co and the share issues made by Sugar Co.
4
Pension schemes – provides information about Sugar Co’s defined benefit and defined
contribution pension schemes.
5
Draft consolidated statement of cash flows – provides extracts of the draft
consolidated statement of cash flows (SOCF) for the year ended 30 June 20X8.
This information should be used to answer the question requirements.
1 – Acquisition of Flour Co
Flour Co has 10 million shares in issue. A 40% shareholding in Flour Co was purchased several
years ago at a cost of $10 million. This investment gave Sugar Co significant influence in
Flour Co. Sugar purchased an additional three million shares (30% shareholding) of the
ordinary shares of Flour on 1 July 20X7. The consideration for the 30% was in two parts: (i)
cash and (ii) a one for two share exchange when the market price of Sugar Co shares was
$6 each. In Flour Co’s individual financial statements, the net assets had increased by
$12 million between the two acquisition dates. The carrying amount of Flour Co’s net assets
on 1 July 20X7 was as follows:
Intangible assets (licenses and patents)
Property, plant and equipment
Cash and cash equivalents
Other net current assets
Total carrying amount of net assets
$000
6,781
18,076
1,234
9,650
––––––
35,741
––––––
The carrying amounts of the net assets at 1 July 20X7 were equal to the fair values except for
land which had a fair value $600,000 above the carrying amount. The Sugar group values
non‑controlling interests (NCI) at fair value and the share price of Flour Co at 1 July 20X7 was
$3.80. This share price should be used to value NCI and the 40% investment in Flour Co at
that date.
Goodwill at 1 July 20X7 was correctly calculated as $2,259,000 and has been correctly
accounted for in the consolidated statement of financial position as part of intangible assets.
KA PL AN P U BLI SH IN G
19
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
2 – Further information
The group’s consolidated financial statements have been correctly completed by the financial
accountant, with the exception of the consolidated statement of cash flows. The financial
accountant has begun to draft the statement of cash flows, but has not yet taken into account
the additional 30% shareholding acquired in Flour Co or the information regarding asset
acquisitions and share issues (exhibit 3). There are also some errors. The draft extracts have
been included in the spreadsheet response option.
3 – Asset acquisitions and share issues
Flour Co was correctly consolidated from 1 July 20X7. The Sugar group also purchased various
assets during the year.
There were no disposals or impairments of intangible assets during the year but amortisation
of $3.5 million had been deducted from profit from operations.
The only additions to property, plant and equipment during the year were as a result of the
acquisition of Flour Co. The group disposed of some plant and machinery which had a
carrying amount of $6.37 million. These were sold at a loss on disposal of $2 million. The
financial accountant included the loss on disposal of $2 million on the plant and machinery
as a cash outflow under investing activities in the draft statement of cash flows.
Sugar Co purchased a 25% equity interest in Butter Co on 1 October 20X7 for $5 million cash
which gave significant influence. Butter Co did not pay a dividend during the year ended
30 June 20X8. Sugar Co did not pay any dividends during the year.
In addition to the shares issued to purchase Flour Co, Sugar Co issued some ordinary
$1 shares for cash during the year ended 30 June 20X8. The financial accountant was waiting
for confirmation of the value of the shares issued for cash, so included the nominal value of
the shares in the draft statement of cash flows.
4 – Pension schemes
Sugar Co is the only entity of the group which operates a defined benefit pension scheme.
The pension scheme obligation increased during the year from $1.175m to $6.368m. The
movement on the pension liability represents the service cost component, the net interest
component and also the remeasurement component for the year. Sugar Co usually makes
cash contributions into the scheme on an annual basis towards the year end. The significant
increase in the pension scheme obligation for the year ended 30 June 20X8 was because the
contributions to the scheme did not follow normal practice and were instead made in July
20X8. Benefits paid during the year were $2 million in cash.
From April 20X8, Sugar Co decided that all new employees would be offered a defined
contribution scheme rather than the defined benefit pension scheme. Contributions of
$0.4 million were expensed to the profit or loss in the period. Sugar Co’s statement of
financial position reflects an accrual in respect of this pension scheme of $0.01 million.
5 – Draft consolidated SOCF
The draft extracts have been replicated in the spreadsheet response option.
Draft extracts from the consolidated statement of cash flows for the Sugar group for the
year ended 30 June 20X8:
Cash flows from investing activities
Disposal of property, plant and equipment
Net cash used in investing activities
Cash flows from financing activities
Proceeds from the issue of shares
Net cash generated from financing activities
20
(2,000)
(2,000)
1,500
1,500
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
Consolidated statement of financial position as at 30 June (extracts):
Non-current assets
Intangible assets
Property, plant and equipment
Equity
Ordinary share capital ($1 shares)
Other components of equity (all share premium)
Non-controlling interest
20X8
$000
20X7
$000
33,456
55,124
15,865
52,818
23,000
33,600
30,152
20,000
18,000
12,914
Consolidated statement of profit or loss for the year ended 30 June 20X8 (extract):
Profit attributable to the non-controlling interest
$000
9,162
Required:
(a)
Using exhibit 1, draft an explanatory note to the directors of Sugar Co, addressing
the following:
(i)
how the initial 40% investment in Flour Co should be accounted for in the
consolidated statement of financial position at 1 July 20X7 before the
additional investment.
(2 marks)
(ii)
how the additional purchase of Flour’s shares on 1 July 20X7 should be
accounted for in the Sugar consolidated financial statements, including an
explanation of how goodwill should be calculated at 1 July 20X7.
(6 marks)
(b)
Using the goodwill figure of $2,259,000, calculate the cash paid to acquire control of
Flour Co and include a brief explanation as to how that cash should be accounted for
in the consolidated statement of cash flows.
(4 marks)
(c)
Using the pre-populated spreadsheet response option and exhibits 1, 2 and 3, update
the draft extracts of the consolidated statement of cash flows to adjust for the
acquisition of the additional Flour Co shares and to amend for any errors/omissions
made by the directors.
(12 marks)
Note: The requirement above reflects the format of the real exam, however no
spreadsheet is provided with this exam kit. You should use the data contained in the
relevant exhibit along with your own spreadsheet software or the ACCA software.
(d)
Describe the impact, if any, that the defined benefit and defined contribution
pension schemes will have on the consolidated statement of cash flows for the Sugar
group for the year ended 30 June 20X8, assuming that cash flows from operating
activities are calculated by the indirect method.
(6 marks)
(Total: 30 marks)
KA PL AN P U BLI SH IN G
21
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
9
HUMMINGS (MAR 2020)
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Tutorial note
This question differs from the current exam style that you will see in question one as no
adjustments to any financial statements via the pre-populated spreadsheet is needed.
However, it still provides useful revision of a range of consolidation and other financial
reporting issues.
Background
Hummings Co is the parent company of a multinational listed group of companies. Hummings
Co uses the dollar ($) as its functional currency. Hummings Co acquired 80% of the equity
shares of Crotchet Co on 1 January 20X4 and 100% of Quaver Co on the same date. The
group’s current financial year end is 31 December 20X4.
Crotchet Co: functional currency
The head office of Crotchet Co is located in a country which uses the dinar as its main
currency. However, its staff are located in a variety of other locations. Consequently, half of
their employees are paid in dinars and the other half are paid in the currency of grommits.
Crotchet Co has a high degree of autonomy and is not reliant on finance from Hummings Co,
nor do sales to Hummings Co make up a significant proportion of their income. All of its sales
and purchases are invoiced in grommits and therefore Crotchet Co raises most of its finance
in grommits. Cash receipts are retained in both grommits and dinars. Crotchet Co does not
own a dollar ($) bank account. Crotchet Co is required by law to pay tax on its profits in dinars.
The acquisition of Crotchet Co
Hummings Co paid cash of $24 million for the 80% holding in Crotchet Co on 1 January 20X4.
Hummings Co has a policy of measuring non-controlling interests at fair value. The fair value
of the non-controlling interests in Crotchet Co on 1 January 20X4 was $6 million. Since
Crotchet Co has a range of net assets held domestically and overseas, the fair values of the
net assets at acquisition were determined in their local currency. Hence, the fair value of
some assets have been determined in dinars and others in grommits. The total fair value of
the net assets denominated in grommits at 1 January 20X4 was 43 million grommits. The
total fair value of the net assets denominated in dinars at 1 January 20X4 was 50 million
dinars.
Excluded from these fair values are several contracts with the customers of Crotchet Co.
These contractual relationships prohibit the customers of Crotchet Co from obtaining
services from any of the main competitors of Crotchet Co. They have an estimated fair value
at 1 January 20X4 of 15 million grommits.
At 31 December 20X4, it was decided to impair goodwill by 30%.
22
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
The following is a summary of the exchange rates between the dollar, grommits and dinars
at 1 January 20X4 and 31 December 20X4:
1 January 20X4
$1:8 grommits
$1: 4 dinar
1 dinar:2 grommits
31 December 20X4
$1:7 grommits
$1: 3.5 dinar
1 dinar:2 grommits
The acquisition of Quaver Co
On 1 January 20X4, Hummings Co purchased a 100% equity interest in Quaver Co. Hummings
Co made the acquisition with the intention to sell and therefore did not wish to have an active
involvement in the business of Quaver Co. Hummings Co immediately began to seek a buyer
for Quaver Co and felt that the sale would be completed by 31 October 20X4 at the latest. A
buyer for Quaver Co was located in August 20X4 but, due to an unforeseen legal dispute over
a contingent liability disclosed in Quaver Co’s financial statements, the sale had not yet been
finalised as at 31 December 20X4. The sale is expected to be completed in early 20X5.
Impairment of bonds
On 31 December 20X3, Hummings Co purchased $10 million 5% bonds in Stave Co at par
value. The bonds are repayable on 31 December 20X6 and the effective rate of interest is 8%.
Hummings Co’s business model is to collect the contractual cash flows over the life of the
asset. At 31 December 20X3, the bonds were considered to be low risk and as a result the
12-month expected credit losses are expected to be $10,000.
On 31 December 20X4, Stave Co paid the coupon interest. However, at that date, the risks
associated with the bonds were deemed to have increased significantly. The present value of
the cash shortfalls arising on default in the year ended 31 December 20X5 is $462,963 and
the probability of default is 3%. The present value of cash shortfalls arising on default in the
year ended 31 December 20X6 is $6,858,710 and the probability of default is 5%.
Required:
Draft an explanatory note to the directors of Hummings Co, addressing the following:
(a)
how the functional currency of Crotchet Co should be determined.
(5 marks)
(b)
(i)
how Crotchet Co’s customer contracts should be accounted for in the
consolidated financial statements of Hummings Co, which are presented in
dollars ($), for the year ended 31 December 20X4.
(4 marks)
(ii)
a calculation of the goodwill on acquisition of Crotchet Co (in grommits) and
how it would be accounted for in the consolidated statement of financial
position of Hummings Co at 31 December 20X4 after translation. Include a
brief explanation and calculation of how the impairment and exchange
difference on goodwill will impact on the consolidated financial statements.
(6 marks)
(c)
how Quaver Co should be accounted for in the consolidated financial statements at
31 December 20X4.
(4 marks)
(d)
a calculation and discussion of how the bonds should be accounted for in the
financial statements of Hummings Co as at 31 December 20X3 and for the year ended
31 December 20X4, including any impairment losses.
(11 marks)
(Total: 30 marks)
KA PL AN P U BLI SH IN G
23
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
10
LUPLOID (SEP/DEC 2019)
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Tutorial note
This question differs from the current exam style that you will see in question one as no
adjustments to any financial statements via the pre-populated spreadsheet is needed.
However, it still provides useful revision of a range of consolidation and other financial
reporting issues.
Background
Luploid Co is the parent company of a group undergoing rapid expansion through acquisition.
Luploid Co has acquired two subsidiaries in recent years, Colyson Co and Hammond Co. The
current financial year end is 30 June 20X8.
Acquisition of Colyson Co
Luploid Co acquired 80% of the five million equity shares ($1 each) of Colyson Co on 1 July
20X4 for cash of $90 million. The fair value of the non-controlling interest (NCI) at acquisition
was $22 million. The fair value of the identifiable net assets at acquisition was $65 million,
excluding the following asset. Colyson Co purchased a factory site several years prior to the
date of acquisition. Land and property prices in the area had increased significantly in the
years immediately prior to 1 July 20X4. Nearby sites had been acquired and converted into
residential use. It is felt that, should the Colyson Co site also be converted into residential
use, the factory site would have a market value of $24 million. $1 million of costs are
estimated to be required to demolish the factory and to obtain planning permission for the
conversion. Colyson Co was not intending to convert the site at the acquisition date and had
not sought planning permission at that date. The depreciated replacement cost of the factory
at 1 July 20X4 has been correctly calculated as $17.4 million.
Impairment of Colyson Co
Colyson Co incurred losses during the year ended 30 June 20X8 and an impairment review
was performed. The carrying amount of the net assets of Colyson Co at 30 June 20X8 (including
fair value adjustments on acquisition but excluding goodwill) are as follows:
Land and buildings
Plant and machinery
Intangibles other than goodwill
Current assets (at recoverable amount)
Total
$m
60
15
9
22
––––
106
––––
The recoverable amount of Colyson Co’s assets was estimated to be $100 million. Included
in this assessment was a building owned by Colyson Co which had been damaged in a storm
and needs to be impaired by $4 million. Other land and buildings are held at recoverable
amount. None of the assets of Colyson Co including goodwill have been impaired previously.
Colyson Co does not have a policy of revaluing its assets.
24
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
Acquisition of Hammond Co and share-based payments
Luploid Co acquired 60% of the 10 million equity shares of Hammond Co on 1 July 20X7. Two
Luploid Co shares are to be issued for every five shares acquired in Hammond Co. These
shares will be issued on 1 July 20X8. The fair value of a Luploid Co share was $30 at 1 July
20X7.
Hammond Co had previously granted a share-based payment to its employees with a threeyear vesting period. At 1 July 20X7, the employees had completed their service period but
had not yet exercised their options. The fair value of the options granted at 1 July 20X7 was
$15 million. As part of the acquisition, Luploid Co is obliged to replace the share-based
payment scheme of Hammond Co with a scheme that has a fair value of $18 million at 1 July
20X7. There are no vesting conditions attached to this replacement scheme.
Unrelated to the acquisition of Hammond, Luploid Co issued 100 options to 10,000
employees on 1 July 20X7. The shares are conditional on the employees completing a further
two years of service. Additionally, the scheme required that the market price of Luploid Co’s
shares had to increase by 10% from its value of $30 per share at the acquisition date over the
vesting period. It was anticipated at 1 July 20X7 that 10% of staff would leave over the vesting
period but this was revised to 4% by 30 June 20X8. The fair value of each option at the grant
date was $20. The share price of Luploid Co at 30 June 20X8 was $32 and is anticipated to
grow at a similar rate in the year ended 30 June 20X9.
Required:
Draft an explanatory note to the directors of Luploid Co, addressing the following:
(a)
(i)
How the fair value of the factory site should be determined at 1 July 20X4 and
why the depreciated replacement cost of $17.4 million is unlikely to be a
reasonable estimate of fair value.
(7 marks)
(ii)
A calculation of goodwill arising on the acquisition of Colyson Co measuring
the non-controlling interest at:
–
fair value
–
proportionate share of the net assets.
(3 marks)
(b)
The calculation and allocation of Colyson Co’s impairment loss at 30 June 20X8 and
a discussion of why the impairment loss of Colyson Co would differ depending on
how non-controlling interests are measured. Your answer should include a
calculation and an explanation of how the impairments would impact upon the
consolidated financial statements of Luploid Co.
(11 marks)
(c)
(i)
How the consideration for the acquisition of Hammond Co should be
measured on 1 July 20X7. Your answer should include a discussion of why only
some of the cost of the replacement share-based payment scheme should be
included within the consideration.
(4 marks)
(ii)
How much of an expense for share-based payment schemes should be
recognised in the consolidated statement of profit or loss of Luploid Co for the
year ended 30 June 20X8. Your answer should include a brief discussion of the
relevant principles and how the vesting conditions impact upon the
calculations.
(5 marks)
Note: Any workings can either be shown in the main body of the explanatory note or in an
appendix to the explanatory note.
(Total: 30 marks)
KA PL AN P U BLI SH IN G
25
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
11
CARBISE (MAR/JUN 2019)
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Tutorial note
This question differs from the current exam style that you will see in question one as no
adjustments to any financial statements via the pre-populated spreadsheet is needed.
However, it still provides useful revision of a range of consolidation and other financial
reporting issues.
Background
Carbise is the parent company of an international group which has a presentation and
functional currency of the dollar. The group operates within the manufacturing sector. On
1 January 20X2, Carbise acquired 80% of the equity share capital of Bikelite, an overseas
subsidiary. The acquisition enabled Carbise to access new international markets. Carbise
transfers surplus work-in-progress to Bikelite which is then completed and sold in various
locations. The acquisition was not as successful as anticipated and on 30 September 20X6
Carbise disposed of all of its holding in Bikelite. The current year end is 31 December 20X6.
Bikelite trading information
Bikelite is based overseas where the domestic currency is the dinar. Staff costs and overhead
expenses are all paid in dinars. However, Bikelite also has a range of transactions in a number
of other currencies. Approximately 40% of its raw material purchases are in dinars and 50%
in the yen. The remaining 10% are in dollars of which approximately half were purchases of
material from Carbise. This ratio continued even after Carbise disposed of its shares in
Bikelite.
Revenue is invoiced in equal proportion between dinars, yen and dollars. To protect itself
from exchange rate risk, Bikelite retains cash in all three currencies. No dividends have been
paid by Bikelite for several years. At the start of 20X6 Bikelite sought additional debt finance.
As Carbise was already looking to divest, funds were raised from an issue of bonds in dinars,
none of which were acquired by Carbise.
Acquisition of Bikelite
Carbise paid dinar 100 million for 80% of the ordinary share capital of Bikelite on 1 January
20X2. The net assets of Bikelite at this date had a carrying amount of dinar 60 million. The
only fair value adjustment deemed necessary was in relation to a building which had a fair
value of dinar 20 million above its carrying amount and a remaining useful life of 20 years at
the acquisition date. Carbise measures non-controlling interests (NCI) at fair value for all
acquisitions, and the fair value of the 20% interest was estimated to be dinar 22 million at
acquisition. Due to the relatively poor performance of Bikelite, it was decided to impair
goodwill by dinar 6 million during the year ending 31 December 20X5.
Rates of exchange between the $ and dinar are given as follows:
1 January 20X2:
Average rate for year ended 31 December 20X5
31 December 20X5:
30 September 20X6:
Average rate for the nine-month period ended 30 September 20X6
26
$1:0.5 dinar
$1:0.4 dinar
$1:0.38 dinar
$1:0.35 dinar
$1:0.37 dinar
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
Disposal of Bikelite
Carbise sold its entire equity shareholding in Bikelite on 30 September 20X6 for $150 million.
Further details relating to the disposal are as follows:
Carrying amount of Bikelite’s net assets at 1 January 20X6 in its
separate financial statements
dinar 48 million
Bikelite loss for the year ended 31 December 20X6 in its separate
financial statements
dinar 8 million
Cumulative exchange gains on Bikelite at 1 January 20X6
$74.1 million
Non-controlling interest in Bikelite at 1 January 20X6
$47.8 million
Required:
(a)
Prepare an explanatory note for the directors of Carbise which addresses the
following issues:
(i)
The meaning of an entity’s presentation and functional currency Explain your
answer with reference to how the presentation and functional currency of
Bikelite should be determined.
(7 marks)
(ii)
A calculation of the goodwill on the acquisition of Bikelite and what the
balance would be at 30 September 20X6 immediately before the disposal of
the shares. Your answer should include a calculation of the exchange
difference on goodwill for the period from 1 January 20X6 to 30 September
20X6.
(5 marks)
(iii)
An explanation of your calculation of goodwill and the treatment of exchange
differences on goodwill in the consolidated financial statements. You do not
need to discuss how the disposal will affect the exchange differences.
(4 marks)
Note: Any workings can either be shown in the main body of the explanatory note
or in an appendix to the explanatory note.
(b)
Explain why exchange differences will arise on the net assets and profit or loss of
Bikelite each year and how they would be presented within the consolidated
financial statements. Your answer should include a calculation of the exchange
differences which would arise on the translation of Bikelite (excluding goodwill) in
the year ended 31 December 20X6.
(7 marks)
(c)
(i)
Calculate the group profit or loss on the disposal of Bikelite.
(ii)
Briefly explain how Bikelite should be treated and presented in the
consolidated financial statements of Carbise for the year ended 31 December
20X6.
(4 marks)
(3 marks)
(Total: 30 marks)
KA PL AN P U BLI SH IN G
27
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
12
MOYES (DEC 2018)
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Tutorial note
This question differs from the current exam style that you will see in question one as no
adjustments to any financial statements via the pre-populated spreadsheet is needed.
However, it still provides useful revision of a range of consolidation and other financial
reporting issues.
Background
The following are extracts from the consolidated financial statements of the Moyes group.
Group statement of profit or loss for the year ended 30 September 20X8:
$m
612
(347)
––––
265
(123)
––––
142
––––
Revenue
Cost of sales
Gross profit
Operating expenses
Operating profit
Extracts from the group statement of financial position:
Inventories
Trade receivables
Trade payables
30 September 20X8
$m
126
156
215
30 September 20X7
$m
165
149
197
The following information is also relevant to the year ended 30 September 20X8:
Pension scheme
Moyes operates a defined benefit scheme. A service cost component of $24 million has been
included within operating expenses. The remeasurement component for the year was a gain
of $3 million. Benefits paid out of the scheme were $31 million. Contributions into the
scheme by Moyes were $15 million.
Goodwill
Goodwill was reviewed for impairments at the reporting date. Impairments arose of
$10 million in the current year.
28
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
Property, plant and equipment
Property, plant and equipment (PPE) at 30 September 20X8 included cash additions of
$134 million. Depreciation charged during the year was $99 million and an impairment loss
of $43 million was recognised, both expenses were recognised in operating expenses. Prior
to the impairment, the group had a balance on the revaluation surplus of $50 million of which
$20 million related to PPE impaired in the current year.
Inventory
Goods were purchased for Dinar 80 million cash when the exchange rate was $1:Dinar 5.
Moyes had not managed to sell the goods at 30 September 20X8 and the net realisable value
was estimated to be Dinar 60 million at 30 September 20X8. The exchange rate at this date
was $1:Dinar 6. The inventory has been correctly valued at 30 September 20X8 with any
expense correctly included within cost of sales.
Changes to group structure
During the year ended 30 September 20X8, Moyes acquired a 60% subsidiary, Davenport,
and also sold all of its equity interests in Barham for cash. The consideration for Davenport
consisted of a share for share exchange together with some cash payable in two years. 80%
of the equity shares of Barham had been acquired several years ago but Moyes had decided
to sell as the performance of Barham had been poor for a number of years. Consequently,
Barham had a substantial overdraft at the disposal date. Barham was unable to pay any
dividends during the financial year but Davenport did pay an interim dividend on
30 September 20X8.
Discontinued operations
The directors of Moyes wish advice as to whether the disposal of Barham should be treated
as a discontinued operation and separately disclosed within the consolidated statement of
profit or loss. There are several other subsidiaries which all produce similar products to
Barham and operate in a similar geographical area. Additionally, Moyes holds a 52% equity
interest in Watson. Watson has previously issued share options to other entities which are
exercisable in the year ending 30 September 20X9. It is highly likely that these options would
be exercised which would reduce Moyes’ interest to 35%. The directors of Moyes require
advice as to whether this loss of control would require Watson to be classified as held for
sale and reclassified as discontinued.
Required:
(a)
Draft an explanatory note to the directors of Moyes which should include:
(i)
a calculation of cash from operating activities before income taxes using the
indirect method, and
(ii)
an explanation of the specific adjustments required to the group operating
profit to calculate the cash from operating activities before income taxes.
Note: Any workings can either be shown in the main body of the explanatory note
or in an appendix to the explanatory note.
(12 marks)
(b)
Explain how the changes to the group structure and dividend would impact upon the
consolidated statement of cash flows at 30 September 20X8 for the Moyes group.
You should not attempt to alter your answer to part (a).
(6 marks)
(c)
Advise the directors as to whether Watson should be classified as held for sale and
whether both it and Barham should be classified as discontinued operations.
(6 marks)
KA PL AN P U BLI SH IN G
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SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
(d)
The recognition criteria in the 2010 Conceptual Framework stated that a flow of
economic benefits must be probable before an element can be recognised in the
financial statements. However, IFRS Accounting Standards were criticised for applying
this probability criterion inconsistently. The 2018 Conceptual Framework addressed
these concerns.
Required:
Explain how the probability criterion has been inconsistently applied across
accounting standards. Illustrate your answer with reference to the measurement of
assets held for sale, provisions, and contingent consideration transferred in a
business combination. Your answer should discuss the Board’s recognition criteria in
the 2018 Conceptual Framework.
(6 marks)
(Total: 30 marks)
13
BANANA (SEP 2018)
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Background
Banana is the parent of a listed group of companies which have a year end of 30 June 20X7.
Banana has made a number of acquisitions and disposals of investments during the current
financial year. The finance director has produced a draft consolidated statement of financial
position but has struggled with the following issues.
The following exhibits, available below, provide information relevant to parts (a) and (b) of
the question:
1
The acquisition of Grape – provides information on the acquisition of 80% of the shares
of Grape on 30 June 20X7.
2
The acquisition and subsequent disposal of Strawberry – provides information on the
purchase of a 40% equity interest in Strawberry and the subsequent disposal of 75%
of its 40% investment on 1 October 20X6.
3
The acquisition and subsequent disposal of bonds – provides details of the $10m bonds
acquired by Banana on 1 July 20X6, which were then disposed of on 30 June 20X7.
4
Draft consolidated SOFP – provides the draft consolidated statement of financial
position for the Banana Group at 30 June 20X7.
This information should be used to answer the question requirements.
1 – The acquisition of Grape
On 30 June 20X7, Banana acquired an 80% equity interest in Grape. The following is a
summary of Grape’s equity at the acquisition date.
Equity share capital ($1 each)
Retained earnings
Other components of equity
Total
30
$m
20
42
8
–––
70
–––
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
The purchase consideration comprised 10 million of Banana’s shares which had a nominal
value of $1 each and a market price of $6.80 each. Additionally, cash of $18 million was due
to be paid on 30 June 20X9 if the net profit after tax of Grape grew by 5% in each of the two
years following acquisition. The present value of the total contingent consideration at 30 June
20X7 was $16 million. It was felt that there was a 25% chance of the profit target being met.
At acquisition, the only adjustment required to the identifiable net assets of Grape was for
land which had a fair value $5 million higher than its carrying amount. This is not included
within the $70 million equity of Grape at 30 June 20X7.
Goodwill for the consolidated financial statements has been incorrectly calculated as follows:
Share consideration
Add NCI at acquisition (20% × $70 million)
Less net assets at acquisition
Goodwill at acquisition
$m
68
14
(70)
––––
12
––––
The finance director did not take into account the contingent cash since it was not probable
that it would be paid. Additionally, they measured the non-controlling interest using the
proportion of net assets method despite the group having a published policy to measure noncontrolling interest at fair value. The share price of Grape at acquisition was $4.25 and should
be used to value the non-controlling interest.
2 – The acquisition and subsequent disposal of Strawberry
Banana had purchased a 40% equity interest in Strawberry for $18 million a number of years
ago when the fair value of the identifiable net assets was $44 million. Since acquisition,
Banana had the right to appoint one of the five directors on the board of Strawberry. The
investment has always been accounted for as an associate in the consolidated financial
statements of Banana.
Banana disposed of 75% of its 40% investment on 1 October 20X6 for $19 million when the
fair values of the identifiable net assets of Strawberry were $50 million. At that date, Banana
lost its right to appoint one director to the board. The fair value of the remaining 10% equity
interest was $4.5 million at disposal. Banana has correctly calculated and recorded the profit
on disposal.
Banana has stated that they have no intention to sell their remaining shares in Strawberry
and wish to classify the remaining 10% interest as fair value through other comprehensive
income in accordance with IFRS 9 Financial Instruments. At 30 June 20X7, the fair value of
this holding had fallen to $4 million but this has not been accounted for in the consolidated
financial statements.
3 – The acquisition and subsequent disposal of bonds
On 1 July 20X6, Banana acquired $10 million 5% bonds at par with interest being due at
30 June each year. The bonds are repayable at a substantial premium so that the effective
rate of interest was 7%. Banana intended to hold the bonds to collect the contractual cash
flows arising from the bonds and measured them at amortised cost.
KA PL AN P U BLI SH IN G
31
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
On 30 June 20X7, interest received from the bonds was credited to the investing section of
the statement of profit or loss. On that day, Banana then sold the bonds to a third party for
$8 million when the fair value was $10.5 million. The bonds, which were still carried at
$10 million, were derecognised and a $2 million loss on disposal recorded in profit or loss.
Banana has the right to repurchase the bonds on 30 June 20X8 for $8.8 million and it is likely
that this option will be exercised. The third party is obliged to return the coupon interest to
Banana and to pay additional cash to Banana should bond values rise. Banana will also
compensate the third party for any devaluation of the bonds.
4 – Draft consolidated SOFP
Draft consolidated statement of financial position as at 30 June 20X7
$m
Assets
Non-current assets
Property, plant and equipment
Goodwill
Financial assets
Current assets
Total assets
Equity
Equity attributable to equity holders of the company
Share capital
Other components of equity
Retained earnings
Non-Controlling Interest
Total equity
Liabilities
Non-current liabilities
Current liabilities
Total liabilities
Total equity and liabilities
32
264
47
15
––––––
326
––––––
109
––––––
435
––––––
100
45
98
––––––
243
38
––––––
281
––––––
44
110
––––––
154
––––––
435
––––––
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
Required:
(a)
(b)
Draft an explanatory note to the directors of Banana, that:
(i)
explains the errors made when calculating the goodwill arising on the
acquisition of Grape
(5 marks)
(ii)
calculates the profit on the disposal of the shares in Strawberry that was
recorded in the consolidated financial statements and explains how the
remaining investment in Strawberry should be accounted for
(5 marks)
(iii)
explains the correct accounting treatment of the bonds in the year ended
30 June 20X7.
(5 marks)
Using the pre-populated spreadsheet response option and your answer to part (a),
adjust the spreadsheet prepared by Banana’s finance director in order to prepare a
completed consolidated statement of financial position as at 30 June 20X7. The
spreadsheet should take into account the following:
•
•
•
The acquisition of Grape
The retained investment in Strawberry
The bonds.
Work to one decimal place.
(10 marks)
Note: The requirement above reflects the format of the real exam, however no
spreadsheet is provided with this exam kit. You should use the data contained in the
relevant exhibit along with your own spreadsheet software or the ACCA software.
(c)
The acquisition of Melon
On 30 June 20X7, Banana acquired all of the shares of Melon, an entity which operates
in the biotechnology industry. Melon was only recently formed and its only recognised
asset consists of a licence to carry out research activities. Melon has no employees
because research activities were outsourced to other companies, although these
contracts expired on 30 June 20X7. The research activities are still at a very early stage
and it is not clear whether any definitive product would result from the activities. A
management company provides personnel for Melon to supply supervisory activities
and administrative functions. Banana believes that Melon does not constitute a
business in accordance with IFRS 3 Business Combinations. The directors of Banana
have treated the purchase as an asset acquisition.
Required:
Explain why the directors are correct to treat the purchase of the shares in Melon as
an asset acquisition.
(5 marks)
(Total: 30 marks)
KA PL AN P U BLI SH IN G
33
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
14
JOCATT
Walk in the footsteps of a top tutor
Background
The following draft group financial statements relate to Jocatt, a public limited company,
with a reporting date of 30 November 20X2. Jocatt has investments in a number of
companies. On 30 June 20X2 Jocatt acquired additional shares in Tigret, obtaining control.
The group is preparing the consolidated statement of cash flows for the year ended
30 November 20X2.
The following exhibits, available below, provide information relevant to parts (a) and (b) of
the question:
1
Acquisition of Tigret – provides information on the acquisition of an additional 52%
shareholding of Tigret on 30 June 20X2.
2
Further information – provides further information about the draft consolidated
statement of cash flow (included in the pre-formatted response option and exhibit 3).
3
Draft consolidated statement of cash flows – provides extracts of the draft
consolidated statement of cash flows (SOCF) for the year ended 30 November 20X2.
This information should be used to answer the question requirements.
1 – Acquisition of Tigret
On 1 December 20X1, Jocatt acquired 8% of the ordinary shares of Tigret for $4 million and
recorded it as a financial asset at the cost of purchase. The investment in Tigret was measured
at fair value through profit or loss.
On 30 June 20X2, Jocatt acquired a further 52% of the ordinary shares of Tigret and gained
control of the company. The purchase consideration transferred on 30 June 20X2 comprised
cash of $15 million and shares of $15 million. The fair value of the non-controlling interest in
Tigret on 30 June 20X2 was correctly determined to be $20 million. The fair value of Tigret’s
identifiable net assets at the acquisition date, excluding deferred tax, was $45 million and
included:
Trade receivables
Trade payables
$m
5
6
Jocatt has calculated and accounted for goodwill arising on the acquisition of Tigret of
$5 million ($30m + $20m – $45 million). However, the following has not been taken into
account:
34
•
At 30 June 20X2, the fair value of the 8% holding in Tigret had risen to $5 million. In the
consolidated statement of financial position as at 30 November 20X2, the investment
in Tigret is still classified as a financial asset and is measured at $4 million.
•
The tax base of the identifiable net assets of Tigret was $35 million at 30 June 20X2.
The tax rate of Tigret is 30%.
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
2 – Further information
The group’s financial controller has started to produce draft extracts of the consolidated
statement of cash flows, but due to the financial controller being on sick leave, the extracts
are not yet complete. The financial controller has not yet considered the impact of the
additional shares purchased in Tigret and there are also some errors and some cash flows
that have been omitted.
Jocatt operates a defined benefit scheme. The service cost component for the year ended
30 November 20X2 is $16 million and is included in operating expenses. The net interest
component of $2 million is included within the interest expense.
The only additions to property, plant and equipment during the year were as a result of the
acquisition of Tigret. There were no disposals in the year. Depreciation for the period was
$27 million and was included in operating expenses.
No adjustments have been made in the draft extracts of the consolidated statement of cash
flows for either the pension scheme or the changes in property, plant and equipment. The
figures for trade and other receivables and trade and other payables have been calculated
by considering only the movement in the balances between the consolidated statement of
financial position from 30 November 20X1 to 30 November 20X2.
The tax paid in the year was correctly calculated and recorded in the draft statement of cash
flows.
Jocatt issued shares for cash during the year, using some of the funds to repay part of the
long-term borrowings. The issue of shares was correctly recorded in the draft statement of
cash flows.
Jocatt did not pay a dividend in the year, however Tigret paid an interim dividend on
30 September 20X2.
3 – Draft consolidated financial statement extracts
The draft extracts have been replicated in the spreadsheet response option.
Jocatt Group: Draft extracts from the consolidated statement of cash flows for the year
ended 30 November 20X2:
Cash flows from operating activities:
Operating profit
Adjustments for:
$m
44
Decrease in inventories
Decrease in trade and other receivables
Increase in trade and other payables
Cash from operating activities before income taxes
Income taxes paid
Net cash from operating activities
23
51
89
207
(18)
189
Cash flows from financing activities
Interest paid
Proceeds from the issue of shares
(8)
15
Net cash generated from financing activities
7
KA PL AN P U BLI SH IN G
35
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Jocatt Group: Extracts from statement of financial position as at 30 November
20X2
$m
20X1
$m
Current assets
Inventories
Trade receivables
105
62
128
113
Equity
Non-controlling interest
55
36
Non-current liabilities:
Long-term borrowings
Defined benefit pension deficit
64
25
71
22
Current liabilities:
Trade payables
144
55
Jocatt Group: Extract from statement of profit or loss and other comprehensive income for
the year ended 30 November 20X2
$m
Other comprehensive income:
Net remeasurement gain on defined benefit plan
8
Non-controlling interest share of profit
10
Required:
(a)
Discuss, with calculations, how goodwill arising on the acquisition of Tigret should
have been calculated. Show the adjustments which need to be made to the
consolidated financial statements.
(6 marks)
(b)
Using the pre-populated spreadsheet response option and exhibits 1 and 2, update
the draft extracts of the consolidated statement of cash flows to adjust for the
acquisition of the additional shares purchased in Tigret and to correct any errors or
omissions made by the financial controller.
(12 marks)
Note: The requirement above reflects the format of the real exam, however no
spreadsheet is provided with this exam kit. You should use the data contained in the
relevant exhibit along with your own spreadsheet software or the ACCA software.
(c)
Direct and indirect methods
The directors of Jocatt have commented that the indirect method of reporting cash
flows from operating activities is more useful and informative to users of financial
statements than the direct method.
Required:
Discuss the extent to which the directors’ comment is valid.
36
(6 marks)
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
(d)
Investment in Abuelo Co
The finance director is considering the acquisition of a 30% investment in Abuelo Co.
The acquisition is proposed to occur on 31 May 20X3. Abuelo Co has a functional
currency of Dinars. The financial controller is uncertain of the accounting treatment of
the proposed investment within the Jocatt Group accounts. The proposed consideration
consists of 6m dinars in cash and 1million shares in Jocatt. The current share price of
Jocatt is $1.50 per share. It is anticipated that, by the acquisition date, the shares will
have grown in value to $2.00. Jocatt will exert significant influence on Abuelo Co under
the terms of the deal. Abuelo’s forecasted information for the year ended 30 November
20X3 shows a profit after tax of 40m dinars.
Exchange rates
1 December 20X2
31 May 20X3
30 November 20X3
Average exchange rate for year ended 30 November 20X3
dinars: $1
5.0
6.0
7.0
5.8
Required:
Explain to the financial controller, using illustrative calculations when needed, the
accounting treatment of the proposed investment in Abuelo Co within the Jocatt
Group statement of financial position and statement of profit or loss and other
comprehensive income for the year ended 30 November 20X3. For any calculations,
assume that the forecasted figures are accurate representations.
(6 marks)
(Total: 30 marks)
15
ZIPPY
Walk in the footsteps of a top tutor
Background
Zippy is a manufacturing company with a reporting date of 30 June 20X6. It has a wide
portfolio of investment properties, as well as investments in many other entities. The
financial accountant has produced a draft consolidated statement of profit or loss and other
comprehensive income for the year but there are a number of issues that have not yet been
dealt with.
The following exhibits, available below, provide information relevant to parts (a) and (b) of
the question:
1
Ginny – provides information on the acquisition of shares in Ginny on 1 July 20X4 and
the subsequent disposal of some of the shares in Ginny on 31 March 20X6.
2
Office blocks – provides information on an office block partially used by Ginny and
partially used for investment purposes.
3
Draft statements – provides the draft consolidated statement of profit or loss and
other comprehensive income for the Zippy group and the individual statement of profit
or loss and other comprehensive income for Ginny for the year ended 30 June 20X6.
This information should be used to answer the question requirements.
KA PL AN P U BLI SH IN G
37
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
1 – Ginny
On 1 July 20X4, Zippy acquired 60% of the equity interests of Ginny, a public limited company.
The purchase consideration comprised cash of $90 million and the fair value of the
identifiable net assets acquired was $114 million at that date. Zippy uses the ‘full goodwill’
method for all acquisitions and the fair value of the non-controlling interest in Ginny was
$50 million on 1 July 20X4. Goodwill had been reviewed annually for impairment and no
impairment was deemed necessary.
Zippy disposed of a 20% equity interest in Ginny on 31 March 20X6 for cash consideration of
$44 million. On the disposal date the remaining 40% holding had a fair value of $62 million
and Zippy was left with significant influence over Ginny. Zippy accounts for investments in
subsidiaries at cost and has correctly included a gain in investment income of $14 million
within its individual financial statements to reflect the disposal. The net assets of Ginny were
carried at $118 million at 1 July 20X5 in the consolidated financial statements. The income
and expenses of Ginny have accrued evenly throughout the year. The disposal is not classified
as a separate major line of business or geographical operation.
The draft consolidated statement of profit or loss and other comprehensive income does not
currently include any income or expense in relation to Ginny, except for the $14 million
investment income noted above.
The statement of profit or loss and other comprehensive income for Ginny is provided in
exhibit 3.
2 – Office blocks
At 1 July 20X5, Zippy held a 10-floor office block at a fair value of $90 million with a remaining
useful life of 15 years. The first floor was occupied by Zippy’s staff and the second floor was
let to Boo, a subsidiary of Zippy, free of charge. The other eight floors were all let to
unconnected third parties at a normal commercial rent. When Boo vacates the property next
year, it will be let out to third parties. It was estimated that the fair value of the office block
was $96 million at 30 June 20X6. Zippy has a policy of restating all land and buildings to fair
value at each reporting date. The only accounting entries for the year ended 30 June 20X6 in
relation to this office block have been to correctly include the rental income in profit or loss
as part of investment income. It can be assumed that each floor is of equal size and value.
Depreciation is charged to administrative costs.
3 – Draft statements
Draft consolidated statement of profit or loss and other comprehensive income for year
ended 30 June 20X6
Revenue
Cost of sales
Gross profit
Administrative costs
Other expenses
Operating profit
38
Group
$m
267
(154)
–––––
113
(65)
(23)
–––––
25
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
Investment income
Profit before financing and income taxes
Interest expense
Profit before tax
Income tax expense
Profit for the year
Other comprehensive income
Items that will not be reclassified to profit or loss in future accounting
periods
Gains on property revaluation
Total comprehensive income
24
–––––
49
(8)
–––––
41
(13)
–––––
28
–––––
5
–––––
33
–––––
The following financial statement relates to Ginny.
Statements of profit or loss and other comprehensive income for the year ended 30 June
20X6
Revenue
Cost of sales
Gross profit
Administrative costs
Other expenses
Operating profit
Investment income
Profit before financing and income taxes
Interest expense
Profit before tax
Income tax expense
Profit for the year
Other comprehensive income
Items that will not be reclassified to profit or loss in future accounting periods
Gains on property revaluation
Total comprehensive income
KA PL AN P U BLI SH IN G
Ginny
$m
132
(76)
–––––
56
(12)
(18)
–––––
26
19
–––––
45
(6)
–––––
39
(7)
–––––
32
–––––
16
–––––
48
–––––
39
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Required:
(a)
(b)
(i)
Explain how the investment in Ginny should be accounted for in the
consolidated statement of profit or loss and other comprehensive income of
the Zippy group for the year ended 30 June 20X6. Calculations are not
required.
(5 marks)
(ii)
Briefly explain, with suitable calculations, how the office block should be
accounted for in the consolidated financial statements of the Zippy group for
the year ended 30 June 20X6.
(5 marks)
(iii)
Explain why the accounting treatment of the 10-floor office block in Zippy’s
individual (non-consolidated) financial statements will differ from the
treatment in the consolidated financial statements of the Zippy group.
Calculations are not required.
(4 marks)
Using the pre-populated spreadsheet response option and your answer to (a)(i) and
(a)(ii), adjust the spreadsheet prepared by the financial accountant of Zippy in order
to prepare a completed consolidated statement of profit or loss and other
comprehensive income for the year ended 30 June 20X6. The spreadsheet should
take into account the following:
•
The sale of the shares in Ginny and the retained investment
•
The office block.
You are not required to show the profit and total comprehensive income attributable
to the owners of Zippy and the non-controlling interest.
Work to one decimal place.
(12 marks)
Note: The requirement above reflects the format of the real exam, however no
spreadsheet is provided with this exam kit. You should use the data contained in the
relevant exhibit along with your own spreadsheet software or the ACCA software.
(c)
Other comprehensive income
The directors of Zippy are unsure as to the differences between other comprehensive
income and profit or loss and the rationale as to why some gains can be and others
cannot be reclassified to profit or loss.
Required:
Discuss the differences between other comprehensive income and profit or loss
and the rationale as to why some gains and losses can be and others cannot be
reclassified to profit or loss.
(4 marks)
(Total: 30 marks)
40
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
16
ASHANTI
Walk in the footsteps of a top tutor
Background
Ashanti, a public limited company, has equity interests in several companies including
Bochem and Ceram, who both operate in the same industry. The financial accountant
recently went on sick leave and before doing so started to draft the consolidated statement
of profit or loss for the year ended 30 April 20X9. The statement is incomplete and there are
a number of outstanding items that need to be factored in. The following information is
relevant to the preparation of the group statement of profit or loss.
The following exhibits, available below, provide information relevant to parts (a) and (b) of
the question:
1
Sale of shares in Bochem – provides information regarding a disposal of a 10%
shareholding in Bochem on 30 April 20X9.
2
Sale of shares in Ceram – provides information regarding a disposal of a 50%
shareholding in Ceram on 1 November 20X8.
3
Additional transactions – provides information about sales made by Ashanti to Bochem
and Ceram in October 20X8 and a sale made to Spice, an unrelated company, at the
year end.
4
Draft statements – provides the draft consolidated statement of profit or loss for the
Ashanti group and the individual statement of profit or loss for Ceram for the year
ended 30 April 20X9.
This information should be used to answer the question requirements.
1 – Sale of shares in Bochem
On 1 May 20X7, Ashanti acquired 70% of the equity interests of Bochem, a public limited
company. The fair value of the identifiable net assets at that date was $160 million. The share
capital and retained earnings of Bochem were $55 million and $85 million respectively and
other components of equity were $10 million at the date of acquisition. The excess of the fair
value of the identifiable net assets at acquisition is due to an increase in the value of plant,
which is depreciated on the straight-line method and has a five year remaining life at the
date of acquisition. The financial accountant has included the fair value depreciation
adjustment, along with the relevant income and expense figures for Bochem, in the draft
consolidated statement of profit or loss for the year ended 30 April 20X9.
Ashanti disposed of a 10% equity interest to the non-controlling interests (NCI) of Bochem
on 30 April 20X9 for a cash consideration of $34 million. The carrying amount of the net assets
of Bochem at 30 April 20X9 was $210 million before any adjustments on consolidation.
Goodwill arising on the acquisition of Bochem was $44 million but had reduced in value by
20% before the sale of the equity interest to the NCI. Goodwill was calculated using the fair
value method.
2 – Sale of shares in Ceram
Ashanti acquired 80% of the equity interests of Ceram, a public limited company, on 1 May
20X7. The purchase consideration was cash of $95.2 million. Ceram’s identifiable net assets
were fair valued at $115 million and the NCI of Ceram had a fair value of $26 million at that
date.
KA PL AN P U BLI SH IN G
41
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
On 1 November 20X8, Ashanti disposed of 50% of the equity of Ceram for a consideration of
$90 million. Ceram’s identifiable net assets were $160 million and the NCI was $35 million at
the date of disposal. The remaining equity interest of Ceram held by Ashanti was fair valued
at $45 million. The financial accountant was unsure how to account for the disposal, so has
included the full year of income and expenses of Ceram in the draft consolidated statement
of profit or loss for the year ended 30 April 20X9. Nothing else was recorded in respect of
Ceram.
After the disposal, Ashanti can still exert significant influence. Goodwill had been impairment
tested and no impairment had occurred. Ceram’s total profit for the year ended 30 April 20X9
was $14 million and can be assumed to have accrued evenly.
The statement of profit or loss for Ceram is provided in exhibit 4.
3 – Additional transactions
Ashanti sold inventory to both Bochem and Ceram in October 20X8. The sale price of the
inventory was $10 million and $5 million respectively. Ashanti sells goods at a gross profit
margin of 20% to group companies. At the year-end, half of the inventory sold to Bochem
remained unsold but the entire inventory sold to Ceram had been sold to third parties.
At the year end, Ashanti sold goods on credit to Spice, an unrelated company, and recognised
revenue of $5 million. Before the date of the sale, Spice had made an announcement that it
would be restructuring its debts. At the date of the sale, it was deemed improbable that Ashanti
would recover the amounts outstanding.
The financial accountant didn’t get round to recording any adjustments for any of the additional
transactions before going on sick leave.
4 – Draft statements
Draft consolidated statement of profit or loss for year ended 30 April 20X9
Revenue
Cost of sales
Gross profit
Operating expenses
Operating profit
Investment income
Profit before financing and income taxes
Interest expense
Profit before tax
Income tax expense
Profit for the year
42
Group
$m
1,045.1
(823.6)
––––––
221.5
(114.1)
––––––
107.4
14.3
––––––
121.7
(8.9)
––––––
112.8
(36.5)
––––––
76.3
––––––
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
Profit attributable to:
Owners of parent
Non-controlling interest
70.5
5.8
––––––
76.3
––––––
The following financial statement relates to Ceram.
Statements of profit or loss for the year ended 30 April 20X9
Revenue
Cost of sales
Gross profit
Operating expenses
Operating profit
Investment income
Profit before financing and income taxes
Interest expense
Profit before tax
Income tax expense
Profit for the year
Ceram
$m
142.8
(84.4)
––––––
58.4
(38.4)
––––––
20.0
0
––––––
20.0
(2.2)
––––––
17.8
(3.8)
––––––
14.0
––––––
Required:
(a)
(b)
(i)
Explain, with suitable calculations, how Ashanti should deal with the sale of
the equity interests in Bochem in the consolidated financial statements.
(6 marks)
(ii)
Explain how Ashanti should deal with the sale of the equity interests in Ceram
and its remaining investment in Ceram in the consolidated statement of profit
or loss. No calculations are required in this part.
(4 marks)
(iii)
Briefly explain the correct treatment of Ashanti’s sale to Spice.
(2 marks)
Using the pre-populated spreadsheet response option and your answer to (a)(ii) and
(a)(iii), adjust the spreadsheet prepared by the financial accountant of Ashanti in
order to prepare a completed consolidated statement of profit or loss for the year
ended 30 April 20X9. The spreadsheet should take into account the following:
•
the sales of the shares in Ceram
•
the transactions between Ashanti and Bochem and Ceram
•
Ashanti’s sale to Spice.
No adjustments are required in respect of Bochem.
Work to one decimal place.
(13 marks)
Note: The requirement above reflects the format of the real exam, however no
spreadsheet is provided with this exam kit. You should use the data contained in the
relevant exhibit along with your own spreadsheet software or the ACCA software.
KA PL AN P U BLI SH IN G
43
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
(c)
Night
The directors of Ashanti are considering acquiring 49.9% of the equity shares of Night.
The next biggest shareholders will be Night’s two original founders, who will hold 21%
and 8% of the equity shares respectively. The original founders are not related. The
remaining 21.1% of the shares will be held by 11 shareholders, who are acquaintances
of the original founders but whom have a remote relationship to one another. There
has not been complete owner representation at the last three annual general meetings
of Night. Ashanti will have the ability to appoint four of the six members of Night’s
Board of Directors (‘the Board’). The Board of Night have overall responsibility for
decisions that affect the entity’s operations.
Required:
Discuss whether the proposed share purchase will lead to Ashanti obtaining control
over Night.
(5 marks)
(Total: 30 marks)
17
JOEY
Walk in the footsteps of a top tutor
Tutorial note
This question differs from the current exam style that you will see in question one as no
adjustments to any financial statements via the pre-populated spreadsheet is needed.
However, it still provides useful revision of a range of consolidation and other financial
reporting issues.
Joey, a public limited company, operates in the media sector. Joey has investments in a number
of companies. The draft consolidated statement of financial position at 30 November 20X4 is
as follows:
$m
Assets:
Non-current assets
Property, plant and equipment
Goodwill
Investment in associate (Margy)
Current assets
Total assets
44
6,709
40
700
––––––
7,449
2,011
––––––
9,460
––––––
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
Equity and liabilities:
Equity attributable to owners of parent
Share capital
Retained earnings
Other components of equity
Non-controlling interest
Non-current liabilities
Current liabilities
Total liabilities
Total equity and liabilities
850
4,086
258
––––––
5,194
908
––––––
6,102
2,770
588
––––––
3,358
––––––
9,460
––––––
The following information is required to correct the draft consolidated financial statements:
Acquisition of Hulty
On 1 December 20X3, Joey acquired 80% of Hulty’s 600 million $1 equity shares in exchange
for cash of $750 million. The carrying amount of Hulty’s net assets at the acquisition date was
$960 million. Joey determined that the fair value of the 20% non-controlling interest in Hulty
at that date was $250 million. It is group policy to measure the non-controlling interest at fair
value. Joey recorded a goodwill asset arising on the acquisition of Hulty of $40 million ($750m
+ $250m – $960m).
However, shortly after the acquisition date, the accountant of Joey realised the following:
•
Deferred cash consideration of $50 million arising on the acquisition of Hulty had not
been recorded by Joey. This payment is due on 30 November 20X5. An appropriate
discount rate is 10%.
•
The fair value of Hulty’s identifiable net assets had been calculated to be $980 million
as at 1 December 20X3. The excess in the fair value of the net assets over their carrying
amounts was due to an unrecognised franchise right with a remaining useful life of
four years at 1 December 20X3. No entries have been recorded in respect of this
franchise right.
Acquisition of Margy
On 1 December 20X1, Joey acquired 30% of the ordinary shares of Margy for a cash
consideration of $600 million. Joey treated Margy as an associate and has equity accounted
for Margy up to 1 December 20X3. Joey’s investment in Margy as at 1 December 20X3 is still
included in the draft consolidated statement of financial position. At 1 December 20X3, the
fair value of the 30% equity interest in Margy held by Joey was $705 million.
On 1 December 20X3, Joey acquired a further 40% of the ordinary shares of Margy for a cash
consideration of $975 million and gained control of the company. At 1 December 20X3, the
fair value of Margy’s identifiable net assets was $2,250 million. The fair value of the noncontrolling interest was assessed as $620 million. A gain on bargain purchase of $655 million
($975m + $620m – $2,250m) has been recorded in profit or loss.
Additionally, buildings with a carrying amount of $200 million had been included in the fair
valuation of Margy at 1 December 20X3. The buildings have a remaining useful life of 20 years
at 1 December 20X3. However, Joey had commissioned an independent valuation of the
KA PL AN P U BLI SH IN G
45
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
buildings of Margy which was not complete at 1 December 20X3 and therefore not
considered in the fair value of the identifiable net assets at the acquisition date. The
valuations were received on 1 April 20X4 and resulted in a decrease of $40 million in the fair
value of property, plant and equipment at the date of acquisition. This fair value decrease,
which does not affect the fair value of the non-controlling interest at acquisition, has not
been entered into the financial statements of Margy or the draft consolidated statements.
Buildings are depreciated on the straight-line basis.
Agreement with CP
Joey is looking to expand into publishing and entered into an arrangement with Content
Publishing (CP), a public limited company, on 1 December 20X3. CP will provide content for
a range of books and online publications.
CP is entitled to a royalty calculated as 10% of sales and 30% of gross profit of the
publications. Joey has sole responsibility for all printing, binding, and platform maintenance
of the online website. The agreement states that key strategic sales and marketing decisions
must be agreed jointly. Joey selects the content to be covered in the publications but CP has
the right of veto over this content. However on 1 June 20X4, Joey and CP decided to set up a
legal entity, JCP, with equal shares and voting rights. CP continues to contribute content into
JCP but does not receive royalties. Joey continues the printing, binding and platform
maintenance. The sales and cost of sales in the period were $5 million and $2 million
respectively. The whole of the sale proceeds and the costs of sales were recorded in Joey’s
financial statements with no accounting entries being made for JCP or amounts due to CP.
Joey currently funds the operations. Assume that the sales and costs accrue evenly
throughout the year and that all of the transactions relating to JCP have been in cash.
Shares
Joey’s share capital is comprised of ‘A’ class shares. These shares have been correctly
classified as equity. Joey is considering issuing the following instruments:
•
‘B’ class shares that are not mandatorily redeemable but contain a call option allowing
Joey to repurchase them. Dividends would be payable on the B shares if, and only if,
dividends are paid on the A ordinary shares.
•
Share options which will give the counterparty rights to buy a fixed number of ordinary
shares for a fixed amount of $10 million.
The directors of Joey require advice as to whether these financial instruments should be
classified as debt or equity in accordance with IAS 32 Financial Instruments: Presentation.
Required:
(a)
Explain, with suitable workings, how to correct the errors that have arisen when
accounting for the acquisition of Hulty. Show the adjusting entries required to
correct the consolidated statement of financial position.
(9 marks)
(b)
Explain, with suitable workings, how to correct the errors that have arisen when
accounting for the acquisition of Margy. Show the adjusting entries required to
correct the consolidated statement of financial position.
(9 marks)
(c)
Discuss, with suitable workings, how the agreement with CP should have been
accounted for in the consolidated financial statements.
(8 marks)
(d)
In accordance with IAS 32 Financial Instruments: Presentation, discuss whether the
‘B’ class shares and the share options should be classified as financial liabilities or
equity.
(4 marks)
(Total: 30 marks)
46
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
18
PARSLEY
Walk in the footsteps of a top tutor
Background
Parsley, a public limited company, has equity investments in several companies including
Sage and Saffron. All three companies prepare their financial statements in accordance with
International Financial Reporting Standards. The presentation currency of the group is the
dollar ($). Saffron’s functional currency is the Franc (FR).
The financial accountant has produced a draft consolidated statement of profit or loss and
other comprehensive income for the year, however there are several issues that the financial
accountant did not know how to record and therefore the issues have not been dealt with in
the draft statement. The only item in other comprehensive income relates to Parsley’s
defined benefit pension scheme, which has been correctly recorded.
The following exhibits, available below, provide information relevant to the preparation of
the group statement of profit or loss and other comprehensive income:
1
Purchase of additional shares in Sage – Parsley acquired 400,000 additional shares in
Sage on 31 January 20X4.
2
Acquisition of Saffron – Parsley acquired 60% of the shares in Saffron on 1 May 20X3.
3
Loan to charity – issued on 1 May 20X3.
4
Draft statements – Draft consolidated statement of profit or loss and other
comprehensive income for the Parsley group and the individual statement of profit or
loss for Sage for the year ended 30 April 20X4.
This information should be used to answer the question requirements.
1 – Purchase of additional shares in Sage
Parsley acquired 30% of Sage’s one million $1 ordinary shares for $2.5 million many years
ago. This investment gave Parsley significant influence over Sage. At the acquisition date, the
carrying amount of Sage’s net assets was $5 million, and this was deemed to be the same as
their fair value.
On 31 January 20X4, Parsley acquired a further 400,000 shares in Sage for $9.5 million. The
fair value of the original 30% shareholding at this date was $6.5 million. The net assets of
Sage were $13 million as at 31 January 20X4, which was deemed to be the same as their fair
value.
The financial accountant assumed that the investment in Sage should be treated as a
subsidiary, so has included Sage’s income and expenses for the full year in the draft
consolidated statement of profit or loss. No other entries were recorded in respect of Sage.
The financial accountant assessed goodwill at the reporting date and determined that
goodwill was not impaired.
The statement of profit or loss for Sage is provided in exhibit 4.
KA PL AN P U BLI SH IN G
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2 – Acquisition of Saffron
On 1 May 20X3, Parsley purchased 60% of Saffron’s one million FR1 ordinary shares for FR71
million. The non-controlling interest at acquisition was valued at FR29 million using the fair
value method. At 1 May 20X3, the carrying amount of Saffron’s net assets was FR60 million
but the fair value was FR70 million. The excess in fair value was due to an unrecognised brand
with a remaining useful economic life of five years at the acquisition date.
For the year ended 30 April 20X4, Saffron’s net profit for the period was FR30 million. Saffron
did not recognise any other comprehensive income in the period. At 30 April 20X4, it was
determined that goodwill arising on the acquisition of Saffron was impaired by FR4 million.
The financial accountant correctly translated Saffron’s income and expenses for the year and
included them in the draft consolidated statement of profit or loss and other comprehensive
income. No other entries were recorded in respect of Saffron.
The following exchange rates are relevant:
1 May 20X3
30 April 20X4
Average for year ended 30 April 20X4
FR: $1
5.0
4.0
4.6
3 – Loan to charity
As part of Parsley’s corporate social responsibility initiatives, Parsley has made a loan of
$50 million to a charitable organisation for the building of new sporting facilities. The loan
was made on 1 May 20X3 and is repayable on maturity in three years’ time. The interest rate
on the loan is 3%, but Parsley assessed that an unsubsidised rate for such a loan would have
been 6%. The first interest payment was made on 30 April 20X4. Parsley initially recorded a
financial asset at $50 million and reduced this by the interest received during the period. The
loss allowance has been correctly dealt with.
4 – Draft statements
Draft consolidated statement of profit or loss and other comprehensive income for the year
ended 30 April 20X4
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative costs
Operating profit
Investment income
Profit before financing and income taxes
Interest expense
Profit before tax
48
Group
$m
256.7
(130.4)
–––––
126.3
(19.0)
(39.3)
–––––
68.0
3.0
–––––
71.0
(6.7)
–––––
64.3
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
Income tax expense
(14.7)
–––––
49.6
–––––
Profit for the year
Other comprehensive income
Remeasurement loss on pension scheme
(1.4)
–––––
48.2
–––––
Total comprehensive income
The following financial statement relates to Sage.
Statement of profit or loss for the year ended 30 April 20X4.
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Operating profit
Investment income
Profit before financing and income taxes
Interest expense
Profit before taxation
Taxation
Profit for the year
Sage
$m
68
(42)
––––––
26
(6)
(10)
––––––
10
2
––––––
12
(4)
––––––
8
(2)
––––––
6
––––––
Required:
(a)
(i)
Explain, with calculations, how Parsley should account for the purchase of the
additional shares in Sage in the consolidated statement of profit or loss and
other comprehensive income for the year ended 30 April 20X4.
(6 marks)
(ii)
Explain, with calculations, how Parsley should account for Saffron in the
consolidated statement of profit or loss and other comprehensive income for
the year ended 30 April 20X4.
(8 marks)
(iii)
Explain, with suitable workings, how the loan to the charitable organisation
should be dealt with in the consolidated financial statements for the year
ended 30 April 20X4.
(6 marks)
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(b)
Using the pre-populated spreadsheet response option and your answer to (a), adjust
the spreadsheet prepared by the financial accountant of Parsley in order to prepare
a completed consolidated statement of profit or loss and other comprehensive
income for the year ended 30 April 20X4. The spreadsheet should take into account
the following:
•
the sales of the shares in Sage
•
the adjustments related to Saffron including the translation differences
•
the loan to charity.
The split of profit and other comprehensive income between the owners of the
parent and non-controlling interest is not required.
Work to one decimal place.
(10 marks)
Note: The requirement above reflects the format of the real exam, however no
spreadsheet is provided with this exam kit. You should use the data contained in the
relevant exhibit along with your own spreadsheet software or the ACCA software.
(Total: 30 marks)
19
TRAVELER
Walk in the footsteps of a top tutor
Tutorial note
This question differs from the current exam style that you will see in question one, as rather
than adjusting a draft financial statement via the pre-populated spreadsheet, the question
requires the preparation of a consolidated statement of financial position. The examining
team have said that the preparation of full consolidated financial statements will not be
required in the Strategic Business Reporting exam. However, this question still provides
important revision of a range of consolidation issues.
Traveler, a public limited company, operates in the manufacturing sector. The draft statements
of financial position are as follows at 30 November 20X1:
Assets:
Non-current assets
Property, plant and equipment
Investments in subsidiaries
Data
Captive
Financial assets
Current assets
Total assets
50
Traveler
$m
Data
$m
Captive
$m
439
810
620
820
541
108
––––––
1,908
1,067
––––––
2,975
––––––
10
––––––
820
781
––––––
1,601
––––––
20
––––––
640
350
––––––
990
––––––
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
Equity and liabilities:
Share capital
Retained earnings
Other components of equity
Total equity
Non-current liabilities
Current liabilities
Total equity and liabilities
1,120
1,066
60
––––––
2,246
––––––
455
274
––––––
2,975
––––––
600
442
37
––––––
1,079
––––––
323
199
––––––
1,601
––––––
390
169
45
––––––
604
––––––
73
313
––––––
990
––––––
The following information is relevant to the preparation of the group financial statements:
1
On 1 December 20X0, Traveler acquired 60% of the equity interests of Data, a public
limited company. The purchase consideration comprised cash of $600 million. At
acquisition, the fair value of the non-controlling interest in Data was $395 million.
Traveler wishes to use the ‘full goodwill’ method. On 1 December 20X0, the fair value
of the identifiable net assets acquired was $935 million and retained earnings of Data
were $299 million and other components of equity were $26 million. The excess in fair
value is due to non-depreciable land.
On 30 November 20X1, Traveler acquired a further 20% interest in Data for a cash
consideration of $220 million.
2
On 1 December 20X0, Traveler acquired 80% of the equity interests of Captive for a
consideration of $541 million. The consideration comprised cash of $477 million and
the transfer of non-depreciable land with a fair value of $64 million. The carrying
amount of the land at the acquisition date was $56 million. At the year end, this asset
was still included in the non-current assets of Traveler and the sale proceeds had been
credited to profit or loss.
At the date of acquisition, the identifiable net assets of Captive had a fair value of
$526 million, retained earnings were $90 million and other components of equity were
$24 million. The excess in fair value is due to non-depreciable land. This acquisition
was accounted for using the partial goodwill method in accordance with IFRS 3
Business Combinations.
3
Goodwill was impairment tested after the additional acquisition in Data on
30 November 20X1. The recoverable amount of the net assets and goodwill of Data
was $1,099 million and that of Captive was $700 million.
Required:
(a)
Prepare a consolidated statement of financial position for the Traveler Group for the
year ended 30 November 20X1.
(23 marks)
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(b)
On 1 December 20X1, Traveler Ltd enters into a five-year lease for a factory with
Tent Ltd, paying Tent Ltd monthly rentals in arrears. The present value of the minimum
lease payments were $4.5m. No amounts were paid initially. The factory had a
remaining useful life of 15 years at the inception of the lease. Traveler Ltd has applied
lessee accounting accurately to this arrangement in all relevant periods. The rate
implicit within the lease is 3.5%.
On the 1 December 20X3, Traveler Ltd subleases the factory to Hitch Ltd for three
years. Hitch makes annual rental repayments in arrears and the present value of the
sublease’s minimum lease payments are correctly calculated as $3m using the rate
implicit in the sublease of 5%.
As the duration of the sublease was less than the majority of the factory’s useful life,
the directors of Traveler Ltd considered the sublease as an operating lease but were
unsure of the appropriate accounting treatment. No entries have yet been recorded in
relation to the sublease.
Required:
Discuss whether Traveler Ltd’s proposed approach for the accounting of the sublease
is in accordance with IFRS 16 Leases. Your answer should explain the appropriate
accounting treatment of the sublease for the year ending 30 November 20X4 and
include any relevant supporting calculations where possible.
(7 marks)
(Total: 30 marks)
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PR AC T ICE Q UE S T ION S : S E CT IO N 1
SECTION A QUESTIONS – REPORTING AND ETHICAL IMPLICATIONS
20
APANIIWA (SEP/DEC 2024)
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Background information
Apaniiwa Co is the parent company of a group. The financial year end of the group is
31 December 20X7.
The following exhibits, available below, provide information relevant to the question:
1
Statement of cash flows – describes the treatment of some transactions in the
consolidated statement of cash flows.
2
Ethical issues – describes ethical issues facing Mr Lennox, one of the accountants of
the Apaniiwa Group.
This information should be used to answer the question requirements.
1 – Statement of cash flows
Long-term borrowings
In Apaniiwa Group’s financial statements for the year ended 31 December 20X7, long-term
borrowings were carried at $21.1 million. The following information was extracted from the
financial records.
Bank loans
Lease liabilities
Total
31 December
20X6
$m
10
––––
10
––––
Receipt/
(payment)
$m
2.5
(0.9)
––––
1.6
––––
Acquisition
of subsidiary
$m
1.5
––––
1.5
––––
New
leases
$m
8
––––
8
––––
31 December
20X7
$m
14
7.1
––––
21.1
––––
A subsidiary was acquired in September 20X7. At the acquisition date, this subsidiary had
bank loans with a carrying amount of $1.5 million.
On 1 January 20X7, Apaniiwa Co entered into a contract to lease a building. In accordance
with IFRS 16 Leases, a lease liability and a right-of-use asset were recognised at $8 million.
In the consolidated statement of cash flows, Mr Lennox reported the net difference between
the opening and closing balances of $11.1 million as a single cash inflow from financing
activities.
High-interest bank account
On 1 November 20X7, Apaniiwa Co paid $4 million into a high-interest bank account.
Apaniiwa Co cannot withdraw the funds before 30 April 20X8. The money in this account has
been treated as a ‘cash equivalent’ in the consolidated statement of cash flows because
Mr Lennox believes the bank would release the funds early if Apaniiwa Co was suffering from
liquidity issues.
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2 – Ethical issues
Mr Lennox is an ACCA member. Ms Ruiz, the finance director and an ACCA member, is his
immediate line manager.
Ms Ruiz has ordered Mr Lennox to produce Apaniiwa Group’s sustainability report in
accordance with the IFRS Sustainability Disclosure Standards. Mr Lennox has never produced
a sustainability report before and is unaware of the content of these new standards.
After correcting the errors outlined in exhibit 1, Mr Lennox sent the consolidated financial
statements to Ms Ruiz for review. As part of her review, Ms Ruiz made several changes.
Mr Lennox believes that Ms Ruiz has understated the foreign exchange loss adjustment in
arriving at the cash flows from operating activities and has also understated dividends paid
by $2 million. These combined errors have no impact on the overall net cash outflow from
operating activities. Mr Lennox is aware that Ms Ruiz is a major shareholder in Apaniiwa Co
and, because of the current liquidity crisis, he has concluded that she wants to conceal, from
third parties, the extent of her dividend.
When Mr Lennox previously questioned Ms Ruiz about some of her decisions, she threatened
to dismiss him.
Required:
(a)
(b)
Using exhibit 1, discuss the correct presentation of the following issues in the
consolidated statement of cash flows:
•
the $11.1 million net movement in long-term borrowings, and
•
the high-interest bank account.
(8 marks)
Using exhibit 2, discuss the ethical issues arising and the actions which Mr Lennox
should take to address them.
(10 marks)
Professional marks will be awarded in part (b) for the relevance of the ethical principles
and actions identified.
(2 marks)
(Total: 20 marks)
21
ABASI (MAR/JUN 2024)
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Background information
Abasi Co is a new company formed on 1 January 20X7. The company’s financial year end is
31 December 20X7.
The following exhibits, available below, provide information relevant to the question:
1
Receipt and crowdfunding – describes the receipt of cash from a director and
information regarding a crowdfunding campaign.
2
Ethical issues – describes Mr Mavic’s actions regarding the crowdfunding campaign
and subsequent manufacture of Zolo drones.
This information should be used to answer the question requirements.
1 – Receipt and crowdfunding
As Abasi Co is a new company, Mr Mavic (a qualified accountant) occupies the roles of both
finance director and production director. There is also a technical director, Mr Pain (inventor
of the Zolo drone).
54
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
The share capital of Abasi Co comprises 10 $1 shares held equally by the two directors,
Mr Mavic and Mr Pain.
On 31 March 20X7, Abasi Co received $0.5 million from Mr Pain (technical director) to assist
the company in developing the Zolo drone. There was no specified repayment date, although
Mr Pain can demand repayment of the $0.5 million at any time.
On the same date, Abasi Co started a crowdfunding campaign on the CrowdPeople platform
to raise additional funds to develop the Zolo drone. The campaign was aimed at raising small
amounts of money from a large number of contributors. The crowdfunding campaign, which
ended on 30 April 20X7, raised $2.4 million. Each contributor donated $300 to the campaign
and, in exchange, was promised a drone once production was complete.
There were production delays. Although Abasi Co had manufactured some drones, none had
been shipped to crowdfunding contributors by 31 December 20X7. All money spent on
research and development activities has been correctly recognised in accordance with IAS 38
Intangible Assets. In addition, by the year end, the total cost incurred on manufacturing
drones for the crowdfunding contributors was $1.5 million.
2 – Ethical issues
On 31 March 20X7, Abasi Co released an advertising video for the Zolo drone on the
CrowdPeople platform.
In order to boost this crowdfunding campaign, the Zolo drone was also advertised at a trade
show on 2 April 20X7. The functionality of the drone at the trade show was significantly
poorer than the functionality demonstrated in the video. Mr Mavic knew that the
crowdfunding advertising video was misleading about the capabilities of the Zolo drone.
During the crowdfunding campaign, Mr Mavic believed that the company would be able to
develop and produce the number of drones required by the promised delivery date of
30 September 20X7. He now realises that the video was also misleading about the readiness
of the drone.
On 1 May 20X7, Mr Mavic ordered a significant amount of component parts to be used in the
manufacture of the Zolo drone to fulfil the crowdfunding promise to the contributors. He
realised also that the success of the crowdfunding campaign would cause enormous
difficulties for the company as they did not have the capability to manufacture and deliver
the Zolo drone in line with their promises. In spite of this, he awarded himself a salary at the
current market rate and also leased an executive car for himself. The CrowdPeople platform
allows any user to report any projects which were felt to be misleading, however only one
person did so.
Mr Mavic regularly communicated with the contributors but the communications, although
honest, reflected a lack of awareness of the problems which the company was facing. No
cash budget was ever created for the project. On 30 September 20X7, although the cost of
producing a Zolo drone had increased by 300%, he still felt that these increasing costs would
be covered by the monies raised from crowdfunding and the money received from Mr Pain.
In December 20X7, Abasi Co sent 500 Zolo drones to new customers as opposed to sending
them as promised to the crowdfunding contributors. The new customers represented
additional revenue. It was known that these drones were not fully functional. A significant
number of these sales to new customers were refunded due to quality issues.
KA PL AN P U BLI SH IN G
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Required:
(a)
Using exhibit 1 only, discuss how the $0.5 million receipt from Mr Pain and the
crowdfunding should be treated in the financial statements for the year ended
31 December 20X7.
(10 marks)
(b)
Using exhibit 2, discuss the ethical issues raised by Mr Mavic’s actions regarding the
crowdfunding campaign and the subsequent manufacture of Zolo drones.
(8 marks)
Professional marks will be awarded in part (b) for the identification of the relevant ethical
principles.
(2 marks)
(Total: 20 marks)
22
DARIO (SEP/DEC 2023)
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Background information
Dario Co is a pharmaceutical company. The financial year end of Dario Co is 31 December
20X7.
The following exhibits, available below, provide information relevant to the question:
1
Ethical considerations – describes the ethical issues surrounding Dario Co.
2
Operating segments – describes the potential operating segments in Dario Co.
This information should be used to answer the question requirements.
1 – Ethical considerations
The finance director (FD) of Dario Co is not a permanent employee but is paid on a
consultancy basis. He is currently on a six-month contract. The chief executive officer (CEO)
is a personal friend of the FD and she recommended him to the board of Dario Co. The FD
and the CEO are both ACCA members.
Dario Co currently has a cash flow problem, and the CEO has asked the FD if he is prepared
to reduce his current fee by 50%. The FD’s contract is due for renewal in the next month. The
CEO has recently spoken to the FD and stated that his contract is more likely to be renewed
if he is prepared to take a fee reduction. She has also said that if he needs support, then as a
friend, she will help him.
The FD is upset by the fee request as no other director has taken a cut in their salary. He is
currently undertaking a going concern review of Dario Co, but has decided not to complete
his report until he has considered his position with Dario Co.
The FD’s findings will also form part of a submission to the government for funding and will
be shared with the external auditors. He knows that the current cash flow position would
indicate that the company is not a going concern and that if he submitted his report, there
would be no government funding. There is also the possibility that the financial statements
would receive a qualified audit report. He is considering overstating future potential returns
on investments.
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KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
In addition, many of the accounting staff are remote employees, meaning that they are now
working at home rather than working in the office. The FD is worried about the possibility of
data theft. Unfortunately, he does not have the skills, nor does Dario Co have the capacity,
to undertake a widespread investigation into the issue. Given the current request to reduce
his fee and the cash flow situation, he also does not have the incentive to deal with the
potential data theft or inform the board to enable them to address any potential problem.
However, he has asked the information technology department to add productivity
monitoring software to all remote employees’ computers without their permission or
knowledge and any employee who spends time on non-business websites will be
immediately disciplined.
2 – Operating segments
Dario Co has four divisions (A, B, C and D).
Divisions A and B produce and sell to third parties. Division A produces vaccines and sells
them to governments, generating 60% of Dario Co’s total revenue. Division B produces
allergy testing kits and sells them to pharmacy wholesalers, generating 20% of Dario Co’s
total revenue. Division B’s long-term average gross profit margin is significantly higher than
division A’s.
Divisions C and D undertake research and development. Division C does not provide any
research and development services to third parties and only conducts activities for divisions
A and B. Division C does not generate revenue from any internal or external source. It is
purely a cost centre operating from division D’s premises.
Division D performs contract investigation activities for other laboratories and pharmaceutical
companies. The external revenues of this division represent 20% of Dario Co’s total revenues.
The operating results for divisions A, B, and D are regularly reviewed by the CEO. These
results include separate divisional operating profit or loss statements, from which
operational decisions are made. The costings and budgets for division C are also reviewed by
the CEO.
There are four divisional heads who are directly accountable to the CEO and these heads
regularly discuss the operating activities including the research and development activities,
financial results, forecasts and plans for their division.
The CEO is the chief operating decision maker.
Required:
(a)
Using exhibit 1, discuss the ethical issues caused by the current business situation.
(10 marks)
Professional marks will be awarded in part (a) for the identification of relevant ethical
principles and the application of these to the scenario.
(2 marks)
(b)
Explain, in accordance with the principles of IFRS 8 Operating Segments, whether
divisions A, B, C and D should be treated as separate reportable segments. Your
explanation should cover:
•
the definition of an operating segment
•
the aggregation of operating segments, and
•
the identification of reportable segments.
(8 marks)
(Total: 20 marks)
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23
CUTHERD (MAR/JUN 2023)
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Background information
Cutherd is a successful division within a multi-national company, Herding Co. The financial
year end of Herding Co is 31 December 20X8.
The following exhibit, available provides information relevant to the question:
1
New system – describes the purchase of an unauthorised procurement system by the
Cutherd division on 1 August 20X8 and the implications of that decision.
This information should be used to answer the question requirements.
1 – New system
New procurement system
In 20X8, Herding Co upgraded its computerised systems and centralised its procurement
(purchasing) processes. All divisions of Herding Co were required to use the same
procurement system. However, on 1 August 20X8, the divisional head of the Cutherd division
(Mr Bookman) purchased a procurement system without authority, which is incompatible
with the other systems in Herding Co.
The new system is specific to the Cutherd division and cannot be used by other divisions in
Herding Co. Mr Bookman has stated that the Cutherd division will use this new system to
make purchases in the future rather than the company’s centralised system. As a result of
using the new system, the Cutherd division has developed a poor purchasing strategy which
has resulted in unfavourable pricing decisions. Even though the Cutherd division has made
purchases with the new system, it is not fully operational because it is incompatible with the
company’s centralised systems.
Accountant and internal auditor
The accountant of Herding Co (Mr Ebrima) is considering the impact of the poor purchasing
decisions and how to improve the financial control over the Cutherd division. However, he
does not wish to introduce controls which Mr Bookman may feel are ‘excessive’ because
Mr Bookman is a dominant individual who often puts pressure on him. Mr Bookman is on the
management committee of Herding Co to whom the internal auditor (Mr Franklin) reports.
Mr Ebrima has reported his concerns to the internal auditor who is a qualified member of
ACCA and known to be a personal friend of Mr Bookman.
Procurement costs
Herding Co’s policy is normally to upgrade systems every four years. The cost of the Cutherd
division’s new system was $5 million. There were additional development costs incurred by
the Cutherd division of $100,000 which related to payroll. All of these costs (totalling
$5.1 million) have been written off in the statement of profit or loss of Herding Co in the year
ended 31 December 20X8. At the year end, the Cutherd division’s new system is still not
yet fully operational because of the incompatibilities with the centralised systems. There
are also doubts about the security of the system and potential short-term technological
obsolescence.
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Required:
(a)
Discuss how the advancement of information technology impacts on the ethical
responsibilities of an accountant.
Note: there is no requirement to refer to any exhibit when answering part (a).
(b)
(4 marks)
Discuss the ethical issues faced by the accountant (Mr Ebrima) and the internal
auditor (Mr Franklin) in Herding Co and any actions they should take to address these
issues.
(6 marks)
Professional marks will be awarded in part (a) and (b) for the quality of the ethical
discussion and identification of appropriate actions.
(2 marks)
(c)
Explain the possible effects of IAS 38 Intangible Assets and IAS 36 Impairment of
Assets on the accounting treatment of the purchase of the Cutherd division’s
procurement system and development costs, in the financial statements for the year
ending 31 December 20X8.
(8 marks)
(Total: 20 marks)
24
JASSIE (SEP/DEC 2022)
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Answer debrief
Background
Jassie Co operates in the oil and gas industry. The current financial year end of Jassie Co is
31 December 20X7.
The following exhibits, available below, provide information relevant to the question:
1
Granting of licences – describes the process of granting licences to customers.
2
Ethical issues – describes the potential ethical issues surrounding the working practices
of the finance director.
This information should be used to answer the question requirements.
1 – Granting of licences
Jassie Co provides services to customers to help them evaluate whether there are potential
oil reserves in a particular geographical location. Customers generally enter into the contract
before the survey process commences and eventually purchase a licence to search for oil
deposits.
Service phase
During the service phase, Jassie Co collects site data over the first year of the contract, then
processes and analyses the data over the next six months. The area surveyed is determined
by Jassie Co, who is the only decision-maker and the owner of both the data and the land
being surveyed. All of the data is made available to customers in the final survey report.
Customers cannot process the data or obtain a licence other than by Jassie Co’s approval.
The value to the customer is in the granting of the licence and not in the data.
As data is being collected and processed, presentations and reports are given to customers
to indicate the potential of an area. Customers have ongoing access to the data during
collection and processing. When the final report is made available, the customer decides
whether to invest in the area.
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Granting of licence
The customers can exit the contract on receipt of the report, but the total price of the
contract, including the price of the final licence, is still payable to Jassie Co. In practice, no
customer leaves the contract at this stage. The licence is granted at this stage and once the
licence has been granted, there is no further analysis or service provided to the customer.
The directors of Jassie Co concluded that the company has only one performance obligation,
being the granting of a licence at the end of a survey. This is because the collection and
processing of the data (service phase) is a component of the granting of the licence and
cannot be distinguished from the licence. In addition, the service phase alone is of no benefit
on its own. The final licence provided to the customer is based upon the data collected and
processed during the service phase.
2 – Ethical issues
Jassie Co uses big data analytics and various algorithms in order to indicate the potential of
finding oil in a particular geographical location. The chief data officer understands the science
and statistics, and can explain outcomes simply and clearly to customers. The finance
director, Mr Betso, who is ACCA qualified, has little knowledge of the technology involved.
He feels that the technology used is too complex and there is no need for him to understand
it as long as the chief data officer understands it. The chief data officer reports to the finance
director.
Recently, the outcome of one set of data showed that there was little chance of oil being
found on one of the sites, but the finance director insisted that the data was run again to
include historical data which would then indicate a more favourable outcome for a customer,
Olio Co.
Mr Betso has a friend, Ms Stylos, who works as the accountant at Olio Co. Ms Stylos has asked
Mr Betso for advice as to how to account for the licence granted to Olio Co. Mr Betso
suggested that Ms Stylos use IFRS 16 Leases as it is a right-to-use licence. In addition, Mr Betso
knew that Ms Stylos held shares in Olio Co and suggested to her that the share price of Olio
Co was likely to fall because there was little chance of oil being found as a result of the
granting of the licence.
Required:
(a)
(b)
Discuss:
•
whether revenue from the service phase and the grant of a licence to a
customer are separate performance obligations or a single performance
obligation, and
•
whether the revenue should be recognised at a point in time in accordance
with IFRS 15 Revenue from Contracts with Customers.
(8 marks)
Explain the ethical issues for the finance director, Mr Betso, setting out how the
issues may be resolved.
(10 marks)
Professional marks will be awarded in part (b) for the quality of the discussion regarding
the resolution of the ethical issues.
(2 marks)
(Total: 20 marks)
Calculate your allowed time, allocate the time to the separate parts……………
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25
RENSHU (MAR/JUN 2022)
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Background
Renshu Co develops gaming apps for which customers are encouraged to buy enhancements
and add-ons to play more effectively. The company's current financial year end is 31 December
20X8.
The following exhibits, available below, provide information relevant to the question:
1
Loans to customers – describes the ethical issues related to authorising loans to
customers.
2
Acquisition of assets – sets out the accounting for the acquisition of intangible assets
that do not constitute a business.
3
Payments for the app – describes the accounting for and derecognition of intangible
assets.
This information should be used to answer the question requirements.
Exhibit 1 – Loans to customers
The financial accountant of Renshu Co, an ACCA member, is responsible for overseeing the
authorisation of small loans of up to $500 to customers for use on their gaming app, Jammy
Play. He is paid a commission based upon the number of loans granted in a period. The
effective interest rate on the loan is approximately 1076% per annum. However, if the loan
is paid back within one month, there is no interest charged. Customers apply for short-term
loans via an online portal which gives them an instant decision as to whether the loan is
approved. Artificial intelligence (AI) systems, which have been subject to frequent
cyberattacks, are used in this process. Currently, the laws on consumer credit in the
jurisdiction only allow such loans where the credit worthiness of the applicant has been
checked.
There are two groups of customers (group A and B) who have different social demographics.
The financial accountant has full knowledge of the AI system and knows that the credit
approval system is positively biased in the favour of group A. He defends this practice by
saying that it gives group A a chance to improve their financial position. Group A is known to
have less wealth than group B and is less likely to be able to afford to pay back the loan within
a month.
Exhibit 2 – Acquisition of assets
Renshu Co has purchased a company which comprised a customer database and a number
of domain names which do not constitute a business. Therefore Renshu Co has to allocate
the purchase price to the individual identifiable assets in accordance with IFRS 3 Business
Combinations.
The customer database relates to a contractual arrangement whereby Renshu Co receives a
commission for referring customers to online gaming websites. Renshu Co either receives an
up-front payment for every customer referred to the gaming websites or it receives a share
of revenue streams based on the referred customer’s further usage.
The acquired assets also included a number of domain names for websites which have
gaming content.
Renshu Co had arbitrarily allocated the purchase price for the company to the two intangible
assets, domain names and customer databases, on a 50:50 basis.
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Exhibit 3 – Payments for the app
Renshu Co develops new gaming apps in conjunction with other companies. When acquiring
a stake in these projects, Renshu Co makes an up-front payment and agrees a series of further
payments based upon the fulfilment of certain defined objectives in the process, both before
and after the app is given final government approval.
Prior to the current year, the payments made have been accounted for as an acquisition of
separate intangible assets as the price paid reflected its belief that expected future economic
benefits would flow to Renshu Co. The probability recognition criterion in IAS 38 Intangible
Assets was considered to be met.
However, in the year to 31 December 20X8, Renshu Co revised its strategic plan and decided
that all previously capitalised payments to date were to be derecognised and expensed as
research and development costs. This reversal of the current accounting treatment has arisen
due to concerns that the payments did not meet the criteria for recognition as intangible
assets and also that the costs will not be recovered in full. Renshu Co considered this action
to be a change in an accounting estimate and, therefore, recognised the amounts
prospectively by recharging the payments to profit or loss.
Required:
(a)
Discuss the ethical and professional dilemmas for the financial accountant in
overseeing the loans made to customers and the appropriate actions to be taken.
(8 marks)
(b)
Discuss whether the customer databases and domain names should be recognised
under IAS 38 Intangible Assets and how the purchase price should have been
allocated in accordance with IFRS 3 Business Combinations.
(4 marks)
(c)
Advise Renshu Co on the accounting treatment of the payments for the app in the
year ended 31 December 20X8 on the assumptions that the amounts:
•
did meet the recognition criteria for an intangible asset, or
•
did not meet the recognition criteria for an intangible asset.
(6 marks)
Professional marks will be awarded in part (a) for the quality of the discussion.
(2 marks)
(Total: 20 marks)
26
AGENCY GROUP (SEP/DEC 2021)
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Background
The Agency Group manufactures products for the medical industry. They have been suffering
increased competition and, therefore, have sold a licence to distribute an existing product.
They have also developed a new product which they hope will improve their market
reputation. They have recently employed an ACCA student accountant. The year end is
31 December 20X7.
Ethical issues and foreign exchange
On 1 October 20X7, the finance director, Ms Malgun, a financial accountant, recruited
Mr Raavi as an ACCA student accountant on a temporary employment contract which can be
terminated by either party without reason. Mr Raavi has found it difficult to find employment
and accepted the risk attached to the employment contract. However, the jurisdiction has
laws which protect employees from termination due to discrimination.
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Mr Raavi has been told by Ms Malgun that there has been a global slowdown in business and
that the biggest uncertainty is customer demand. She has therefore impressed upon Mr Raavi
that the company profitability targets are based upon achieving 30% higher net profit than
their nearest competitors. Ms Malgun is partly remunerated through profit-related pay.
Ms Malgun has been under significant pressure from the board of directors to meet
performance targets and would normally prepare the year-end financial statements.
However, for the current year end, she has delegated this task to Mr Raavi.
Mr Raavi has included in profit or loss the foreign exchange gains arising on the retranslation of a foreign subsidiary which is held for sale. Mr Raavi has emailed Ms Malgun
informing her of the accounting treatment. Although Ms Malgun is an expert in IFRS
Accounting Standards, she did not comment on this incorrect accounting treatment of the
foreign exchange gains.
After the financial statements had been published, Ms Malgun disciplined Mr Raavi for the
incorrect accounting treatment of the foreign exchange gains. However, despite this, she is
prepared to make his employment contract permanent.
Sale of licence
On 1 January 20X7, Agency Co granted (sold) Kokila Co a licence with no end date to sell a
headache product (Headon) in South America. Agency Co has retained the rights to sell
Headon in the rest of the world. The South American market’s relative value compared
to the rest of the world is 20%. The manufacturing process used to produce Headon is not
specialised and several other entities could also manufacture it for Kokila Co. Kokila Co will
purchase Headon directly from Agency Co at cost plus 50%. The product has been sold for
many years.
On 1 January 20X7, Kokila Co made an up-front payment of $15 million and will make an
additional payment of $3 million when South American sales exceed $35 million. Agency Co
had correctly capitalised development costs for Headon as an intangible asset at a carrying
amount of $30 million.
Drug development
Agency Co is developing a biosimilar product for the treatment of a particular medical
condition. A biosimilar product is one which is highly similar to another which has already
been given regulatory approval. The existing approved product’s (Xudix) patent is
expiring and AgencyCo has applied to the government for regulatory approval of its new
product. The submission includes an analysis which compares Xudix to Agency Co’s
proposed product in order to demonstrate biosimilarity. The government has reviewed
the analysis and allowed Agency Co to undertake initial medical trials. Agency Co feels that
the trials are going well. The product is used in the treatment of a very specific condition
which affects only a small group of people, and Agency Co has decided to develop this
product for reputational reasons. A person using the product will only pay a notional
amount for the product if it is proven to be effective.
Required:
(a)
(i)
Discuss the appropriateness of Mr Raavi’s accounting treatment of the foreign
exchange gains on the re-translation of the foreign subsidiary which is held for
sale.
(3 marks)
(ii)
Discuss any ethical issues raised by Ms Malgun’s actions regarding her
management of Mr Raavi.
(6 marks)
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(b)
Discuss how the granting (sale) of the licence to Kokila Co should be accounted for
by Agency Co on 1 January 20X7.
(5 marks)
(c)
Discuss the accounting treatment of the costs incurred to date in developing the
biosimilar drug.
(4 marks)
Professional marks will be awarded in part (a)(ii) for the quality of the discussion.
(2 marks)
(Total: 20 marks)
27
BISMUTH (MAR/JUN 2021)
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Background
Bismuth Co is a mining company. Investors in Bismuth Co receive earnings from mining
projects as a return on their investment. The year end is 31 December 20X7.
Impairment testing of mines
At 31 December 20X7, Bismuth Co owns mines which have a carrying amount of $200 million.
The company has committed itself to decommissioning its mines at the end of their useful
life (five years or less) and has created a decommissioning provision of $53 million. However,
the directors are unsure how the decommissioning provision will impact on the impairment
testing of the mines. At the end of the useful life of a mine, its reusable components will be
dismantled and sold.
The following information relates to the decommissioning of the mines at 31 December 20X7:
Carrying amount of decommissioning provision
Present value of future cash inflows from:
–
sale of reusable components at decommission date (inflows)
–
sale of mining output from 31 December 20X7 to decommission date
(inflows)
–
operating costs from 31 December 20X7 to decommission date (outflows)
$million
53
20
203
48
Class A and Class B shares
Bismuth Co has issued two classes of shares, class A and class B, in exchange for a
cryptocurrency, Bitcoin. Both types of shares permit the holder to vote and give an
entitlement to ‘rewards’. Bismuth Co has discretion over whether ‘rewards’ are payable on
class A and class B shares. Bitcoin can be readily converted into cash in Bismuth Co’s
jurisdiction.
Class A shares are redeemable at par in the event of Bismuth Co obtaining a listing on a formal
stock exchange which is highly probable. On listing, Bismuth Co has a choice as to the method
of redemption either:
(i)
cash to the value of 1 Bitcoin per 1000 class A shares, or
(ii)
shares to the value of 2 Bitcoins per 1000 class A shares.
Note: 1 Bitcoin equates to approximately $12,000.
The share settlement option, option (ii) above, would involve exchanging class A shares for
the equivalent number of class B shares. Class B shares have never fluctuated in value.
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Bismuth Co is not compelled to redeem the class B shares but these shares do contain an
option allowing Bismuth Co to repurchase them. However, if within two years, Bismuth Co
fails to exercise its call option on the class B shares, it must pay an additional reward to the
holders of class B shares.
Blockchain technology
Bismuth Co plans to implement Blockchain technology to store all of its data relating to its
mines, trading and to certify the ethical sourcing of all its raw materials. The chief accountant,
Ms Pleasant, is currently developing a blockchain technology that will be filed for patent.
Ms Pleasant has only recently taken up the post and has discovered that work done at her
previous employer, Gypsam Co, is relevant to the project. If Ms Pleasant discloses this
information, it will compromise a patent process at Gypsam Co but will consolidate her
position as chief accountant in Bismuth Co. When she left the employment of Gypsam Co,
she signed a confidentiality agreement but the clauses were not clear or specific about what
information could be shared and with whom.
Ms Pleasant has significant knowledge of Blockchain technology but the finance director,
Mr Fricklin has limited knowledge of it or the new business model that Bismuth Co is trying
to develop. Mr Fricklin has told her that there is no need to spend a significant amount of
time creating a technology to ethically source materials. Ms Pleasant is worried about
Mr Fricklin’s lack of technical and legal knowledge as she feels that it will affect the
development of the technology. In addition, some of the data concerning ethically sourced
materials has gone missing and she thinks that Mr Fricklin has erased the data to try and
sabotage the project. Mr Fricklin has told the Board of Directors that he has an ‘in depth
knowledge’ of the technology.
Required:
(a)
Discuss, with suitable calculations, whether Bismuth Co should recognise an
impairment loss for the mines.
(5 marks)
(b)
Discuss whether the class A and B shares should be classified as either equity or
liability in accordance with IAS 32 Financial Instruments: Presentation.
(5 marks)
(c)
Discuss the ethical issues raised by the implementation of the blockchain technology
for both the chief accountant and the finance director, including any appropriate
actions which should be considered to resolve these issues.
(8 marks)
Professional marks will be awarded in part (c) for the quality of the discussion.
(2 marks)
(Total: 20 marks)
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28
CALIBRA (SEP/DEC 2020)
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Calibra Co operates in the property sector and has invested in new technology, distributed
ledgers/blockchain, to trade and to support property transactions. The financial year end of
Calibra Co is 31 December 20X8.
Apartment blocks
Calibra Co builds apartment blocks which normally take two years to complete from the date
of signing the contract. The performance obligation is satisfied at a point in time. The title
and possession, and therefore control, of the apartment blocks pass to the customer upon
completion of construction. The price which is payable on completion of each apartment
block is $9.55 million. Alternatively, customers can pay $8.5 million cash on the day that the
contract is signed. The chief accountant has calculated that this represents an appropriate
borrowing rate of 6% for Calibra Co.
Calibra Co immediately recognises $8.5 million as revenue if customers pay when they sign
the contract.
Chief accountant and Bodoni Co
The chief accountant does not hold a permanent employment contract with Calibra Co. He
has applied for the position on a permanent basis and is to be interviewed in the near future.
Bodoni Co, a customer of Calibra Co, wanted to take advantage of the $8.5 million reduced
price for an apartment block but was having problems with cash flow. The chief accountant
therefore allowed Bodoni Co to pay $8.5 million and to delay payment until one month after
the contract was signed. In return, Bodoni Co has agreed to provide a good employment
reference. The chief accountant of Calibra Co was afraid that he might lose Bodini Co as a
customer and referee if he did not agree to the delay in payment.
Distributed ledger technology
Calibra Co has recently used distributed ledger technology/blockchain to sell shares in a
property to investors. These digitised transactions are only visible to the authorised parties.
The chief accountant publicly supports this technology and is to manage the new system.
However, he has private concerns over the reliability of the due diligence carried out on the
sale of property shares and the potential violation of local regulations. The directors of
Calibra Co want to increase the number of transactions on the distributed ledger by offering
digital shares in the whole of the entity’s property portfolio. Although the chief accountant
has very basic knowledge of distributed ledgers, he has assured the directors that he can
facilitate this move. The project has been approved by the board despite the chief
accountant’s private reservations. The chief accountant has only recently qualified as an
accountant and wishes to be employed with Calibra Co on a permanent basis.
Required:
(a)
Discuss how Calibra Co should have accounted for the sale of the apartment blocks
in accordance with IFRS 15 Revenue from Contracts with Customers and IAS 23
Borrowing Costs.
(5 marks)
(b)
Provide the accounting entries that would be required to record the contractual sale
of an apartment block on 1 January 20X8 at the discounted amount over the twoyear construction period.
(3 marks)
(c)
Discuss the way in which the chief accountant should have acted to ensure that he
maintained ethical standards in dealing with the issues described.
(10 marks)
Professional marks will be awarded in part (c) for the quality of the ethical discussion.
(2 marks)
(Total: 20 marks)
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29
BAGSHOT (MAR 2020)
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Background
Bagshot Co has a controlling interest in a number of entities. Group results have been
disappointing in recent years and the directors of Bagshot Co have been discussing various
strategies to improve group performance. The current financial year end is 31 December
20X5.
The following personnel are relevant to the scenario:
Mr Shaw: Head accountant of Bagshot Co
Mrs Dawes: Chief executive of Bagshot Co
Mike Starr: Nephew of Mr Shaw
Mrs Shaw: Wife of Mr Shaw
Group restructure
Mr Shaw, an ACCA member, is the head accountant of Bagshot Co. He is not a member of the
board of directors. Mrs Dawes, the chief executive of Bagshot Co, is also an ACCA member.
During December 20X5, Mrs Dawes revealed plans to Mr Shaw of a potential restructure of
the Bagshot group which had been discussed at board meetings. The restructuring plans
included a general analysis of expected costs which would be incurred should the restructure
take place. These include legal fees, relocation costs for staff and also redundancy costs for
a number of employees. One such employee to be made redundant, Mike Starr, is the
nephew of Mr Shaw.
Mrs Dawes is insistent that Mr Shaw should include a restructuring provision for all of the
expenditure in the financial statements of Bagshot Co for the year ended 31 December 20X5.
Mrs Dawes argues that, even if the restructure did not take place exactly as detailed, similar
levels of expenditure are likely to be incurred on alternative strategies. It would therefore be
prudent to include a restructuring provision for all expenditure. None of the staff other than
Mr Shaw have been notified of the plans although Mrs Dawes has informed Mr Shaw that
she expects a final decision and public announcement to be made prior to the authorisation
of the financial statements.
Mrs Shaw
Mrs Shaw is the wife of Mr Shaw, the head accountant of Bagshot Co. She is not an employee
of Bagshot Co and does not know about the proposed restructure. However, Mrs Shaw
recently acquired 5% of the equity shares in Bagshot Co. Mr Shaw is considering informing
his wife of the proposed restructure so that she can make an informed decision as to whether
to divest her shareholding or not. Mr Shaw is concerned that, in the short term at least, the
inclusion of any restructuring costs would be harmful to the profitability of Bagshot Co. It is
also uncertain as to how the market may react should the restructure take place. It is,
however, anticipated that in the long term, shareholder value would be enhanced.
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Required:
(a)
(b)
(i)
Discuss the appropriate accounting treatment of the restructuring costs in the
financial statements of Bagshot Co for the year ended 31 December 20X5.
(6 marks)
(ii)
Discuss what is meant by good stewardship of a company and whether the
restructure and the recognition of a restructuring provision in the financial
statements are examples of good stewardship.
(4 marks)
(iii)
Discuss briefly whether Mrs Shaw’s acquisition of the equity shares in Bagshot
Co should be disclosed as a related party transaction.
(3 marks)
Identify and discuss the ethical issues arising from the scenario which Mr Shaw needs
to consider and what actions he should take as a consequence.
(5 marks)
Professional marks will be awarded in part (b) for the clarity of discussion. (2 marks)
(Total: 20 marks)
30
STENT (SEP/DEC 2019)
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Stent Co is a consumer electronics company which has faced a challenging year due to
increased competition. Stent Co has a year end of 30 September 20X9 and the unaudited
draft financial statements report an operating loss. In addition to this, debt covenant limits
based on gearing are close to being breached and the company is approaching its overdraft
limit.
Cash advance from Budster Co
On 27 September 20X9, Stent Co’s finance director asked the accountant to record a cash
advance of $3 million received from a customer, Budster Co, as a reduction in trade
receivables. Budster Co is solely owned by Stent Co’s finance director. The accountant has
seen an agreement signed by both companies stating that the $3 million will be repaid to
Budster Co in four months’ time. The finance director argues that the proposed accounting
treatment is acceptable because the payment has been made in advance in case Budster Co
wishes to order goods in the next four months. However, the accountant has seen no
evidence of any intent from Budster Co to place orders with Stent Co.
(4 marks)
Preference shares
On 1 October 20X8, the CEO and finance director each paid $2 million cash in exchange for
preference shares from Stent Co which provide cumulative dividends of 7% per annum. These
preference shares can either be converted into a fixed number of ordinary shares in two
years’ time, or redeemed at par on the same date, at the choice of the holder. The finance
director suggests to the accountant that the preference shares should be classified as equity
because the conversion is into a fixed number of ordinary shares on a fixed date (‘fixed for
fixed’) and conversion is certain (given the current market value of the ordinary shares).
(4 marks)
Deferred tax asset
Stent Co includes a deferred tax asset in its statement of financial position, based on losses
incurred in the current and the previous two years. The finance director has asked the
accountant to include the deferred tax asset in full. He has suggested this on the basis that
Stent Co will return to profitability once its funding issues are resolved.
(3 marks)
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Required:
(a)
Discuss appropriate accounting treatments which Stent Co should adopt for all issues
identified above and their impact upon gearing.
Note: The mark allocation is shown against each issue above.
The accountant has been in her position for only a few months and the finance director has
recently commented that ‘all these accounting treatments must be made exactly as I have
suggested to ensure the growth of the business and the security of all our jobs’. Both the
finance director and the accountant are fully qualified members of ACCA.
Required:
(b)
Discuss the ethical issues arising from the scenario, including any actions which the
accountant should take to resolve the issues.
(7 marks)
Professional marks will be awarded in this question for the application of ethical
principles.
(2 marks)
(Total: 20 marks)
31
HUDSON (MAR/JUN 2019)
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Background
Hudson has a year end of 31 December 20X2 and operates a defined benefit scheme for all
employees. In addition, the directors of Hudson are paid an annual bonus depending upon
the earnings before interest, tax, depreciation and amortisation (EBITDA) of Hudson.
Hudson has been experiencing losses for a number of years and its draft financial statements
reflect a small loss for the current year of $10 million. On 1 May 20X2, Hudson announced
that it was restructuring and that it was going to close down division Wye. A number of
redundancies were confirmed as part of this closure with some staff being reallocated to
other divisions within Hudson. The directors have approved the restructuring in a formal
directors’ meeting. Hudson is highly geared and much of its debt is secured on covenants
which stipulate that a minimum level of net assets should be maintained. The directors are
concerned that compliance with IFRS Accounting Standards could have significant
implications for their bonus and debt covenants.
Redundancy and settlement costs
Hudson still requires a number of staff to operate division Wye until its final expected closure
in early 20X3. As a consequence, Hudson offered its staff two packages in relation to the
curtailment of the defined benefit scheme. A pension enhancement was offered for all staff
who leave before the final closure of division Wye. An additional pension enhancement was
offered for staff who remained in employment until the final closure of division Wye. The
directors of Hudson have only included an adjustment in the financial statements for those
staff who left prior to 31 December 20X2. The directors have included this adjustment within
the remeasurement component of the defined benefit scheme. They do not wish to provide
for any other enhancements until employment is finally terminated, arguing that an
obligation would only arise once the staff were made redundant. On final termination, the
directors intend to include the remaining basic enhancement and the additional pension
enhancement within the remeasurement component.
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The directors and accountant are aware that the proposed treatment does not conform to
IFRS Accounting Standards. The directors believe that the proposed treatment is justified as
it will help Hudson maintain its debt covenant obligations and will therefore be in the best
interests of their shareholders who are the primary stakeholder. The directors have indicated
that, should the accountant not agree with their accounting treatment, then he will be
replaced.
Tax losses
The directors of Hudson wish to recognise a material deferred tax asset in relation to $250
million of unused trading losses which have accumulated as at 31 December 20X2. Hudson
has budgeted profits for $80 million for the year ended 31 December 20X3. The directors
have forecast that profits will grow by 20% each year for the next four years. The market is
currently depressed and sales orders are at a lower level for the first quarter of 20X3 than
they were for the same period in any of the previous five years. Hudson operates under a tax
jurisdiction which allows for trading losses to be only carried forward for a maximum of two
years.
Required:
(a)
Explain why the directors of Hudson are wrong to classify the basic and additional
pension enhancements as part of the remeasurement component, including an
explanation of the correct treatment for each of these items. Also explain how any
other restructuring costs should be accounted for.
(8 marks)
(b)
Explain whether a deferred tax asset can be recognised in the financial statements
of Hudson in the year ended 31 December 20X2.
(5 marks)
(c)
Identify any ethical issues which arise from the directors’ proposed accounting
treatments and behaviour. Your answer should also consider the implications for the
accountant arising from the directors’ behaviour.
(5 marks)
Professional marks will be awarded in part (c) for quality of discussion.
(2 marks)
(Total: 20 marks)
32
FISKERTON (DEC 2018)
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Background
The following is an extract from the statement of financial position of Fiskerton, a public
limited entity as at 30 September 20X8.
Non-current assets
Current assets
Equity share capital ($1 each)
Other components of equity
Retained earnings
Non-current liabilities (bank loan)
Current liabilities
$000
160,901
110,318
10,000
20,151
70,253
50,000
120,815
The bank loan has a covenant attached whereby it will become immediately repayable should
the gearing ratio (long-term debt to equity) of Fiskerton exceed 50%. Fiskerton has a negative
cash balance as at 30 September 20X8.
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Halam property
Included within the non-current assets of Fiskerton is a property in Halam which has been
leased to Edingley under a 40-year lease. The property was acquired for $20 million on
1 October 20X7 and was immediately leased to Edingley.
The asset was expected to have a useful life of 40 years at the date of acquisition and have a
minimal residual value. Fiskerton has classified the building as an investment property and
has adopted the fair value model.
The property was initially revalued to $22 million on 31 March 20X8. Interim financial
statements had indicated that gearing was 51% prior to this revaluation. The managing
director was made aware of this breach of covenant and so instructed that the property
should be revalued. The property is now carried at a value of $28 million which was
determined by the sale of a similar sized property on 30 September 20X8. This property was
located in a much more prosperous area and built with a higher grade of material. An
independent professional valuer has estimated the value to be no more than $22 million. The
managing director has argued that fair values should be referenced to an active market and
is refusing to adjust the financial statements, even though he knows it is contrary to
international accounting standards.
Sales contract
Fiskerton has entered into a sales contract for the construction of an asset with a customer
whereby the customer pays an initial deposit. The deposit is refundable only if Fiskerton fails
to complete the construction of the asset. The remainder is payable on delivery of the asset.
If the customer defaults on the contract prior to completion, Fiskerton has the right to retain
the deposit. The managing director believes that, as completion of the asset is performed
over time, revenue should be recognised accordingly. He has persuaded the accountant to
include the deposit and a percentage of the remaining balance for construction work in
revenue to date.
Required:
(a)
Discuss how the Halam property should have been accounted for and explain the
implications for the financial statements and the debt covenant of Fiskerton.
(7 marks)
(b)
In accordance with IFRS 15 Revenue from Contracts with Customers, discuss whether
revenue arising from the sales contract should be recognised on a stage of
completion basis.
(4 marks)
(c)
Explain any ethical issues which may arise for the managing director and the
accountant from each of the scenarios.
(7 marks)
Professional marks will be awarded in part (c) for the quality of the discussion.
(2 marks)
(Total: 20 marks)
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33
FARHAM (SEP 2018)
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Background
Farham manufactures white goods such as washing machines, tumble dryers and dishwashers.
The industry is highly competitive with a large number of products on the market. Brand
loyalty is consequently an important feature in the industry. Farham operates a profit related
bonus scheme for its managers based upon the consolidated financial statements but recent
results have been poor and bonus targets have rarely been achieved. As a consequence, the
company is looking to restructure and sell its 80% owned subsidiary Newall which has been
making substantial losses. The current year end is 30 June 20X8.
Factory subsidence
Farham has a production facility which started to show signs of subsidence since January
20X8. It is probable that Farham will have to undertake a major repair sometime during 20X9
to correct the problem. Farham does have an insurance policy but it is unlikely to cover
subsidence. The chief operating officer (COO) refuses to disclose the issue at 30 June 20X8
since no repair costs have yet been undertaken although she is aware that this is contrary to
international accounting standards. The COO does not think that the subsidence is an
indicator of impairment. She argues that no provision for the repair to the factory should be
made because there is no legal or constructive obligation to repair the factory.
Farham has a revaluation policy for property, plant and equipment and there is a balance on
the revaluation surplus of $10 million in the financial statements for the year ended 30 June
20X8. None of this balance relates to the production facility but the COO is of the opinion
that this surplus can be used for any future loss arising from the subsidence of the production
facility.
(5 marks)
Sale of Newall
At 30 June 20X8 Farham had a plan to sell its 80% subsidiary Newall. This plan has been
approved by the board and reported in the media. It is expected that Oldcastle, an entity which
currently owns the other 20% of Newall, will acquire the 80% equity interest. The sale is
expected to be complete by December 20X8. Newall is expected to have substantial trading
losses in the period up to the sale. The accountant of Farham wishes to show Newall as held
for sale in the consolidated financial statements and to create a restructuring provision to
include the expected costs of disposal and future trading losses. The COO does not wish Newall
to be disclosed as held for sale nor to provide for the expected losses. The COO is concerned as
to how this may affect the sales price and would almost certainly mean bonus targets would
not be met. The COO has argued that they have a duty to secure a high sales price to maximise
the return for shareholders of Farham. She has also implied that the accountant may lose his
job if he were to put such a provision in the financial statements. The expected costs from the
sale are as follows:
Future trading losses
Various legal costs of sale
Redundancy costs for Newall employees
Impairment losses on owned assets
$m
30
2
5
8
Included within the future trading losses is an early termination penalty of $6 million for a
leased asset which is deemed surplus to requirements.
(6 marks)
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Required:
(a)
Discuss the accounting treatment which Farham should adopt to address each of the
issues above for the consolidated financial statements.
Note: The mark allocation is shown against each of the two issues above.
(b)
Discuss the ethical issues arising from the scenario, including any actions which
Farham and the accountant should undertake.
(7 marks)
Professional marks will be awarded in part (b) for the quality of the discussion.
(2 marks)
(Total: 20 marks)
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SECTION B QUESTIONS
34
CIAL (SEP/DEC 2024)
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Background information
Cial Co manufactures computer hardware. It also buys and sells software licences. It has a
financial year end of 31 December 20X7.
The following exhibits provide information relevant to the question:
1
Bundled goods – provides information regarding the sale of a bundle of goods.
2
Discontinued operation – outlines the sale of a software licence and the proposed
presentation in the financial statements.
3
Land – outlines the purchase of land originally intended for use as an employee car
park.
4
Option to purchase a building – describes the purchase of an option.
1 – Bundled goods
Cial Co entered a contract with a customer, Heed Co, to sell a hardware package comprising
a computer, a monitor, and a printer for $2,000. Cial Co will supply each of the three products
at different points in time according to the needs of the customer. Cial Co regularly sells the
computers separately for $1,720. However, the monitor and printer are new models and are
not yet sold separately.
Cial Co knows that competitor companies sell a similar specification of printer for $180, which
Cial Co feels reflects the entity’s costs and margins. The cost to produce a monitor is $150.
Cial Co achieves a gross profit margin of 25% on the selling price of its products.
2 – Discontinued operation
During 20X7, Cial Co purchased and then subsequently sold a licence. The income it
generated was small in the context of the overall business. Cial Co regularly buys licences
with the view to reselling them. At any point in time, it owns several software licences.
The profit on the sale of this licence was presented as arising from discontinued operations
in the statement of profit or loss for the year ended 31 December 20X7. This was because
Cial Co believed that the licence was a separate component of the business.
3 – Land
On 31 December 20X6, Cial Co acquired land for $10 million. The intention was to turn it into
an employee car park. The cost of this land was recorded as property, plant and equipment.
By 1 September 20X7, the land had not been developed into a car park. Many employees had
started working from home meaning that a car park was no longer required, and so Cial Co
decided that it would lease this land instead.
Cial Co classified the land as investment property and measured it at the original cost of
$10 million. Cial Co wished to use the fair value model in IAS 40 Investment Property.
However, as at 1 September 20X7, Cial Co believed that it was impossible to measure the fair
value of the land due to legal complications concerning public access. A nearby plot of land,
of very similar size and with similar legal complications, sold in September 20X7 for $11 million.
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On 31 December 20X7, the legal issues were resolved. Cial Co hired a surveyor, who stated
that it had a fair value of $11.5 million at this date. Cial Co calculated a fair value gain of
$1.5 million as the difference between the $10 million purchase cost and its fair value of
$11.5 million. This gain was recognised in the investing section of the statement of profit or
loss.
4 – Option to purchase a building
The functional currency of Cial Co is the dollar. On 1 December 20X7, Cial Co paid 10,000
dinars to a property developer for an option to purchase a building situated overseas at a
fixed price on 1 July 20X8. The payment to the property developer is non-refundable. Cial Co
believes it is highly probable that it will purchase the building.
Cial Co proposes to treat the contract as a derivative financial asset measured at fair value
through profit or loss in its financial statements for the year ended 31 December 20X7.
Required:
(a)
Using exhibit 1, and in accordance with IFRS 15 Revenue from Contracts with
Customers, discuss how Cial Co should allocate the transaction price to the hardware
package sold to Heed Co. Show all calculations.
(8 marks)
(b)
Using exhibit 2, and in accordance with IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations, discuss whether the profit on the sale of the licence should
be presented as arising from discontinued operations in the statement of profit or
loss.
(7 marks)
(c)
Using exhibit 3, discuss how the land, and its fair value, should be accounted for in
the year ended 31 December 20X7.
(6 marks)
(d)
Using exhibit 4, discuss how the payment made to acquire the option should be
accounted for in the year ended 31 December 20X7.
(4 marks)
(Total: 25 marks)
35
KIMIMILA (SEP/DEC 2024)
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Background information
Kimimila Co manufactures petrol car engines. The financial year end is 31 December 20X7.
The following exhibits provide information relevant to the question:
1
Sustainability report – provides information about the sustainability report produced
by Kimimila Co for its investors.
2
Climate change – outlines two areas of Kimimila Co's financial statements which might
be impacted by climate change.
3
Share-based payment – outlines a share-based payment scheme for the directors of
Kimimila Co.
1 – Sustainability report
Kimimila Co has produced a sustainability report. The sustainability report states that it has
been produced in accordance with the IFRS Sustainability Disclosure Standards. Due to a
systems issue, Kimimila Co was unable to capture important data during December 20X7. As
such, its sustainability report covers the 11 months to 30 November 20X7.
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In its climate-related disclosure, Kimimila Co has identified several climate-related
opportunities. It has also identified climate-related physical risks, but no other types of risk.
For the risks and opportunities identified, Kimimila Co has disclosed the potential impact on
its financial position and financial performance over the next 12 months.
Kimimila Co has disclosed its Scope 1 greenhouse gas emissions. It has not disclosed Scope 2
or Scope 3 greenhouse emissions on the basis that these figures are difficult to measure.
Kimimila Co believes that this level of measurement uncertainty would not be useful to the
primary users of the financial statements.
Several years ago, Kimimila Co introduced a share-based payment scheme for its directors.
The options would vest on 31 December 20X7 if Kimimila Co cut its Scope 1 greenhouse gas
emissions by 10% per year on average. This target was not met, and the scheme did not vest.
No mention is made of this share-based payment in the climate-related disclosure.
The climate-related disclosure details Kimimila Co’s target of becoming ‘net zero’ within the
next decade. Around half of its anticipated carbon reduction is estimated to arise from
carbon credits. There is no reference to the use of carbon credits in the disclosure.
2 – Climate change
Kimimila Co is currently assessing the impact of climate change on its financial statements.
Financial assets
Kimimila Co has extended loans to its key suppliers to help ensure their viability. Kimimila Co
has recognised these loans as financial assets. Kimimila Co holds loans of this type with the
intention of collecting the contractual cash flows.
Kimimila Co and its suppliers have been affected by wildfires and flooding. In addition, there
have been considerable policy and regulatory changes which have affected all parties.
Significant uncertainty exists around the impact of climate change scenarios on Kimimila Co
and its suppliers’ business models.
Deferred tax assets
Kimimila Co has been loss-making for the past two years. These losses can be carried forward
to reduce taxable profits in future years. Kimimila Co has recognised material deferred tax
assets in respect of these losses.
Many of Kimimila Co’s suppliers are incurring costs in order to reduce carbon emissions
during their production processes. This will cause the purchase price of raw materials used
by Kimimila Co to increase. Due to an increase in the popularity of electric cars, Kimimila Co
has forecast a decrease in demand for many of its product lines.
3 – Share-based payment
On 1 January 20X4, Kimimila Co introduced a share-based payment scheme for its ten
directors. Each director was granted 15,000 share options. The fair value of an option at this
date was $8. The options would vest on 31 December 20X7 if Kimimila Co cut its Scope 1
greenhouse gas emissions by an average of 10% per year over the four-year period.
As at 31 December 20X6, none of the directors had left Kimimila Co or were expected to leave
in the next 12 months. Kimimila Co was on track to meet the greenhouse gas target, meaning
that the share options were expected to vest. The share-based payment scheme was
correctly accounted for in the financial statements for the year ended 31 December 20X6.
At 31 December 20X7, due to unanticipated changes in production processes, the
greenhouse gas target was not met.
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Required:
(a)
(i)
Briefly discuss how the materiality approach is different in the European
Sustainability Reporting Standards compared to the IFRS Sustainability
Disclosure Standards.
(2 marks)
Note: You do not need to refer to any exhibit when answering part (a)(i).
(ii)
Using exhibit 1 only, discuss why Kimimila Co's sustainability report does not
comply with the IFRS Sustainability Disclosure Standards.
(10 marks)
Professional marks will be awarded in part (a)(ii) for the clarity of the answer and for
the specific use of the IFRS Sustainability Disclosure Standards.
(2 marks)
(b)
(c)
36
Using exhibit 2, discuss the impact of climate change on the following issues in
Kimimila Co's financial statements for the year ended 31 December 20X7:
•
the financial assets, and
•
the recognition of deferred tax assets.
(6 marks)
Using exhibit 3, and in accordance with IFRS 2 Share-based Payment, explain how
the share-based payment should be accounted for in Kimimila Co's financial
statements for the year ended 31 December 20X7. Show all calculations. (5 marks)
JOBON (MAR/JUN 2024)
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Background information
Jobon Co is the parent company of a clothing retail group. The financial year end is
31 December 20X7.
The following exhibits provide information relevant to the question:
1
Impairment of cash-generating units – provides details of an impairment test carried
out on cash-generating units.
2
Sale of subsidiary – describes the plan to sell a wholly owned subsidiary.
3
After date events – describes events after the reporting period which may impact the
accounting treatment and presentation of the wholly owned subsidiary.
1 – Loan portfolio
Jobon Co is a lessee. It leases a number of commercial properties which it uses as retail stores.
As a result of an increase in customer online shopping, Jobon Co’s revenue from these retail
stores has halved. Each retail store is a cash-generating unit (CGU) and comprises right-ofuse assets, fixtures and fittings and allocated central assets.
Jobon Co calculated that a total impairment loss of $50 million should be recognised in
relation to the retail store CGUs.
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Jobon Co deducted the lease liabilities when calculating the net carrying amount of the CGUs
for impairment purposes. Jobon Co assessed value in use (VIU) to be the recoverable amount.
Instead of deducting the lease liabilities from VIU, Jobon Co included contractual lease
payments within the future estimated net cash flows of the CGU.
The future estimated net cash flows used to calculate VIU were determined using internal
management forecasts covering the next 10 years. These future estimated net cash flows
also included costs of $5 million to install advertising technology in the properties to enhance
the CGU’s performance.
The future estimated net cash flows were discounted at 5%. This is the weighted average cost
of capital (WACC) of another company in the retail sector which purchased rather than leased
its commercial properties. The interest rate implicit in the lease was 4%.
2 – Sale of subsidiary
In the consolidated financial statements for the years ended 31 December 20X6 and 20X7,
Jobon Co classified a wholly owned subsidiary, Tilte Co, as a disposal group held for sale.
Tilte Co’s results were also presented as arising from discontinued operations in the
consolidated statement of profit or loss for both years. Tilte Co is a geographically distinct
component of the Jobon Group.
In the jurisdiction, sales of shareholdings in subsidiaries require authorisation from the
shareholders of the parent company. On 1 May 20X6, the shareholders of Jobon Co
authorised management to sell all of the shares held in Tilte Co within the next 12 months
but thereafter the management would have to ask for further approval to sell the shares. At
the same time, Jobon Co instructed its agents to sell the shares as soon as possible at the
current market price. The shares had not been sold by 31 December 20X6.
In February 20X7, Jobon Co reallocated the online sales division of another subsidiary to
Tilte Co. As a result, Tilte Co recruited additional employees and purchased new computer
equipment.
At the shareholder meeting in May 20X7, there was no discussion on or further approval for
the sale of Tilte Co. The updated instructions given to the agents by the directors on 1 May
20X7 stated that they were authorised to sell the shares in Tilte Co if the cumulative losses
suffered by Tilte Co for the year ended 31 December 20X7 exceeded $20 million. Tilte Co
made quarterly losses of approximately $4.5 million per quarter during 20X7.
3 – After date events
On 1 April 20X8, after the publication of the preliminary results of the group but before the
authorisation of the consolidated financial statements for issue, Jobon Co received a signed
letter from a third-party company outlining its intention to purchase Tilte Co. The transaction
price was far below the original price paid by Jobon Co, due to the significant losses of Tilte Co
since the year end.
The sale was agreed to complete on 1 January 20X9. At 1 April 20X8, the shareholders
approved this sale.
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The agreed sale of Tilte Co will create a tax allowable loss which can be carried forward to
reduce future taxable profits. Jobon Co has recognised a deferred tax asset in respect of this
issue in its financial statements for the year ended 31 December 20X7. The deferred tax asset
was calculated by taking the value of Tilte Co for tax purposes of $12 million multiplied by
the corporate tax rate of 30%. The tax loss was acceptable under local legislation. Jobon Co
expected to be able to offset the tax loss against its own future taxable profits.
Required:
(a)
Using exhibit 1:
•
explain why the cash-generating units should have been tested for
impairment, and
•
discuss whether the methods used to calculate the value in use and discount
rate are acceptable.
(9 marks)
(b)
Using exhibit 2 only, discuss whether Tilte Co should have been classified as a
disposal group held for sale, and its results presented as arising from discontinued
operations, in the consolidated financial statements for both the years ended
31 December 20X6 and 20X7.
(8 marks)
(c)
Using exhibit 3:
•
explain whether receipt of the signed letter on 1 April 20X8 affects your
answer to part (b), and
•
explain whether the deferred tax asset should be recognised in the financial
statements for the year ended 31 December 20X7 or the year ended
31 December 20X8.
(8 marks)
(Total: 25 marks)
37
MAPLE (MAR/JUN 2024)
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Answer debrief
Background information
Maple Co is a company in the mining industry. The financial year end of Maple Co is
31 December 20X7.
The following exhibits provide information relevant to the question:
1
Judgements and estimates note – provides an extract from a disclosure note to the
financial statements of Maple Co relating to the use of management judgement and
estimates.
2
Financial instruments – describes a loan and the issue of preference shares which the
directors have judged to have no effect on the financial statements.
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1 – Judgements and estimates note
Maple Co is a company in the mining industry. It mines materials known as ‘ore’ and stores
them for future use. The amount of ore stored is known as an ‘ore reserve’.
The following is an extract from a financial statement disclosure note of Maple Co for the
year ended 31 December 20X7. It concerns the impact of key judgements and estimates
around ore and ore reserves on the financial statements.
Judgements and estimates in the financial statements
Property, plant and equipment
Mining equipment is depreciated using the units of production method. Depreciation in the
financial year is calculated based on the increase in ore reserves during the period as a
percentage of total proved ore and probable unmined ore. The company uses its own
engineers to estimate probable unmined ore within a mine.
Provisions
The recognition and measurement of environmental restoration and decommissioning
provisions requires judgement and is based on assumptions and estimates regarding the date
of the mine closure. The date will change as estimates of probable unmined ore are updated.
The Group considers it unlikely that a reasonably possible change to mine closure dates
would have a material impact on the provisions and, as such, no sensitivity analysis has been
provided.
Significant judgement is required to determine the costs associated with restoration work.
External, independent experts are involved in the cost estimation process but there remains
significant estimation uncertainty.
Inventories
Accounting for inventories of ore involves the use of judgements and estimates, particularly
in relation to the measurement and valuation of work in progress. Certain estimates are
calculated by engineers using available industry, engineering and scientific data. Estimates
are periodically reassessed.
Inventory is valued at the lower of cost and net realisable value. The market price of ore
changes daily. The net realisable value of inventory is measured using the current price of
the ore rather than the forecast future price of the ore.
2 – Financial instruments
At 1 January 20X7, Maple Co loaned a third-party company $3 million. Maple Co is due to be
repaid on 1 May 20X8.
At 1 January 20X7, Maple Co issued preference shares and received $3 million. Maple Co is
due to repay the preference shareholders the $3 million on 1 May 20X8.
No financial asset or liability was recognised. The directors justified this on the grounds that
the proceeds from the loan would be used to pay back the preference shareholders.
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Required:
(a)
(i)
With reference to the IFRS Conceptual Framework for Financial Reporting,
briefly explain why disclosures relating to judgements and estimates are
important to investors.
(3 marks)
(ii)
With regards to accounting for a business combination, outline three examples
where management judgement or management estimates might be required.
Note: There is no need to refer to a specific exhibit to answer part (a).
(b)
(i)
(3 marks)
Using exhibit 1, critically assess the extent to which Maple Co’s disclosure of
judgements and estimates is useful for investors.
(7 marks)
Two professional marks will be awarded in part (b)(i) for the quality of the
discussion regarding the investors’ perspectives.
(2 marks)
(ii)
Explain how Maple Co should establish an accounting policy where an issue is
not addressed directly by IFRS Accounting Standards.
Note: There is no need to refer to a specific exhibit to answer part (b)(ii).
(3 marks)
(c)
Using exhibit 2, discuss whether the directors’ decision to not recognise the thirdparty loan and preference shares is in accordance with IFRS Accounting Standards.
(7 marks)
(Total: 25 marks)
Calculate your allowed time, allocate the time to the separate parts……………
38
JACINTA (SEP/DEC 2023)
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Background information
Jacinta Co is the parent company of a group. Its main business is in the telecommunications
sector but, with the continued expansion of products and services, it has also developed a
credit risk management business. The financial year end is 31 December 20X6. The functional
and presentation currency of Jacinta Co and Jacinta Group is the dollar.
The following exhibits provide information relevant to the question:
1
Loan portfolio – describes the purchase of credit-impaired loans by Jacinta Co.
2
Revenue and inventories – describes a two-year service agreement with Sear Co and
the sale of inventories to an overseas subsidiary.
1 – Loan portfolio
Jacinta Co purchases credit-impaired loans and measures these at amortised cost. Jacinta Co
correctly calculates the loss allowance as the changes in lifetime expected credit losses since
initial recognition of the asset which is effectively the changes in the estimated cash flows.
On 1 January 20X6, Jacinta Co bought credit-impaired loans with a remaining term of four
years. Jacinta Co paid $32 million, which is equivalent to the fair value.
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At 1 January 20X6, the remaining contractual cash flows expected to be received on
31 December each year are:
Year
Expected cash flows
20X6
$m
8.8
20X7
$m
8.8
20X8
$m
8.8
20X9
$m
8.8
The credit-adjusted effective interest rate on the above cash flows is 3.9% per annum.
During the year ended 31 December 20X6, $8.8 million was collected. At 31 December 20X6,
the credit worthiness of the loans has improved. Jacinta Co now expects the following cash
flows to be collected:
Year
Expected cash flows
20X7
$m
10
20X8
$m
10
20X9
$m
10
2 – Revenue and inventories
Revenue from Sear Co
On 1 January 20X6, Jacinta Co entered into a contract to provide Sear Co with an internet
service for two years. The contract price was agreed at $2 million which was received in full
on 1 January 20X6. At the same date, Jacinta Co sold equipment to Sear Co at its fair value of
$500,000. At the end of the internet service contract, on 31 December 20X7, Sear Co has a
right to return the equipment to Jacinta Co and receive $20,000. Jacinta Co anticipates that
the equipment’s fair value will be $75,000 in two years’ time.
The market for second-hand equipment is very strong and Sear Co would be able to sell the
equipment easily at the end of the two-year agreement. Jacinta Co does not want to deal in
second-hand equipment and therefore always prices equipment returns at an amount
substantially below fair value. Sear Co has never returned equipment to Jacinta Co in the
past.
Sale of inventories to overseas subsidiary
On 1 September 20X6, Jacinta Co sold inventories costing $1.35 million to a wholly-owned
overseas subsidiary for $2 million. There is no right of return.
The subsidiary has the euro (€) as its functional currency. The exchange rate on the date of
the sale from Jacinta Co to the overseas subsidiary was $1 = €1.25. At 31 December 20X6,
the subsidiary still holds the goods in inventories and the exchange rate is $1 = €1.30. There
is no intercompany debt outstanding at the year end.
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Required:
(a)
Explain how Jacinta Co should account for the credit-impaired loans in the financial
statements for the year ended 31 December 20X6. Your answer should include
journal entries.
(8 marks)
(b)
(i)
Explain how the revenue from the internet service contract and the sale of
equipment to Sear Co should be accounted for in accordance with IFRS 15
Revenue from Contracts with Customers.
(10 marks)
(ii)
Explain, with calculations, how the sale of inventories would be accounted for
in the individual financial statements of both Jacinta Co and the overseas
subsidiary at 1 September 20X6 and in the consolidated financial statements
of the Jacinta Group at 31 December 20X6.
(7 marks)
(Total: 25 marks)
39
BENITO (SEP/DEC 2023)
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Background information
Benito Co is in the real estate industry. The financial year end of Benito Co is 31 December
20X7.
The following exhibit provides information relevant to the question:
1
Sale and leaseback – describes a sale and leaseback transaction with Otine Co, and the
key performance indicators that are affected by the sale and leaseback
Exhibit 1
Sale and leaseback
Sale and leaseback
On 1 January 20X7, Benito Co sold its head office which had a carrying amount of $3.75
million to Otine Co for cash of $7.5 million. On the same date, Benito Co has entered into a
contract with Otine Co to use the head office for 20 years, with annual payments payable at
the end of each year. Both companies have correctly accounted for the transaction as a sale
and leaseback.
At 1 January 20X7, the fair value of the head office is $6.75 million. The present value of the
annual lease payments is $5.47 million.
Key performance indicators (KPIs)
A sale and leaseback transaction allows selling companies to free up cash, improve liquidity
and redeploy capital into core activities. The decision as regards whether the sale and
leaseback can be treated as a sale under IFRS 15 Revenue from Contracts with Customers can
significantly affect Benito Co’s KPIs and profitability, therefore affecting an investor’s view of
the assets which Benito Co is using and the liabilities which it has. The following KPIs of Benito
Co will be affected by this decision:
KPI
Calculation
Gearing
Debt/equity
EBIT
Earnings before interest and tax
Asset turnover
Sales/total assets
Return on capital employed (ROCE)
EBIT/equity plus financial liabilities
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Required:
(a)
In accordance with IFRS Accounting Standards:
(i)
describe how an entity assesses whether the transfer of an asset qualifies as a
‘sale’ in sale and leaseback accounting
(ii)
explain how sale and leaseback transactions are dealt with by the seller-lessee
in accordance with IFRS 16 Leases, if the transfer of an asset qualifies as a ‘sale’
(iii)
explain how sale and leaseback transactions are dealt with by the sellerlessee, if the transfer of an asset does not qualify as a ‘sale’, and
(iv)
explain the effect on the accounting treatment if a sale and leaseback
agreement contains a call option under which the seller-lessee can, at its
option, repurchase the property.
Note: There is no need to refer any exhibit to answer part (a).
(b)
(c)
(9 marks)
Using exhibit 1, explain in accordance with IFRS 16, the accounting entries for the
sale and leaseback transaction in the financial statements of Benito Co on 1 January
20X7 if the head office transfer:
•
qualifies as a ‘sale’, and
•
does not qualify as a ‘sale’.
(7 marks)
Using exhibit 1, compare the impact of the head office transfer qualifying as a ‘sale’
and not qualifying as a ‘sale’ on Benito Co’s financial statements and key performance
indicators (KPIs).
(7 marks)
Professional marks will be awarded in part (c) for the quality of the discussion regarding
the effects on the financial statements and the specific KPIs.
(2 marks)
(Total: 25 marks)
40
FERNANDA (MAR/JUN 2023)
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Background information
Fernanda Co is the parent company of a group which constructs industrial properties.
Fernanda Co is currently preparing the consolidated financial statements for the year ended
31 December 20X7.
The following exhibits provide information relevant to the question:
84
1
Roof collapse – describes the potential liability for a section of a roof collapsing which
was constructed by Fernanda Co.
2
Financial instruments – describes the accounting treatment by Fernanda Co of a put
option and non-redeemable preference shares.
3
Cash flow issues – describes the treatment of cash flows on the sale and purchase of
subsidiaries.
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
1 – Roof collapse
Fernanda Co is a group which constructs industrial properties. In September 20X7, a section
of the roof in a building constructed by Fernanda Co partially collapsed, injuring 10 people.
Production, which was taking place inside the building, had to be stopped. However, no legal
action had been brought against Fernanda Co as at 31 December 20X7, as accident
investigators were still trying to find out the reason for the collapse.
The investigators were assessing the responsibilities of the various parties involved, with the
report expected in February 20X8. The extent of the damage and the details of any
compensation payments to be made had not as yet been determined.
Fernanda Co felt that given the current stage of the investigation into the accident, there was
no requirement to record any liability in the consolidated financial statements as at
31 December 20X7, especially as Fernanda Co felt that any compensation payable would be
covered by insurance.
2 – Financial instruments
Put options
On 1 January 20X7, as a result of a business combination, Fernanda Co has written put
options to purchase the non-controlling interest shareholding in a newly acquired subsidiary,
Runda Co. This means that Fernanda Co would be obliged to purchase the non-controlling
interest shareholdings in the subsidiary if the put options were exercised by the noncontrolling interest shareholders. At 31 December 20X7, Fernanda Co disclosed a contingent
liability in the consolidated financial statements for the estimated cost of redeeming the put
options.
Preference shares
In addition, in order to partly fund the purchase of the subsidiary, on 1 January 20X7
Fernanda Co issued non-redeemable preference shares and recognised them as equity
instruments in the consolidated financial statements at 31 December 20X7.
The preference shareholders receive an annual fixed cash dividend of 5% and a participating
dividend which was 7% of the ordinary dividend. Fernanda Co stated that the instrument had
characteristics of equity capital as it provided for participation in the future income of the
company.
Fernanda Co concluded that compliance with IAS 32 Financial Instruments: Presentation
would be so misleading that it would conflict with the objective of financial statements set
out in the Conceptual Framework. Fernanda Co considers the classification of the preference
shares to be equity rather than a compound instrument.
3 – Financial instruments
On 31 December 20X7, Fernanda Co sold its entire holding in a subsidiary company,
Interactive Co. Fernanda Co had loaned $3 million to Interactive Co on 1 April 20X6 and this
remained outstanding after its sale.
As a result, the loan to the former subsidiary was recorded in the consolidated financial
statements at 31 December 20X7. Therefore, Fernanda Co presented the full amount of the
loan as a cash outflow in investing activities in its consolidated statement of cash flows at
that date, despite the fact that there had been no cash movement on the loan during the
period.
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Investing activities showed a cash inflow of $2 million. This was made up of the $10 million
cash received as consideration for the sale of the subsidiary, less $8 million paid to acquire
the shares in a newly acquired subsidiary, Runda Co.
Cash and cash equivalents held by Interactive Co at the date of disposal were $3 million.
Required:
(a)
Discuss the acceptability of Fernanda Co’s decision not to record any liability for the
roof collapse in the consolidated financial statements for the year ending 31 December
20X7.
(7 marks)
(b)
Discuss the acceptability of Fernanda Co’s decisions, in the consolidated financial
statements:
(c)
(i)
to disclose a contingent liability for the estimated cost of redeeming the put
options, and
(4 marks)
(ii)
to record the non-redeemable preference shares as equity rather than a
compound financial instrument.
(6 marks)
In accordance with IAS 7 Statement of Cash Flows:
•
explain the importance of and the distinction between classification of cash
flows from investing activities and cash flows from financing activities,
•
outline the circumstances where cash flows may be reported on a net basis,
and
•
discuss the issues with Fernanda Co’s treatment of the cash flows for the year
ended 31 December 20X7.
(8 marks)
(Total: 25 marks)
41
ELOA (MAR/JUN 2023)
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Background information
Eloa Co is the parent company of a group and a multinational sports clothing manufacturer.
The company is preparing its group financial statements for the year ended 31 December
20X7.
The following exhibits provide information relevant to the question:
1
Operating segments – outlines information about the various divisional activity of the
company for the year ended 31 December 20X7.
2
Divisional performance – sets out the performance of the divisions for the year ended
31 December 20X7.
3
Investment in Ganic Co – describes the relationship with two partners in setting up a
manufacturing entity.
This information should be used to answer the question requirements.
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Exhibit 1
Operating segments
Eloa Co’s equity instruments are listed. In the year ended 31 December 20X7, it operated
four divisions: Tennisgear, Badmintonwear, Squashracket and Casualwear.
Casualwear operates overseas and produces sports clothing. It sells 90% of its production to
the other three divisions of Eloa Co.
Badmintonwear and Squashracket sell the same clothing with different brand names.
Eloa Co has stated that making the specific disclosures required by IFRS 8 Operating Segments
might affect its competitive position and be misleading. Therefore, the company has
currently elected not to disclose any segment information.
The company’s chief executive officer (CEO) is the chief operating decision maker. Each
division has a manager who reports directly to the CEO and their compensation is partly
based upon the division’s results. Every quarter of the year, the CEO reviews the statement
of profit or loss and the key performance measures such as earnings before interest, tax,
depreciation and amortisation (EBITDA) for each division. The division managers meet the
CEO each quarter to review the division’s performance and compare the actual results to the
budgeted figures. The final budgets for each division are based upon performance and are
approved by the CEO.
Exhibit 2
Divisional performance
The table sets out the divisional performance for the year ended 31 December 20X7.
Division
Revenue
External
Revenue
Internal
Profit
Assets
$million
$million
$million
$million
Tennisgear
16
nil
2
15
Badmintonwear
1.6
nil
0.3
3
Squashracket
1.8
nil
0.5
4
Casualwear
1.2
10.8
3.6
20
Total
20.6
10.8
6.4
42
Exhibit 3
Investment in Ganic
On 1 January 20X7, Eloa Co has undertaken a venture with two other venturers and called
the entity Ganic Co. Ganic Co will manufacture tennis and badminton rackets and will supply
rackets to Tennisgear and Badmintonwear.
Each venturer owns equity with one-third of the voting interests which also carries rights to
the net assets. All key decisions which affect the venture are made by a unanimous vote of
the shareholders, as outlined in an agreement between the venturers. However, Eloa Co has
the option to purchase an additional 5% of Ganic Co’s equity shares from each of the other
two venturers for a fixed price at any time.
Ganic Co’s financial results are scrutinised quarterly by the CEO of Eloa Co and the other
venturers. Eloa Co’s CEO reviews the results to help make decisions about the allocation of
future resources and to determine whether to continue with the venture.
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Required:
(a)
(b)
(i)
Using exhibit 1 only, discuss, in accordance with IFRS 8 Operating Segments,
whether the four divisions owned by Eloa Co should be classified as operating
segments.
(ii)
Using exhibit 1 and 2 determine, in accordance with IFRS 8, whether:
•
the four divisions owned by Eloa Co should be identified as separate
reportable segments, and
•
whether it is necessary or possible for any of the divisions to be
combined into a single reportable segment for Eloa Co.
(9 marks)
Discuss how the investment in Ganic Co should be accounted for in the consolidated
financial statements of Eloa group and discuss whether Ganic Co can be classified as
an operating segment.
(7 marks)
Segmental reporting provides information about an entity’s operations which enables users
of financial reports to assess and make informed decisions on the true position and
performance of an entity with diversified segments.
(c)
Explain why segmental information is important to investors.
(7 marks)
Professional marks will be awarded in part (c) for clarity and quality of the explanation of
the importance of segmental information to investors.
(2 marks)
(Total: 25 marks)
42
RUBUL (SEP/DEC 2022)
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Rubul Co is a group which manufactures furniture and is currently preparing its financial
statements for the year ended 31 December 20X7.
The following exhibits, available below, provide information relevant to the question:
1
Consignment arrangement – describes the sale and despatch of garden furniture to
garden centres and its inclusion in the financial statements.
2
Provision for tax liability – describes the basis of the calculation of sales and income
tax liabilities for the current and previous years.
3
Historic exchange rate – describes the use of the historic exchange rate, which is not
updated, to translate the results of international subsidiaries.
This information should be used to answer the question requirements.
1 – Consignment arrangement
Rubul Co provides garden centres with furniture on a consignment basis. Rubul Co retains
legal title to the furniture until it is sold by the garden centre to a customer. The products are
immediately available for sale on delivery to the garden centres. The garden centre does not
have any obligation to pay Rubul Co until a sale to a customer occurs. Physical possession
remains with the garden centre unless the furniture is sold or returned to Rubul Co. Rubul Co
also retains the right to have any unsold furniture returned to them, or to transfer unsold
products to another retailer. Once the garden centre has sold the furniture, Rubul Co has no
further obligations. The garden centres then remit to Rubul Co the sales proceeds net of their
agent’s commission.
Rubul Co has decided to include the sales value of all furniture delivered to and held by
garden centres in revenue.
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2 – Provision for tax liability
Sales tax
Rubul Co has shipped and sold goods in an overseas country for ten years. Rubul Co was
under the impression that the sales in the overseas country are subject to sales tax if the
company had a physical and economic presence in the country. Rubul Co had always
understood that because it did not have a physical presence in the country, it was exempt
from sales tax. However, the tax law stated that companies were subject to sales tax if they
had a physical or economic presence. Therefore, at 31 December 20X7, Rubul Co has realised
that a liability for sales tax has existed for the previous ten years.
Rubul Co has never collected sales tax or filed sales tax returns in the overseas country.
Rubul Co has never been contacted regarding sales tax by the tax authorities in the overseas
country. Rubul Co therefore considers that the risk of detection by the taxation authorities is
very low. However, if the taxation authorities knew about Rubul Co’s activities, it is probable
that Rubul Co would be liable for uncollected sales taxes, interest and penalties.
Rubul Co considers that the tax authorities would settle for an amount less than the full
liability if full disclosure was made as it is ‘widely understood’ that the taxation authority
would look back no more than seven years to determine the amount of sales tax due. The
tax authorities can reclaim any sales tax liability from prior years.
Income tax
On 31 December 20X7, legal proceedings were started against Rubul Co by the tax authorities
in the same overseas country for unpaid income tax. Rubul Co disputes the fact that it owes
income tax as it has always paid this tax on time. Rubul Co considers that it is just coincidence
that these proceedings have commenced and does not relate to the sales tax issue. Rubul Co
considers that there is little chance of the income tax case succeeding. In any event, Rubul Co
considers that it cannot measure any potential income tax liability as in its opinion none
exists.
3 – Historic exchange rate
Rubul Co has substantial deposits in currencies other than its functional currency. It also has
a number of overseas subsidiaries where the local currency is used to prepare the financial
statements, which are then translated into the presentation currency under IAS 21 The
Effects of Changes in Foreign Exchange Rates. These countries often suffer fluctuations in
exchange rates, so Rubul Co decided to eliminate the effect of exchange rate differences and
presented financial information using a single historic fixed exchange rate for the translation
of the international subsidiaries, which is not updated between periods.
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Required:
(a)
Explain, in accordance with IFRS 15 Revenue from Contracts with Customers, how the
consignment arrangement should be dealt with in the financial statements of Rubul
Co and explain why the proposed treatment of revenue is not in accordance with
IFRS 15.
(7 marks)
(b)
Assess whether Rubul Co should create a provision in accordance with IAS 37
Provisions, Contingent Liabilities and Contingent Assets for its sales tax and income
tax liabilities in the financial statements for the year ended 31 December 20X7.
(10 marks)
(c)
Discuss:
•
the advantages for the users of the financial statements of applying a single
historic fixed exchange rate in the financial statements of Rubul Co,
•
whether this is acceptable practice under IFRS Accounting Standards, and
•
whether it would enhance the usefulness of the financial statements if the
foreign exchange gains or losses on Rubul Co’s overseas deposits were
recognised in other comprehensive income.
(8 marks)
(Total: 25 marks)
43
JUAN (SEP/DEC 2022)
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Answer debrief
Juan Co is a group of companies which operates in the energy industry. The financial year
end of the company is 31 December 20X7.
The following exhibit, available below, provides information relevant to the question:
1
Climate change issues – outlines the issues which Juan Co currently faces due to the
impact of climate change.
This information should be used to answer the question requirements.
1 – Climate change issues
Juan Co has several coal-fired power plants and is currently facing challenges dealing with
the impact of climate change. Juan Co has not considered the effect of climate change when
preparing the current financial statements.
There has been a decline in the demand for the energy from Juan Co’s coal-fired plants
because of the volume of greenhouse gases emitted by the plants. The company is
committed to meeting the expanding climate change regulations of its jurisdiction relating to
emissions. If a company does not meet the jurisdiction’s climate-related targets, then fines
are imposed by the government for this failure. Juan Co is also considering a restructure to
achieve eco-design of its products and services and to improve the energy efficiency of its
existing buildings.
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As a result, Juan Co has had to change and adapt its business activities and operations,
including increased expenditure on research and development. The company has revised its
assumptions about future profitability and cash flows based upon it cutting its emissions. If
it does not cut emissions, it will risk losing many customers.
Juan Co’s supply chains are becoming more complex and globally spread with many points of
possible failure. Juan Co has subsidiaries in regions of the world which are subject to weather
extremes and anticipates some physical harm to its property, plant and equipment because
of this. There is the likelihood that some of the power plants will require decommissioning
sooner than expected which will mean restoring the land damage. Some restoration work
may not be possible at the level required by regulatory changes.
Corporate risk is increasing due to environmental damage caused by climate change.
Investors are worried about their share value in Juan Co because of an anticipated increase
in carbon taxes and the significant costs which the company will have to incur if it is to meet
its commitments.
In the financial statements for the year ended 31 December 20X7, Juan Co has carried out
impairment tests and has not recognised an impairment loss.
Required:
Many preparers of financial statements feel that there is sufficient disclosure of climaterelated matters in the management commentary and therefore there is no need to disclose
any further information in the actual financial statements, especially if there is no impact on
those financial statements. Even though there is an acceptance that investors feel such
information is important, some preparers think that the materiality decision does not extend
to climate change as there are no mandatory IFRS standards dealing with the subject.
(a)
Discuss the validity of the above views expressed by preparers of financial
statements regarding materiality.
Note: you do not need to refer to any exhibit when answering part (a).
(b)
(5 marks)
Discuss the potential effects of climate-related matters on the financial statements
of Juan Co for the year ended 31 December 20X7 in applying the following IFRS
Accounting Standards.
(i)
IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets (6 marks)
(ii)
IAS 36 Impairment of Assets
(6 marks)
(iii)
IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
(6 marks)
Professional marks will be awarded for the overall understanding of climate-related
issues in corporate reporting.
(2 marks)
(Total: 25 marks)
Calculate your allowed time, allocate the time to the separate parts……………
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44
BOHAI (MAR/JUN 2022)
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Background
Bohai Co trades as a leisure travel group and provides travellers with unique vacations. The
financial year end of the company is 31 December 20X8.
The following exhibits, available below, provide information relevant to the question:
1
Impairment test – describes why the directors did not conduct an impairment test at
31 December 20X8.
2
Deferred tax asset – describes the accounting treatment of deferred tax assets at
1 January 20X8 and 31 December 20X8.
3
Operating leases – describes the lease and non-lease components of agreements with
third parties.
This information should be used to answer the question requirements.
Exhibit 1 – Impairment test
Bohai Co has a portfolio of global cruise brands and a fleet of over 100 ships. At 31 December
20X8, as a result of a global recession, the directors of Bohai Co assessed whether there was
any indication that its cruise ships may be impaired. The directors concluded that the ships
should be measured at their carrying amount without conducting an impairment test. The
directors had highlighted several factors which were pertinent to this conclusion:
•
The price-to-book ratio, calculated by dividing the market price per share by the
carrying amount of the net assets per share, was 0,3. The directors were happy with
this ratio as it was similar to other companies in the industry.
•
There had been no losses from the disposal of surplus ships in 20X8 which were
material in respect of the 20X8 year-end financial statements.
•
There had only been an estimated 2% drop in the market value of the fleet in
December 20X8. The directors had not engaged a qualified valuer to estimate the
market value of the fleet and this value was not based upon market transactions.
•
The cost of fuel for the ships had fallen and there was an increase in demand for
cruising after a significant reduction due to a recession.
•
Bohai Co has started negotiations with its creditors to defer payments of its debt into
20X9.
Bohai Co had ignored the fact that several companies in the industry had written down the
carrying amount of their ships during 20X8. This write down was a result of many ships,
including Bohai Co’s ships, lying idle as a result of overcapacity due to the recession. Even
though the losses from the total sale of ships in Bohai Co were not material in the financial
statements for the year ended 31 December 20X8, there were several cases where the loss
relating to the disposal of a ship was 40% of the carrying amount of the ship.
The price of a cruise had not increased in two years and therefore conservative income
estimates had been applied in future budgets because of an anticipated delay in the recovery
of the cruise market.
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Exhibit 2 – Deferred tax asset
Bohai Co applied the expected credit loss (ECL) model in accordance with IFRS 9 Financial
Instruments for the first time at 1 January 20X8. As a result, the ECL model had a negative
impact on the opening retained earnings as Bohai Co correctly applied the impairment model
retrospectively. Therefore, a deferred tax asset (DTA) was recognised of $25 million because
of increased tax losses. The recoverability of the DTA was based upon future budgets.
As at 31 December 20X8, there was a change in the ECL allowance. As a result, Bohai Co
increased the amount of DTAs assessed as recoverable from $25 million to $30 million and
recognised the increase in DTAs of $5 million in profit or loss.
Bohai Co has a subsidiary, Yuyan Co, which has a deferred tax liability of $10 million. Bohai
Co has a legally enforceable right to offset its own tax assets and liabilities but not that of its
subsidiary. The directors of Bohai Co have decided that, as Yuyan Co is located within the
same taxation jurisdiction as Bohai Co, they can offset the deferred tax asset of $30 million
against Yuyan Co’s deferred tax liability of $10 million.
Exhibit 3 – Operating leases
The business model of Bohai Co also includes the management and refurbishment of cruise
ships. Income is generated by:
(i)
leasing cruise ships on operating leases to third parties, normally for a period of five
years, and
(ii)
managing the cruise ships operations (non-lease element).
Gross revenue therefore comprises rental income and recharges of operating fees. Bohai Co
bears all costs which occur when the lessee operates the cruise ships and recharges them to
the lessee.
For some operational items such as fuel and food supplies, the lessee can enter into direct
purchase agreements with third parties at each port. The third parties bill Bohai Co directly
as Bohai Co arranges the port facility. In this specific case, Bohai Co then recharges the costs
to the lessee based on the lessee’s consumption of goods plus a management fee.
For other operating costs of the cruise ship such as engine maintenance and cleaning of the
cruise ship, these are billed at a price agreed on the date when the lease is signed.
Bohai Co concluded that it acts as a principal in all of its dealings with the lessee and recorded
all revenue gross.
Required:
(a)
Discuss whether the directors of Bohai Co were correct in not conducting an
impairment test at 31 December 20X8.
(9 marks)
(b)
In accordance with IAS 12 Income Taxes, discuss:
(c)
–
whether it is acceptable for Bohai Co to recognise the additional deferred tax
asset of $5 million in profit or loss rather than equity at 31 December 20X8,
and
–
whether the deferred tax liability of Yuyan Co of $10 million can be offset
against the deferred tax asset of $30 million of Bohai Co at the same date.
(7 marks)
Explain how Bohai Co should account for the lease and non-lease components of the
cruise ship agreements in accordance with IFRS 15 Revenue from Contracts with
Customers and IFRS 16 Leases.
(9 marks)
(Total: 25 marks)
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45
WING (MAR/JUN 2022)
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Background
Wing Co manufactures textile products and is currently assessing the impact of a global
pandemic on its operations. The financial year end of the company is 31 December 20X8.
The following exhibit, available below, provides information relevant to the question:
1
Impact of pandemic – describes the impact of the pandemic on certain aspects of
Wing Co’s business
This information should be used to answer the question requirements.
Exhibit 1 – Impact of pandemic
There are several measures taken by government and banks in the jurisdiction which Wing
Co operates in to provide relief for companies which have been negatively affected by the
pandemic. The business reduction loan scheme provides lenders with a government
guarantee of 90% on each loan to give lenders confidence in continuing to provide finance to
companies. The national bank is also buying short-term debt from companies.
Wing Co has a history of profitable operations and relies on external financing resources.
Wing Co has taken advantage of the government support measures. However, its operations
have been temporarily suspended before and after the reporting date of 31 December 20X8.
The impact of the pandemic has created circumstances which change rapidly.
The pandemic has significantly affected the global supply chain. Wing Co has several
contracts to sell goods at a fixed price. The government require a shutdown of Wing’s
manufacturing facilities, meaning that Wing cannot deliver the goods itself without first
buying them from a third party at a significantly higher cost. Normally if Wing Co terminates
the contracts, then it incurs a penalty. Exceptionally, some contracts can be cancelled without
paying compensation.
Wing Co has several investment properties which it measures at fair value in accordance with
IFRS 13 Fair Value Measurement. The pandemic has significantly affected the market price of
these properties.
The directors of Wing Co are of the opinion that the market is undervaluing its properties and
have therefore decided to disregard market prices at 31 December 20X8. The directors claim
that some of the market transactions are not representative as they are based on
transactions which are forced due to the cash flow problems of the vendors. The directors
have indicated that they would not sell their properties in the current market. There has been
a significant decrease in the volume of transactions in the property market. However, several
properties, similar to those held by Wing Co, have been sold in December 20X8.
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Required:
(a)
(b)
With regards to Wing Co’s financial statements for the year ended 31 December
20X8, discuss the impact that the pandemic and subsequent events will have on:
(i)
the assessment regarding Wing Co’s ability to remain a ‘going concern’
(5 marks)
(ii)
accounting for onerous contracts, and
(4 marks)
(iii)
fair value measurement of investment property.
(6 marks)
Discuss the nature of the information that investors of Wing Co will expect to be
disclosed in financial statements as a result of the pandemic. Candidates should
include, amongst other things, such factors as disclosure of uncertainties, events
(8 marks)
after the reporting period, government measures and covenants.
Professional marks will be awarded in part (b) for clarity and quality of discussion.
(2 marks)
(Total: 25 marks)
46
STEM (SEP/DEC 2021)
Walk in the footsteps of a top tutor
Stem Co is a manufacturing company and is considering providing cars for its senior
management. It has also entered into an agreement with two other companies to develop a
new technology through a separate legal entity, Emphasis Co. The financial year end of Stem
Co is 31 December 20X7.
Company cars
On 1 January 20X7, Stem Co is considering providing company cars for its senior management
and is comparing three options.
Option 1
The cars can be leased for a period of four years starting on 1 January 20X7. The cars have a
total market value of $75,274 on this date. The lease requires payments of $1,403 on a
monthly basis for the duration of the lease term of which $235 is a servicing charge. Stem Co
wishes to show the servicing charge as a separate line item in profit or loss.
At the end of the four-year period, there is no option to renew the lease or purchase the cars,
and there is no residual value guarantee. The interest to be charged for the year ended
31 December 20X7 is correctly calculated at $2,274 based upon the implicit interest rate in
the lease. The net present value of the lease payments over four years is $50,803 excluding
the service charge.
Option 2
The cars can be purchased for $75,274 with a 100% bank loan. The cars would be purchased
on 1 January 20X7 and held for four years. The estimated residual value is $29,753. Monthly
service costs would still be $235 per month. The loan would be repayable in four annual
instalments commencing 1 January 20X8. Assume that an average annual percentage rate on
a loan is 5%.
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Option 3
A final alternative is to lease the cars with a 12-month agreement on 1 January 20X7 with no
purchase option. The cost would be $1,900 per month in advance including servicing charge.
Stem Co would take advantage of the short-term lease exemption under IFRS 16 Leases.
Other relevant information
The profit before tax and before accounting for any of the three options for cars is likely to
be $100,000 for the year ended 31 December 20X7. Stem Co depreciates cars over a fouryear period using straight line depreciation.
Emphasis Co
On 1 January 20X7, Stem Co has contributed cash to a new legal entity, Emphasis Co, and holds
an interest of 40%. The other two companies contributing have retained equity interests of
40% and 20%, respectively. The purpose of the entity is to share risks and rewards in developing
a new technology. The holders of a 40% interest can appoint three members each to a sevenmember board of directors. All significant decisions require the unanimous consent of the
board. The holder of the 20% interest can appoint only one board member and can only
participate in the significant decisions of the entity through the board. There are no related
parties.
Stem Co contributed cash of $150,000 to Emphasis Co. The entity will use the cash invested
by Stem Co to gain access to new markets and to develop new products. At 1 January 20X7,
the carrying amount of the net assets contributed by the three companies was $310,000 but
the fair value of the net assets contributed was $470,000.
Required:
(a)
Explain, with suitable calculations, the impact of the three alternative company car
options on:
–
earnings before interest, tax, depreciation and amortisation (EBITDA)
–
profit before tax, and
–
the statement of financial position for the year ended 31 December 20X7.
Note: Candidates should refer to IFRS 16 Leases where appropriate.
(b)
(i)
(13 marks)
Discuss briefly principles of the equity method of accounting and whether it is
a more relevant measurement basis than cost or fair value of an investment in
an associate company.
Note: There is no need to refer to any exhibit when answering part (b)(i). (4 marks)
(ii)
Discuss why Stem Co’s investment in Emphasis Co should be classified as a
joint venture and how Stem Co should account for its interest at 1 January
20X7 in accordance with IAS 28 Investments in Associates and Joint Ventures.
Note: Candidates should show any relevant entries required in the accounting
records of Stem Co.
(8 marks)
(Total: 25 marks)
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47
SYMBAL (SEP/DEC 2021)
Walk in the footsteps of a top tutor
Symbal Co develops cryptocurrency funds and is a leading authority on crypto investing.
Symbal Co specialises in Initial Coin Offerings (‘ICO’) that raises funds from investors in the
form of cash or a crypto asset such as Bitcoin.
The year-end of Symbal Co is 31 March 20X7.
Development costs
The diagram below illustrates how the ICO is used by Symbal Co.
Symbal Co issues
tokens to investors
Tokens
Cash or cryptocurrency
Investor buystokens
Buy/sell tokens
% of fee from
trade of tokens
Funds used to develop trading
platform to buy and sell tokens
and fund other projects
Note: The terms token and coin mean the same and investors are often referred to as
supporters.
An ICO issues tokens to investors for cryptocurrency or cash. For each ICO, Symbal Co
establishes a separate payment platform on which the investors can trade the tokens. These
tokens do not represent an ownership interest in the entity. Symbal Co promises to produce
gains for investors from trading the tokens on the platform and in return, the company takes
a percentage of the profit as a fee.
As at 31 March 20X7, Symbal Co has incurred significant cost in promoting the issue of the
ICO tokens, and developing the trading platform for dealing with the purchase and sale of
the ICO tokens. These costs have been met from its own capital and expensed to profit or
loss. Symbal Co will earn revenue from supporting the purchase and sale of tokens.
ICO arrangements
Occasionally, Symbal Co enters into pre-sale agreements to raise funding from selected
investors prior to a public sale of tokens. Symbal Co has entered into a pre-sale agreement
with an investor which entitles the investor to a 10% discount on the price for tokens
compared to other investors at the time of the ICO. On 1 March 20X7, the investor paid
Symbal Co $1 million in cash. The issue date of the ICO is 30 April 20X7. The cash is only
refundable if the ICO is abandoned before 30 April 20X7 because the minimum funding level
of $9 million has not been achieved.
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Once the tokens are issued, ICO investors can readily convert them into cash or
cryptocurrencies on Symbal Co’s platform but they do not entitle the holder to future goods
and services from Symbal Co other than supporting the purchase and sale of tokens. The
inflows received for tokens are used by Symbal Co to fund the future development of the
payment platform and other projects.
In order to induce investment in the ICO, Symbal Co has made a commitment to the holders
of tokens to pay a single payment of 10% of any annual profit for the year ended 31 March
20X8. The holders do not have any other rights such as redemption of their tokens or any
residual interest in the assets of Symbal Co.
The ICO raised $10 million on 30 April 20X7.
Tokens granted to directors
Symbal Co sometimes does not issue all the tokens from an ICO to investors but retains
some to use to reward their employees. On 1 March 20X7, Symbal Co granted tokens to its
five directors from the issue on 30 April 20X7. The award vests on 31 March 20X7 to directors
who were in Symbal Co’s employment at 31 March 20X7. The tokens give the directors
the right to receive a car of their choice up to a value of $50,000 at any time in the
next 12 months to 31 March 20X8 if they remain as directors of Symbal Co. All five directors
were still with Symbal Co on 31 March 20X7.
Required:
(a)
Explain the principles of good disclosure which should be used to inform investors
regarding the company’s holding of crypto assets.
Note: There is no need to refer to any exhibit when answering part (a).
(6 marks)
Professional marks will be awarded in part (a) for clarity and quality of discussion.
(2 marks)
(b)
Advise whether the various development and promotional costs related to the ICO
can be accounted for as an intangible asset at 31 March 20X7.
(5 marks)
(c)
Discuss how the receipt of $1 million cash in the pre-sale agreement should be
accounted for in the financial statements for the year ended 31 March 20X7 and how
the $10 million raised in the ICO should be accounted for in the financial statements
for the year ended 31 March 20X8.
(6 marks)
(d)
Discuss why the granting of the tokens to the five directors should be accounted for
in accordance with IAS 19 Employee Benefits rather than IFRS 2 Share-based Payment
in the financial statements for the year ended 31 March 20X7.
(6 marks)
(Total: 25 marks)
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48
SITKA (MAR/JUN 2021)
Walk in the footsteps of a top tutor
Sitka Co is a software development company which operates in an industry where
technologies change rapidly. Its customers use the cloud to access the software and Sitka Co
generates revenue by charging customers for the software license and software updates. It
has recently disposed of an interest in a subsidiary, Marlett Co, and purchased a controlling
interest in Billing Co. The year end of the company is 31 December 20X7.
Software contract and updates
On 1 January 20X7, Sitka Co agreed a four-year contract with Cent Co to provide access to
licence Sitka Co’s software including customer support in the form of monthly updates to the
software. The total contract price is $3 million for both licensing the software and the
monthly updates. Sitka Co licenses the software on a stand-alone basis for between
$1 million and $2 million over a four-year period and regularly sells the monthly updates
separately for $2,5 million over the same period. The software can function on its own
without the updates. Although, the monthly updates improve its effectiveness, they are not
essential to its functionality. However, because of the rapidly changing technology in the
industry, if Cent Co does not update the software regularly, the benefits of using the software
would be significantly reduced. In the year to 31 December 20X7, Cent Co has only updated
the software on two occasions. Cent Co must access the software via the cloud and does not
own the rights to the software.
Part-disposal of Marlett Co
Sitka Co prepares separate financial statements in accordance with IAS 27 Separate Financial
Statements. At 31 December 20X6, it held a 60% controlling equity interest in Marlett Co and
accounted for Marlett Co as a subsidiary. In its separate financial statements, Sitka Co had
elected to measure its investment in Marlett Co using the equity method. On 1 July 20X7,
Sitka Co disposed of 45% of its equity interest in Marlett Co for $10 million and lost control.
At the date of disposal, the carrying amount of Marlett Co in its separate financial statements
was $12 million. After the partial disposal, Sitka Co does not have joint control of, or
significant influence over Marlett Co and its retained interest of 15% is to be treated as an
investment in an equity instrument. At 1 July 20X7, the fair value of the retained interest of
15% in Marlett Co was $3.5 million. Sitka Co wishes to recognise any profit or loss on the
disposal of the 45% interest in other comprehensive income.
Acquisition of Billing Co
Sitka Co has acquired two assets in a business combination with Billing Co. The first asset is
‘Qbooks’ which is an accounting system developed by Billing Co for use with the second asset
which is ‘Best Cloud’ software. The directors of Sitka Co believe that the fair value of the
assets is higher if valued together rather than individually. If the assets were to be sold, there
are two types of buyers that would be interested in purchasing the assets. One buyer group
would be those who operate in the same industry and have similar assets. This group of
buyers would eventually replace Qbooks with their own accounting system which would
enhance the value of their assets. The fair values of the individual assets in the industry buyer
group would be $30 million for Qbooks and $200 million for ‘Best Cloud’, therefore being
$230 million in total. Another type of buyer is the financial investor who would not have a
substitute asset for Qbooks. They would licence Qbooks for its remaining life and
commercialise the product. The indicated fair values for Qbooks and Best Cloud within the
financial investor group are $50million and $150 million, being $200 million in total.
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Required:
(a)
(i)
Discuss whether the four-year software contract with Cent Co is a single
performance obligation in accordance with IFRS 15 Revenue from Contracts
with Customers including how the revenue from the contract would be
accounted for in Sitka Co’s financial statements for the year ended
31 December 20X7. Your answer should include whether the revenue should
be recognised at a point in time or over time.
(8 marks)
(ii)
Discuss briefly why the right to receive access to Sitka Co’s software is unlikely
to be accounted for as an intangible asset or a lease in Cent Co’s financial
statements.
(4 marks)
(b)
Discuss and demonstrate how the disposal of 45% interest and the retained interest
of 15% in Marlett Co should be accounted for in the separate financial statements of
Sitka Co at the date of disposal.
(9 marks)
(c)
Discuss how the two assets acquired on the acquisition of Billing Co should be valued
in accordance IFRS 13 Fair Value Measurement.
(4 marks)
(Total: 25 marks)
49
COLAT (MAR/JUNE 2021)
Walk in the footsteps of a top tutor
Colat Co manufactures aluminium products and operates in a region that has suffered a
natural disaster on 1 November 20X7. There has been an increase in operating costs as the
company had to replace a regional supplier with a more costly international supplier. The
year-end of Colat Co is 31 December 20X7.
Non-current assets
As a result of the natural disaster, the share price of Colat Co has declined as a significant
amount of non-current assets were destroyed, including the manufacturing facility. In
addition, Colat Co has suffered reputational damage resulting in a decline in customer
demand. The non-current assets of Colat Co that were destroyed had a carrying amount of
$250 million on 31 October 20X7 and the fair value of these non-current assets was
$280 million based on an independent appraisal shortly before that date. In addition,
Colat Co determined that a power plant will have to be closed and decommissioned earlier
than previously expected. The remaining useful life of the power plant has reduced from
25 years to 8 years. Non-current assets are valued using the cost model.
Other natural disaster consequences
Environmental damage and government compensation
Colat Co has, in the past, repaired minor environmental damage that it has caused but it has
never suffered a natural disaster on this scale. There is no legal obligation for Colat Co to
repair and restore damage caused by the disaster as this will be the responsibility of the
government.
The government announced on 1 December 20X7 that there would be compensation of
$50 million available to repair the environmental damage only and that companies should
apply for the compensation by 31 December 20X7. By 1 March 20X8, when the financial
statements were approved, Colat Co had only received an acknowledgement of their
application but no approval.
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PR AC T ICE Q UE S T ION S : S E CT IO N 1
Hedge of commodity price risk in aluminium
Colat Co hedges commodity price risk in aluminium and such transactions were classified as
‘highly probable’ in accordance with IFRS 9 Financial Instruments. However, the purchases
which were considered highly probable prior to the natural disaster, are no longer expected
to occur.
Potential insurance policy proceeds
Colat Co’s insurance policy provides compensation for losses based on the fair value of noncurrent assets, any temporary relocation costs estimated at $2million and any revenue lost
during the two-month period from 1 November 20X7. At 31 December 20X7, it is unclear
which events and costs are covered by insurance policies and significant uncertainty exists as
to whether any compensation will be paid. Before the financial statements were approved,
it was probable that the insurance claim for the loss of the non-current assets would be paid
but no further information was available about other insured losses.
The insurance policy does not cover environmental damage which is the responsibility of the
government.
Required:
Investors need to understand a variety of factors when making an investment decision. The
nature of the companies in which they are looking to invest is an important consideration, as
is the need to incorporate sustainability factors into investment decisions.
(a)
Discuss why sustainability has become an important aspect of the investors’ analysis
of companies.
Note: there is no requirement to refer to any exhibit when answering part (a).
(4 marks)
Professional marks will be awarded in part (a) for clarity and quality of discussion.
(2 marks)
(b)
Discuss any events affecting Colat Co which might indicate that an impairment test
ought to be conducted in accordance with IAS 36 Impairment of Non-Current Assets.
(3 marks)
(c)
Discuss how the following should be accounted for in the financial statements for
the year ended 31 December 20X7:
(i)
the destruction of the non-current assets and decommissioning of the power
plant
(4 marks)
(ii)
the cost of repairing the environmental damage and the potential receipt of
government compensation
(4 marks)
(iii)
the hedge of the commodity price risk in aluminium, and
(4 marks)
(iv)
the potential insurance policy proceeds.
(4 marks)
(Total: 25 marks)
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50
CORBEL (SEP/DEC 2020)
Walk in the footsteps of a top tutor
Answer debrief
Corbel Co trades in the perfume sector. It has recently acquired a company for its brand
‘Jengi’, purchased two additional brand names, and has announced plans to close its Italian
stores. Corbel Co also opened a new store on a prime site in Paris. The current financial year
end is 31 December 20X7.
Acquisition of Jengi Co
On 1 January 20X7, Corbel Co acquired 100% of Jengi Co. Both companies operate in the
perfume sector. Corbel Co intends to merge the manufacture of Jengi Co’s products into its
own facilities and close Jengi Co’s manufacturing unit. Jengi Co’s brand name is well known
in the sector, retailing at premium prices, and therefore, Corbel Co will continue to sell
products under the Jengi brand name after its registration has been transferred and its
manufacturing units have been integrated. The directors of Corbel Co believe that most of
the value of Jengi Co was derived from the brand and there is no indication of the impairment
of the brand at 31 December 20X7.
Acquisition of perfume brands
In addition to now owning the Jengi Co brand, Corbel Co has acquired two other perfume
brand names to prevent rival companies acquiring them. The first perfume (Locust) has been
sold successfully for many years and has an established market. The second is a new perfume
which has been named after a famous actor (Clara) who intends to promote the product. The
directors of Corbel Co believe that the two perfume brand names have an indefinite life.
Plan to close and sell stores
Corbel Co approved and announced a plan to close and sell all six Italian stores on 31 December
20X7. The six stores will close after a liquidation sale which will last for three months.
Management has committed to a formal plan for the closure of the six stores and has also
started an active search for a single buyer for their assets. The stores are being closed
because of the increased demand generated by Corbel Co’s internet sales.
A local newspaper has written an article suggesting that up to 30 stores may be closed with
a loss of 500 jobs across the world, over the next five years. The directors of Corbel have
denied that this is the case.
Corbel Co’s primary store
Corbel Co’s primary store is located in central Paris. It has only recently been opened at a
significant cost with the result that management believes it will make a loss in the current
financial year to 31 December 20X7. This loss‑making is not of concern as the performance is
consistent with expectations for such a new and expensive store and management believes
that the new store will have a positive effect on Corbel Co’s brand image.
If impairment testing of the primary store were to be required, then Corbel Co would include
the cash flows from all internet sales in this assessment. The goods sold via the internet are
sourced from either Corbel Co’s central distribution centre or individual stores. Internet sales
are either delivered to the customer’s home or collected by the customer from the store
supplying the goods.
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PR AC T ICE Q UE S T ION S : S E CT IO N 1
Required:
(a)
Describe the main challenges in recognising and measuring intangible assets, such as
brands, in the statement of financial position.
(5 marks)
(b)
Discuss the following accounting issues relating to Corbel Co’s financial statements
for the year ended 31 December 20X7 in accordance with IFRS Accounting Standards:
(i)
whether the Jengi Co brand name will be accounted for separately from
goodwill on acquisition and whether it should be accounted for as a separate
cash generating unit after the integration of the manufacturing units
(4 marks)
(ii)
how to account for intangible assets with an indefinite life and whether the
Locust and Clara perfume brand names can be regarded as having an indefinite
life
(6 marks)
(iii)
how to account for the proposed closure of the six stores and the suggested
closure of the remaining stores, and
(6 marks)
(iv)
whether the primary store should be tested for impairment at 31 December
20X7 and whether the internet sales can be attributed to this store. (4 marks)
(Total: 25 marks)
Calculate your allowed time, allocate the time to the separate parts……………
51
HANDFOOD (SEP/DEC 2020)
Walk in the footsteps of a top tutor
Handfood Co is a small and medium‑sized enterprise (SME) which has introduced a benefit
to encourage employees to remain with the entity. The company’s financial year end is
31 December and it prepares its financial statements using IFRS Accounting Standards but is
interested in the differences with the SMEs Standard. Handfood Co is also environmentally
conscious and the directors require further information regarding the IFRS Sustainability
Disclosure Standards.
SMEs
It can be argued that small and medium‑sized enterprises (SMEs) face financing difficulties
because there is serious information asymmetry between SMEs and investors. Information
asymmetry, in the context of SMEs, means that the SME has access to relevant information,
while the investor suffers from a lack of relevant information. It can be argued that the SMEs
Standard decreases information asymmetry between the entity and investors.
Sustainability reporting
Handfood Co is aware of the increasing importance of sustainability reporting for SMEs and
has several key investors who are keen to learn more about how Handfood Co manages
sustainability related risks and opportunities. The directors of Handfood Co would like more
information on the IFRS Sustainability Standards to help them decide whether Handfood Co
should be applying these standards. Specifically, the directors want to understand the
objectives and scope of the standards.
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Employee benefit
On 1 January 20X2, Handfood Co introduced a benefit to encourage employees to remain in
its employment for at least five years. Handfood Co has promised its employees a lump‑sum
benefit, payable on 1 January 20X7, which is equal to 1% of their salary at 31 December 20X6,
provided they remain employed until that date.
The current salaries of employees on 1 January 20X2 are $1.1 million per annum. The
directors of Handfood Co have used the following assumptions:
•
Salaries for year ended 31 December 20X2 will remain at $1.1 million.
•
Salaries should increase by 3% each year from 1 January 20X3.
•
There is a 75% probability that all employees will still be employed by Handfood Co at
31 December 20X6.
The discount rate is 5% per year.
Handfood Co recognises actuarial gains and losses in other comprehensive income. Interest
is recognised by Handfood Co on an annual basis. Handfood Co uses the projected unit credit
method to measure its benefit obligations which means that the current service cost is the
increase in the present value of the future benefit liabilities. The benefit will be payable from
the balance on Handfood Co’s business bank account at 1 January 20X7.
Present value factors
Periods (years)
4
5
5%
0.823
0.784
Required:
(a)
(i)
Discuss the nature of the SMEs Standard and the principal differences between
the SMEs Standard and full IFRS Accounting Standards.
(4 marks)
(ii)
Discuss the effect that information asymmetry can have on the decision to
invest in SMEs.
(4 marks)
Professional marks will be awarded in part (a) for clarity and quality of discussion.
(2 marks)
(b)
Outline the information requested by the directors regarding sustainability reporting.
(5 marks)
(c)
(i)
Discuss, with suitable calculations, the principles of how Handfood Co should
account for the current service cost of its employee benefit for the year ended
31 December 20X2.
(6 marks)
(ii)
Discuss the impact on the additional employee benefit for the year ended
31 December 20X3 if Handfood Co were to take into account the following
changes in assumptions:
•
an increase in employees’ salaries above 3% per annum, and
•
a decrease in the probability of employees leaving the company.
Note: there is no need to provide any calculations in your answer to (b) (ii).
(4 marks)
(Total: 25 marks)
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52
LERIA (MAR 2020)
Walk in the footsteps of a top tutor
Background
Leria Co is an internationally successful football club. Leria Co is preparing the financial
statements for the year ending 31 October 20X5 but is currently facing liquidity problems.
Stadium sale/leaseback and improvements
Leria Co has entered into a contract regarding its stadium whereby it will sell the stadium on
30 November 20X6 and immediately lease it back. The directors of Leria Co wish to classify
the stadium as a non-current asset ‘held for sale’ in its financial statements for the year ended
31 October 20X5 as they believe the sale to be highly probable at that date. The sale contract
requires the disposal of the stadium for its fair value (market value) of $30 million and for
Leria Co to lease it back over 10 years. The present value of the lease payments at market
rates on 30 November 20X6 will be $26 million. The market value for a stadium of this type
has not changed in several years and is unlikely to change in the near future. The stadium is
being depreciated by 5% per annum using the reducing balance method.
In the year to 31 October 20X6, it is anticipated that $2 million will be spent to improve the
crowd barriers in the stadium. There is no legal requirement to improve the crowd barriers.
Leria Co has incorrectly treated this amount as a reduction of the asset’s carrying amount at
31 October 20X5 and the corresponding debit has been made to profit or loss. At 31 October
20X5, the carrying amount of the stadium, after depreciation and deduction of the crowd
barrier improvements, is $18 million.
Television programme content rights
Leria Co has its own subscription-based television station. As a result, it has material
intangible assets which relate to the content rights associated with the television
programmes. The budgeted costs of production are based on the estimated future revenues
for the television programme. These costs of production are then capitalised as an intangible
asset and called ‘contents rights’. The directors of Leria Co believe that the intellectual
property in the content rights is consumed as customers view the television programmes.
Consequently, Leria Co currently amortises the content rights based upon estimated future
revenues from the television programme. For example, if a television programme is expected
to generate $8 million of revenue in total and $4 million of that revenue is generated in
year 1, then the intangible asset will be amortised by 50% in year 1. However, the industry
practice is to amortise the capitalised cost of the programme, less its recoverable amount,
over its remaining useful life.
Players’ contract costs
Players’ registration contract costs are shown as intangible assets and are initially recognised
at the fair value of the consideration paid for their acquisition. However, subsequently,
players’ contracts are often re-negotiated at a cost. Also, players’ contracts may contain
contingent performance conditions where individual players may be paid a bonus based on
their success in terms of goals scored or the success of the football team as a whole. These
bonuses represent additional contract costs.
For impairment purposes, Leria Co does not consider that it is possible to determine the
value-in-use of an individual player unless the player were to suffer a career threatening
injury and cannot play in the team. Players only generate direct cash flows when they are
sold to another football club.
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Required:
(a)
(b)
Discuss with reference to IFRS Accounting Standards:
(i)
whether the directors can classify the stadium as held for sale at 31 October
20X5
(ii)
Leria Co’s accounting treatment of the crowd barrier improvements at
31 October 20X5, and
(iii)
the principles of the accounting treatment for the sale and leaseback of the
stadium at 30 November 20X6.
(13 marks)
Discuss:
(i)
whether the amortisation of the intangible assets relating to television
programme content rights by Leria Co and by the industry are acceptable
policies in accordance with IFRS Accounting Standards, and
(ii)
how to account for the players’ contract costs (including the contingent
performance conditions), any impairment which might be required to these
non-current assets and whether a player can be considered a single cash
generating unit.
(12 marks)
(Total: 25 marks)
53
ECOMA (MAR 2020)
(a)
Walk in the footsteps of a top tutor
Sustainability
There is a global trend towards more extensive and more meaningful narrative
reporting. Improvements in the quality and scope of this reporting are driven by
regulatory demands as well as market demands for transparency. Many investors now
adhere to ‘sustainable investing’, an approach to investment where environmental,
social or governance (ESG) factors, in combination with financial considerations, guide
the selection and management of investments.
Required:
Discuss why the disclosure of sustainable information has become an important and
influential consideration for investors.
(8 marks)
(b)
Background
The directors of Ecoma Co consider environmental, social and governance issues to be
extremely important in a wide range of areas, including new product development,
reputation building and overall corporate strategy. The company is taking a proactive
approach to managing sustainability and is actively seeking opportunities to invest in
sustainable projects and embed them in their business practices. The company’s
financial year end is 30 September 20X5.
Head office
Ecoma Co is committed to a plan to move its head office to a building which has an
energy efficient green roof that acts as a natural temperature controller. The move
from the current head office, which is leased, will take place at the company’s year end
of 30 September 20X5. The new green roof building requires less maintenance than a
conventional building and produces oxygen which offsets Ecoma Co’s CO2 emissions.
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The directors of Ecoma Co believe that the green roof building will save the company
$2 million per annum over the useful life of the building. However, over the next two
years, it anticipates that the disruption of the move will cause the company to make a
loss of $10 million per annum. The company wishes to make a provision of $16 million
which comprises the loss to be incurred over the next two years net of the saving
created by the green roof.
Meanwhile, the company will have to vacate its currently leased head office building.
At 30 September 20X5, the lease has two years to run with rentals payable in advance
on 1 October each year.
The pre-tax discount rate is 5%.
Defined benefit pension scheme
Ecoma Co is worried that the poor remuneration package offered to employees is
putting the company at risk of reputational damage. Consequently, Ecoma Co changed
its pension scheme on 30 September 20X5 to include all of its staff. The benefits accrue
from the date of their employment but only vest after two years additional service
from 30 September 20X5. The net pension obligation at 30 September 20X5 of
$78 million has been updated to include this change. During the year, benefits of
$6 million were paid under the scheme and Ecoma Co contributed $10 million to the
scheme. These payments had been recorded in the financial statements but no other
entries for the year have been made. The following information relates to the pension
scheme:
Net pension obligation at 30 September 20X5
Net pension obligation at 30 September 20X4
Current service cost for year
Past service cost relating to scheme amendment at 30 September 20X5
Discount rate at 30 September 20X4
Discount rate at 30 September 20X5
$78m
$59m
$18m
$9m
5.5%
5.9%
Required:
(i)
In accordance with relevant IFRS Accounting Standards, discuss how the $16 million
provision associated with Ecoma Co’s move to a new head office and the vacation of
its old head office should be accounted for.
(6 marks)
(ii)
Advise Ecoma Co on the principles of accounting for the pension scheme, including
calculations, for the year to 30 September 20X5.
(7 marks)
(iii)
Calculate the impact which the above adjustments in (b) (ii) will have on profit before
tax of $25 million for the year ended 30 September 20X5. Ignore potential tax
(2 marks)
implications.
Professional marks will be awarded in part (a) for clarity and quality of discussion.
(2 marks)
(Total: 25 marks)
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54
DIGIWIRE (SEP/DEC 2019)
Walk in the footsteps of a top tutor
Digiwire Co has developed a new business model whereby it sells music licences to other
companies which then deliver digital music to consumers.
Revenue: sale of three-year licence
Digiwire Co has agreed to sell Clamusic Co, an unlisted technology start-up company, a threeyear licence to sell Digiwire Co’s catalogue of classical music to the public. This catalogue
contains a large selection of classical music which Digiwire Co will regularly update over the
three-year period.
As payment for the three-year licence, Clamusic Co has issued shares to Digiwire Co
equivalent to a 7% shareholding. Voting rights are attached to these shares. Digiwire Co
received the shares in Clamusic Co on 1 January 20X6, which is the first day of the licence
term.
Digiwire Co will also receive a royalty of 5% of future sales of Clamusic Co as additional
revenue for the licence.
Clamusic Co valuation and revenue
On 1 January 20X6, Clamusic Co was valued at between $4–$5 million by a professional valuer
who used a market-based approach. The valuation was based on the share price of a
controlling interest in a comparable listed company.
For the financial year end of 31 December 20X6, sales of the classical music were $1 million.
At 31 December 20X6, a further share valuation report had been produced by the same
professional valuer which indicated that Clamusic Co was valued in the region of
$6–$7 million.
Investment in FourDee Co
Digiwire Co has agreed to work with TechGame Co to develop a new music platform. On
31 December 20X6, the companies created a new entity, FourDee Co, with equal
shareholdings and shares in profit. Digiwire Co has contributed its own intellectual property
in the form of employee expertise, cryptocurrency with a carrying amount of $3 million (fair
value of $4 million) and an office building with a carrying amount of $6 million (fair value of
$10 million). The cryptocurrency has been recorded at cost in Digiwire Co’s financial
statements. TechGame Co has contributed the technology and marketing expertise. The
board of FourDee Co will comprise directors appointed equally by Digiwire Co and TechGame
Co. Decisions are made by a unanimous vote.
Pension plan
Digiwire Co provides a defined benefit pension plan for its employees. From 1 September
20X6, Digiwire Co decided to curtail the plan and to limit the number of participants. The
monthly service cost calculated using assumptions at the start of the year is $9 million.
The monthly service cost calculated using assumptions at 1 September 20X6 is $6 million.
The relevant financial information relating to the plan is as follows:
Date
1 January 20X6
1 September 20X6
31 December 20X6
10 8
Net deficit
$m
30
36
39
Discount rate
%
3
3.5
3.7
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PR AC T ICE Q UE S T ION S : S E CT IO N 1
Required:
(a)
(b)
(c)
Advise the directors of Digiwire Co on the recognition and measurement of the:
(i)
Clamusic Co shares received as revenue for the sale of the three-year licence
and how they should be accounted for in the financial statements for the year
ended 31 December 20X6, and
(ii)
royalties which Clamusic Co has agreed to pay in respect of the three-year
licence in the financial statements for the year ended 31 December 20X6. Your
answer to (a) (ii) should demonstrate how recognition and measurement of
the royalties is supported by the Conceptual Framework for Financial
Reporting.
(10 marks)
Based on International Financial Reporting Standards, advise the directors on the
following:
(i)
the classification of the investment which Digiwire Co has in FourDee Co
(ii)
the derecognition of the assets exchanged for the investment in FourDee Co
and any resulting gain/loss on disposal in the financial statements of Digiwire
Co at 31 December 20X6, and
(iii)
whether the cryptocurrency should be classified as a financial asset or an
intangible asset. Your answer should also briefly consider whether fair value
movements on the cryptocurrency should be recorded in profit or loss.
(10 marks)
Discuss the accounting repercussions of the pension plan curtailment, including a
calculation of the net interest component and current service cost for the year ended
31 December 20X6.
(5 marks)
(Total: 25 marks)
55
GUIDANCE (SEP/DEC 2019)
Walk in the footsteps of a top tutor
Guidance Co is considering the financial results for the year ended 31 December 20X6. The
industry places great reliance on the return on equity (ROE) as an indicator of how well a
company uses shareholders’ funds to generate a profit.
Return on equity (ROE)
Guidance Co analyses ROE in order to understand the fundamental drivers of value creation
in the company. ROE is calculated as:
Return on equity =
Net profit before tax
Sales
Assets
×
×
Sales
Assets Equity
Guidance Co uses year-end equity and assets to calculate ROE.
The following information relates to Guidance Co for the last two years:
Net profit before tax
Sales
Assets at 31 December
Equity at 31 December
KA PL AN P U BLI SH IN G
20X5
$m
30
200
250
175
20X6
$m
38
220
210
100
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Special purpose entity (SPE)
During the year ended 31 December 20X6, Guidance Co stated that it had reorganised its
assets and set up a SPE. Guidance Co transferred property to the SPE at its carrying amount
of $50 million, but had incorrectly charged revaluation reserves with this amount rather than
showing the transfer as an investment in the SPE. The property was the SPE’s only asset.
However, Guidance Co still managed the property, and any profit or loss relating to the assets
of the entity was remitted directly to Guidance Co. Guidance Co had no intention of
consolidating the SPE.
Miscellaneous transactions
Guidance Co has bought back 25 million shares of $1 for $1.20 per share during the year
ended 31 December 20X6 for cash and cancelled the shares. This transaction was deemed to
be legal.
Guidance Co purchased a 25% interest in an associate company on 1 July 20X6 for cash. The
investment had cost $15 million and the associate had made profits of $32 million in the year
to 31 December 20X6. Guidance Co accounted for the purchase of the associate correctly.
These miscellaneous transactions have been accounted for in the financial information
provided for the year ended 31 December 20X6.
(a)
Management’s intent and motivation will often influence accounting information.
However, corporate financial statements necessarily depend on estimates and
judgement. Financial statements are intended to be comparable but their analysis may
not be the most accurate way to judge the performance of any particular company.
This lack of comparability may be due to different accounting policy choices or
deliberate manipulation.
Required:
Discuss the reasons why an entity may choose a particular accounting policy where
an IFRS Standard allows an accounting policy choice and whether faithful
representation and comparability are affected by such choices.
(6 marks)
(b)
(i)
Discuss the usefulness to investors of the ROE ratio and its component parts
provided above and calculate these ratios for the years ended 31 December
20X5 and 20X6. These calculations should be based upon the information
provided in table 1.
(5 marks)
(ii)
Discuss the impact that the setting up of the SPE and miscellaneous
transactions have had on ROE and its component parts. Given these
considerations, adjust table 1 and recalculate the ROE for 20X6 thereby
making it more comparable to the ROE of 20X5.
(12 marks)
Professional marks will be awarded in part (b) for clarity and quality of discussion.
(2 marks)
(Total: 25 marks)
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PR AC T ICE Q UE S T ION S : S E CT IO N 1
56
CRYPTO (MAR/JUN 2019)
(a)
(i)
Walk in the footsteps of a top tutor
Crypto operates in the power industry, and owns 45% of the voting shares in
Kurran. Kurran has four other investors which own the remaining 55% of its
voting shares and are all technology companies. The largest of these holdings is
18%. Kurran is a property developer and purchases property for its renovation
potential and subsequent disposal. Crypto has no expertise in this area and is
not involved in the renovation or disposal of the property.
The board of directors of Kurran makes all of the major decisions but Crypto can
nominate up to four of the eight board members. Each of the remaining four
board members are nominated by each of the other investors. Any major
decisions require all board members to vote and for there to be a clear majority.
Thus, Crypto has effectively the power of veto on any major decision. There is
no shareholder agreement as to how Kurran should be operated or who will
make the operating decisions for Kurran. The directors of Crypto believe that
Crypto has joint control over Kurran because it is the major shareholder and
holds the power of veto over major decisions.
The directors of Crypto would like advice as to whether or not they should
account for Kurran under IFRS 11 Joint Arrangements.
(6 marks)
(ii)
On 1 April 20X7, Crypto purchased bonds in Eptruck for $20 million from an
unconnected, third-party investor. The five-year bonds were originally issued on
1 April 20X6 for $30 million and had an effective interest rate of 15%. However,
in September 20X6, Eptruck indicated that it would be unable to fulfil any annual
contractual interest repayments and would offer a substantially reduced
premium to bond holders on redemption.
On 1 April 20X7, Crypto calculated a credit-adjusted effective interest rate based
on expected future cash flows associated with the bonds to be 4%. At 31 March
20X8 the increase in lifetime expected credit losses since 1 April 20X7 was
calculated to be $0.3 million.
The directors of Crypto would like advice on the accounting treatment of the
financial asset in Crypto’s financial statements for the year ended 31 March
20X8 under IFRS 9 Financial Instruments.
(4 marks)
(iii)
Crypto was invited to tender for a major contract with a multinational company.
The tender was successful. Crypto incurred the following costs on the tender:
External fees incurred on customer research
Internal staff costs of preparing tender
Travel and accommodation costs to deliver tender
Commission paid to sales staff for winning the tender
$000
50
30
3
70
The above costs cannot be recharged to the customer.
The financial controller is unsure whether these costs can be recognised as an
asset in Crypto’s statement of financial position in accordance with IFRS 15
Revenue from Contracts with Customers.
(4 marks)
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Required:
Advise the directors of Crypto as to how the above issues should be accounted for,
with reference to relevant IFRS Accounting Standards.
Note: The split of the mark allocation is shown against each of the three issues above.
(b)
The directors of Crypto have prepared forecasts for the next five years and have been
assessing how to finance their expansion plans. The directors propose to raise the
required funds on 1 April 20X8 in one of the following ways:
(i)
The issue of 5 million ordinary shares
(ii)
The issue of 10 million convertible bonds in exchange for cash proceeds. Interest
is payable annually in arrears. The bondholders will be able to redeem the bonds
on 31 March 20X6 in the form of cash or a fixed number of Crypto’s ordinary
shares.
The directors are unsure of the impact of the proposals on the financial statements.
Required:
Discuss the impact of the above proposals on the financial statements of Crypto.
Your answer should consider the potential impact on basic and diluted earnings per
share and on the primary users’ perception of Crypto’s financial performance and
position.
(9 marks)
Professional marks will be awarded in part (b) for clarity and quality of presentation.
(2 marks)
(Total: 25 marks)
57
ZEDTECH (MAR/JUN 2019)
(a)
Zedtech is a software development company, listed on a local stock exchange, which
provides data hosting and other professional services. As part of these services,
Zedtech also securely hosts a range of inventory management software online which
allows businesses to manage inventory from anywhere in the world. It also sells
hardware in certain circumstances.
Zedtech sells two distinct software packages. The first package, named 0inventory,
gives the customer the option to buy the hardware, professional services and hosting
services as separate and distinct contracts. Each element of the package can be
purchased without affecting the performance of any other element. Zedtech regularly
sells each service separately and generally does not integrate the goods and services
into a single contract.
With the second package, InventoryX, the hardware is always sold along with the
professional and hosting services and the customer cannot use the hardware on its
own. The hardware is integral to the delivery of the hosted software. Zedtech delivers
the hardware first, followed by professional services and finally, the hosting services.
However, the professional services can be sold on a stand-alone basis as this is a
distinct service which Zedtech can offer any customer.
Zedtech has decided to sell its services in a new region of the world which is suffering
an economic downturn. The entity expects the economy to recover and feels that
there is scope for significant growth in future years. Zedtech has entered into an
arrangement with a customer in this region for promised consideration of $3 million.
At contract inception, Zedtech feels that it may not be able to collect the full amount
from the customer and estimates that it may collect 80% of the consideration.
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PR AC T ICE Q UE S T ION S : S E CT IO N 1
Required:
(i)
Discuss the principles in IFRS 15 Revenue from Contracts with Customers which
should be used by Zedtech to determine the recognition of the above
contracts.
(5 marks)
(ii)
Discuss how the above contracts should be recognised in the financial
(7 marks)
statements of Zedtech under IFRS 15.
The directors of Zedtech have heard through industry forums and think-tanks that
sustainability reporting is becoming a primary focus for the executives within Zedtech’s
industry. Zedtech’s management are keen to promote the ways that Zedtech positions
sustainability at the core of its operations.
(b)
Discuss the specific factors that Zedtech must consider to ensure they operate in a
sustainable fashion and how sustainability reporting could be important to Zedtech’s
management and stakeholders.
(8 marks)
Zedtech has a reporting date of 31 December 20X1. On the reporting date, it enters
into a 5-year lease agreement to hire a new server to improve software performance
and deal with increased data storage requirements. The present value of the lease
payments to be made is $15 million. Lease rentals are paid in advance and the first
$4m has already been paid. In Zedtech’s tax jurisdiction, tax relief on leases is given in
respect of the lease liability as payments are made. The tax rate is 20%.
(c)
Explain the deferred tax implications caused by the lease arrangement entered into
by Zedtech.
(5 marks)
(Total: 25 marks)
58
FILL (DEC 2018)
(a)
Fill is a coal mining company and sells its coal on the spot and futures markets. On the
spot market, the commodity is traded for immediate delivery and, on the forward
market, the commodity is traded for future delivery. The inventory is divided into
different grades of coal. One of the categories included in inventories at 30 November
20X6 is coal with a low carbon content which is of a low quality. Fill will not process
this low quality coal until all of the other coal has been extracted from the mine, which
is likely to be in three years’ time. Based on market information, Fill has calculated that
the three-year forecast price of coal will be 20% lower than the current spot price.
The directors of Fill would like advice on two matters:
(b)
(i)
whether the Conceptual Framework affects the valuation of inventories
(ii)
how to calculate the net realisable value of the coal inventory, including the low
quality coal.
(7 marks)
At 30 November 20X6, the directors of Fill estimate that a piece of mining equipment
needs to be reconditioned every two years. They estimate that these costs will amount
to $2 million for parts and $1 million for the labour cost of their own employees. The
directors are proposing to create a provision for the next reconditioning which is due
in two years’ time in 20X8, along with essential maintenance costs. There is no legal
obligation to maintain the mining equipment.
As explained above, it is expected that there will be future reductions in the selling
prices of coal which will affect the forward contracts being signed over the next two
years by Fill.
The directors of Fill require advice on how to treat the reconditioning costs and
(8 marks)
whether the decline in the price of coal is an impairment indicator.
KA PL AN P U BLI SH IN G
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(c)
Fill jointly controls coal mines with other entities. The Theta mine was purchased by
three participants during the year. Fill owns 40%, and the other two participants own
35% and 25% of the mine. The operating agreement requires any major decisions to
be approved by parties representing 72% of the interest in the mine.
The directors of Fill wish advice on whether the Conceptual Framework will affect the
decision as to whether Fill controls the mine.
The directors are also wondering whether the acquisition of the 40% interest would
be considered a business combination under IFRS Accounting Standards. (10 marks)
Required:
Advise the directors of Fill on how the above transactions should be dealt with in its
financial statements with reference to relevant IFRS Accounting Standards and the
Conceptual Framework.
Note: The split of the mark allocation is shown against each of the three issues above.
(Total: 25 marks)
59
HOLLS (DEC 2018)
(a)
Walk in the footsteps of a top tutor
The IFRS Practice Statement Management Commentary provides a broad, non-binding
framework for the presentation of management commentary which relates to
financial statements which have been prepared in accordance with IFRS Accounting
Standards. The management commentary is within the scope of the Conceptual
Framework and, therefore, the qualitative characteristics will be applied to both the
financial statements and the management commentary.
Required:
(b)
(i)
Discuss briefly the arguments for and against issuing the IFRS Practice
Statement Management Commentary as a non-binding framework or as an
IFRS Standard.
(4 marks)
(ii)
Discuss how the qualitative characteristics of understandability, relevance and
comparability should be applied to the preparation of the management
commentary.
(5 marks)
Holls Group is preparing its financial statements for the year ended 30 November 20X7.
The directors of Holls have been asked by an investor to explain the accounting for
taxation in the financial statements.
The Group operates in several tax jurisdictions and is subject to annual tax audits which
can result in amendments to the amount of tax to be paid.
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PR AC T ICE Q UE S T ION S : S E CT IO N 1
The profit from continuing operations was $300 million in the year to 30 November
20X7 and the reported tax charge was $87 million. The investor was confused as to
why the tax charge was not the tax rate multiplied by the profit from continuing
operations. The directors have prepared a reconciliation of the notional tax charge on
profits as compared with the actual tax charge for the period.
Profit from continuing operations before taxation
Notional charge at local corporation tax rate of 22%
Differences in overseas tax rates
Tax relating to non-taxable gains on disposals of businesses
Tax relating to the impairment of brands
Other tax adjustments
Tax charge for the year
$ million
300
––––
66
10
(12)
9
14
––––
87
––––
The amount of income taxes paid as shown in the statement of cash flows is $95 million
but there is no current explanation of the tax effects of the above items in the financial
statements.
The tax rate applicable to Holls for the year ended 30 November 20X7 is 22%. There is a
proposal in the local tax legislation that a new tax rate of 25% will apply from 1 January
20X8. In the country where Holls is domiciled, tax laws and rate changes are enacted
when the government approves the legislation. The government approved the
legislation on 12 November 20X7. The current weighted average tax rate for the Group
is 27%. Holls does not currently disclose its opinion of how the tax rate may alter in the
future but the government is likely to change with the result that a new government will
almost certainly increase the corporate tax rate.
At 30 November 20X7, Holls has deductible temporary differences of $4.5 million
which are expected to reverse in the next year. In addition, Holls also has taxable
temporary differences of $5 million which relate to the same taxable company and the
tax authority. Holls expects $3 million of those taxable temporary differences to
reverse in 20X8 and the remaining $2 million to reverse in 20X9. Prior to the current
year, Holls had made significant losses.
Required:
With reference to the above information, explain to the investor, the nature of
accounting for taxation in financial statements.
Note: Your answer should explain the tax reconciliation, discuss the implications of
current and future tax rates, and provide an explanation of accounting for deferred
taxation in accordance with relevant IFRS Accounting Standards.
(14 marks)
Professional marks will be awarded in part (b) for clarity and quality of discussion.
(2 marks)
(Total: 25 marks)
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60
SKIZER (SEP 2018)
(a)
Walk in the footsteps of a top tutor
Skizer Group (Skizer), a listed entity, is a pharmaceutical company which develops new
products with other pharmaceutical companies that have the appropriate production
facilities and prepares its financial statements using IFRS Accounting Standards.
Stakes in development projects
When Skizer acquires a stake in a development project, it makes an initial payment to
the other pharmaceutical company. It then makes a series of further stage payments
until the product development is complete and it has been approved by the
authorities. In the financial statements for the year ended 31 August 20X7, Skizer has
treated the different stakes in the development projects as separate intangible assets
because of the anticipated future economic benefits related to Skizer’s ownership of
the product rights. However, in the year to 31 August 20X8, the directors of Skizer
decided that all such intangible assets were to be expensed as research and
development costs as they were unsure as to whether the payments should have been
initially recognised as intangible assets. This write off was to be treated as a change in
an accounting estimate.
Sale of development project
On 1 September 20X6, Skizer acquired a development project as part of a business
combination and correctly recognised the project as an intangible asset. However, in
the financial statements to 31 August 20X7, Skizer recognised an impairment loss for
the full amount of the intangible asset because of the uncertainties surrounding the
completion of the project. During the year ended 31 August 20X8, the directors of
Skizer judged that it could not complete the project on its own and could not find a
suitable entity to jointly develop it. Thus, Skizer decided to sell the project, including
all rights to future development. Skizer succeeded in selling the project and, as the
project had a nil carrying value, it treated the sale proceeds as revenue in the financial
statements. The directors of Skizer argued that IFRS 15 Revenue from Contracts with
Customers states that revenue should be recognised when control is passed at a point
in time. The directors of Skizer argued that the sale of the rights was part of their
business model and that control of the project had passed to the purchaser.
Required:
11 6
(i)
Outline the criteria in IAS 38 Intangible Assets for the recognition of an
intangible asset and discuss whether these are consistent with the Conceptual
Framework.
(5 marks)
(ii)
Discuss the implications for Skizer’s financial statements for both the years
ended 31 August 20X7 and 20X8 if the recognition criteria in IAS 38 for an
intangible asset were met as regards the stakes in the development projects
above. Your answer should also briefly consider the implications if the
recognition criteria were not met.
(5 marks)
(iii)
Discuss whether the proceeds of the sale of the development project above
should be treated as revenue in the financial statements for the year ended
31 August 20X8.
(4 marks)
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PR AC T ICE Q UE S T ION S : S E CT IO N 1
(b)
External disclosure of information on intangibles is useful only insofar as it is
understood and is relevant to investors. It appears that investors are increasingly
interested in and understand disclosures relating to intangibles. A concern is that, due
to the nature of IFRS disclosure requirements, investors may feel that the information
disclosed has limited usefulness, thereby making comparisons between companies
difficult. Many companies spend a huge amount of capital on intangible investment,
which is mainly developed within the company and thus may not be reported. Often,
it is not obvious that intangibles can be valued or even separately identified for
accounting purposes.
Required:
Discuss the potential issues which investors may have with:
(c)
–
accounting for the different types of intangible asset acquired in a business
combination
–
the choice of accounting policy of cost or revaluation models, allowed under
IAS 38 Intangible Assets for intangible assets
–
the capitalisation of development expenditure.
(7 marks)
Skizer acquired 80% of the shares in Deeze, a private company, during the period.
Skizer correctly treating the investment as a subsidiary in the group financial
statements. Deeze currently prepares its financial statements under local GAAP. Skizer
would prefer Deeze to prepare its financial statements under IFRS Accounting
standards in order to simplify the consolidation process. However, Deeze is reluctant
to change its reporting standards due to concerns over the extent of the disclosures
required under IFRS reporting. If Deeze does apply IFRS Accounting Standards, Skizer
believes that Deeze may be able to apply IFRS 19 Subsidiaries without Public
Accountability: Disclosures.
Explain whether Deeze can apply the reduced disclosure requirements under IFRS 19
Subsidiaries without Public Accountability: Disclosures and briefly explain the
benefits to Deeze of applying IFRS 19.
(4 marks)
(Total: 25 marks)
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61
TOOBASCO (SEP 2018)
Walk in the footsteps of a top tutor
Sharrocliffe Financial Services Co (Sharrocliffe) offers IFRS accounting compliance advice and
consultancy services to a range of clients. Two separate clients have approached Sharrocliffe
for advice as outlined in the exhibits below:
Exhibit 1 Toobasco
Toobasco operates in the retail industry. In the reporting of financial information, the
directors have disclosed several alternative performance measures (APMs), other than those
defined or specified under International Financial Reporting Standards. The directors have
disclosed the following APMs:
(i)
‘Operating profit before extraordinary items’ is often used as the headline measure of
the Group’s performance, is published in external marketing communications and is
based on operating profit before the impact of extraordinary items. Extraordinary
items relate to certain costs or incomes which are excluded by virtue of their size and
are deemed to be non-recurring. Toobasco has included restructuring costs and
impairment losses in extraordinary items. Both items had appeared at similar amounts
in the financial statements of the two previous years and were likely to occur in future
years.
(ii)
‘Operating free cash flow’ is calculated as cash from operating activities before income
taxes less purchase of property, plant and equipment, purchase of own shares, and
the purchase of intangible assets. The directors have described this figure as
representing the residual cash flow in the business but have given no detail of its
calculation. They have emphasised its importance to the success of the business. They
have also shown free cash flow per share in bold next to earnings per share in order to
emphasise the entity’s ability to turn its earnings into cash.
(iii)
‘EBITDAR’ is defined as earnings before interest, tax, depreciation, amortisation and
rent. EBITDAR uses operating profit as the underlying earnings. In an earnings release,
just prior to the financial year end, the directors disclosed that EBITDAR had improved
by $180 million because of cost savings associated with the acquisition of an entity six
months earlier. The directors discussed EBITDAR at length describing it as ‘record
performance’ but did not disclose any comparable IFRS information and there was no
reconciliation to any IFRS measure. In previous years, rent had been deducted from
the earnings figure to arrive at this APM.
(iv)
The directors have not taken any tax effects into account when calculating the
remaining APMs.
Required:
(a)
(i)
Advise the directors whether the above APMs would achieve fair presentation
in the financial statements.
(10 marks)
(ii)
Discuss whether each of the APMs would require further disclosure under
IFRS 18 Presentation of financial statements.
(3 marks)
Professional marks will be awarded in part (a) for clarity and quality of discussion.
(2 marks)
11 8
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Exhibit 2 – Africant Co
Africant Co owns several farms and also owns a division which sells agricultural vehicles. It is
considering selling this agricultural retail division and wishes to measure the fair value of the
inventory of vehicles for the purpose of the sale. The directors are also considering several
options to value some farmland that it owns.
1 – Vehicles
Three markets currently exist for the vehicles. Africant Co has transacted regularly in all three
markets.
At 31 December 20X5, Africant Co wishes to find the fair value of 150 new vehicles, which
are identical. The current volume and prices in the three markets are as follows:
Market
Sales price
per vehicle
$
40,000
38,000
34,000
Europe
Asia
Africa
Historical
volume –
vehicles sold
by Africant
6,000
2,500
1,500
Total
volume of
vehicles sold
in the
market
150,000
750,000
100,000
Transaction
costs per
vehicle
Transport
cost to
market per
vehicle
$
500
400
300
$
400
700
600
Africant Co wishes to value the vehicles at $39,100 per vehicle as these are the highest net
proceeds per vehicle, and Europe is the largest market for Africant Co’s product.
The directors of Africant Co are unclear about the principles behind the valuation of the new
vehicles and also whether their valuation would be acceptable under IFRS 13 Fair Value
Measurement.
2 – Land
Africant Co uses the revaluation model for its non-current assets. Africant Co has several
plots of farmland which are unproductive. The company directors of Africant Co believe that
the land would have more value if it were used for residential purposes. There are several
potential purchasers for the land but planning permission has not yet been granted for use
of the land for residential purposes. However, preliminary enquiries with the regulatory
authorities seem to indicate that planning permission may be granted. Additionally, the
government has recently indicated that more agricultural land should be used for residential
purposes.
Africant Co has also been approached to sell the land for commercial development at a higher
price than that for residential purposes and understands that fair value measurement of a
non-financial asset takes into account a market perspective. The directors of Africant Co are
unclear about what is meant by a ‘market perspective’ and how to measure the fair value of
the land in its financial statements.
Required:
(b)
Advise Africant Co on the appropriate accounting treatment of (i) its vehicles and (ii)
its land with reference to relevant International Financial Reporting Standards:
(i)
vehicles
(6 marks)
(ii)
land.
(4 marks)
(Total: 25 marks)
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62
PLAYER TWO
(a)
Player Two, a public limited company, operates a number of retail stores that sell
computer and video games. It prepares financial statements in accordance with IFRS
Accounting Standards. In its financial statement disclosure notes for the year ended
31 December 20X1 it has reported an additional performance measure: adjusted basic
EPS (earnings per share). This performance measure does not feature on the face of
its statement of profit or loss and other comprehensive income. The following is an
extract from its financial statement disclosures:
20X1
2.5
10.3
––––
12.8
––––
122.2
10.5c
Profit after tax ($m)
Adjusting items ($m)
Adjusted profit after tax ($m)
Shares outstanding (m)
Adjusted basic EPS
Player Two also discloses similar information for the prior period.
The disclosure note states that ‘adjusting items’ comprise:
•
$6.8 million amortisation charge in relation to acquired brands and intangible
assets (20X0: $6.9 million).
•
$1.4 million restructuring costs (20X0: $0.9 million)
•
$2.1 million impairment charge relating to retail stores.
Required:
With reference to Player Two’s disclosure of adjusted EPS, discuss the benefits and
limitations of disclosing additional performance measures in the financial
statements.
(15 marks)
(b)
Wrap is a public limited company that operates in the media industry. This industry is
currently experiencing little economic growth. Wrap’s market capitalisation (the
market price per share multiplied by the number of shares outstanding) is less than its
net asset value per the financial statements.
In accordance with IAS 36 Impairment of Assets, Wrap has carried out various
impairment reviews. Cash generating unit D, a magazine publishing business to which
goodwill has been allocated, was tested for impairment and was deemed not to be
impaired. Wrap has produced the following disclosure note for inclusion in the
financial statements:
‘The recoverable amount of cash generating unit D has been determined as its value
in use. The calculation of value in use was based on cash flow projections that were
approved by management. The average discount rate used by Wrap during the year
was 10%. The future cash flows of unit D beyond the budgeted period were
extrapolated using an 8 per cent growth rate. Management believes that any
reasonably possible change in the key assumptions on which D’s recoverable amount
is based would not cause D’s carrying amount to exceed its recoverable amount.’
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Required:
Discuss why the information contained in this disclosure may be of limited use to the
users of Wrap’s financial statements.
(8 marks)
Professional marks will be awarded in this question for clarity and quality of
presentation.
(2 marks)
(Total: 25 marks)
63
MEHRAN
(a)
Walk in the footsteps of a top tutor
Mehran is a public limited company. It operates in a number of business sectors,
including farming, mining and retail. The directors require advice about how to apply
IFRS 13 Fair Value Measurement.
(i)
Mehran has just acquired a company, which comprises a farming and mining
business. Mehran wishes advice on how to fair value some of the assets acquired.
One such asset is a piece of land, which is currently used for farming. The fair
value of the land if used for farming is $5 million. If the land is used for farming
purposes, a tax credit of $0.1 million arises.
Mehran has determined that market participants would consider that the land
could have an alternative use for residential purposes. The fair value of the land
for residential purposes before associated costs is thought to be $7.4 million. In
order to transform the land from farming to residential use, there would be legal
costs of $200,000, a viability analysis cost of $300,000 and costs of demolition
of the farm buildings of $100,000. Additionally, permission for residential use
has not been formally given by the legal authority and because of this, market
participants have indicated that the fair value of the land, after the above costs,
would be discounted by 20% because of the risk of not obtaining planning
permission.
In addition, Mehran has acquired the brand name associated with the produce
from the farm. Mehran has decided to discontinue the brand on the assumption
that it is similar to its existing brands. Mehran has determined that if it ceases
to use the brand, then the indirect benefits will be $20 million. If it continues to
use the brand, then the direct benefit will be $17 million. Other companies in
this market do not have brands that are as strong as Mehran’s and so would not
see any significant benefit from the discontinuation.
(9 marks)
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(ii)
Mehran owns a non-controlling equity interest in Erham, a private company,
and wishes to fair value it as at its financial year end of 31 March 20X6. Mehran
acquired the ordinary share interest in Erham on 1 April 20X4. During the current
financial year, Erham has issued further equity capital through the issue of
preferred shares to a venture capital fund. As a result of the preferred share
issue, the venture capital fund now holds a controlling interest in Erham. The
terms of the preferred shares, including the voting rights, are similar to those of
the ordinary shares, except that the preferred shares have a cumulative fixed
dividend entitlement for a period of four years and the preferred shares rank
ahead of the ordinary shares upon the liquidation of Erham. The transaction
price for the preferred shares was $15 per share. Mehran wishes to know the
factors which should be taken into account in measuring the fair value of their
holding in the ordinary shares of Erham at 31 March 20X6 using a market-based
approach.
(6 marks)
Required:
Discuss the way in which Mehran should fair value the above assets with reference
to the principles of IFRS 13 Fair Value Measurement.
Note: The mark allocation is shown against each of the two issues above.
(b)
Mehran has recognised provisions in its financial statements for the year ended
31 March 20X6. It has produced the following provisions disclosure note:
1 April 20X5
Charged to profit or loss
Utilised
31 March 20X6
Of which:
Current
Non-current
Customer
refunds
$m
10.2
13.1
(9.1)
––––
14.2
––––
Reorganisations
Total
$m
8.0
10.2
(9.6)
––––
8.6
––––
$m
18.2
23.3
(18.7)
––––
22.8
––––
14.2
–
8.0
0.6
22.2
0.6
Provisions for customer refunds reflect the company’s expected liability for returns of
goods sold in retail stores based on experience of rates of return. Provisions for
reorganisations reflect restructuring and redundancy costs, principally in relation to our
retail operations as well as restructurings in Finance and IT.
The directors of Mehran have been asked by an investor to explain the accounting for
provisions in the financial statements and to explain why the information provided in
the provisions disclosure note is useful.
Required:
Explain to the investor the nature of accounting for provisions in financial
statements. Your answer should explain the benefits and limitations of the
information provided in Mehran’s disclosure note.
(8 marks)
Professional marks will be awarded in part (b) for clarity and quality of presentation.
(2 marks)
(Total: 25 marks)
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PR AC T ICE Q UE S T ION S : S E CT IO N 1
64
CARSOON
Carsoon Co is a public limited. It constructs premises for third parties. It has a year end of
28 February 20X7.
(a)
(i)
On 1 March 20X6, Carsoon invested in a debt instrument with a fair value of
$6 million and has assessed that the financial asset is aligned with the fair value
through other comprehensive income business model. The instrument has an
interest rate of 4% over a period of six years. The effective interest rate is also
4%. On 1 March 20X6, the debt instrument is not impaired in any way. During
the year to 28 February 20X7, there was a change in interest rates and the fair
value of the instrument seemed to be affected. The instrument was quoted in
an active market at $5.3 million but the price based upon an in-house model
showed that the fair value of the instrument was $5.5 million. This valuation was
based upon the average change in value of a range of instruments across a
number of jurisdictions.
The directors of Carsoon felt that the instrument should be valued at
$5.5 million and that this should be shown as a Level 1 measurement under
IFRS 13 Fair Value Measurement. There has not been a significant increase in
credit risk since 1 March 20X6, and expected credit losses should be measured
at an amount equal to 12-month expected credit losses of $400,000. Carsoon
sold the debt instrument on 1 March 20X7 for $5.3 million.
The directors of Carsoon wish to know how to account for the debt instrument
until its sale on 1 March 20X7.
(8 marks)
(ii)
Carsoon constructs retail vehicle outlets and enters into contracts with
customers to construct buildings on their land. The contracts have standard
terms, which include penalties payable by Carsoon if the contract is delayed.
In the year ended 28 February 20X7, Carsoon incurred general and
administrative costs of $10 million, and costs relating to wasted materials of
$5 million. These have been recognised as contract assets.
Due to poor weather, one of the projects was delayed. As a result, Carsoon faced
contractual penalties. Carsoon felt that the penalties should be shown as a
contingent liability. Additionally, during the year, Carsoon agreed to construct a
storage facility on the same customer’s land for $7 million at a cost of $5 million.
This was completed during the current financial year.
The directors of Carsoon wish to know how to account for the $15 million costs,
the penalties, and the storage facility in accordance with IFRS 15 Revenue from
Contracts with Customers.
(7 marks)
Required:
Advise Carsoon on how the above transactions should be dealt with in its financial
statements with reference to relevant International Financial Reporting Standards.
Note: The mark allocation is shown against each of the two issues above.
(b)
Carsoon owns the entire share capital of Sinkton, a company that operates in the
manufacturing industry and also has a reporting date of 28 February 20X7. Heavy rain
in the month prior to the reporting date caused several rivers surrounding Sinkton to
burst their banks. As a result, Sinkton’s only owned building, in which its factory and
head office functions are housed, was flooded. At the start of the reporting period the
building was believed to have a remaining useful life of twenty years.
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The flooding damaged key plant and machinery as well as some finished goods.
Production did not cease, but production volumes declined by two-thirds. The
inventory was not insured for flood damage but the machinery was. The directors
believe it is probable that the insurers will compensate Sinkton for the machinery
damage, but there is doubt about the amount of insurance proceeds that will be
received. Confirmation will not be received from the insurers until after the
authorisation of the financial statements.
As a result of the flood, Sinkton expects to make an operating loss in the next financial
year. The flood has caused a strain on cash flow and the board of directors believe that
they will need to make some staff redundancies. However, no firm redundancy plans
have been drafted. The directors of Sinkton are worried about the increasing incidence
of flooding and expect to move to new premises in five years’ time.
Required:
Discuss the financial reporting repercussions of the above in Sinkton’s financial
statements for the year ended 28 February 20X7.
(10 marks)
(Total: 25 marks)
65
WHITEBIRK
(a)
Whitebirk meets the definition of a small entity in its jurisdiction and complies with
the IFRS for SMEs Standard (the SMEs Standard). Whitebirk has entered into the
following transactions during the year ended 31 May 20X6.
(i)
Whitebirk requires a new machine, which will be included as part of its property,
plant and equipment. Whitebirk therefore commenced construction of the
machine on 1 February 20X6, and this continued until its completion which was
after the year end of 31 May 20X6. The direct costs were $2 million in February
2016 and then $1 million in each subsequent month until the year end.
Whitebirk has incurred an interest expense on its general borrowings during the
period, which could have been avoided if the machine had not been
constructed. Whitebirk has calculated that the weighted average cost of
borrowings for the period 1 February – 31 May 20X6 on an annualised basis
amounted to 9% per annum.
(ii)
Whitebirk has incurred $1 million of research expenditure to develop a new
product in the year to 31 May 20X6. Additionally, it incurred $0.5 million of
development expenditure to bring another product to a stage where it is ready
to be marketed and sold.
Required:
12 4
(i)
In accordance with IAS 23 Borrowing Cost and IAS 38 Intangible Assets, advise
the directors of Whitebirk on how the borrowing costs (note i) and the
research and development expenditure (note ii) would be accounted for in the
year ended 31 May 20X6.
(8 marks)
(ii)
Discuss how the two transactions would be dealt with under the SMEs
Standard in the year ended 31 May 20X6.
(4 marks)
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PR AC T ICE Q UE S T ION S : S E CT IO N 1
(b)
Whitebirk has been exploring its options for expansion and has been looking for other
companies to work with on several new projects. Two such companies have been
identified and the finance director has been asked to produce an analysis of both
companies’ financial performance and position for the other directors. The finance
director is unsure about two items that have been recorded in the financial statements
and requires advice on these items.
(i)
Fryer produces its financial statements in line with full IFRS Accounting
Standards. The finance director noted that Fryer has a number of financial
liabilities that are measured at fair value through profit or loss, whereas
Whitebirk’s financial liabilities are all measured at amortised cost. The notes to
Fryer’s financial statements revealed that Fryer has a number of financial asset
investments that are measured at fair value through profit or loss. The purchase
of these assets is funded by issuing bonds, i.e. the fair value through profit or
loss financial liabilities.
At 31 March 20X6, Fryer’s reporting date, the fair value of the bonds had fallen
by $2 million. The fair value decline attributable to the change in Fryer’s credit
risk was $0.6 million.
(ii)
Coral manufactures aluminium equipment and is anticipating purchasing 2,500
tonnes of aluminium in 4 months’ time. In order to manage Coral’s exposure to
a rise in aluminium costs, Coral entered into a futures contract on 30 November
20X2 to buy 2,500 tonnes of bauxite, the main component of aluminium. This
arrangement was designated as a cash flow hedge, with a hedge ratio of 1:1.
The hedging effectiveness criteria were deemed to have been met at the
inception of the hedge.
At the 31 December 20X2, Coral’s reporting date, the loss in respect of the future
cash flows amounted to $52,000 and the fair value of the futures contract was
$40,000. As a result of the changes in value, Coral have reassessed the
relationship between the price of aluminium and bauxite, and concluded that it
has changed since the inception of the hedge. Coral’s analysis shows that a more
appropriate hedge ratio is now 1:1.2, which should be used in order to continue
meeting the hedging effectiveness criteria.
Required:
(i)
Explain why the treatment of Fryer’s financial liabilities is different to the
treatment of Whitebirk’s financial liabilities, and the impact of the treatment
on Fryer’s financial statements.
(5 marks)
(ii)
Discuss the accounting treatment of the cash flow hedge arrangement in the
year ended 31 December 20X2 and the adjustment required as a result of the
change in hedge ratio on that date. Include in your answer a brief explanation
of the impact of the hedging arrangement on the financial performance of
Coral.
(8 marks)
(Total: 25 marks)
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66
BUSINESS COMBINATIONS
(a)
Walk in the footsteps of a top tutor
You work for an accountancy firm. You have asked to provide advice to clients about
the following transactions:
(i)
On 1 October 20X4, Saag, a listed company, purchased 90% of the ordinary
shares of Aloo. Aloo, which ceased trading one week prior to the share purchase,
owns a manufacturing facility comprising of land and buildings as well as related
equipment. The fair value of the land and buildings is similar to the fair value of
the equipment. The acquisition of Aloo only gained legal approval on the basis
that all employees who worked at the facility are retained. There are no other
assets, including any inventories, or processes transferred as part of the sale.
Saag proposes to account for the purchase of Aloo as a business combination.
(7 marks)
(ii)
On 1 September 20X4, Bimbi, a listed bank, entered into a business combination
with another listed bank, Lental. The business combination has taken place in
two stages, which were contingent upon each other. On 1 September 20X4,
Bimbi acquired 45% of the share capital and voting rights of Lental for cash. On
1 November 20X4, Lental merged with Bimbi and Bimbi issued new A-shares to
Lental’s shareholders for their 55% interest.
On 31 August 20X4, Bimbi had a market value of $70 million and Lental a market
value of $90 million. Bimbi’s business represents 45% and Lental’s business 55%
of the total value of the combined businesses.
After the transaction, the former shareholders of Bimbi excluding those of
Lental owned 51% and the former shareholders of Lental owned 49% of the
votes of the combined entity. The Chief Operating Officer (COO) of Lental is the
biggest individual owner of the combined entity with a 25% interest. The
purchase agreement provides for a board of six directors for the combined
entity, five of whom will be former board members of Bimbi with one seat
reserved for a former board member of Lental. The board of directors nominates
the members of the management team. The management comprised the COO
and four other members, two from Bimbi and two from Lental. Under the terms
of the purchase agreement, the COO of Lental is the COO of the combined
entity.
Bimbi proposes to identify Lental as the acquirer in the business combination
but requires advice as to whether this is correct.
(8 marks)
Required:
Advise whether the proposed treatments of the above two transactions are in
accordance with IFRS Accounting Standards.
Note: The mark allocation is shown against each of the two transactions above.
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(b)
On 1 January 20X4, Bolo purchased 45% of the ordinary shares of Kata. Consideration
paid was $3 million. The carrying amounts of the net assets of Kata at that date were
$2.4 million and approximated their fair values. The statement of financial position for
Kata as at 31 December 20X4 was as follows:
$m
14
1
––––
15
––––
1
2
12
––––
15
––––
Property, plant and equipment
Inventories
Total assets
Share capital
Retained earnings
Loans
Equity and liabilities
The directors of Bolo are unsure whether to treat Kata as an associate or a subsidiary
in the consolidated financial statements. When relevant, Bolo measures noncontrolling interests using the proportion of net assets method.
Required:
Discuss and compare the impact on the consolidated financial statements of Bolo for
the year ended 31 December 20X4 if the investment in Kata is accounted for as:
•
a subsidiary, or
•
an associate.
(8 marks)
Professional marks will be awarded in part (b) for clarity and quality of presentation.
(2 marks)
(Total: 25 marks)
67
MARGIE
(a)
Walk in the footsteps of a top tutor
Margie, a public limited company, has entered into several share related transactions
during the period and wishes to obtain advice on how to account for them.
(i)
On 1 May 20X2, Margie granted 500 share appreciation rights (SARs) to its
300 managers. All of the rights vested on 30 April 20X4 but they can be exercised
from 1 May 20X4 up to 30 April 20X6. At the grant date, the value of each SAR
was $10 and it was estimated that 5% of the managers would leave during the
vesting period. The fair value of each SAR is as follows:
Date
30 April 20X3
30 April 20X4
30 April 20X5
Fair value ($)
9
11
12
All of the managers who were expected to leave employment did leave the
company as expected before 30 April 20X4. On 30 April 20X5, 60 managers
exercised their options when the intrinsic value of the right was $10.50 and were
paid in cash.
KA PL AN P U BLI SH IN G
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Margie is confused as to whether to account for the SARs under IFRS 2 Sharebased Payment or IFRS 13 Fair Value Measurement, and would like advice as to
how the SARs should have been accounted for between the grant date and
30 April 20X5.
(6 marks)
(ii)
Margie issued shares during the financial year. Some of those shares were
subscribed for by employees who were existing shareholders, and some were
issued to an entity, Grief, which owned 5% of Margie’s share capital. Before the
shares were issued, Margie offered to buy a building from Grief and agreed that
the purchase price would be settled by the issue of shares.
Margie requires advice about how to account for these two transactions.
(5 marks)
(iii)
Margie has entered into a contract with a producer to purchase 350 tonnes of
wheat. The purchase price will be settled in cash at an amount equal to the value
of 2,500 of Margie’s shares. Margie may settle the contract at any time by paying
the producer an amount equal to the current market value of 2,500 of Margie
shares, less the market value of 350 tonnes of wheat. Margie has no intention
of taking physical delivery of the wheat.
The directors of Margie are unsure as to whether this transaction is a sharebased payment and require advice as to how it should be accounted for in the
financial statements.
(5 marks)
Required:
Advise the directors of Margie on their various requests above. Note: The mark
allocation is shown against each of the three issues.
(b)
The directors of Margie have heard that they must implement the new ISSB Standards.
The directors are aware that there are two new IFRS Sustainability Disclosure
Standards (aka the ISSB Standards) but need advice as to what the standards consist
of and how to comply with them.
The directors of Margie would like guidance as to the advantages and disadvantages
of complying with ISSB Standards and are worried about how compliance will be
perceived by its investors.
Margie also have operations in the Republic of Ireland. The directors are aware that
any sustainability disclosures relating to these operations will have to comply with the
European Sustainability Reporting Standards (ESRS).
Required:
Provide advice to the directors of Margie that addresses the following:
(i)
what the ISSB Standards consist of, what is required to comply with them and
highlight any misconceptions held by the directors
(ii)
the advantages and disadvantages of complying with ISSB Standards for the
investors of Margie
(iii)
the differences between ISSB Standards and the ESRS.
(7 marks)
Professional marks will be awarded in part (b) for clarity and quality of discussion and
the application of advantages and disadvantages to the investors.
(2 marks)
(Total: 25 marks)
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68
KAYTE
Kayte, a public limited company, operates in a number of industries. It has a reporting date
of 30 November 20X3.
(a)
One of the industries that Kayte operates in is shipping. Kayte’s owns shipping vessels –
classified as property, plant and equipment and measured using the cost model- which
constitute a material part of its total assets. The economic life of the vessels is estimated
to be 30 years, but the useful life of some of the vessels is only 10 years because Kayte’s
policy is to sell these vessels when they are 10 years old. Kayte estimated the residual
value of these vessels at sale to be half of acquisition cost and this value was assumed to
be constant during their useful life. Kayte argued that the estimates of residual value
used were conservative in view of an immature market with a high degree of uncertainty
and presented documentation which indicated some vessels were being sold for a price
considerably above carrying value. Broker valuations of the residual value were
considerably higher than those used by Kayte. Kayte argued against broker valuations
on the grounds that it would result in greater volatility in reporting.
Kayte keeps some of the vessels for the whole 30 years and these vessels are required
to undergo an engine overhaul in dry dock every 10 years to restore their service
potential, hence the reason why some of the vessels are sold. The residual value of the
vessels kept for 30 years is based upon the steel value of the vessel at the end of its
economic life. In the current period, one of the vessels had to have its engine totally
replaced after only eight years. Normally, engines last for the 30-year economic life if
overhauled every 10 years. Additionally, one type of vessel was having its funnels
replaced after 15 years but the funnels had not been depreciated separately.
Required:
Advise the directors of Kayte on the accounting issues above.
(b)
(11 marks)
Throughout its other business operations, Kayte is reliant on skilled workers to design
and manufacture high-tech products. Because of the importance of Kayte’s workforce
to its business operations, the directors wish to disclose the following key performance
indicators (KPIs) in its annual report.
Average employee salary ($)
Revenue per employee ($)
Sick days per employee
Employee turnover (%)
20X3
30,325
116,432
4.9
18.7
20X2
29,956
102,124
2.1
13.9
The national rate of inflation is currently 2%.
Employee turnover has been calculated as the number of employees who left Kayte
during the year as a % of the average number of employees throughout the year. The
average rate of employee turnover in the industry is 14.1%.
Required:
(i)
Briefly discuss some of the factors that management should consider when
disclosing KPIs in the reporting entity’s annual report.
(4 marks)
(ii)
Discuss how the KPIs might be interpreted by users of the annual report.
(8 marks)
Professional marks will be awarded in part (b) for clarity and quality of presentation.
(2 marks)
(Total: 25 marks)
KA PL AN P U BLI SH IN G
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69
ARON
The directors of Aron would like advice about the financial reporting treatment of some
financial instrument transactions that took place during the year ended 31 May 20X7.
Convertible bonds
Aron issued one million convertible bonds on 1 June 20X6. The bonds had a term of three
years and were issued for their fair value of $100 million, which is also the par value. Interest
is paid annually in arrears at a rate of 6% per annum. Bonds without the conversion option
attracted an interest rate of 9% per annum on 1 June 20X6. The company incurred issue costs
of $1 million. The impact of the issue costs is to increase the effective interest rate to 9.38%.
At 31 May 20X9 the bondholders can opt to be repaid the par value in cash, or they can opt
to receive a fixed number of ordinary shares in Aron.
Share exchange
Aron held 3% holding of the shares in Smart, a public limited company. The investment was
designated upon recognition as fair value through other comprehensive income and as at
31 May 20X7 was measured at its fair value of $5 million. The cumulative gain reported in
other comprehensive income and held in equity relating to this investment was $400,000.
On 31 May 20X7, the whole of the share capital of Smart was acquired by Given, a public
limited company. Aron received shares in Given with a fair value of $5.5 million in exchange
for its holding in Smart.
Winston bonds
On 1 June 20X6, Aron purchased $10 million of listed bonds at par and paid in cash. These
bonds had been issued by Winston, an entity operating in the video games industry. The
bonds are due to be redeemed at a premium on 31 May 20X9, with Aron also receiving 5%
interest annually in arrears. The effective rate of interest on the bonds is 15%. Aron often
holds bonds until the redemption date, but will sell prior to maturity if investments with
higher returns become available. Winston’s bonds were deemed to have a low credit risk at
inception.
On 31 May 20X7, Aron received the interest due on the bonds. However, there were wider
concerns about the economic performance and financial stability of the video games
industry. As a result, the quoted price of Aron’s investment at 31 May 20X7 was $9 million,
although a pricing model developed by the financial controller that relies on management
estimates valued the holding at $9.5 million. Based on Winston’s strong working capital
management and market optimism about the entity’s forthcoming products, the bonds were
still deemed to have a low credit risk.
The financial controller of Aron calculated the following expected credit losses for the
Winston bonds as at 31 May 20X7:
12 month expected credit losses
Lifetime expected credit losses
13 0
$0.2m
$0.4m
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
Overseas loan
Aron’s functional currency is the dollar. Aron took out a foreign currency loan of 5 million
dinars at a fixed interest rate of 8% on 1 June 20X6. The effective rate of interest on the loan
is also 8%. Annual interest payments commenced on 31 May 20X7. The loan will be repaid
on 31 May 20X8. Currency rates during the year are as follows:
Exchange rates
1 June 20X6
31 May 20X7
Average exchange rate for year ended 31 May 20X7
dinars: $1
5.0
6.0
5.6
The average currency exchange rate for the year is not materially different from the actual
rate.
Required:
(a)
Discuss the accounting treatment of the convertible bonds in the financial
statements for the year ended 31 May 20X7.
(6 marks)
(b)
Discuss the accounting treatment of the share exchange in the financial statements
for the year ended 31 May 20X7.
(6 marks)
(c)
Discuss the accounting treatment of the Winston bonds in the financial statements
for the year ended 31 May 20X7. Your answer should explain the impact of the bonds
in Aron’s statement of cash flows.
(10 marks)
(d)
The directors of Aron require advice on how to account for the loan in dinars and
interest in the financial statements for the year ended 31 May 20X7.
(8 marks)
(Total: 30 marks)
70
EMCEE
(a)
(i)
Walk in the footsteps of a top tutor
Emcee, a public limited company, is a sports organisation that owns several
soccer and American football clubs. It has a financial year end of 31 May 20X6.
Emcee purchases and sells players’ registrations on a regular basis. Emcee must
purchase registrations for that player to play for the club. Player registrations are
contractual obligations between the player and Emcee. The costs of acquiring
player registrations include transfer fees, league levy fees, and player agents’ fees
incurred by the club. Also, players’ contracts can be extended and this incurs
additional costs for Emcee.
At the end of every season, which also is the financial year end of Emcee, the club
reviews its playing staff and makes decisions as to whether they wish to sell any
players’ registrations. These registrations are actively marketed by circulating
other clubs with a list of players’ registrations and their estimated selling price.
Players’ registrations are also sold during the season, often with performance
conditions attached. Occasionally, it becomes clear that a player will not play for
the club again because of, for example, a player sustaining a career threatening
injury or being permanently removed from the playing squad for another reason.
The playing registrations of certain players were sold after the year end, for total
proceeds, net of associated costs, of $25 million. These registrations had a
carrying amount of $7 million.
KA PL AN P U BLI SH IN G
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SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Emcee would like to know the financial reporting treatment of the acquisition,
extension, review and sale of players’ registrations in the circumstances outlined
above.
(9 marks)
(ii)
In the consolidated financial statements for 20X6, Emcee recognised a net
deferred tax asset of $16 million. This asset was made up of $3 million relating to
taxable temporary differences and $19 million relating to the carry-forward of
unused tax losses. The local tax regulation allows unused tax losses to be carried
forward indefinitely. Emcee expects that within five years, future taxable profits
before tax would be available against which the unused tax losses could be offset.
This view was based on the budgets for the years 20X6-20Y1. The budgets were
primarily based on general assumptions about economic improvement indicators.
Additionally, the entity expected a substantial reduction in the future
impairments that the entity had recently suffered and this would result in a
substantial increase in future taxable profit.
Emcee had recognised material losses during the previous five years, with an
average annual loss of $19 million. A comparison of Emcee’s budgeted results for
the previous two years to its actual results indicated material differences relating
principally to impairment losses. In the interim financial statements for the first
half of the year to 31 May 20X6, Emcee recognised impairment losses equal to
budgeted impairment losses for the whole year. In its financial statements for the
year ended 31 May 20X6, Emcee disclosed a material uncertainty about its ability
to continue as a going concern. The current tax rate in the jurisdiction is 30%.
(8 marks)
Required:
Discuss how the above matters should be dealt with in Emcee’s financial statements.
Note: The mark allocation is shown against each of the two issues above.
(b)
Developing a framework for disclosure is at the forefront of current debate and there
are many bodies around the world attempting to establish an overarching framework
to make financial statement disclosures more effective, coordinated and less
redundant. Some argue that disclosure notes are too lengthy and numerous. Others
argue that there is no such thing as too much ‘useful’ information for users.
Required:
Discuss why it is important to ensure the optimal level of disclosure in annual
reports, and the role of materiality when preparing financial statement disclosure
notes.
(8 marks)
(Total: 25 marks)
13 2
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
71
GASNATURE
(a)
Walk in the footsteps of a top tutor
Gasnature is a public limited company involved in the production and trading of
natural gas and oil. It prepares its financial statements using International Financial
Reporting Standards. The directors require advice about the accounting treatment of
some of the transactions that Gasnature has entered into during the year.
(i)
Gasnature jointly owns an underground storage facility with another entity, Gogas.
Both parties extract gas from offshore gas fields, which they own and operate
independently from each other. Gasnature owns 55% of the underground facility
and Gogas owns 45%. They have agreed to share services and costs accordingly,
with decisions regarding the storage facility requiring unanimous agreement of the
parties. Local legislation requires the decommissioning of the storage facility at the
end of its useful life.
Gasnature wishes to know how to treat the agreement with Gogas including any
obligation or possible obligation arising on the underground storage facility.
(7 marks)
(ii)
Gasnature has entered into a 10-year contract with Agas for the purchase of
natural gas. Gasnature has made an advance payment to Agas for an amount
equal to the total quantity of gas contracted for 10 years which has been
calculated using the forecasted price of gas. The advance carries interest of 6%
per annum, which is settled by way of the supply of extra gas. Fixed quantities
of gas have to be supplied each month and there is a price adjustment
mechanism in the contract whereby the difference between the forecasted
price of gas and the prevailing market price is settled in cash monthly. If Agas
does not deliver gas as agreed, Gasnature has the right to claim compensation
at the current market price of gas.
Gasnature wishes to know whether the contract with Agas should be accounted
for under IFRS 9 Financial Instruments.
(6 marks)
Required:
Discuss, with reference to IFRS Accounting Standards, how Gasnature should account
for the above agreement and contract.
(b)
Gasnature’s institutional shareholders invest in a wide-range of entities. Gasnature’s
directors are concerned that certain IFRS Accounting Standards permit entities to
choose between different measurement bases and presentation methods. They
believe that these choices hinder its shareholders from comparing Gasnature to other
entities on a like-for-like basis.
Required:
Outline the main accounting choices permitted by IAS 16 Property, Plant and
Equipment and IAS 20 Accounting for Government Grants and Disclosure of
Government Assistance and discuss the potential impact of these on investors’
analysis of financial statements.
(10 marks)
Professional marks will be awarded in part (b) for clarity and quality of presentation.
(2 marks)
(Total: 25 marks)
KA PL AN P U BLI SH IN G
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SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
72
LUCKY DAIRY
(a)
(i)
The Lucky Dairy, a public limited company, produces milk for supply to various
customers. The company also has production facilities that is used to turn milk
into other products, such as butter and cheese. It is responsible for producing
twenty five per cent of the country’s milk consumption. The company owns
cows and heifers (young female cows).
The herd as at 31 May 20X2 is comprised as follows:
70,000
–
3-year-old cows (all purchased before 1 June 20X1)
25,000
–
2-year-old heifers purchased for $46 each on 1 December 20X1
There were no animals born or sold in the year. The per unit values less
estimated costs to sell were as follows:
2-year-old animal at 31 May 20X1
2-year-old animal at 31 May 20X2
3-year-old animal at 31 May 20X2
$
50
55
60
The directors would like advice on how the herd should be accounted for in its
primary financial statements for the year ended 31 May 20X2. Advice about
disclosure notes is not required.
(6 marks)
(ii)
On 1 December 20X1, Lucky Dairy purchased interest-bearing bonds in Jags, another
listed company, for $10 million and classified these assets to be measured at
amortised cost. Just prior to the date of the bond purchase, Jags had released an
interim financial report that demonstrated encouraging year-on-year growth and a
strong financial position. As such, external agencies had graded the bonds as having
a low credit risk. In May 20X2, Jags released its annual financial statements and
these showed a weak trading performance in the final six months of its reporting
period as well as a large decline in the cash generated from its operations compared
to the prior year. These financial statements show that, at the period end, Jags was
relatively close to breaching its loan covenants. The listed bond price of Jags has
fallen by 20% since December 20X1 despite an overall increase in bond prices for
other listed entities in the same sector. It has been reported that external agencies
are reviewing and re-assessing the credit rating of Jags. Despite encountering
financial difficulties, Jags has met all of its obligations to its lenders and bond
holders.
The directors of Lucky Dairy would like advice on how the above information will
impact the carrying amount of its financial assets.
(8 marks)
Required:
Advise Lucky Dairy on how the above transactions should be correctly dealt with in
its financial statements with reference to relevant International Financial Reporting
Standards.
Note: The mark allocation is shown against each of the two issues above.
13 4
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
(b)
Lucky Dairy has included the following disclosure note in its financial statements for
the year ended 31 May 20X2. The note relates to key judgements and estimates made
when preparing the financial statements.
Judgements and estimates in the financial statements
Revenue
Revenue is recognised net of rebates and at the point when goods are transferred to
customers. Estimates are applied when measuring accruals for rebates and other sales
incentives.
Most rebates are calculated based on terms agreed with customers, and typically the
final rebate amount depends on future sales volumes and prices. This means there is
a degree of estimation and judgement involved in determining the amount of rebates
to be recognised. Estimates are based on historical experience and forecasted future
sales.
Property, plant and equipment
Estimates are made when assessing the useful lives of items of property, plant and
equipment and in determining the amount that the group can recover at the end of
the useful life of an asset.
As a result of climate-related risks, the entity could face future impairment of production
equipment due to the equipment becoming outdated because of sustainability-related
technological advances or due to an excess of production capacity if milk volume
demand declines.
Property, plant and equipment has not been affected by any such impairment in 20X2.
Inventory
The company uses standard costs to calculate inventory. The key components of
standard cost include milk-based components, energy and packaging costs. Changes in
commodity prices can significantly affect these standard costs.
Judgement is involved when assessing the net realisable value of inventory,
particularly when estimating the selling price of certain cheese products that have long
maturities. The selling price of these products is based on market prices at the
reporting date.
Required:
Critically assess the extent to which Lucky Dairy's disclosure of judgements and
estimates is useful to investors.
(9 marks)
Professional marks will be awarded in part (b) for clarity and quality of presentation.
(2 marks)
(Total: 25 marks)
KA PL AN P U BLI SH IN G
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SB R : S T RA TE GI C B US IN E SS RE P O RT IN G
73
KLANCET
Walk in the footsteps of a top tutor
Answer debrief
Klancet, a public limited company, is a pharmaceutical company and is seeking advice on
several financial reporting issues.
(a)
(i)
Klancet produces and sells its range of drugs through three separate divisions.
In addition, there are two laboratories which carry out research and
development activities.
In the first of these laboratories, the research and development activity is
funded internally and centrally for each of the three sales divisions. It does not
carry out research and development activities for other entities. Each of the
three divisions is given a budget allocation which it uses to purchase research
and development activities from the laboratory. The laboratory is directly
accountable to the division heads for this expenditure.
The second laboratory performs contract investigation activities for other
laboratories and pharmaceutical companies. This laboratory earns 75% of its
revenues from external customers and these external revenues represent 18%
of the organisation’s total revenues.
The performance of the second laboratory’s activities and of the three separate
divisions is regularly reviewed by the chief operating decision maker (CODM). In
addition to the heads of divisions, there is a head of the second laboratory. The
head of the second laboratory is directly accountable to the CODM and they
discuss the operating activities, allocation of resources and financial results of
the laboratory.
Klancet is uncertain as to whether the research and development laboratories
should be reported as two separate segments under IFRS 8 Operating Segments,
and would like advice on this issue.
(8 marks)
(ii)
Klancet has agreed to sell a patent right to another pharmaceutical group, Jancy.
Jancy would like to use the patent to develop a more complex drug. Klancet will
receive publicly listed shares of the Jancy group in exchange for the right. The
value of the listed shares represents the fair value of the patent. If Jancy is
successful in developing a drug and bringing it to the market, Klancet will also
receive a 5% royalty on all sales.
Additionally, Klancet won a competitive bidding arrangement to acquire a
patent. The purchase price was settled by Klancet issuing new publicly listed
shares of its own.
Klancet’s management would like advice on how to account for the above
transactions.
(6 marks)
Required:
Advise Klancet on how the above transactions should be dealt with in its financial
statements with reference to relevant International Financial Reporting Standards.
Note: The mark allocation is shown against each of the two issues above.
13 6
KA PL AN P U BLI SH IN G
PR AC T ICE Q UE S T ION S : S E CT IO N 1
(b)
On 1 July 20X6, Klancet purchased a debt instrument for its nominal value of $5 million.
The transaction was at fair value. Klancet’s business model is to hold financial assets
to collect the contractual cash flows but also sell financial assets if investments with
higher returns become available. Interest is received at a rate of 4% annually in arrears.
The effective rate of interest is 10%.
On 30 June 20X7, the fair value of the debt instrument was $4.5 million. There has not
been a significant increase in credit risk since inception. Expected credit losses are
immaterial.
The directors are unsure how to account for this financial instrument. They also wish
to know if the correct accounting treatment is consistent with the Conceptual
Framework.
Required:
(i)
Discuss, with reference to IFRS 9 Financial Instruments, how the above
transactions should be dealt with in Klancet’s financial statements for the year
ended 30 June 20X7.
(4 marks)
(ii)
Discuss whether the accounting treatment of this transaction is consistent
with the Conceptual Framework.
(7 marks)
(Total: 25 marks)
Calculate your allowed time, allocate the time to the separate parts……………
KA PL AN P U BLI SH IN G
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SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
13 8
KA PL AN P U BLI SH IN G
Section 2
ANSWERS TO PRACTICE QUESTIONS
SECTION A QUESTIONS – GROUP FINANCIAL STATEMENTS
1
LAYOUT (SEP/DEC 2024)
Walk in the footsteps of a top tutor
Key answer tips
This question tests some core SBR topics – the definition of control, defined benefit pensions,
subsidiaries and associates.
You should allocate your time based on the mark allocation, which should help you avoid
overrunning on the explanation parts of the question.
For part (a) read the requirement carefully and don’t be tempted to stray from what you
have been asked to cover. The requirement concentrates on why Layout doesn’t have control
over Brassioc. There is no need to discuss how the investment in Brassioc should be treated.
In part (b) you are asked to explain how to account for the defined benefit pension plan. You
may want to start by calculating the movement in the pension deficit, using the spreadsheet
response area, but make sure you also explain how each adjustment to the deficit should be
treated in the consolidated financial statements. Your explanation should be set out in the
word processor response area. The examiner wants to see a narrative answer as well as some
calculations!
In part (c) you are asked to adjust the draft consolidated statement of financial position for
the pension plan. To be as efficient as possible in picking up marks in part (c), it would be
wise to record the adjustments for the pension scheme first, which are potentially more
straightforward marks, before moving onto the adjustments for the subsidiary and associate.
(a)
Control
Tutorial note
Easy marks can be earned by stating the definition of control per IFRS 10 at the start of
your answer. You can then apply the definition to the scenario.
KA PL AN P U BLI SH IN G
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SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
IFRS 10 Consolidated Financial Statements sets out the following three elements of
control:
–
power over the investee,
–
exposure, or rights, to variable returns from involvement with the investee, and
–
the ability to use its power over the investee to affect the amount of those
returns.
Rights confer power when they are sufficient to give the investor the current ability to
direct the ‘relevant activities’ unilaterally. In accordance with IFRS 10, relevant
activities are activities of the investee which significantly affect the investee’s returns.
Application to Layout Co
Tutorial note
You are asked to state why Layout does not have control over Brassioc Co. Use all the
facts from the scenario to provide evidence to support this conclusion.
Control is normally assumed when an investor holds more than 50% of the voting
rights. Layout Co only owns 45% of the voting rights, and this suggests that control
does not exist. Moreover, the other 55% of the voting rights are held by a single
investor, rather than being dispersed.
However, assessing control is more complicated than this, because it would seem that
Brassioc Co’s relevant activities are directed through its board of directors.
Layout Co cannot take any decision on its own as business decisions require the
approval of seven out of twelve executive directors, and only five executive directors
are appointed by Layout Co. Also, the fact that Layout Co can appoint the majority of
the non-executive directors is irrelevant as they have no decision-making power.
Currently, Layout Co does not have rights which give it the ability to direct the relevant
activities of the company.
The forward contract’s settlement date is in over nine months’ time and therefore
Layout Co does not have the current ability at 31 December 20X7 to direct the relevant
activities of Brassioc Co.
This means that the existing private investor can direct the relevant activities of
Brassioc Co. Layout Co should not treat Brassioc Co as a subsidiary as at 31 December
20X7.
(b)
Pension plan
Tutorial note
When explaining the treatment of the defined benefit plan, for any income and
expenses recognised in the profit or loss, you should state clearly which section of the
profit or loss the item would be presented in. The net interest component is presented
in the financing section, whereas the service cost is presented in the operating section.
14 0
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
In accordance with IAS 19 Employee Benefits, Layout Co should recognise a net interest
component of $1.2 million ($24m × 5%). This is recognised as an expense in the
financing section of the statement of profit or loss and increases the net pension plan
deficit.
The cash contributions are accounted for as a reduction to the net plan deficit (an
increase to the plan assets). As such, a $4 million expense should be removed from the
operating section of the statement of profit or loss.
Tutorial note
You may not have come across a gain or loss on settlement before, so read the
information in the exhibit carefully to identify the adjustments required. The plan assets
are reduced by $60m as a result of the payout, and the plan obligation is also reduced,
but only by $50m. This means Layout have a cost to bear of $10m, which is the loss on
settlement.
The payment to another pension provider is a settlement. There is a loss on settlement
of $10 million ($60m – $50m) in profit or loss. This forms part of the service cost
component. Therefore, the total service cost is $16 million ($10m + $6m) which
increases the net plan deficit and is recognised as an expense in the operating section
of the statement of profit or loss.
At the year end, a net deficit of $40 million should be recognised in non-current
liabilities on the statement of financial position. This is the valuation provided by the
actuary after the information about the settlement event is considered. The previous
valuation of $32 million is no longer accurate.
A remeasurement loss of $2.8 million arises. This is recognised in other comprehensive
income and presented as an item which will not be reclassified to profit or loss in the
future.
Net deficit at 1 January 20X7
Net interest component
Service cost component (6 + 10)
Cash contributions
Remeasurement loss (balancing figure)
Net deficit at 31 December 20X7
KA PL AN P U BLI SH IN G
$m
24.0
1.2
16.0
(4.0)
2.8
–––
40.0
–––
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SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
(c)
Spreadsheet solution
Tutorial note
As Brassioc Co is an associate, its net assets, goodwill and non-controlling interest,
which have been incorrectly recognised in the draft consolidated statement of financial
position at the reporting date, will need to be removed. This will require calculations
for goodwill and non-controlling interest, which can be presented below the draft
statement.
An investment in the associate at a cost of $35 million will be added to the statement
of financial position. This will subsequently be increased by Layout Co’s share of postacquisition profits.
Layout Group
Draft consolidated statement of financial position as at 31 December 20X7
Draft
Assets
Non-current assets
Property, plant and
equipment (W2)
Investment in associates
(W3)
Goodwill (W1)
Total non-current assets
Current assets
Total assets
Equity
Share capital
Other components of
equity
Retained earnings (W3)
Non-controlling interest
(W4)
Total equity
Liabilities
Non-current liabilities
Net defined benefit
deficit
Current liabilities
Total equity and liabilities
14 2
$m
Remove
sub
$m
634
(56.8)
51
35
81
–––––
766
–––––
1,456
–––––
2,222
–––––
(3)
Associate
profits
$m
Pension
interest
$m
Pension
service
$m
Pension
cash
$m
(2.8)
4.4
(1.2)
(16)
4
135
186.2
1,492.8
242.6
–––––
2,129
–––––
–––––
2,056.6
–––––
24
69
–––––
2,222
–––––
$m
78
–––––
745.6
–––––
1,409
–––––
2,154.6
–––––
(47)
(4.4)
(56.4)
Revised
577.2
90.4
4.4
135
189
1,506
299
Pension
remeasurement
$m
1.2
(11)
16
(4)
2.8
40
58
–––––
2,154.6
–––––
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Workings
(W1) Goodwill
Consideration
NCI at acquisition
Fair value of net assets at acquisition
Goodwill
$m
35
51
(83)
–––––
3
–––––
(W2) PPE
Per SFP
Uplift ($83m FV – $10m – $3m – $39m)
Depreciation on uplift ($31m/5 years)
$m
32
31
(6.2)
–––––
56.8
–––––
(W3) Post-acquisition retained earnings
Retained earnings at rep date ($55m – $6.2m (W2))
Retained earnings at acquisition
Post acquisition
Group share ($9.8m × 45%)
NCI share ($9.8m × 55%)
$m
48.8
(39)
–––––
9.8
–––––
4.4
5.4
(W4) NCI at reporting date
NCI at acquisition
NCI share of post-acquisition retained earnings (W3)
Post acquisition
KA PL AN P U BLI SH IN G
$m
51
5.4
–––––
56.4
–––––
14 3
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
ACCA Marking scheme
Marks
(a)
Discussion and application of the IFRS 10 principles to the scenario:
Principles
Discussion
Maximum
(b)
Discussion and application of the IAS 19 principles to the scenario:
Discussion
Application and accounting
Maximum
(c)
Pre-populated spreadsheet:
PPE – calculation
PPE – adjustment
Investment in associate – calculation
Investment in associate – adjustments
Goodwill – calculation
Goodwill – adjustment
Remove current assets and current liabilities
Other components of equity – adjustment
Retained earnings – adjustment
Non-controlling interest – calculation
Non-controlling interest – adjustment
Net defined benefit deficit
Maximum
Total
4
7
––––
8
––––
4
7
––––
8
––––
2
2
1
2
1
1
1
1
3
1
1
1
––––
14
––––
30
––––
Examiner’s comments
Part (a) was generally answered well, although some candidates strayed beyond the
requirement. An explanation of why Brassioc is an associate was not required, nor how an
associate is accounted for under the equity method. The question did not ask for how the
investment should be treated, so no marks were available for descriptions of this.
The Examiners’ Reports for SBR consistently advise candidates that their answers to this sort
of requirement should have two sections: knowledge and application. Firstly, candidates
should describe what they know about ‘control’ and how control is obtained. A significant
minority of students missed relatively basic marks by not covering the definition of control.
Secondly, candidates should then apply this knowledge to the scenario to come to a valid
conclusion that control is not obtained.
Part (b) was generally answered well. Weaker answers focused purely on the calculations
without answering the requirement in full, which asked for an explanation with calculations.
Some candidates therefore missed the opportunity to earn relatively straightforward marks
by failing to explain how each adjustment impacts the consolidated financial statements.
Better answers correctly described each adjustment and used the spreadsheet to present a
working which led to the correct remeasurement loss as a balancing figure. The table in the
spreadsheet then helped as a reminder of which adjustments to the draft CSOFP were
needed in part (c).
14 4
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
If candidates prefer to present the calculations first, this is fine, but they should also ensure
that they provide sufficient explanation of each adjustment. For example, marks were
available for calculating the net interest based on the opening net deficit, and then for
explaining how this increases the deficit and results in a charge to retained earnings.
Common errors included calculating interest based on the closing rather than the opening
net deficit, and some answers failed to include the correct net deficit, after the settlement.
Some more fundamental errors included reporting the settlement loss as a gain. Care is
needed with use of +/– signs in a working.
Part (c) continues to be a challenge to some candidates despite advice provided in previous
SBR Examiners’ Reports. Candidates should be aware by now that question 1 often comprises
two tasks – the first to explain the correct treatment of certain issues or omissions and the
second to make corrections to the financial statements for the issues described in task one.
Both tasks are linked and should be considered together before answering. Some candidates
might prefer to answer task 1 alongside their answer to task 2.
Investment in Brassioc
Candidates did not need to spend any time explaining the process of correcting Brassioc.
Requirement (c) simply requires adjustment of the spreadsheet in the prepopulated
response option, as well as the production of any necessary workings.
The removal of the subsidiary proved to be the most challenging aspect. High-scoring
answers worked through the consolidation process with workings for goodwill, PPE fair value
adjustment and depreciation, post-acquisition profits and the allocation of post-acquisition
profit between the group and the non-controlling interest (NCI).
Candidates were then able to consider the steps needed to remove these items from the
CSOFP.
Even when candidates struggled to present these workings, marks were available for more
basic corrections. For example, most candidates should be able to calculate and remove the
goodwill from the draft CSOFP. Brassioc’s current assets and current liabilities needed no
consolidation adjustment and so could be removed without any further calculation.
Restating Brassioc as an associate proved to be more straightforward, with most answers
correctly adding the share of post-acquisition profit to the restated consideration under the
investment in associate line of the CSOFP.
Defined benefit pension
Correcting entries for the defined benefit pension plan were generally well-presented, with
many candidates scoring well – particularly where candidates had noted adjustments already
as part of their answer to part (b). It makes sense to insert each adjustment in a separate
column in the spreadsheet. This makes it clear to the marker what each entry is for.
In conclusion, it was good to see an overall improvement in the presentation of corrections
in the spreadsheet requirement of question 1. The markers felt that candidates who
performed well on this part of the question were those who showed solid exam technique.
To maximise potential for marks, candidates should present clear workings for each
adjustment without the need for markers to review spreadsheet cells for formulae (this
should be avoided as it is a risky approach). Candidates scored better when they separated
out the required corrections into separate steps.
KA PL AN P U BLI SH IN G
14 5
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
2
PEONY (MAR/JUN 2024)
Walk in the footsteps of a top tutor
Key answer tips
With the exception of part (a), this question is fully focussed on groups and doesn’t test nongroup IFRS knowledge, which is different to previous sittings.
Part (a) tests IAS 21 The Effects of Changes in Foreign Exchange Rates and how to determine
an entity’s functional currency, which should be something that students are well prepared
for and should offer the opportunity to pick up some easy marks.
Part (b) is made up of two parts. The first part being to discuss how to correct the treatment
of a subsidiary in a foreign currency, which includes calculating the exchange differences on
the translation of net asset and goodwill. The second part requires you to adjust the draft
consolidated statement of financial position. To be as efficient as possible, you should
attempt both parts at the same time and update the draft consolidated statement of financial
position as you go. Use the word processor for the explanation elements and the spreadsheet
for any calculations.
Translating a foreign subsidiary can be a tricky topic for some students, and in addition some
of the adjustments here are quite fiddly, so try to work methodically through the three issue
signposted in the exhibit.
Part (c) should offer some relief after part (b) and provide you with the opportunity to
demonstrate your knowledge of the definition of control, so don’t overrun on the earlier
parts of this question and miss out on some ‘easier’ marks!
(a)
Determining an entity’s functional currency
Tutorial note
The requirement asks you to ‘explain why’ the functional currency of Nomstra is the Ny,
therefore you have been given the conclusion that needs to be justified. Don’t be
tempted to offer alternative conclusions!
There are marks available for demonstrating your knowledge of IAS 21, so a good place
to start your answer would be stating the rules regarding how an entity determines its
functional currency.
According to IAS 21 The Effects of Changes in Foreign Exchange Rates, the functional
currency of a foreign operation is the currency of the primary economic environment
in which the foreign operation operates. This would be the currency which mainly
influences sales prices and related costs relating to goods and services (often this is
the currency goods and services are denominated and settled in), and of the country
whose competitive forces and regulations mainly determine these prices. Secondary
factors include the currency in which funds from financing activities are generated, and
in which receipts from operating activities are usually retained.
14 6
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Further factors are provided in IAS 21 to help assess whether the functional currency
of the foreign operation is the same as its parent. These include whether the foreign
operation acts with a significant degree of autonomy, and whether transactions with
the parent company are a high proportion of its overall activities.
If, after considering all of the above, the functional currency of the foreign operation
is not obvious, then management should apply judgement to determine the functional
currency which most faithfully represents the economic effects of the underlying
transactions, events and conditions.
Tutorial note
Be sure to apply the rules to the scenario in your answer in order to maximise your
marks.
Nomstra Co’s sales and related costs are predominantly denominated and settled in
Ny, indicating the Ny to be the functional currency. Although Peony Co had previously
provided a supporting loan in dollars to Nomstra Co (which may provide evidence of
financing in dollars), the loan is now settled and funds from financial activities are
generated in Ny.
Finally, there is evidence of autonomy from Peony Co in that Nomstra Co’s board of
directors operates independently. Peony Co is therefore correct in determining that
the functional currency for Nomstra Co is the Ny in accordance with IAS 21.
(b)
(i)
Adjustments to Peony Group for the three issues
Goodwill at acquisition:
Goodwill arising from Nomstra Co’s acquisition should be initially translated into
the functional currency of the group ($) at the acquisition date rate of Ny12:$1.
The non-controlling interest (NCI) should be introduced into the consolidated
financial statements at the historic rate from the date of acquisition (Ny2.7
million/12 = $225,000). Using the closing rate to initially value NCI, (Ny2.7
million/18 = $150,000) understates both NCI and goodwill by $75,000. Goodwill
and NCI must therefore be increased by $75,000.
Tutorial note
When dealing with an overseas subsidiary, always calculate goodwill in the subsidiary’s
functional currency first, before then translating at the closing rate for inclusion in the
consolidated statement of financial position at the year end.
Remember, a calculation of any foreign currency gains or losses on the translation of
goodwill is required, which will be recorded in equity of the group.
KA PL AN P U BLI SH IN G
14 7
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Goodwill
Consideration
NCI
Fair value of net assets
Goodwill at acquisition
Impairment loss
Ny000
13,200
2,700
(6,300)
––––––
9,600
(3,300)
––––––
Exchange loss
––––––
6,300
––––––
Rate
12
12
12
12
15
ß
––––
18
––––
$000
1,100
225
(525)
–––––
800
(220)
–––––
580
(230)
–––––
350
–––––
Tutorial note
To identify the double entry adjustment, first work out how much goodwill needs
to be adjusted by and then record the opposite movement in the balance that
has been calculated incorrectly. In this case the non-controlling interest
contained the error.
Record each double entry in the draft statement of financial position as you go.
Adjustment: to goodwill at acquisition date
Dr Goodwill at acquisition
Cr NCI ($2,700/12 – 2,700/18)
$000
75.0
$000
75.0
Explanation of impairment and translation of goodwill at 31 December 20X2:
The impairment loss in 20X2 should be translated at the average rate for 20X2
in accordance with stated group policy.
The impairment loss of $220,000 reduces the carrying amount of goodwill. A
corresponding expense is charged to the operating section of the statement of
profit or loss.
The owners of the parent company and the NCI should be allocated a share of
the goodwill impairment in proportion to their shareholdings. As such, 75% of
the impairment loss ($165,000) should be debited to retained earnings, and 25%
($55,000) to the NCI reserve within the equity section of the draft statement of
financial position.
The remaining carrying amount of goodwill (Ny6.3 million) is translated at the
closing rate at the financial year end. This creates a balancing difference in
dollars which is accounted for as an exchange loss of $230,000. This reduces the
carrying amount of goodwill in dollars and the corresponding loss is charged to
other comprehensive income.
14 8
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
The exchange loss should also be allocated to the owners of the parent company
and the NCI in proportion to their shareholdings. As such, 75% of the impairment
loss ($172,500) should be debited to the translation reserve, and 25% ($57,500)
to the NCI reserve within the equity section of the draft statement of financial
position.
Tutorial note
Adjustment to goodwill post-acquisition: impairment
Dr RE ($220,000 × 75%)
Dr NCI ($220,000 × 25%)
Cr Goodwill
$000
165.0
55.0
$000
220.0
Adjustment to goodwill post-acquisition: translation to CR
Dr Translation reserve ($230,000 × 75%)
Dr NCI ($230,000 × 25%)
Cr Goodwill
172.5
57.5
230.0
Explanation/calculation of translation reserve:
Profit and other comprehensive income for each year are translated at the
actual rate of exchange, but the average rate can be used as an approximation.
In the draft consolidated statement of financial position, the closing rate has
been incorrectly used to translate the loss for the year.
Correction for Nomstra’s loss in year at average rate not closing rate:
Loss at average rate: ((900)/15)
Loss at closing rate: ((900)/18)
Adjustment to loss:
$000
(60)
(50)
––––
(10)
––––
Tutorial note
The subsidiary Nomstra’s loss is included within the post-acquisition movement
in net assets and should be allocated between the parent shareholders and the
NCI.
The annual loss of Nomstra needs to be increased by $10,000 as the amount
currently consolidated in the group amounts is understated. Of this, $7,500 will
be debited against retained earnings and $2,500 against the NCI reserve.
KA PL AN P U BLI SH IN G
14 9
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Exchange loss on translation of Nomstra Co
Tutorial note
When calculating the exchange difference on net assets, remember to include
the subsidiary’s share capital as well as the retained earnings in the net assets
figure.
Due to the incorrect translation of Nomstra’s loss, the exchange difference on
translation of the subsidiary will also be misstated. The increase in Nomstra’s
loss in the group will decrease the foreign exchange loss by $10,000 (from
$175,000 to $165,000). The exchange difference on translation of Nomstra’s net
assets can be calculated as below:
Equity (net assets) at 1 January 20X2
(Ny1,500 + Ny4,800)
Loss for year
Exchange loss
Equity (net assets) at 31 December 20X2
Ny000
Rate
$000
6,300
(900)
12
15
ß
525
(60)
(165)
––––
300
––––
––––––
5,400
––––––
18
Tutorial note
Note: This calculation above is shown for clarification purposes but is not
required in your answer. The incorrectly calculated exchange loss on translation
of $175,000 was provided in the scenario, which could have been directly
adjusted for by the $10,000 error.
The foreign exchange loss has been wholly recorded in the translation reserve,
rather than allocating the NCI its share. As such, the translation reserve should
be increased by $41,250 ($165,000 × 25%), and the NCI reserve reduced by the
same amount.
15 0
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Tutorial note
Adjustment translate loss for year at average rate not closing rate
$000
7.5
2.5
Dr RE (75% × $10,000)
Dr NCI (25% × $10,000)
Cr Translation reserve
$000
10.0
Allocation of NCI’s share of exchange loss
Dr NCI (25% × $165,000)
Cr Translation reserve
(ii)
41.3
41.3
Peony Group
Tutorial note
There is a mark available for each debit and credit entry, so to maximise your marks
here, record each adjustment in a separate column.
Note that if you make a mistake within an entry, (e.g. if you failed to allocate your
adjustments to NCI) all is not lost. You would still earn credit for any adjustments taken
to the correct accounts.
Consolidated statement of financial position as at 31 December 20X2
Assets
Non-current assets
Property, plant and
equipment
Goodwill
Current assets
Total assets
KA PL AN P U BLI SH IN G
Draft
NCI
at HR
Goodwill
impairment
Exchange
loss on
GW
Translate
loss at AR
not CR
$000
$000
$000
$000
$000
(220.0)
(230.0)
18,500.0
725.0
–––––––
19,225.0
–––––––
3,200.0
–––––––
22,425.0
–––––––
75.0
NCI share
of
corrected
translation
loss
$000
Revised
$000
18,500.0
350.0
–––––––
18,850.0
–––––––
3,200.0
–––––––
22,050.0
–––––––
15 1
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Equity
Share capital
Retained earnings
Translation reserve (OCE)
Non-controlling interest
Total equity
Liabilities
Non-current liabilities
Current liabilities
Total liabilities
Total equity and liabilities
(c)
6,000.0
15,462.5
(175.0)
–––––––
21,287.5
137.5
–––––––
21,425.0
–––––––
(165.0)
75.0
200.0
800.0
–––––––
1,000.0
–––––––
22,425.0
–––––––
(55.0)
(172.5)
(7.5)
10.0
41.3
(57.5)
(2.5)
(41.3)
6,000.0
15,290.0
(296.2)
–––––––
20,993.8
56.2
–––––––
21,050.0
–––––––
200.0
800.0
–––––––
1,000.0
–––––––
22,050.0
–––––––
Changes in government regulations
Tutorial note
The definition of control is regularly examined, so make sure you learn it. Start your
answer by setting out this definition and then consider whether control still exists
following the change in government regulations. If control has been lost then the
subsidiary would need to be derecognised, so set out how this would be recorded in the
consolidated financial statements.
You should then consider the alternative treatments of the investment, as per the
requirement, if Peony don’t have control.
According to IFRS 10 Consolidated Financial Statements, a subsidiary is an investment
under the control of the investor. Control arises when the investor is exposed, or has
rights, to variable returns from its involvement with the investee and can affect those
returns through its power over the investee. Power arises when the investor has
existing rights which give it the current ability to direct the activities which significantly
affect the investee’s returns.
Restrictions on the ability to transfer funds from subsidiary to parent do not preclude
the existence of control. However, the government restrictions which limit the extent
to which Peony Co can exercise rights or governance over Nomstra Co suggests that
power, and hence control, may have been lost.
15 2
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
If Peony Co no longer has control over Nomstra Co, it may still exert a significant
influence. Indicators of significant influence under IAS 28 Investments in Associates
and Joint Ventures include representation on the board of directors, participation in
policy-making processes (decisions about distributions), material transactions
between the entities, interchange of managerial personnel or provision of essential
technical information. If this is the case, it should account for Nomstra Co as an
associate in the consolidated financial statements using the equity method. The
goodwill, net assets and non-controlling interest of the subsidiary would need to be
derecognised at the date control was lost, giving rise to a gain or loss on disposal in the
consolidated statement of profit or loss, which is presented in the operating section.
Tutorial note
Try to remember that an investment in another entity may be a financial asset, if
neither control nor significant influence exists.
IAS 28 also, however, describes how the loss of significant influence can occur when
the investee is subject to the control of a government, which may be the case here.
Peony Co may not even be able to account for Nomstra Co as an associate if it no longer
holds significant influence over Nomstra Co and no longer has the power to participate
in Nomstra Co’s financial and operating policy decisions. If this is the case, the
investment will meet the definition of a financial asset, in accordance with IFRS 9
Financial Instruments, and will be remeasured to fair value at each reporting date.
ACCA Marking scheme
Marks
(a)
Determining an entity’s functional currency under IAS 21:
Principles
Application
Maximum
(b)
(i)
Explanation with calculations of the three issues:
Goodwill at acquisition
Goodwill impairment and translation at 31 December 20X2
Translation reserve
Maximum
(ii)
Adjust consolidated statement of financial position:
Goodwill
Retained earnings
Translation reserve
NCI
Maximum
KA PL AN P U BLI SH IN G
4
3
––––
5
––––
3
5
4
––––
10
––––
3
2
3
4
––––
10
––––
15 3
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
(c)
Discussion about control/significant influence:
Control definition and application
Loss of control impact on treatment as subsidiary
Alternative treatment: equity method IAS 28
Alternative treatment: financial asset IFRS 9
Maximum
Total
2
1
2
2
––––
5
––––
30
––––
Examiner’s comments
Part (a) was generally answered well, although some candidates strayed beyond the
requirement. The use of ‘why’ in the requirement implies that this is not something to
debate: candidates are required to explain why this is indeed the case.
Answers which outlined the way in which IAS 21 determines the functional currency, and
then applied this knowledge to the scenario, often gained maximum marks. A good way to
present this would be to state each determining factor from the standard, and then explain
whether this was the case in the exhibit.
Omitting knowledge from IAS 21 severely restricts the marks available because candidates’
answers often end up merely repeating information from the exhibit without justifying the
conclusion.
Weaker answers lacked the focus on how the functional currency is determined, and instead
strayed away from the requirement to discuss the implications of control and the process of
consolidating a foreign subsidiary, which was not asked for.
For part (b), the spreadsheet requirement continues to be a challenge. Candidates may have
benefited from answering part (ii) alongside their answer to part (i), given that the
explanations and calculations from part (i) form the basis for the corrections to the draft
financial statements in part (ii).
Candidates should have considered each issue individually, explaining the correct method of
consolidation in accordance with IAS 21.
Issue 1: There was only one error, so the explanation should have been brief. Good answers
quantified how much the NCI had been understated by.
Better answers also outlined the correcting journal, which could then be used to apply
corrections to the draft CSFP in answering part b(ii).
Marks are available in part (ii) for every correcting entry (every debit, every credit), so whilst
it is not an explicit requirement of part (i), presenting these journal entries can be used to
help you methodically process the corrections in the CSFP spreadsheet when you get to
answer part b(ii).
Issue 2: Many answers included a goodwill calculation to help incorporate the impact of the
goodwill impairment. Most candidates provided a good explanation of the process by which
the goodwill is first impaired and then remeasured at the reporting date. Marks were often
gained in explaining that applying an average rate to the impairment loss is correct, and how
much this would be (in dollars). However, as in the case of issue 1, fewer answers identified
the double entry impact of the impairment.
15 4
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Most answers appreciated that goodwill should be translated at the closing rate, but the
challenge was to calculate the closing goodwill amount (in Ny). Few answers considered the
correcting double entry required, which could then be processed through the spreadsheet
when answering part (ii).
Issue 3: Most candidates appreciated that this loss should have been translated at the
average rate. Few candidates commented that the loss for the year needed be allocated
between the group and the NCI.
Many candidates made good attempts to calculate a revised exchange loss arising on the
translation of the subsidiary’s net assets and profits. Many, however, failed to apportion the
NCI share of the exchange loss.
Across the three errors in part (i), candidates often performed well. However, in part (ii), they
were unable to process the entries needed to correct the draft financial statements. This
suggests that candidates need further practice at adjusting a CSFP and at working with
spreadsheets.
Part (c) was well-answered overall, with most candidates identifying the consequences of
government-imposed restrictions over the transfer of funds from Peony Co’s subsidiary, and
the limitations imposed on the extent to which it can exercise rights over its subsidiary.
Candidates which identified that the key issue related to the extent of control which Peony
could now retain, gained marks by first defining what ‘control’ is in a group context, and what
happens if such control is lost. Fewer answers extended this discussion to consider significant
influence, but those who did, earned marks for relevant examples of indications of significant
influence (e.g. board representation, participation in policy making, material transactions),
and then explaining how the equity method of accounting would be required.
3
KABELO (SEP/DEC 2023)
Walk in the footsteps of a top tutor
Key answer tips
This question presented every candidate’s favourite exam topic – consolidated cash flows.
The important thing here is not to panic, work through your technique and realise there are
plenty of easy marks available. Do not down tools!!
The pre-populated spreadsheet element (part a(i)) is first followed by an explanation of the
adjustments you need to consider in order to complete the extracts provided (part a (ii)). Do
not think about these two requirements as separate exercises. To improve efficiency,
attempt both parts at the same time – write your explanation (preferably in the word
processing software – writing too much narrative in the spreadsheet function is not
recommended as viewing issues upon marking can arise) as you deal with the adjustments in
the spreadsheet.
Part b incorporates some IFRS 9 knowledge of simple financial instruments but with a cash
flow spin. This requirement tests your knowledge of the cash implications of the different
types of financial instruments (acquired debentures, issued bonds and finance raised through
loans) caused by capital and interest payments or receipts.
KA PL AN P U BLI SH IN G
15 5
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
(a)
(i)
Consolidated statement of cash flows for the Kabelo Group for the year ended
31 December 20X5
Cash flows from operating activities
Draft
Operating profit
Depreciation
Impairment
Increase in inventories
Decrease in trade and
other receivables
Decrease in trade and
other payables
Cash from operating
activities before income
taxes
Taxation paid
Cash inflow from
operating activities
Cash flows from investing
activities
Acquisition of property,
plant and equipment
Consideration paid for
acquisition of Trudos Co
Cash outflow from
investing activities
$
1,318,100
625,060
Working
capital
adjustments
$
Acquisition
of Trudos Co
Revised
$
(658,100)
(211,500)
256,800
220,300
$
1,318,100
625,060
31,100
(401,300)
8,800
93,900
(175,400)
(81,500)
–––––––––
1,167,460
–––––––––
1,500,260
(385,600)
–––––––––
781,860
(413,200)
–––––––––
(W2)
(W3)
1,087,060
(543,600)
(not yet calculated)
(697,660)
400,000 – 24,900
(W1)
(375,100)
–––––––––
(543,600)
–––––––––
(1,072,760)
–––––––––
–––––––––
Workings
(W1) Acquisition of PPE
At 31 December 20X4
Trudos Co
Fair value adjustment to plant
Depreciation
At 31 December 20X5
Cash additions (cash outflow)
15 6
$
3,125,300
421,000
50,000
(625,060)
–––––––––
2,971,240
3,668,900
–––––––––
(697,660)
–––––––––
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
(W2) Goodwill impairment
Cash consideration (80% × 100,000 × $5)
Share exchange (80% × 100,000 × 1/4 × $13)
$
400,000
260,000
–––––––
$
660,000
Add NCI at acquisition
20% × 100,000 × $8
Less net assets at acquisition:
Carrying amount
Fair value uplift plant
Deferred tax on fair value uplift (50,000 ×
30%)
160,000
–––––––
820,000
747,600
50,000
(15,000)
–––––––
(782,600)
–––––––
37,400
Goodwill on acquisition of Trudos Co
Carrying amount of goodwill at 31 December
20X4
441,100
–––––––
478,500
Carrying amount of goodwill at 31 December
20X5
447,400
–––––––
31,100
–––––––
Impairment (non-cash expense)
(W3) Taxation paid
$
Current taxation at 31 December 20X4
Deferred taxation at 31 December 20X4
Add additional deferred tax on fair value
adjustment
Add charge to 20X5 profit or loss
Current taxation at 31 December 20X5
Deferred taxation at 31 December 20X5
Tax paid (cash outflow)
KA PL AN P U BLI SH IN G
$
256,900
250,000
15,000
385,600
–––––––
907,500
364,300
130,000
–––––––
494,300
–––––––
413,200
–––––––
15 7
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
(ii)
Explanation of adjustments
Tutorial note
Work through the details in the question methodically, simultaneously updating
the explanation and the adjustments.
Don’t make things overly complicated – explain why a cash flow impact occurs
for each issue and where the impact will be presented within the consolidated
statement of cash flows.
The mid year acquisition is considered first. When consolidated cash flows are
tested you must expect either a mid-year acquisition or disposal to be included
within the scenario. Three main areas are affected – the cash from the
acquisition/disposal, the impact upon consolidation workings due to the
acquisition/disposal (e.g. PPE, GW) and the impact on the working capital
movements within the cash from operating activities reconciliation.
Don’t forget to mention that non-cash transactions are omitted from the
statement of cash flows e.g. there is no cash effect of the parent issuing shares
to buy the new subsidiary. Its not enough to just leave this detail out, you must
explain to the marker why something is omitted to get marks!!
The consolidated statement of cash flows categorises inflows and outflows of
cash and cash equivalents from the group’s perspective between operating,
investing, and financing activities. The acquisition of Trudos Co should be
included as an outflow in investing activities. It is important that the effects of
non-cash transactions are eliminated. The consideration paid as a share for
share exchange must not be included since it is not a cash flow. Since the assets
and liabilities of Trudos Co will be consolidated from 30 June 20X5, the cash
balance existing on acquisition is effectively a cash addition to the group. The
cash paid to acquire Trudos Co is therefore shown net of the cash and cash
equivalents acquired on acquisition. Significant non-cash transactions are
otherwise disclosed in a note to the financial statements.
It is also necessary to adjust the calculations for the other assets and liabilities
acquired when gaining control over Trudos Co, such as inventories, trade
receivables and trade payables. Since the net assets of Trudos Co will be
consolidated, the effects of the acquisition must be eliminated so that the
movements on the assets and liabilities reflect only cash flows incurred by the
group during the year. The impact of the acquisition of a subsidiary on the
statement of cash flow is included in a note to the financial statements.
Tutorial note
Use a working (T account or an alternative) to determine what movements in
goodwill have arisen. This working will require a calculation of the goodwill
arising from the acquisition of Trudos Co. The working enables us to determine
the impairment charge on goodwill.
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KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Care must also be undertaken to identify any goodwill impairments arising in
the year. Cash from operating activities is calculated by adjusting the group’s
profits for non-cash flows which have impacted upon operating profit.
Impairments of goodwill must be added back to operating profit since they
would reduce group profits but without impacting on the group’s cash flows.
Tutorial note
Use a working (T account or an alternative) to determine what movements in
property, plant and equipment have arisen.
The cash paid to acquire property, plant and equipment during the year must
exclude the effects of the acquisition of Trudos Co. The acquisition of Trudos Co
will increase the non-current assets by their fair value at acquisition, being the
carrying amount of $421,000 plus the fair value adjustment of $50,000 needed
at the date of acquisition. The initial recognition of the non-current assets of
Trudos Co is not a cash flow for the Kabelo Group.
Tutorial note
The tax charge included within the statement of profit or loss will include both
the movements caused by deferred tax and the current year tax charges.
Therefore, any working to determine the tax paid during the year should
combine both the current and deferred tax opening and closing balances.
Deferred tax entries must be matched against the accounting treatment of the
transaction causing the deferred tax. As fair value adjustments on acquisition of
a subsidiary cause changes to the resulting goodwill, then the deferred tax
liability caused by the fair value adjustments will also affect goodwill.
The taxation figure should be the cash paid by the group to the tax authorities
during the year. It is important therefore that the impact of deferred tax is
adjusted for in calculating the figure since movements in deferred tax are not a
cash flow. The fair value increase of $50,000 to the property, plant and
equipment increases the carrying amount of property, plant and equipment for
consolidation purposes without a corresponding change to the tax base of the
assets. A deferred tax liability arises on acquisition equal to $15,000 being 30%
of the fair value adjustment. This must be excluded from the consolidated
statement of cash flows so that only the cash transaction for tax paid is
recognised.
KA PL AN P U BLI SH IN G
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SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
(b)
Presentation in statement of cash flows
Tutorial note
This requirement focusses on the presentation of the financial instruments within the
statement of cash flows. It doesn’t require a detailed summary of the accounting
treatments of the financial instruments. Focus on the cash implications of each
instrument (capital and interest repayments/receipts). Do not waste time on
complicated technical considerations that are not asked for.
Details regarding 4 different financial instruments are presented (namely the acquired
debentures, issued bonds, a loan to acquire the subsidiary and an overdraft) and only
6 marks are available in total. Aim for coverage of each instruments’ cash flow effects.
A single, cash flow relevant point on each one should give at least 4 out of 6.
Investing activities include expenditures intended to generate future income and cash
flows. Consequently, the acquisition of the debentures should be presented within
investing activities as they were acquired to increase returns.
Financing activities are activities which result in changes in the size and composition
of the contributed equity and borrowings of the entity.
Issues of bonds are similar in nature to bank borrowings since they typically are used
to finance the long-term activities of the entity. IAS 7 Statement of Cash Flows states
that bank borrowings are generally considered to be financing activities. The
acquisition of Trudos Co was financed by a bank loan. It would therefore seem
appropriate that both the proceeds of the loan and from the issue of the bonds should
be included as a financing activity.
The bank overdraft should, however, be classified as cash and cash equivalents. Where
the bank overdraft is repayable on demand and forms an integral part of the entity’s
cash management, then it should be included as a component of cash and cash
equivalents. Since the bank balance fluctuates between an in-funds balance and an
overdraft on a regular basis, it would seem to be integral to the cash management of
the business. Should the overdraft be more of a permanent nature, then it would be
correctly presented within financing activities.
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KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
ACCA Marking scheme
Marks
(a)
(i)
Marks awarded for calculations and adjustment of pre-populated
spreadsheet, as follows:
Calculation and adjustment of goodwill impairment
Working capital adjustments
Cash paid to acquire PPE
Taxation paid
Net cash to acquire Trudos Co
Maximum
(ii)
1 mark per discussion point of key principles and application to the
scenario:
Acquisition of subsidiary
Working capital adjustments
Goodwill impairment
Purchase of PPE
Taxation paid
Maximum
(b)
1 mark per discussion point of key principles and application to the scenario:
IAS 7 knowledge
Loans
Overdraft
Maximum
Total
7
3
3
3
1
–––
14
–––
3
2
1
3
3
–––
10
–––
2
3
3
–––
6
–––
30
–––
Examiner’s comments
It seemed that some candidates may have been less prepared for a question involving a cash
flow statement than they would have been with either a statement of financial position or a
statement of profit or loss.
Part (a)(i) & (ii): Exhibit 1 described the acquisition of a subsidiary for a consideration made
up of both cash and a share exchange and presented the net assets of the subsidiary at the
acquisition date. The question explained that goodwill was impaired during the year, and
candidates needed to calculate this. A fair value adjustment was required to plant, and a
deferred tax rate was provided so that candidates could apply deferred tax to the fair value
adjustment. A depreciation charge for the year was provided and the exhibit stated that
there were no disposals of non-current assets during the year, with some additions paid for
by cash.
Exhibit 1 described the methods used to prepare the draft statement of cash flow. In this
case, movements in working capital and property, plant and equipment were generated by
taking the difference between opening and closing balances. Candidates needed to know
that this method was wrong, and instead prepare workings which show the full movements
between opening and closing balances. From this, candidates can complete a revised
statement of cash flow, task a(i), and also explain the corrections to the draft statement of
cash flow, task a(ii). There is no need to complete task a(i) before answering task a(ii), and
some candidates may find it helpful to answer a(ii) alongside a(i), to ensure that every step
of the correction is suitably explained. Workings which are presented in the spreadsheet to
answer a(i) may also prove useful when describing the approach to the adjustments in a(ii).
Weaker answers to a(ii) tended to repeat the workings from a(i) with minimal explanation of
why the corrections to the cash flow statement were required.
KA PL AN P U BLI SH IN G
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SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Relatively easy marks are often available for a goodwill calculation, and in this case, marks
were given for cash and share exchange consideration calculations, a calculation of the noncontrolling interest at fair value and a revised net assets figure, uplifted for the fair value of
the plant net of deferred tax. Better answers extended the working by adding the resulting
goodwill figure to the net increase in goodwill, using the opening and closing balances, to show
the impairment as a balancing item. This impairment is a non-cash item which will be an
adjustment in the reconciliation to cash from operations: be careful to add the impairment.
In addition, the cash consideration will be shown under investing activities in the cash flow,
but net of the cash introduced into the group through the acquisition of the subsidiary. A
second working should have been produced for taxation. Following the goodwill working,
candidates who identified a change in deferred tax from the fair value uplift on plant could
include the other side of the double entry here. Marks were available for including the tax
charge and deferred tax to determine the tax paid.
A final working relating to the acquisition of property, plant and equipment should include
the amounts added from the subsidiary acquisition and the fair value adjustment, as well as
deducting the depreciation charge. Marks were available for the correct inclusion of each of
these three items leading to a balancing item representing cash spent on property, plant and
equipment during the year. This should have been included in the revised statement of cash
flow and referenced to this working.
When adjusting the draft cash flow statement, candidates should be careful with signs (+/-).
Marks are only awarded for the correct adjustment to original entries, i.e. addition or
deduction. This was particularly important for the adjustments to the three movements in
working capital, being inventories, trade receivables and trade payables, in the reconciliation
of operating profit to cash from operating activities before income taxes. A significant
number of answers failed to present their adjustments with the correct signage and so failed
to score marks for these entries. This same issue was raised in the previous examiner’s report
where candidates used an adjustment column to present corrections to the draft figures but
failed to show the correct + or – sign. Explanations for these adjustments in answering part
a(ii) were often poor.
Weaker answers attempted to revise the spreadsheet by editing the original draft entries.
Some answers amended the original cells by inserting formulae within cells, and other
answers deleted and replaced the original entries with alternative figures. A few attempted
to present a revised statement below the draft statement, wasting valuable time. Such
methods make it harder to link to workings. The recommended approach is to leave the draft
numbers alone, instead making adjustments in subsequent columns.
As already noted, some figures for inclusion in the spreadsheet were more easily calculated
via workings. Provided these figures are referenced to workings, the marker will be clear
where they have come from and can award marks accordingly, even if some mistakes have
been made.
Part (b): Candidates should read the requirement carefully, it asks for presentation within
the statement of cash flows. Weak answers failed to focus on the cash flow presentation at
all and instead provided explanations relating to the categorisation of each financial
instrument in the statement of financial position. These answers gained no marks.
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KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
A good answer defined cash and cash equivalents, investing activities and financing activities,
and then matched, with reasons, each financial instrument with the appropriate
presentation method. Weaker answers omitted the knowledge step and merely concluded
with minimal reasoning.
Most candidates were able to describe investing and financing activities, although a
significant number of answers failed to consider presentation of the overdraft as cash and
cash equivalents.
4
GREER (MAR/JUN 2023)
Walk in the footsteps of a top tutor
Key answer tips
This question is of a common ‘Q1’ style. As always, it tests the group syllabus area, but also
includes requirements covering other syllabus areas – this time the topic area tested is IFRS
9 Financial instruments.
The group topics tested here include a discussion of how to determine the acquirer in a
business combination, followed by a calculation of goodwill, including a step acquisition that
achieves control and, lastly, the discussion of a step acquisition from FVOCI financial asset to
associate undertaking.
The IFRS 9 scenario covers a tricky area – that of the modification of a financial liability.
(a)
The acquirer
Tutorial note
Part (a) is a discussion as to why Greer should be deemed the acquirer as oppose to
Layout. Discussion of acquisition accounting and control are tested on a regular basis.
This will not be the final time you see such a requirement in this exam kit.
The requirement is worth 10 marks. Therefore depth of discussion is required to pass. It
will not be enough to get straight to the point and move on – ‘Greer is the acquirer
because Greer has control of Layout’ – now let’s move onto the next question…. To score
well, candidates should be justifying their arguments using the many specific indicators
that are described in the scenario e.g. voting rights, composition of the board.
Do not restrict you answer to only discussing why Greer is the acquirer. The requirement
is restrictive as to your conclusion but you should still consider all potential options. The
scenario describes conflicting indicators that, in isolation, may suggest that Layout is
the acquirer e.g. that Layout is the larger than Greer. Consideration of all relevant
angles would be needed in practice and so will carry marks in the SBR exam.
The acquisition method set out in IFRS 3 Business Combinations is applied from the
viewpoint of the acquirer. The acquirer is the entity obtaining control over an acquiree,
which must meet the definition of a business. An acquirer must therefore be identified
whenever there is a business combination.
KA PL AN P U BLI SH IN G
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In more complex situations, IFRS 3 takes a substance over legal form approach to
identifying the acquirer. This approach looks beyond the rights of the combining
entities themselves. It also considers the relative rights of the combining entities’
owners before and after the transaction. IFRS 3 provides the following indicators to
consider:
•
•
•
•
•
•
The entity which transfers cash or other assets or incurs the liabilities.
The entity which issues the equity interests.
The entity whose size is significantly greater than that of the other combining
entity or entities.
The entity whose owners as a group retain the largest portion of the voting
rights.
The entity whose owners have the ability to elect or appoint or remove a
majority of the members of the governing body of the combined entity.
The entity whose (former) management dominates the combined management.
The arguments supporting Greer Co or Layout Co as the acquirer are finely balanced.
IFRS 10 Consolidated Financial Statements states that control exists when the investor
has:
•
power over the investee
•
exposure, or rights, to variable returns from its involvement with the investee,
and
•
the ability to use its power over the investee to affect the amount of the
investor’s returns.
There could be a general presumption that Greer Co has achieved control over Layout
Co by acquiring more than one half of the voting rights of the combined entity (51%)
(unless it can be demonstrated that such ownership does not constitute control). A
controlling ownership does not necessarily mean that the entity has the power to
govern the combined entity’s financial and operating policies so as to affect the
amount of its returns, therefore other facts should also be considered.
As set out above, the entity which issues the equity interests is normally the acquirer
and that is Greer Co. Also, Greer Co has paid cash for 35% of the equity and this
represents a significant part of the total purchase consideration.
The former members of Greer Co’s board represent the majority of the board of
directors of the combined entity with six former board members of Greer Co and two
former board members of Layout Co.
It is not evident which company is able to dominate the management of the combined
business as the management team comprises the former CEO of Layout Co and five
other members, three from Greer Co and two from Layout Co. Although the board
(which comprises six former board members of Greer Co and two former board
members of Layout Co) nominates the management team, the CEO of Layout Co has
significant influence on the business and on the selection of the team.
Also, as the fair value of Layout Co ($90 million) is significantly greater than that of
Greer Co ($70 million), this again would point towards Layout Co as the acquirer.
Similarly, Greer Co’s business only represents 44% and Layout Co’s business 56% of the
total value of the combined businesses.
However, in deciding which company is the acquirer, the decision that Greer Co is the
acquirer is influenced by the fact that Greer Co issued the equity interest, transferred
cash and has the marginal controlling interest (51%).
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KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
(b)
Goodwill
Tutorial note
Do not consider this as just a goodwill calculation – the requirement wants an
‘explanation’. Narrative marks are likely to be easier to achieve than calculation marks.
An acquisition from a 35% to a 100% shareholding is a step acquisition that achieves
control. This is treated as if Greer sells the 35% investment and buys back the entire
100% in one go. The 35% associate investment is revalued to fair value with gains or
losses taken to profit or loss. Goodwill is then calculated as if the entire subsidiary was
acquired in one transaction. The cost of investment therefore includes the fair value of
the original investment at the date of acquisition (the 35%).
Only 5 marks for this part vs 10 marks and 9 marks for (a) and (c) so prioritise your time
accordingly.
Prior to control being obtained, Greer Co has accounted for its investment in Layout
Co as an associate in accordance with IAS 28 Investments in Associates and Joint
Ventures. As part of accounting for the business combination, Greer Co remeasures
any previously held interest at fair value and takes this amount into account in the
calculation of goodwill. Any resultant gain or loss is recognised in the investing section
of the consolidated profit or loss.
$m
1 April 20X7
Shares issued – consideration transferred (25m × $2.85)
Fair value of equity interest held before business combination
(35% of $90m)
Fair value of identifiable net assets
Goodwill
71.25
31.5
(87)
––––––
15.75
––––––
Therefore, there is a loss on the previously held interest of $4.5 million ($36m –
$31.5m) which will be recognised in the investing section of the consolidated profit or
loss.
(c)
Gae Co
Tutorial note
Here we have a step acquisition from a 10% FVOCI financial asset to a 22% investment
in associate. The step acquisition principles when achieving significant influence are
similar to that of achieving control. Sell the original and buyback the entire 22%.
KA PL AN P U BLI SH IN G
16 5
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
If an equity investment is not held for trading, an entity can make an irrevocable
election at initial recognition to measure it at fair value through other comprehensive
income (FVTOCI). Any changes in fair value are recognised in other comprehensive
income (OCI) and are never reclassified to profit or loss, even if the asset is sold,
impaired or increased in size.
Dividends are recognised when the entity’s right to receive payment is established, it
is probable the economic benefits will flow to the entity, and the amount can be
measured reliably. Dividends are recognised in profit or loss (investing section) unless
they clearly represent recovery of a part of the cost of the investment, in which case
they are included in OCI.
The additional investment in Gae Co creates an associate relationship and, therefore,
the investment will be accounted for using equity accounting in the consolidated
financial statements from 1 July 20X7. Using the equity method, the investment is
initially recognised at cost and adjusted thereafter for the post-acquisition change in
the investor’s share of the investee’s net assets.
At 1 July 20X7, a gain of $3 million ($26m – $23m) will be recorded in OCI when the
shareholding is increased to 22% as Greer Co is using the fair value as deemed cost
approach. The investment in associate amount included in the consolidated statement
of financial position for the year ended 31 December 20X7 would be:
Cost – cash paid
Fair value of original 10% holding
Deemed cost of associate
Share of post-acquisition profits ($20m × 22% × 6/12)
$m
30
26
–––––
56
2.2
–––––
58.2
–––––
Post-acquisition profits of $2.2 million will be included in the investing section of the
consolidated statement of profit or loss and not OCI.
The gain of $3 million in OCI on the revaluation of the investment in Gae Co will not be
reclassified to profit or loss.
Tutorial note
Watch your dates! The dividend paid by Gae Co is before the second acquisition. It was
paid before Gae Co was an associate. Therefore, the dividend income is not removed
from the group profits and the carrying amount of the investment in associate is
unaffected.
The dividend received on 31 March 20X7 will be included in the investing section of
the consolidated statement of profit or loss for the year as this was received whilst the
investment was at 10% and classified as FVTOCI.
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KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
(d)
Loan
Tutorial note
The modification of the financial liability represents an unusual technical situation. You
may have found this difficult to remember or maybe you haven’t even studied it yet!
However, never leave an answer blank. Stick to the basics, have a guess at the harder
stuff and you may surprise yourself. Discussion of the ‘basic’ accounting rules (initial
recognition and subsequent treatment) regarding a financial liability will still score
plenty of marks, even if your understanding of the modification is limited.
Also, watch your dates again! The requirement wants the accounting for a 2-year
period. The amortised cost needs to be at the end of the 2nd year.
The loan was initially recognised on 1 January 20X6 at $26,325,000 being the
transaction price of $27 million less the transaction costs of $675,000.
The loan would be measured at amortised cost as follows:
Effective interest
Interest paid
rate (5.6%)
$
$
$
20X6
26,325,000
1,474,200
(1,350,000)
(27,000,000 – 675,000)
(26,325,000 × 5.6%) (27,000,000 × 5%)
20X7
26,449,200
1,481,155
nil
(26,449,200 × 5.6%)
PV of the modified cash flows at original EIR – restate closing balance
Difference to profit or loss
Opening
Closing
$
26,449,200
27,930,355
26,841,000
1,089,355
In the year ended 31 December 20X6, an interest expense of $1,474,200 would be
recognised in the financing section of the statement of profit or loss. The carrying
amount of the liability at 31 December 20X6 was $26,449,200.
In the year ended 31 December 20X7, the interest expense recognised in the financing
section of the statement of profit or loss would be $1,481,155. This would give a
carrying amount of $27,930,355 at 31 December 20X7 before remeasurement.
At 31 December 20X7, the carrying amount of the liability is adjusted to the present
value of the modified cash flows of $26,841,000. As noted in the scenario, the
modification was not considered to be substantive. A gain of $1,089,355 ($27,930,355
– 26,841,000) is therefore recognised in the financing section of the statement of profit
or loss in the year ended 31 December 20X7.
KA PL AN P U BLI SH IN G
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SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
ACCA Marking scheme
Marks
(a)
1 mark per discussion point of key principles and application to the
scenario:
IFRS 3 principles
Application of IFRS 3 principles to the scenario
Maximum
(b)
1 mark per discussion point of key principles and 1 mark per correct
principle in calculation:
Step acquisition principles
Goodwill calculation:
Consideration
Fair value of equity interest
Fair value of net assets
Discussion/calculation of loss on previously held interest
Max 2
Maximum
(c)
1 mark per discussion point of key principles and application to the
scenario:
Discussion of FVOCI financial assets
Investment becomes associate
Carrying amount of associate
Post-acquisition profits in SPL
Gain of $3 million in OCI
Dividend in SPL
Maximum
(d)
1 mark per discussion point of key principles and 1 mark per correct
principle in calculations:
Discussion/principles from IFRS 9
Initial carrying amount
EIR in 20X6
Interest paid in 20X6
EIR in 20X7
Interest paid in 20X7
Difference to SPL
Maximum
Total
16 8
Max 5
Max 8
–––
10
–––
1
2
1
1
–––
5
–––
Max 3
1
4
1
2
1
–––
9
–––
Max 2
1
1
1
1
1
1
–––
6
–––
30
–––
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Examiner’s comments
Part (a) of this question required candidates to evaluate why a company (Greer Co) was
deemed to be the acquirer in a business combination.
Candidates gained marks for two key elements. The first was for setting out the principles of
control, IFRS 3 Business Combinations ‘substance over form’ approach and how an acquirer
is identified. The second area where marks were obtained was the application of these
principles to the scenario. The arguments were finely balanced, but the question did advise
candidates as to which company was actually the acquirer. Therefore, candidates’ answers
should have been written with this in mind, whilst at the same time discussing why the
circumstances might point to the other company (Layout Co) being deemed to be the
acquirer.
This question was answered well by those candidates who discussed relevant IFRS
Accounting Standards and then applied the principles to the scenario. Other candidates did
not fully understand the control relationship, or simply gave information from the scenario
without adding any further reasoning as to how this information demonstrated acquisition
or control.
Part (b) of the question required candidates to explain, with calculations, how goodwill on
acquisition was determined within the consolidated financial statements.
Candidates were asked to explain and calculate. This means that candidates were expected
to describe in more detail the calculation of goodwill by stating relevant facts. There were
5 marks in total for this part of the question with the principles being awarded 2 marks. This
element was answered reasonably well by most candidates. However, very few candidates
gave any explanation or discussed the principles behind the calculation of goodwill as the
requirement asked for. This meant that many candidates unnecessarily limited their marks.
Many correctly calculated the amount of the consideration value of the shares issued and
also stated correctly the fair value of the net assets. The weakest element of the answer was
the calculation of the fair value of the equity interest before the business combination. This
was unfortunate, given that this is a well-established and often examined element of the
syllabus. There was a loss on the previously held interest which was recognised in profit or
loss. As an illustration of the way marks can be lost by not discussing the calculation, a mark
would be awarded for not only calculating the loss but also for stating that the loss is
recognised in profit or loss.
Part (c) of the question required candidates to explain how an investment of 10% and a
further investment of 12% in a company would be dealt with in the consolidated financial
statements.
The additional investment created an associate relationship and therefore, the investment
would be accounted for using equity accounting in the consolidated financial statements
from the date of the additional purchase. Candidates were expected to discuss that, under
equity accounting, the investment is initially recognised at cost and adjusted thereafter for
the post-acquisition change in the investor's share of the investee's net assets.
The problem arises as to what constitutes ‘cost’ but the question stipulated that the company
used fair value as ‘deemed cost approach’ and, therefore, on the acquisition of the second
tranche of shares, a fair value gain was measured and recorded in OCI. Candidates were then
expected to calculate the subsequent value of the investment in associate in the consolidated
statement of financial position at the year end. Marks are always given for an explanation of
the equity method as well as, in this case, the calculation of share of post-acquisition profits
attributed to the associate.
KA PL AN P U BLI SH IN G
16 9
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Most candidates made a good attempt at this part of the question. However, the discursive
element of the answers was often limited to an explanation of what constitutes an associate
rather than the wider issues concerning the treatment before the company was an associate
and deemed cost at fair value. Many candidates did not realise that the fair value of the
original holding should be used in the calculation of the investment in the associate, but most
candidates made a good attempt at the calculation of the post-acquisition profits with the
most common error being not to time-apportion. Very few candidates discussed the issues
surrounding the recognition of the dividend generally and in profit or loss specifically.
Part (d) of the question required candidates to calculate and briefly outline how a loan would
be accounted for in the financial statements over a two-year period.
The majority of the marks were allocated to an amortised cost calculation. However, many
candidates did not correctly treat the transaction costs at initial recognition and did not
appear to understand the difference between the effective interest rate and the interest
paid. The interest expense recognised in profit or loss was calculated using the effective
interest rate, but many candidates treated the interest paid as the interest expense.
Marks were awarded for candidates’ own figures if they adjusted the current carrying
amount of the liability to the present value of the modified cash flows and recognised a gain
in profit or loss in the financial statements. Surprisingly some candidates treated the loan as
a financial asset. Overall, the performance was disappointing.
Conclusion
Generally, the performance was good for this question, but some core areas of syllabus
knowledge still need improvement.
5
STERLING (SEP/DEC 2022)
Walk in the footsteps of a top tutor
Key answer tips
This question has a heavy groups focus, and less emphasis on non-group IFRS knowledge
compared to previous sittings. There is also a substantial amount of marks available for
calculations – up to 15 marks. The requirements still ask for an explanation of the accounting
treatment though, so your answer should consist of both a narrative responsive and
calculations.
The requirement has been structured in such a way that you only need to read one exhibit in
order to answer a particular part of the question. Don’t waste time reading all of the exhibits
upfront – read each exhibit as you answer each sub-requirement.
17 0
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
(a)
(i)
Treatment of Berthold Co in Sterling Co’s consolidated statement of profit or
loss for the year ended 31 March 20X9
Tutorial note
Look out for the dates in a group question, particularly when there is an
acquisition or disposal of shares during the period. In part (a) there is a step
acquisition as Sterling Co obtains control over Berthold Co on 1 December 20X8
(Sterling’s shareholding goes from 40% to 75%).
Split the reporting year into two periods. Prior to the 1 December 20X8 Sterling
has an associate, so equity accounting should be applied. Then from 1 December
20X8, the investment in Berthold is treated as a subsidiary, so a line-by-line
consolidation would be required.
In addition, to reflect the change in the status of the investment, the original
shareholding needs to be remeasured to fair value, with the resulting gain being
recognised in the group profit or loss.
Prior to the investment in Berthold Co on 1 December 20X8, Sterling Co’s 40%
investment in Berthold Co would be accounted for in its consolidated financial
statements as an associate, using equity accounting in accordance with IAS 28
Investments in Associates and Joint Ventures. Sterling Co exercises significant
influence, and so should recognise Sterling Co’s share of Berthold Co’s postacquisition profits. Up to 1 December 20X8, the first eight months of the year
ended 31 March 20X9, Sterling Co should report its share of Berthold Co’s profits
as a single line entry in the investing section of the consolidated statement of
profit or loss using the equity method. This amount would be $2.96 million (8/12
× $11.1m × 40%).
In addition to Sterling Co’s share of profit prior to gaining control, the step
acquisition from associate to subsidiary on 1 December 20X8 requires the
acquirer to remeasure its previously held equity interest in the acquiree to its
fair value at the step acquisition date, recognising any resulting gain or loss in
profit or loss. The fair value of the 40% investment in Berthold Co at 1 December
20X8 (when control was obtained) was $36.80 million (40% × 10m × $9.20). The
carrying amount of the 40% investment under equity accounting would be
$34.72 million. The investment in associate is made up of the historic cost of the
investment ($25 million) plus Sterling Co’s share of post-acquisition profits up to
the step acquisition date of $9.72 million (($42.3m – $18m) × 40%). A gain on
remeasurement of $2.08 million ($36.80m less $34.72m) is therefore recognised
in the investing section of the consolidated statement of profit or loss alongside
the share of profit of associate for the first eight months.
KA PL AN P U BLI SH IN G
17 1
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Gain on remeasurement of associate
$m
FV at control date (40% × 10m × $9.20)
Carrying amount:
Cost
Post-acquisition (($42.3m – $18.0m) × 40%)
Total
$m
36.80
25.00
9.72
–––––
(34.72)
–––––
2.08
–––––
On 1 December 20X8, Sterling Co acquires a further 35%, thereby gaining control
(holding a total of 75% of equity). IFRS 3 Business Combinations describes this
manner of acquisition as a business combination achieved in stages, or a step
acquisition. Once control is obtained, Berthold Co will be accounted for in the
consolidated statement of profit or loss as a subsidiary, using the acquisition
method in accordance with IFRS 3. The accounting treatment conforms with the
substance of the transaction as, once a majority of the voting rights are obtained
by Sterling Co, it can control the actions of Berthold Co. Sterling Co should
therefore recognise 4/12 of Berthold Co’s sales, expenses and tax in its
consolidated statement of profit or loss, representing the transactions of
Berthold Co under the control of Sterling. Since Sterling Co owns 75% of the
equity of Berthold Co, 25% of the 4/12 of Berthold’s sales, expenses and profit
included in the consolidated statement of profit or loss is attributable to the
non-controlling interest (NCI). The profit for the year reported in Sterling Co’s
consolidated statement of profit or loss should therefore be shared between
Sterling Co (as the parent) and the NCI, who are attributed (4/12 × 11.1m × 25%)
= $925,000.
(ii)
Goodwill in Berthold
Tutorial note
The goodwill calculation should be a source of easy marks. It’s really important
to show your workings, because even if you make a mistake with one of the
figures, you could still score full marks on the calculation.
To maximise your marks, make sure you are also then explaining how you have
calculated the goodwill figure.
On 1 December 20X8, Sterling Co recognises and measures in its financial
statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in Berthold Co, and recognises and measures the goodwill
acquired in the business combination. In order to calculate goodwill in this step
acquisition, the purchase consideration of $41 million paid on 1 December 20X8
is combined with the fair value of the 40% share at the date of control
(1 December 20X8).
17 2
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
This 40% holding now has a fair value of $36.8 million (40% × 10m × $9.20). A
25% non-controlling interest will also be incorporated into the goodwill
calculation, and into the equity section of the consolidated statement of
financial position, based on a fair value of $23 million (25% × 10m × $9.20). The
fair value of Sterling Co’s consideration at the date of obtaining control
($41 million plus $36.8 million) and the fair value of non-controlling interest
($23 million) is compared with the fair value of the net assets of Berthold Co
($55.3 million), resulting in goodwill of $45.5 million:
Tutorial note
Note the total of the fair value of net assets is given in the question, so there is
no need for a separate net assets working.
Goodwill at 1 December 20X8:
Previous 40% holding now at FV (40% × 10m × $9.20)
Cost of 35% acquired in year
FV of NCI (25% × 10m × $9.20)
Less: Fair value of net assets
Total
(b)
$m
36.8
41.0
23.0
(55.3)
–––––
45.5
–––––
Malting Co: joint venture
Tutorial note
When you see that a company owns a 30% investment in equity shares, don’t
automatically assume that the investment is an associate. Read all of the information
provided about the investment. Where there is a contractual agreement and key
operating decisions require unanimous consent, joint control exists and hence the
investment is treated as a joint arrangement.
Once you have identified a joint arrangement, you then need to identify whether it is a
joint operation or joint venture. This decision will be based upon the rights of each
investor created through the joint arrangement (as described below).
Under IFRS 11 Joint Arrangements, the acquisition of a 30% interest in Malting Co is a
joint arrangement since the three parties are bound by a contractual arrangement
which gives each party joint control (where decisions about the relevant activities
require the unanimous consent of the parties sharing control). The contractual
agreement distinguishes this transaction as a joint arrangement rather than an
investment in an associate.
KA PL AN P U BLI SH IN G
17 3
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Under IFRS 11, there are two types of joint arrangement:
–
A joint operation is a joint arrangement in which the joint controlling parties
have rights to the assets and obligations for the liabilities relating to the
arrangement.
–
A joint venture is a joint arrangement in which the joint controlling parties have
rights to the net assets of the arrangement.
The accounting treatment is determined based on whether or not the investor has
direct rights to the assets, and obligations for the liabilities, which should be
recognised separately in its financial statements, rather than merely following the legal
form of the joint arrangement. In the case of the investment in Malting Co, the
contractual agreement describes the conditions of a joint venture, since Malting Co is
a separate vehicle with rights to the assets and obligations for the liabilities. The three
investing parties have no interests (no rights, title or ownership) in the assets of
Malting Co and are not liable to Malting Co for any obligations beyond unpaid or
additional capital (presumably fully paid by each party). The fact that the parties
provided a guarantee to a third party providing finance to Malting Co does not, by
itself, determine that the joint arrangement is a joint operation. IFRS 11 outlines how
the provision of guarantees to third parties is often required. The parties did not have
obligations for the liabilities relating to Malting Co but had instead provided a
guarantee for some of them. The contractual arrangement establishes each party’s
share in the profit or loss relating to the activities of the arrangement based on shares
held rather than through relative performance of each party to the joint arrangement.
All of the above lead to the conclusion that Malting Co should be accounted for as a
joint venture under IFRS 11.
Tutorial note
Make sure you cover the treatment in both Sterling Co’s individual financial statements
and the group financial statements.
Accounting for Malting Co in the separate financial statements of Sterling Co
According to IAS 27 Separate Financial Statements, investments in subsidiaries,
associates and joint ventures are carried in the investor’s separate financial statements
at cost, at fair value (as a financial asset under IFRS 9 Financial Instruments), or using
the equity method as described in IAS 28. Where the joint venturer has no subsidiaries,
the equity method must be used. As a holding company, Sterling Co can therefore
choose to keep the investment at cost of $3.8 million ($2.5m cash plus the fair value
of the loan notes of $1.3m), fair value or under the equity method (as required in the
consolidated financial statements). If they elect to account for it as an investment at
cost or fair value, any dividends received would be recorded as investment income. If
they elect for the equity method, the statement of profit or loss would be the same as
the consolidated financial statements (see below).
17 4
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Accounting for Malting Co in the consolidated financial statements of Sterling Co
According to IFRS 11, joint ventures are accounted for using the equity method in the
consolidated financial statements in exactly the same way as for associates. The
share of Sterling Co’s post-acquisition loss (0.8 × 9/12 × 30% = $0.18m) of Malting Co
would be deducted from the fair value of the consideration of $3.8 million, leaving
$3.62 million shown under ‘Investment in joint venture’ in the consolidated statement
of financial position. The ‘share of loss of joint venture’ of $0.18 million will be shown
as a single line in the investing section of the consolidated statement of profit or loss
for the year.
Investment in joint venture:
Cost
FV of loan notes
Consideration
Share of loss: (0.8 × 9/12 × 30%)
Total
(c)
$m
2.50
1.30
––––––
3.80
(0.18)
––––––
3.62
––––––
Batch Co: discontinued operation
Tutorial note
Note the focus of this part – you are asked how to account for Batch Co as a
discontinued operation, not whether Batch Co is a discontinued operation.
You need to consider and apply the rules for accounting for a disposal group under IFRS
5. Remember that a disposal group should be measured at the lower of carrying
amount and fair value less costs to sell. For a subsidiary that is a disposal group, the
carrying amount is made up of the net assets of the subsidiary and goodwill.
The requirement directs you towards the calculations required, so use this to your
advantage, particularly if you are unsure of the measurement rules under IFRS 5.
KA PL AN P U BLI SH IN G
17 5
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
The adjustments required on 1 January 20X9 to account for Batch Co as a discontinued
operation
The disposal group will include goodwill acquired upon acquisition. On 1 January 20X7,
goodwill at acquisition was $0.4 million.
$m
$m
3.10
0.90
––––
4.00
Cost
FV of NCI
Equity
Retained earnings
Fair value adjustment: building
Goodwill
0.50
2.10
1.00
––––
(3.60)
––––
0.40
––––
Immediately before initial classification of the disposal group as held for sale, the
carrying amounts of the assets and liabilities in the group should be remeasured in
accordance with applicable IFRS standards. In this case, no adjustments were needed.
On classification as held for sale, Batch Co must be measured at the lower of carrying
amount and fair value less costs to sell. An impairment arises of $0.2 million, which will
be allocated to goodwill. The impairment loss will be recorded in the operating section
of the consolidated statement of profit or loss. The carrying amount of Batch Co prior to
reclassification includes goodwill of $0.4 million, the net assets reported by Batch Co,
and the fair value adjustment on consolidation adjusted for two years depreciation
(at 10%).
Tutorial note
Note the requirement asks you to explain how to account for Batch Co as a discontinued
operation at 1 January 20X9, which has been addressed above. If you were asked to
consider the impact for the year ended 31 March 20X9, then you would also want to
include the fact that nine months of Batch Co’s profit or loss for the period would be
included in the discontinued operation line in the consolidated profit or loss, along with
the impairment.
17 6
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Impairment
$m
Fair value less costs to sell
Goodwill
Share capital
Retained earnings
Fair value adjustment
Fair value depreciation ($1m/10) × 2 years
$m
4.4
0.4
0.5
2.9
1.0
(0.2)
––––
Carrying amount
(4.6)
––––
Impairment (against goodwill, i.e. $0.4 – $0.2m),
shared between parent and NCI
(0.2)
––––
Tutorial note
Journal to correct for reclassification:
DR RE of group (70% share of impairment)
DR NCI (30% share of impairment)
CR Goodwill
DR FV less costs to sell (of disposal group)
CR Net assets at FV (after goodwill write-off)
$m
0.14
0.06
$m
0.20
4.40
–––––
4.60
–––––
4.40
–––––
4.60
–––––
ACCA Marking scheme
Marks
(a)
(i)
1 mark per discussion point of key principles in IAS 28 and IFRS 3 and
application to the scenario including:
–
Associate for eight months using equity method
–
Remeasure previously held interest
–
Gain on remeasurement in consolidated SPL
–
Gain control and treat as a subsidiary
–
Substance of transaction
–
Time apportion consolidation SPL
–
Impact of NCI
Marks for calculations as follows:
–
8/12 associate profit
–
FV of associate at date of control
–
Carrying amount at date of control
–
Gain on remeasurement
–
Profit attributable to NCI
Maximum
KA PL AN P U BLI SH IN G
5
1
1
1
1
1
–––
5
3
–––
8
–––
17 7
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
(ii)
1 mark per discussion point of key principles in IFRS 3 and application to
the scenario, including:
–
Principle of goodwill calculation
–
Consideration combined with FV of 40%
–
NCI discussion
Marks for calculations as follows:
–
Previous 40% FV
–
Purchase consideration of 35%
–
FV NCI at acquisition date
–
Carrying amount of net assets
–
FV adjustment
Maximum
(b)
1 mark per discussion point of key principles in IFRS 11 and IAS 27 and the
application to the scenario, including:
–
Joint arrangement identified
–
Joint venture v joint operation
–
Malting Co is separate vehicle with rights to assets and obligations for
liabilities
–
Guarantee to third party providing finance
–
Contract establishes share of profit or loss
–
Treatment in investor’s separate FS
–
Equity method
Marks for calculations as follows:
–
Cost of investment
–
FV loan notes
–
Share of loss
(c)
1 mark per discussion point of key principles in IFRS 3 and application to the
scenario, including:
–
Immediately before, remeasure in accordance with IFRS
–
Lower of CA and FVLCS
–
Impairment arises
–
Explanation of calculation
Marks for calculations as follows:
–
Goodwill – cost and NCI
–
Goodwill – CA of net assets at acquisition
–
Goodwill – FV adjustment
–
FV less costs to sell
–
Goodwill at impairment date
–
CA net assets at impairment date
–
FV adjustment at impairment date
Maximum
Total
17 8
3
1
1
1
1
1
–––
5
3
–––
6
–––
4
1
1
1
–––
7
–––
3
1
1
1
1
1
1
1
–––
7
6
–––
9
–––
30
–––
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Examiner’s comments
Candidates still seem to exceed their time allocation on question 1. The result will always be
that other questions are rushed with parts of questions not being answered which can mean
that professional marks may be lost in questions 2 and 4. It also means that some of the
relatively easier marks on the paper may be missed.
(a)(i) Candidates performed quite well on this part of the question with some excellent
explanations of the timeline of the investment and how individual increases in the
shareholding impacted upon the financial statements. However, the main issue was that
some candidates did not time apportion correctly. In this situation, the marking guide would
treat this as a single error and candidates’ calculations would not be further penalised if the
principles of IFRS 3 were followed.
(a)(ii) Most candidates scored well on the calculation of goodwill but some found it difficult
to explain the principles of the goodwill calculation. Some candidates failed to make fair value
adjustments at the control date, therefore producing incorrect calculations.
(b) A significant number of candidates ignored the requirement to show the accounting in
the individual financial statements. Candidates often find difficulty in differentiating between
the accounting in the parent company and that in the consolidated financial statements.
Most candidates correctly applied the principle of equity accounting for the investment in
the consolidated financial statements, but many failed to discuss the accounting in the
individual financial statements. As a result, marks were lost.
(c) Many candidates displayed both knowledge of discontinued activities in the year of sale
and accurate goodwill calculations. In addition, the allocation process was well done by these
candidates. However, other candidates had no knowledge of this area or could not apply
their knowledge to the scenario.
6
LUNA (MAR/JUN 2022)
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Key answer tips
Question 1 always tests group accounting, however other financial reporting standards are
often tested as well. This question requires a good level of understanding of IFRS 15 Revenue
from Contracts with Customers.
Read the requirements carefully and pay attention to the verbs used. Part (a)(i) asks you to
‘explain, with calculations’ whereas part (a)(iii) asks you to ‘present extracts’. Your answer
for part (a)(i) should therefore include a narrative response alongside your calculations. Your
answer to part (a)(iii) should not include any explanation, simply the extract and any relevant
workings.
Also note that part (a)(ii) asks you to ‘discuss’ and ‘conclude’, so make sure your answer ends
with a conclusion.
With a change in group structure, tested in part (a)(i), always watch out for the dates as the
change often occurs part way through the year. In this scenario, the date of disposal has an
impact on the profit attributable to the non-controlling interest (NCI).
KA PL AN P U BLI SH IN G
17 9
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
(a)
(i)
Tutorial note
With a disposal scenario, you need to identify whether or not there has been a
loss of control. In this case, Luna still has control over Starlight, so there is no
profit or loss on disposal to be recognised. Instead, Luna has sold part of its
shareholding in Starlight to the NCI, increasing the NCI’s shareholding.
A calculation is required to determine the amount by which the NCI should be
increased. Note the NCI is measured using the fair value method, so the NCI
should be apportioned a share of the net assets and goodwill at the disposal
date. If the proportionate method was used, the NCI would be allocated a share
of the net assets only.
There is often more marks available for the explanation than the calculation,
which is the case here, so make sure you are explaining the adjustment that is
required as you progress with your workings.
The disposal of 100,000 shares by Luna Co would reduce its equity interest from
80% to 70%. This disposal would not result in a loss of control over Starlight Co.
Income and expenses should be consolidated for the entire year. Similarly, the
disposal does not affect the consolidation of Starlight’s assets and liabilities,
including goodwill.
A decrease in the parent’s ownership interest which does not result in a loss of
control is accounted for as an equity transaction, i.e. a transaction with owners
in their capacity as owners. The carrying amounts of the controlling and noncontrolling interests are adjusted to reflect the changes in their relative interests
in the subsidiary. Luna Co should recognise directly in equity any difference
between the amount which the non-controlling interest is adjusted by and the
fair value of the consideration received. No gain or loss on the disposal of the
shares should be recognised within profit or loss.
It is not clear under IFRS 10 Consolidated Financial Statements as to what
happens to the non-controlling interests’ share of goodwill when there is a
change in the relative ownership of a subsidiary. However, it seems reasonable
that Luna Co should reallocate 10% of the carrying amount of goodwill to the
non-controlling interest. This will ensure that future impairments of goodwill
will reflect the revised ownership interest in the goodwill.
18 0
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
The net assets of Starlight Co at 1 January 20X6 should be determined as follows:
Share capital
Retained earnings at 1 April 20X5
Add 9 months of profit to the disposal date (9/12 × $165,056)
Fair value adjustment on land
Carrying amount of goodwill
Total
$
1,000,000
4,658,000
123,792
200,000
272,000
––––––––
6,253,792
––––––––
Since the non-controlling interest is obtaining an extra 10% of the equity of
Starlight Co, the non-controlling interest in the consolidated statement of
financial position will be credited with $625,379 (10% × $6,253,792). The fair
value of the consideration received is $700,000 (100,000 × $7). Luna Co should
record a credit directly in equity equal to the difference of $74,621 ($700,000 –
$625,379).
In summary
Dr Cash 700,000
Cr NCI 625,379
Cr Equity 74,621
(ii)
Tutorial note
IFRS 15 Revenue from Contracts with Customers is a popular exam topic. You
need to have a sufficient level of understanding of the standard so that you can
apply the relevant principles to an exam scenario.
Avoid listing out and discussing the full five-step approach, as this will not score
much credit. Instead, focus on the relevant elements of the step for issues in the
scenario, in this case whether Luna Co should recognise revenue on the transfer
of the goods (Step 5 – recognise revenue as the performance obligation is
satisfied) and the variable consideration (Step 3 – determining the transaction
price).
Note the question explicitly asks you to consider the treatment in the individual
financial statements of Luna Co, not the consolidated financial statements, so no
marks are awarded for discussion of intra-group transactions.
Revenue should be recognised when a performance obligation is satisfied. This
can be over time or at a point in time. Since the risks and rewards of ownership
of the goods pass to Starlight Co on 20 March 20X6, it is right that Luna Co should
recognise revenue at this date and not when Starlight sells the goods to the final
consumer.
KA PL AN P U BLI SH IN G
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SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
The price concession which is likely to be offered by Luna Co means that the
value of the consideration is variable and uncertain. IFRS 15 Revenue from
Contracts with Customers requires the entity to estimate the amount of
consideration to which it is entitled in exchange for the goods sold. Luna Co
should either choose an expected value method or choose the most likely
outcome to estimate the amount of the variable consideration. Luna Co should
choose whichever method will better predict the amount of the consideration
to which it is entitled.
Since Luna Co has a history of offering price concessions but over a range from
8% to 38%, it would appear that an expected value method is probably more
appropriate. In the absence of further information, it would seem reasonable to
make an initial estimate of the variable consideration by using the mid-point of
the previous price concessions. This mid-point would be a price concession
equal to 23%. This would result in a revenue figure equal to $770,000 ($200 ×
5,000 × 77%).
IFRS 15 states that when estimating the amount of variable consideration,
revenue must only be recognised to the extent that it is highly probable that a
significant reversal of the cumulative revenue will not be required in the future.
The risk of obsolescence means that the value of the consideration Luna Co is
entitled to is highly contingent on factors outside the control of Luna Co. Luna Co
has a history of offering price concessions of up to 38%, so it is unlikely that Luna
Co can conclude that it is highly probable that a significant reversal in revenue
will not be required. Current market data suggests that the maximum price
concession is likely to be 35%. Therefore, it seems reasonable for Luna Co to
revise its estimate to $650,000 ($200 × 5,000 × 65%).
This is the maximum amount that is highly probable that a significant reversal of
revenue will not be required. Since the whole $1,000,000 ($200 × 5,000) has
been included within revenue, the accounting treatment adopted is not correct.
Revenue should be reduced by $350,000 ($1,000,000 – $650,000).
Tutorial note
Candidates are given full credit for different assumptions on the price concession
provided that they are justified in their answer.
18 2
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
(iii)
Extracts for the statement of profit or loss for the year ended 31 March 20X6:
Tutorial note
No explanation was required for this part. Make use of the spreadsheet response
area when preparing an extract. You can use the columns in the spreadsheet by
putting each figure in a separate column, allowing you to use the sum function
to total your figures.
Don’t forget to calculate the profit attributable to the non-controlling interest.
The non-controlling interest changed from 20% to 30% part way through the
year, so you need to time apportion the subsidiary’s profit first and then allocate
the relevant percentage. You can show your calculation for this either by writing
it out or using a formula within the answer cell. Both options can be seen in the
example answer below.
$
Revenue ($29,812,540 + $14,185,160 – $350,000 – $650,000)
Cost of sales ($18,154,020 + $11,042,120 – $350,000 –
$650,000 + $600,000)
Profit attributable to non-controlling interests
(($165,056 × 9/12 × 20%) + ($165,056 × 3/12 × 30%))
42,997,700
28,796,140
37,138
Example answer in the spreadsheet response area:
Tutorial note
Revenue and purchases should be reduced by $350,000 to correctly record the sale and
purchase per (a)(ii). Since the transaction is intra-group, a further $650,000 should be
removed from revenue and cost of sales.
The original cost of the goods sold by Luna Co is (5,000 × $80) = $400,000. Since the
closing inventory is currently valued at $1,000,000, unrealised profit is $600,000.
The profit of Starlight Co of $165,056 will be consolidated for the entire year but the
allocation of the profits between the shareholders of Luna Co and the non-controlling
interest will need to be time-apportioned. The profit attributable to non-controlling
interests would be $37,138 (($165,056 × 9/12 × 20%) + ($165,056 × 3/12 × 30%)).
KA PL AN P U BLI SH IN G
18 3
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
(b)
Tutorial note
Joint ventures are accounted for in the same way as associates – using the equity
method. Make sure you can set out the impact on both the consolidated statement of
profit or loss and consolidated statement of financial position.
In accordance with IAS 28 Investments in Associates and Joint Ventures, Luna Co should
adopt equity accounting within its consolidated financial statements for its investment
in Roquet Co. Equity accounting means that in the consolidated statement of financial
position the investment should be included as one figure within non-current assets (an
investment in joint venture). This figure is initially recognised at cost and will be
increased by Luna Co’s 50% equity interest in the increase in Roquet Co’s net assets
since incorporation.
Within the consolidated statement of profit or loss, 50% of the profit for the year of
Roquet Co will need to be included as a one line item in the investing section. Since
the profit is before deducting any dividend payments during the year, it is important
to exclude the $15,000 dividend received by Luna Co from investment income within
the consolidated statement of profit or loss.
Tutorial note
You may wish to use the spreadsheet response to layout the calculations. The change in
net assets is made up of profits made by the joint venture, less the dividends paid out.
The share of the profits of the joint venture for the year ended 31 March 20X6 should
be calculated as $63,490 (50% × $126,980). Since Luna Co received a dividend of
$15,000, total dividends paid by Roquet Co would have been $30,000 ($15,000 × 2).
The net assets of Roquet Co would have increased by $170,430 ($73,450 + $126,980 –
$30,000) since incorporation. The investment in the joint venture in the consolidated
statement of financial position should be valued at $6,085,215 ($6,000,000 + (50% ×
$170,430)).
Tutorial note
This part of the question is a bit more difficult, but you can still score enough marks to
pass by covering the basic treatment of the joint venture and performing the
calculations. You might not know all of the detailed rules on gains and losses between
a parent and joint venture, but you can always refer back to basic principles, in
particular here the prudence concept. The parent company has sold a property at a
loss, so there is evidence it is impaired, and therefore it would be prudent to recognise
this in full in the individual and consolidated accounts.
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KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
The joint venture is not part of the single entity concept and therefore it is not
necessary to eliminate transactions and outstanding balances at the reporting date
between the parent and the joint venture. However, IAS 28 does require that gains
and losses arising between a parent entity and its joint venture should only be
recognised to the extent of the unrelated investors’ interest in the joint venture. An
exception to this rule is that losses should be recognised in full by the parent where a
downstream transaction provides evidence that the asset is impaired. This is relevant
to Luna Co as they have sold the property to Roquet Co (a downstream transaction) at
a loss of $2 million ($10 million – $8 million). Since it is agreed that the proceeds of
$8 million are equal to the market value of the property, this provides evidence that
the property was indeed impaired. Luna Co should recognise the loss of $2 million
within the operating section of its individual and consolidated financial statements for
the year ended 31 March 20X6. The investment in the joint venture and the share of
the profits of the joint venture will not be affected by the transaction.
(c)
A business combination, in accordance with IFRS 3 Business Combinations, is a
transaction in which the acquirer obtains control over one or more businesses. For the
acquisition to be treated as a business combination, it is therefore necessary to assess
whether the activities of Eclip Co constituted a business in the first place. This means
that the activities must have been capable of being conducted and managed in a way
for the purpose of providing a return to investors or other owners and members of the
entity.
Tutorial note
Once you have stated the rules, use the details of the scenario and apply them. More
marks will be available for application than knowledge.
The components of a business will consist of inputs and processes which have the
ability to create outputs. Inputs are economic resources which have the ability to
create outputs when one or more processes are applied to it. Processes will involve
strategic management or operational processes capable of being applied to the inputs
to create outputs but would not include administrative or accounting functions.
Usually, such processes would be formally documented but an organised workforce
having the necessary skills and experience, as indicated by Eclip Co, may provide the
necessary processes. Output does not need to be present at the acquisition date for
the activities of the entity to constitute a business.
It can be seen that the activities of Eclip Co do constitute a business. Inputs are in place
by having secured a licence to manufacture the new medicine. Operational and
management processes would be associated with the performance and supervision of
the clinical trials. Also, Eclip Co is pursuing a plan to produce an output which is capable
of generating a return for the investors and owners of the entity. That is a commercially
developed medicine to be sold on the market in the future. It is not relevant that the
medicine is not yet on the market.
A further consideration is whether Luna Co may choose to apply a concentration test
which, if met, eliminates the need to consider further whether the activities of the
acquiree constitute a business. Under this optional test, where substantially all of the
fair value of the gross assets acquired is concentrated in a single asset (or a group of
similar assets), the assets acquired would not represent a business.
KA PL AN P U BLI SH IN G
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SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Tutorial note
The optional concentration test can be applied when it seems unlikely that the acquiree
is a business. Even if you think the test is not going to be met, it’s still worth stating the
rule, applying it to the scenario and explaining how you have reached that conclusion.
This will score marks.
The only assets on the statement of financial position of Eclip Co relate to the licence
and development of the new medicine. Additionally, in accordance with IAS 38
Intangible Assets, it would not be permitted to recognise the knowledge and skills of
the workforce as a separate intangible asset within the consolidated financial
statements. The workforce is not separable in that it cannot be sold, transferred,
rented or otherwise exchanged without causing disruption to the acquirer’s business.
Such assets tend to be subsumed into goodwill on recognition of a business
combination.
Tutorial note
The requirement specifically asks you to consider if the team of scientists can be
recognised as a separate intangible asset. Don’t miss this part out and lose out on the
associated marks. You may want to use a separate sub-heading so that the marker can
clearly see you have addressed this element.
Nor does the assembled workforce represent the intellectual capital of the skilled
workforce which is the specialised skills and experience that the employees bring to
their jobs. However, prohibiting an acquirer from recognising an assembled workforce
as an intangible asset does not prohibit the intellectual property from being recognised
as a separate intangible asset. In relation to Eclip Co, it is likely that much of the
processes and systems which have been undertaken to the development have been
documented. Whilst some of this may have been capitalised within the development
costs, much of this knowledge will have been at the research stage where IAS 38 states
it is prohibited to capitalise research costs as an intangible asset. Since Luna Co
acquires not just the manufacturing rights but the assembled workforce, it is unlikely
that the concentration test would be met. The acquisition should therefore be treated
as a business combination.
Tutorial note
Be sure to end your answer with a conclusion. This should flow from your discussion.
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ACCA Marking scheme
Marks
(a)
(i)
1 mark per discussion point of key principles in IFRS 3 and application
to the scenario, including:
–
No loss of control
–
Consolidation all year
–
Equity transaction
–
No gain/loss reported in profit or loss
–
Consider how to treat goodwill
Marks for calculations as follows:
–
9/12 profit added
–
Goodwill less impairment
–
Fair value adjustment of land
–
10% of net assets to NCI
–
Gain to equity
Maximum
(ii)
1 mark per discussion point of key principles in IFRS 15 and application
to the scenario, including:
–
Timing of revenue recognition
–
Variable consideration
Maximum
–
Estimate needed
–
Expected value or most likely outcome
–
Consider if reversal likely
–
Historic concessions
–
Conclusion
–
Calculations
4
1
1
1
1
1
–––
5
–––
3
–––
7
–––
1
4
1
–––
6
–––
(iii)
Marks for calculation as follows:
–
PUP adjustment
–
Intra-group sale
–
NCI time apportionment
–
NCI 20%/30%
1
1
1
1
–––
4
–––
(b)
1 mark per discussion point of key principles in IAS 28 and application to the
scenario, including:
–
Explanation of equity method
Maximum
–
Exclude dividend received
–
–
–
Property disposal
No need to eliminate intra-group
Impairment indicator
Calculations
–
Share of profits of JV
–
Investment in JV
–
Dividend adj
2
Maximum
2
Maximum
3
–––
7
–––
KA PL AN P U BLI SH IN G
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SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
(c)
1 mark per discussion point of key principles in IFRS 3 and IAS 38 and
application to the scenario, including:
–
Definition of a business
Maximum
–
Control
–
Managed to provide a return
–
Inputs are resources
–
Processes not admin team
–
Outputs not necessary at acquisition date
–
Conclusion
–
–
–
–
–
Workforce
Not separable
IP can be a development cost
Research costs
Concentration test not met
Total
Maximum
4
2
–––
6
–––
30
–––
Examiner’s comments
Question 1 in the SBR examination carries 30 marks which equates to 54 minutes of the three
hour examination. Candidates however seem to give this question disproportionate
significance with the result that candidates appear to spend more time on this question than
the allotted time. The result is that the final question on the SBR exam is quite often poorly
answered because of the lack of time available. A candidate is more likely to pass the SBR
exam with four reasonably answered questions than if the final question is poorly answered
because of time constraints. There is a significant amount of material which discusses
examination technique, but it seems that many candidates still ignore the advice.
(a)(i) In this part of the question, candidates needed to understand that this was an equity
transaction. Many candidates recognised this fact, but the question asked in addition how
the disposal should have been accounted for. Candidates found it difficult to explain the
actual accounting entries, and in particular the accounting for the NCI which had obtained an
extra 10% of the shares. Candidates could score one mark for every valid point explained and
the own figure rule was used for the calculations of the increase in the NCI and the equity
gain. There is more than one approach to calculating the values to be used for this transaction
and candidates are not penalised for using one method rather than another. The sample
answer covers two different approaches.
Overall, the performance in this part of the question was encouraging despite obvious
weaknesses in some candidates’ answers.
Part (a)(ii) Many candidates did recognise that IFRS 15 should be applied but failed to discuss
the principles of variable consideration. IFRS 15 has been in issue since 2014 and candidates
still appear to have only a superficial knowledge of the standard which is very disappointing.
IFRS 15 appears regularly in SBR questions and knowledge level three is required as set out
in the syllabus. This means that candidates should be capable of synthesis and evaluation.
Unfortunately, in many cases, candidates do not show this level of knowledge or application.
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Part (a)(iii) This part of the question was not well answered. Many candidates failed to timeapportion the profit attributable to the NCI and there were many candidates who did not
attempt this part of the question. This was quite surprising given that the knowledge level
required is that of Financial Reporting. Although narrative was not required, credit was given
for an explanation of the process for example, the calculation of NCI share of profits. It was
surprising that many candidates could calculate but not eliminate the unrealised profit of
$600,000.
Part (b) required candidates to discuss, with calculations, how an investment in a joint
venture and the sale of the property should be accounted for in the consolidated financial
statements, for 7 marks. Many candidates realised that the equity method should be used to
account for the joint venture. However, few could explain the accounting for the gains and
losses arising between a parent entity and its joint venture. This was relevant to Luna Co as
they had sold the property to the joint venture at a loss which provided evidence that the
property was impaired. The loss of $2 million was recognised within Luna Co’s individual and
consolidated financial statements for the year. Many candidates had no knowledge of this
subject, with the result that some candidates simply did not attempt this part of the question.
Many candidates who attempt SBR are not fully prepared for the examination. The
knowledge level required is mainly at level three which means that rote learning knowledge
is not sufficient to pass the examination.
Part (c) of the question required candidates to discuss for 6 marks whether an acquisition
should be treated as a business combination in accordance with IFRS 3 Business
Combinations. Candidates were also asked to consider whether the skills and experience of
the team of scientists could be recognised as a separate identifiable asset. This type of
question has been asked several times in the past and requires discussion of whether the
acquisition constitutes a business. The components of a business consist of inputs and
processes which have the ability to create outputs. Inputs are economic resources which
have the ability to create outputs when one or more processes are applied to it.
Candidates needed to consider the scenario, otherwise it is impossible to conclude. Some
candidates mentioned the optional concentration test which eliminates the need to consider
further whether the activities of the acquiree constitute a business and gained marks.
However, it is important to apply the test to the scenario and many candidates failed to do
this.
The activities of Eclip Co did constitute a business and many candidates came to this
conclusion. However, opinion seemed split as to whether the company would be permitted
to recognise the knowledge and skills of the workforce as a separate intangible asset within
the consolidated financial statements. Candidates’ performance was mixed on this part of
the question. Some produced excellent answers whilst many failed to demonstrate the
principles involved. Also, where knowledge was demonstrated, the application to the
scenario was often missing. More than half of the allotted marks were given for the
application of knowledge to the scenario.
KA PL AN P U BLI SH IN G
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7
COLUMBIA (MAR/JUN 2021)
Walk in the footsteps of a top tutor
Key answer tips
This question is a typical ‘Q1’ style question. It tests the groups syllabus area, but also
includes requirements covering other syllabus areas – this time the topic areas tested is
IAS 19 Employee Benefits.
The group content (seen in requirements (a) (i) & (ii)) consisted of discussion and explanation
of group issues, not just group calculations. More marks are typically afforded to narrative
elements of the answer than the calculation elements. Candidates should remember this
when attempting answers – the focus should be on the explanation of the thought processes
and rationale used when performing calculations, rather than just presenting an answer
consisting solely of inexplicable calculations.
If you justify your point by applying reasonable assumptions but have calculated the figures
incorrectly, credit will still be given for your rationale. If presented with only an incorrect
calculation to mark, bereft of any justification as to how the numbers were derived, markers
cannot award any marks at all.
(a)
(i)
An acquirer is the entity which has assumed control over another entity. In
accordance with IFRS® 10 Consolidated Financial Statements, an investor
controls an investee where it has:
–
power over the investee,
–
exposure or rights to variable returns from its involvement with the
investee,
–
the ability to use its power over the investee to affect the amount of the
investor’s returns.
Tutorial note
To determine whether Columbia is the acquirer requires contemplation of who
has control of Peru Co. This is a great illustration of the type of requirement
where candidates should:
(i)
outline the rules from the standard (e.g. as above re control definition)
(ii)
apply the rules to the specific details in the questions (e.g. how does the
particular arrangement illustrate control, which factors do not indicate
control)
(iii)
provide a conclusion that addresses the requirement (e.g. based on the
factors identified do you think that Columbia is the acquirer or not?).
Throughout the proceeding paragraphs, you’ll see reference to how the factors
in the scenario illustrate ‘power’, the ‘rights to variable returns’ and ‘the ability
to affect the amount of variable returns’. The examiner is applying the rules from
the standard to the specific scenario to allow a conclusion to be made.
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AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
There are a significant number of factors to consider when determining which
entity should be treated as the acquirer. The first factor to consider is the
consideration transferred for the relative share of ownership. It may look at first
that Columbia Co and Brazil Co have undertaken a joint venture where the two
parties share control over the investee. This is because both Columbia Co and
Brazil Co have paid an equal amount of $8 per share. Additionally, Columbia Co
and Brazil Co have each obtained 50% of the equity interests and have equal
voting rights of one vote per share. Both entities satisfy the criteria for rights to
a variable return. However, a joint venture relies upon there being joint control
over all the key operating and financing decisions of the entity. The scenario
does not indicate that unanimous consent is required because decision-making
responsibilities appear to be split between Columbia Co and Brazil Co.
Tutorial note
When discussing accounting issues, it is important to consider any possible
alternative outcomes. In this requirement, you are asked to determine whether
Columbia is the acquirer. Do not let any initial assumptions you make restrict
your answer. As in, do not assume the examiner only wants to hear that
Columbia is the acquirer. Confirmation bias can be displayed in many candidates
answers, which can limit the marks awarded e.g. only mentioning the factors
that suggest Columbia is the acquirer and ignoring any suggestions that
Columbia may not be the acquirer.
Scenarios will regularly provide information that point towards different
conclusions from what you may originally expect but which may (or may not) be
able to be refuted when applying the rules of the standard. Here the answer
addresses the potential for the acquisition of Peru Co to be a joint venture, rather
than an acquired subsidiary which is fully controlled by Columbia (where
Columbia would be the acquirer).
Some factors may confirm your hypothesis, others may indicate that alternative
approaches may be relevant. Easy marks can be awarded by outlining why an
accounting treatment is not relevant too (e.g. ‘Peru Co is not a joint venture
because…’.) A really good answer will be able to consider conflicting information
and address whether it impacts on the candidate’s overall conclusions.
A second factor to consider is who has the rights to appoint the majority of the
governing body. Columbia Co can appoint 60% of the board suggesting they may
be the acquirer. It is true that Brazil Co does have additional rights in terms of
the power to veto amendments to the articles of incorporation and the
appointment of auditors. In the assessment of control, it is important to
consider whether these rights give Brazil Co power over the investee and
whether it can use this power to affect their return. In this assessment, it is
important to distinguish between substantive rights and protective rights. Only
rights which are substantive are said to give the investor control. These rights
are more likely to be considered protective since they appear to prohibit
changes in the activities of the investee which Brazil Co does not agree with
rather than give Brazil Co power. Additionally, these are not rights which would
allow Brazil Co to affect the profitability of Peru Co and subsequently their
return. Protective rights do not prevent Columbia Co from obtaining control.
KA PL AN P U BLI SH IN G
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A similar argument can be applied to the appointment of the senior managers.
The entity which has the right to appoint the majority of the senior management
team is more likely to be the acquirer. Whilst each entity can appoint one senior
manager each, the rights of the senior management appointed by Brazil Co
appear to be protective while all key decisions are made by the senior manager
appointed by Columbia Co. The rights of the senior manager appointed by
Columbia Co therefore appear substantive including requesting board approval
for significant activities. They have the rights over decisions affecting the key
revenue earning capabilities of Peru Co including technological development,
markets to operate it and ways of raising finance. Thus Columbia Co has power
over the investee and these rights enable them to affect their return.
Further evidence that Columbia Co is the acquirer is reflected by the share issue
which Columbia paid as additional consideration. To obtain control, it is often
the case that the acquirer has to pay a premium on acquisition for their equity
interests. Columbia Co has in effect had to pay additional consideration equal to
$1.25 million (50% × $5 million × 1/20 × $10) despite each investor acquiring
50% of the equity shares. It can be concluded that Columbia is the acquirer in a
business combination and that Brazil Co, in effect, is the non-controlling
interest.
Tutorial note
Make sure you give a conclusion. Tell the examiner, based on the factors you
identified in your explanation, whether you think Columbia is, or is not, the
acquirer. Do not be afraid to have an opinion!
(ii)
Tutorial note
The question requires an explanation of the fair value of net assets used in a
goodwill calculation. To determine fair values, IFRS 13 Fair Value Measurement
needs to be applied.
IFRS 13 Fair Value Measurement states that the fair value is the price which
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. This means
that fair value is not entity specific but rather should take into account a market
participant’s ability to generate economic benefits by using the asset in its
highest and best use or by selling it to another market participant who would
use the asset in its highest and best use.
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AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
In assessing the fair value of the identifiable net assets at acquisition, it is
important that the net assets of Peru Co are measured using the same
accounting policies of the group. Since Columbia Co has similar bonds where
their business model is to either collect the cash flows or to sell, the bonds
should be measured at their acquisition date fair values and treated as a fair
value through other comprehensive income investment rather than amortised
cost. The carrying amount of the bonds in the individual financial statements of
Peru Co on 31 December 20X5 would be $6.24 million ($6 million + (6/12 ×
$6 million × 8%)). Since the bonds are in an unquoted company and an active
market for an identical asset is not observable, it appears reasonable to use the
market value for a similar asset as adjusted for differences in their liquidity. The
bonds would have a fair value of $8.4 million (6 million × $2 × 70%). A fair value
uplift to the net assets of Peru Co of $2.16 million ($8.4 million – $6.24 million)
is required.
Tutorial note
Remember, goodwill is calculated at acquisition. As identified in the
requirement, this is 31 December 20X5. Subsequent treatment of the financial
asset is therefore irrelevant in this particular requirement so there is no need to
discuss it.
The fair value of the brand has to be determined in accordance with its highest
and best use for market participants. Since it is not entity-specific, the intention
by Columbia Co to discontinue the brand is not relevant unless it is what other
market participants would also do with the brand. Since it is estimated that a
competitor would be prepared to pay $5 million to continue the trade of the
brand, this is not the case. The highest and best use of the brand from a market
perspective would appear to be continue the trade at a value of $5 million. A
$1 million increase is required to the fair value of the brand.
The deferred income must be measured from the market’s perspective. Since
the market would expect to incur direct and incremental costs of $1.7 million in
the performance of their obligations, the fair value should be determined by
adding the 30% mark-up to this estimate. The fair value of the deferred income
should be $2.21 million ($1.7 million × 130/100). This will result in a decrease in
the liabilities at acquisition and therefore an increase in the net assets of Peru Co
equal to $590,000 ($2.8 million – $2.21 million).
KA PL AN P U BLI SH IN G
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Tutorial note
There are three separate fair value adjustments to consider. The bond, the brand
and the contract liability. Make sure you attempt to discuss them all as each one
will have its own mark allocation. Marks can still be obtained even if you make
a mistake but leaving an issue out entirely will definitely cost you credit. So, if
you’re not sure, have a guess and move on.
(b)
Defined benefit plan
Where a defined benefit pension scheme is in surplus, IAS® 19 Employee Benefits
requires the surplus to be measured as the lower of:
–
The surplus in the plan, and
–
The present value of the economic benefits in the form of refunds from the plan
or reductions in the future contributions to the plan (known as the asset ceiling).
At 1 January 20X5, the surplus of the scheme is $60 million ($260 million – $200 million)
but the asset ceiling is only $20 million, so the defined benefit pension asset would
have been restricted to $20 million. Interest on the opening asset would therefore be
adjusted and only $1 million (5% × $20 million) interest income will be recorded in the
financing section of the statement profit or loss for the year. The cash contributions of
$21 million should be added to the scheme assets, benefits paid of $25 million are
deducted from both the scheme’s assets and the scheme’s liabilities and the current
service cost of $30 million is charged to the operating section of the statement profit
or loss.
The pension scheme surplus at 31 December 20X5 is summarised as follows:
Before 1 January
20X5
Net interest at 5%
Cash contributions
Benefits paid
Current service
costs
Total at
31 December 20X5
19 4
Asset
Liabilities
Net plan
assets before
ceiling
adjustment
$m
Ceiling
adjustment
$m
$m
260
13
21
(25)
200
10
(40)
(2)
–
–
20
1
21
(25)
60
3
21
–
––––
30
––––
(30)
––––
–
––––
(30)
––––
269
215
54
(42)
12
$m
Net plan
assets after
ceiling
adjustment
$m
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Tutorial note
Candidates are not required to produce this table in its entirety and the detail provided
here is for tutorial purposes only.
An abbreviated version would directly use the ‘Net plan assets after ceiling adjustment’
column and still provide the conclusions shown below.
The actuary has valued the scheme as a surplus of $47 million ($242 million –
$195 million) which would result in a remeasurement loss of $7 million ($54 million –
$47 million) on 31 December 20X5. However, the effect of the asset ceiling is that the
pension scheme would only be recognised at a value of $12 million (see table above).
Since the scheme is valued at the lower of the surplus of the scheme and the present
value of the economic benefits in the form of refunds from the plan or reductions in
the future contributions, the scheme will be restated to $25 million. A net gain of
$13 million ($25 million – $12 million) will be recognised in other comprehensive
income.
The pension scheme asset should be included in the financial statements of Columbia Co
at $25 million (the lower of $25 million and $47 million).
(c)
Consolidated statement of financial position
Tutorial note
The requirement asks for a consolidated statement of financial position. You should
start with the pre-populated response – do not waste time by creating your own
proforma. Work through each of the elements that need to be taken into account,
considering carefully what has already been recorded in the scenario. Record your
adjustments in separate columns so it’s easier for the marker to follow and importantly,
award follow through marks where needed.
You will need to calculate goodwill. This should be a familiar calculation at this point.
Set up a goodwill working under the proforma within the pre-populated spreadsheet
before reading the detail in the question. You can then fill in sections as you go through
the detail rather than attempting the goodwill calculation all in one go (which can be
inefficient from a timing perspective).
Note this part of the question does not require any explanations.
KA PL AN P U BLI SH IN G
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Draft
$m
1
2
3
4
5
6
7
8
Final
$m
Assets
Non-current assets
Property , plant
and equipment
Financial assets
Investment in
subsidiary
Goodwill
Defined benefit
pension surplus
Other non-current
assets
Current assets
417.0
23.0
21.3
417.0
25.2
2.2
(21.3)
5.5
20.0
(29)
21
13
47.0
25.0
1
48.0
––––––
––––––
528.3
520.7
––––––
––––––
115.0
(21)
94.0
––––––
––––––
Total assets
0
5.5
643.3
614.7
––––––
––––––
Equity
Equity attributable
to equity holders
of the company
Share capital
40.0
40.0
Other components
of equity
Retained earnings
92.0
288.0
Non-controlling
interest
Peru's equity
Total equity
Liabilities
Non-current
liabilities
Loans
19 6
13
105.0
259.0
(29)
––––––
––––––
420.0
404.0
0
32.0
20.0
(32.0)
20.0
0
––––––
––––––
452.0
424.0
––––––
––––––
50.0
50.0
––––––
––––––
50.0
50.0
––––––
––––––
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Draft
$m
1
2
3
4
5
6
7
8
Final
$m
Current liabilities
Contract liabilities
55.0
Other current
liabilities
86.3
86.3
––––––
––––––
(0.6)
54.4
141.3
140.7
––––––
––––––
191.3
190.7
––––––
––––––
643.3
614.7
––––––
––––––
Total liabilities
Total equity and
liabilities
Adjustment
1
2
3
4
5
6
7
8
KA PL AN P U BLI SH IN G
Details
Remove cost of the investment in Peru
Remove Peru’s equity
Pension scheme profit and loss impact:
– Interest income
– Service cost
Pension scheme – contributions
Pension scheme – remeasurement gain
Fair value adjustment – bonds
Fair value adjustment – brand
Fair value adjustment – deferred income
Goodwill
Non-controlling interest
$m
(21.3)
(32.0)
1
(30)
–––
(29)
–––
21
13
2.2
1
(0.6)
5.5
20.0
19 7
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Workings
(W1) Goodwill
$m
$m
Consideration:
Cash (5m × 50% × $8)
Shares (2.5m × 1/20 × $10)
20
1.3
Non-controlling interest at acquisition
(5m × 50% × $8)
Less net assets at acquisition:
Net assets per question
Fair value adjustment – bonds
Fair value adjustment – brand
Fair value adjustment – deferred income
Subsequent deferred tax
Goodwill on acquisition of Peru Co
20
32
2.2
1
0.6
(35.8)
–––––
5.5
–––––
ACCA Marking scheme
(a)
(i)
(ii)
Application of IFRS 13 to the following:
–
bonds
–
brand
–
deferred income
(b)
Discussion of defined benefit scheme and asset ceiling
Defined benefit calculations
(c)
Adjustment of spreadsheet for the following:
–
Impact of defined benefit pension scheme
–
Impact of fair value adjustments
–
Goodwill calculation
–
Non-controlling interest
Total
19 8
Definition of control
Application of the following to the scenario:
–
voting rights
–
governance structure
–
key management
–
premium on consideration
Marks
1
2
2
2
1
–––
8
–––
2
1
2
–––
5
–––
3
4
–––
7
–––
3
3
3
1
–––
10
–––
30
–––
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Examiner’s comments (extracts from the original question)
Columbia Co was a 30-mark question. It is important to allow yourself time for reading,
thinking and checking your answer within the allocated timeframe to ensure you have the
opportunity to gain the maximum marks across the question. You should avoid the
temptation to expand your answer to one requirement beyond the allotted time. Markers
cannot allocate more marks to a requirement than is available, even if the comments may
otherwise be worthy of marks. So, in short, stick to your allotted time.
(a) (i) Many candidates cut and pasted information from the question. Marks were awarded
as long as sensible comments were made by the candidates as to why the information was
important in the determination of the acquirer – the candidate must add their own
comments to the cut and pasted information. There were many points that could be raised
by candidates and the marking scheme flexibly allocated marks based upon the application
of the control principle. As a result, many candidates scored full marks on this part of the
question, demonstrating a good knowledge of the principles and their application.
(a) (ii) Various errors were made when trying to correctly account for the fair values of
identifiable net assets. Many candidates struggled with the fair valuation of the bond,
although the concept of fair values was generally well understood. Dealing with the
accounting for the brand was the best answered part of the question, although a common
mistake was to use the full fair value rather than the fair value adjustment when calculating
goodwill (part b).
(b) Candidates showed a good knowledge and understanding of the defined benefit scheme
and were able to make a good attempt at the calculations, although the discussion was
lacking at times.
Part (c) of the question has been adapted from the original version to adjust for syllabus
updates. Therefore no further examiner’s comments are available.
8
SUGAR (SEP/DEC 2020)
Walk in the footsteps of a top tutor
Key answer tips
This question tests consolidated statements of cash flow. This is a topic that students find
difficult. However, in part (b), there are some easy marks for simply picking up figures from
the scenario. Read the question carefully so that you are able to identify these easy marks.
Pay careful attention to verbs. Part (a) asks for you to ‘address’ the accounting treatment.
Part (c) requires you to ‘update the draft extracts’. This means that explanations will score
you marks in part (a), but will not in part (c).
Parts (a), (b) and (c) involve calculations. Set out workings clearly – this will help the markers
give you credit even if you have made mistakes.
KA PL AN P U BLI SH IN G
19 9
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
(a)
(i)
Initial 40% investment in Flour Co
After the 40% investment, Sugar exerts significant influence over Flour, meaning
Flour is Sugar’s associate. As an associate, the initial investment would have
been accounted for using the equity method and would be carried at $14.8 million
as at 1 July 20X7:
Cost
Share of post-acquisition net asset increase ($12m × 40%)
Investment in associate as at 1 July 20X7
$000
10,000
4,800
––––––
14,800
––––––
Tutorial note
Any associate impairments would have been deducted from the carrying amount of the
investment.
(ii)
Additional purchase of shares in Flour Co
The acquisition of the additional shares in Flour Co is a step acquisition. This means the
original 40% equity interest is treated as if it is disposed and then reacquired at fair
value (as part of the goodwill upon consolidation). The difference between the carrying
amount of the original 40% equity interest in the consolidated financial statements
and its fair value would be included as a gain within profit or loss.
Tutorial note
Gains and losses arising on step acquisitions are recorded in profit or loss unless the
previous shareholding was an investment in shares that had been designated to be
measured at fair value through other comprehensive income.
The fair value of the original 40% interest would be $15.2 million (10m × 40% × $3.80)
and so a gain of $400,000 ($15.2m – $14.8m) would be included in the investing section
of the statement profit or loss.
Tutorial note
Goodwill is always calculated on the date control is achieved. It is not recalculated,
even if the parent increases its shareholding.
20 0
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Goodwill will be calculated at 1 July 20X7, the date that control is gained, as the
difference between the fair value of the consideration and non-controlling interest and
the fair value of the identifiable net assets at acquisition. The consideration must
include the fair value of the original 40% equity interest as well as the fair value of the
additional consideration.
Tutorial note
Some students get very confused about what measuring the non-controlling interest at
fair value actually means. Keep it simple – we are trying to value the shares that the
parent entity did not purchase.
The fair value of the non-controlling interest at 1 July 20X7 will be $11.4 million (10m
× 30% × $3.80). The fair value of the share exchange will be $9 million. (3 million shares
acquired × ½ × $6).
The net assets should be measured at fair value at the date control is achieved,
therefore the land will be adjusted upwards by $600,000 to its fair value.
Tutorial note
Put all the relevant figures into the goodwill calculation. Remember that the
subsidiary’s identifiable net assets at acquisition are measured at fair value. The ‘cash
consideration’ is the balancing figure.
(b)
Goodwill
Goodwill has been determined to be $2,259,000 which means the cash paid to acquire
Flour Co on 1 July 20X7 must be $3 million as follows:
Cash consideration (bal. fig.)
Fair value of original 40% equity interest
Fair value of share exchange
Fair value of non-controlling interest at acquisition
Fair value of identifiable net assets at acquisition including FV uplift
($35,741 + $600)
Goodwill on acquisition per question
KA PL AN P U BLI SH IN G
$000
3,000
15,200
9,000
11,400
(36,341)
––––––
2,259
––––––
20 1
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Tutorial note
The share exchange is not a cash flow and so will not be reported in the statement of
cash flows.
The debit entry for the share exchange is recorded in goodwill. The credit entry is
recorded in equity (share capital and premium).
Cash paid to acquire Flour Co will be included within the investing activities of the
consolidated statement of cash flows. However, the cash held by Flour Co comes under
group control, so the net outflow presented in the consolidated statement of cash
flows is $1,766,000 ($3m – $1.234m).
(c)
Extracts from the consolidated statement of cash flows for the Sugar Group year
ended 30 June 20X8
Tutorial note
Remember to put brackets around the cash outflows. Try to reference figures to your
workings – this will help the marker award credit if you have made a mistake.
Cash flows from
investing activities
Proceeds from the
sale of PPE (W1)
Net cash paid to
acquire Flour Co
Cash paid on
acquisition of
Butter Co
Cash paid to
acquire intangible
assets (W1)
Net cash used in
investing activities
Cash flows from
financing activities
Proceeds from the
issue of shares
(W3)
Dividends paid to
NCI (W4)
Net cash generated
from financing
activities
20 2
Draft
$000
1
(2,000)
6,370
2
3
4
5
6
4,370
(1,766)
(1,766)
(5,000)
(5,000)
(12,051)
(12,051)
(2,000)
1,500
(14,447)
8,100
9,600
(3,324)
1,500
Final
$000
(3,324)
6,276
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Workings
Tutorial note
Set out your workings clearly. This will help you to score marks even if you make
mistakes.
(W1) Disposal of PPE
Proceeds (balancing figure)
Carrying amount
Loss on disposal
$000
4,370
(6,370)
––––––
(2,000)
––––––
(W2) Intangibles
Tutorial note
Remember to include the intangible assets owned by Sugar Co. These are now
under group control.
Intangibles b/f
Goodwill on acquisition of Sugar Co
Licences and patents on acquisition of Sugar Co
Amortisation
Cash purchase (bal. fig.)
Intangibles c/f
$000
15,865
2,259
6,781
(3,500)
12,051
––––––
33,456
––––––
(W3) Issue of ordinary shares during the year
Tutorial note
Remember to reconcile the total of share capital and premium year-on-year. Lots
of students will forget about the impact of the share exchange in part (a).
KA PL AN P U BLI SH IN G
20 3
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Share capital and premium b/f ($20m + $18m)
Share for share exchange (part a)
Cash proceeds (bal. fig.)
Share capital and premium c/f ($23m + $33.6m)
$000
38,000
9,000
9,600
––––––
56,600
––––––
(W4) Non-controlling interest
Tutorial note
Remember to include the non-controlling interest added on the step acquisition
of Flour Co.
Non-controlling interest b/f
Acquisition of Flour Co (part a)
Non-controlling interest profit for the year
Dividends paid to NCI (balancing figure)
Non-controlling interest c/f
(d)
$000
12,914
11,400
9,162
(3,324)
––––––
30,152
––––––
Pension schemes
Tutorial note
To answer this question, you need to nail down the accounting treatment of the two
pension schemes. Once you have done that, you should be able to identify the cash flow
and the non-cash expenses.
The only cash flow that should be recorded in the consolidated statement of cash flows
in relation to defined benefit pension schemes is the contributions paid into the
scheme. Contributions to defined benefit schemes are typically included within the
operating activities of the group statement of cash flows.
Since Sugar Co did not make any contributions until after the year end there will be no
cash flows to include in the consolidated statement of cash flows for the year ended
30 June 20X8. The $2 million benefits paid out of the scheme are an outflow of cash
from the pension scheme itself, a separate entity, rather than a cash outflow of
Sugar Co.
20 4
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
However, despite the lack of contribution during the year, the defined benefit pension
scheme will still have an impact upon the consolidated statement of cash flows of the
Sugar group. Since operating activities are being calculated using the indirect method,
it is necessary to adjust for any items that effect operating profit but are not cash flows.
Therefore the service cost component would need to be added back to group profits.
The remeasurement component does not impact the group statement of cash flows
since it is not a cash flow, nor does it impact operating profit.
Tutorial note
The remeasurement component is reported in other comprehensive income. It is
presented as an item that will never be reclassified to profit or loss.
In SBR exam questions, the remeasurement component is normally accumulated in
other components of equity. However, the question states that other components of
equity wholly relate to share premium. This must mean that the remeasurement
component has been accumulated in retained earnings. This treatment is allowed and
is, in fact, the treatment adopted by many real-life companies.
For the defined contribution pension scheme, the expense of $0.4m should be added
back to group profits. The contributions actually paid in the period of $0.3 million
($0.4 million – $0.1 million) should be reflected as a cash outflow within the operating
activities of the group statement of cash flows. The $0.1 million accrual is not included
within this cash flow as this reflects contributions that are outstanding at the year end
and have not yet been paid by Sugar Co.
ACCA Marking scheme
(a)
(b)
(c)
(d)
(i)
(ii)
Treatment as an associate
Application of the following discussion to the scenario:
–
Share exchange at 1 July 20X7
–
FV NCI and identifiable net assets at 1 July 20X7
Goodwill calculation and treatment of cash consideration
Adjustment to the spreadsheet for the following:
Proceeds from the sale of PPE
Net cash paid to acquire Flour Co
Cash paid for Butter Co
Acquisition of intangibles
Issue of ordinary shares
Dividends paid to non-controlling interest
Application of the following discussion to the scenario:
−
Defined benefit scheme cash flows to include/exclude
−
Other elements of defined benefit scheme
−
Defined contribution scheme
Total
KA PL AN P U BLI SH IN G
Marks
2
3
3
–––
6
–––
4
1
1
1
4
2
3
–––
12
–––
2
2
2
–––
6
–––
30
–––
20 5
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Examiner’s comments (extracts from original question)
Overall, parts (a) and (b) were well-answered. Most candidates provided clear explanations,
and a significant number of answers calculated the correct cash consideration. Many answers
explained where the cash outflow would appear in the statement of cash flows, although
very few worked out the net outflow.
Part (c) required collating information from various sources, and there was evidence from
some candidates’ answers that they found this challenging. A well-presented answer would
include a list of additions or deductions leading from opening to closing balances, with a
balancing item for the cash item. Some spreadsheet answers did not use the functionality
available which meant basic arithmetic errors occurred. Similarly, some candidates did not
show the workings behind a figure – this could have been presented as a typed out working
or as formula within a cell. Not showing any supporting workings means it is not possible to
award partial marks.
For part (d), weaker answers tended to focus too much on the benefits paid in the next year,
which was not relevant for answering the question on cash flow impact. Some candidates
incorrectly suggested this represented an adjusting event and missed the cash flow focus of
the requirement.
9
HUMMINGS (MAR 2020)
Walk in the footsteps of a top tutor
Key answer tips
Only 14 of the 30 available marks in this question test group accounting. In fact, the
requirement worth the most marks tests financial instruments. There is no point attempting
to guess which topics will be examined in your SBR exam – instead, you must cover, and feel
comfortable with, the whole syllabus. Although this question tests many different accounting
standards, well-prepared students should not find it too tough.
The easiest marks are on the topic of foreign exchange – 5 marks in part (a) for a discussion
of functional currency and 6 marks in part (b) on accounting for goodwill. Concentrate on
these if you are struggling.
(a)
Functional currency
Tutorial note
Start by stating the definition of functional currency and the principles used to
determine it.
Remember that a subsidiary would have the same functional currency as its parent if it
acted with little autonomy.
20 6
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
The functional currency is the currency of the primary economic environment in which
the entity operates. With a foreign acquisition, consideration should be given as to
whether Crotchet Co should adopt the same functional currency as its parent,
Hummings Co. However, Crotchet Co appears to be largely independent and is not
reliant on Hummings Co for either sales or finance. It is not required therefore for
Crotchet Co to adopt the same functional currency as Hummings Co. Crotchet Co does
not appear to have transactions in dollars or have a dollar bank account and it can be
concluded that the dollar should not be their functional currency.
Tutorial note
Make sure that you reach an explicit conclusion – what is the functional currency of
Crotchet Co?
In determining its functional currency, Crotchet Co should consider the currency which
mainly influences its sales price of goods and the currency which mainly influences its
labour and other costs. This is likely to be the currency which goods are invoiced in and
the currency in which costs are settled. The location of the entity’s head office is
irrelevant except to the extent that it is likely that the costs of running the head office
are likely to be settled in the domestic currency. For Crotchet Co, whilst there are a
number of transactions in dinars and tax has to be paid in dinars, it appears that the
vast majority of their transactions are in grommits. All sales and purchases are invoiced
in grommits as well as approximately half of their staff being paid in grommits. Funds
for finance are raised in grommits which further suggests that grommits should be
chosen as the functional currency of Crotchet Co.
(b)
(i)
Customer contracts
Tutorial note
This question is only worth 4 marks so your answer should be less detailed than
the one below, otherwise you would be wasting time.
You score easy marks for stating the key principles – the subsidiary’s identifiable
net assets at acquisition are recognised at fair value.
IFRS 3 Business Combinations requires the investor to recognise the investee’s
identifiable net assets at acquisition at fair value.
To be identifiable, a customer contract must either be capable of being used or
sold separately, or it must arise from legal or contractual rights. A reliable
estimate of its fair value is also necessary to be recognised as a separate asset
rather than subsumed within the goodwill figure. This is the case regardless of
whether the contracts had been recognised within the individual financial
statements of Crotchet Co or not.
KA PL AN P U BLI SH IN G
20 7
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
The contracts provide Crotchet Co with a legal right to prevent their customers
from obtaining goods and services from their competitors and a reliable
estimate of fair value appears to be obtainable. The contracts should therefore
be recognised as a separate intangible asset.
Identifiable net assets should be recognised at fair value as at the acquisition
date. For the contracts, this amounts to 15 million grommits. This would be
translated at the spot rate of exchange of $1 to 8 grommits and would be
recognised initially in the consolidated financial statements at $1.875 million.
Tutorial note
The question asks for the accounting treatment in the year ended 31 December
20X4. As such, you should discuss the accounting treatment subsequent to initial
recognition – i.e. amortisation. Many students concentrate on initial recognition
issues only.
The contracts need to be examined to determine their average unexpired useful
life and amortised over this period. This amortisation expense should be
translated at the average rate of exchange and recorded in the operating section
of the consolidated statement of profit or loss. The carrying amount of the
contracts would need to be retranslated at the closing rate of exchange of $1 to
7 grommits, with a corresponding exchange gain recognised in other
comprehensive income.
(ii)
Calculation of goodwill
Tutorial note
Set out your workings neatly.
You will only be penalised for errors once, so do not worry if you make a mistake
early in the calculation (such as with the net assets figure).
In SBR, goodwill impairments are normally translated at the average rate of
exchange. However, this rate was not provided and so the closing rate was used
instead.
20 8
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Goodwill at 31 December 20X4 would be $8.2 million calculated as follows:
Consideration ($24m × 8)
NCI at acquisition ($6m × 8)
Net assets at acquisition (W1)
Goodwill at 1 January 20X4
Impairment (30%)
Exchange gain (bal. fig.)
Goodwill at 31 December 20X4
Grommits
millions
192
48
(158)
–––––
82
(24.6)
–––––
57.4
–––––
Rate
$ millions
8
7
10.25
(3.51)
1.46
–––––
8.2
–––––
7
(W1) Net assets at acquisition
Net assets at acquisition are 43 million grommits plus 15 million grommits
for the contractual relationships plus 100 million grommits for the dinar
assets translated at 1 dinar to 2 grommits (50m × 2).
Example answer in the spreadsheet response area:
Explanation of accounting treatment
Tutorial note
Be explicit about where income and expenses are recognised – the statement of
profit or loss, or in other comprehensive income.
Many students forget to discuss whether income or expenses should be
attributed to non-controlling interests.
KA PL AN P U BLI SH IN G
20 9
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Goodwill is initially recognised at the spot rate of exchange of $1:8 grommits
and so would initially be $10.25 million.
The impairment loss of $3.51 million will be expensed to the operating section
of the consolidated statement of profit or loss.
Goodwill will be retranslated using the closing rate of exchange of
$1:7 grommits with the exchange gain of $1.46 million included in other
comprehensive income.
Since non-controlling interests at acquisition are measured at fair value, both
the impairment and the exchange gain will be apportioned 80/20 between the
shareholders of Hummings Co and the non-controlling interest respectively.
(c)
Quaver Co
Tutorial note
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations is regularly tested
in the SBR exam. Make sure that you know the definition of an asset held for sale, as
well as the qualifying criteria. Applying these criteria to the scenario is relatively
straightforward.
An asset or disposal group should be classified as held for sale if the carrying amount
will be primarily recovered through a sales transaction. For this to be the case, IFRS 5
Non-current Assets Held for Sale and Discontinued Operations states that:
•
The asset must be available for immediate sale in its present condition and the
sale must be highly probable
•
The sale must be expected to be complete within 12 months
•
The asset must be actively marketed at a reasonable price
•
Management must be committed to a plan of sale and it is unlikely that any
significant changes to the plan will be made.
The sale has not taken place within 12 months of acquisition, however, an exception
is permitted where the sale is still deemed to be highly probable and the delay was
caused by events which were unforeseen and beyond the control of management. The
sale is still expected early in 20X5 and the legal dispute was unforeseen, so this
exception seems applicable. As such, Quaver should be classified as a disposal group
held for sale. Quaver Co should initially be measured at fair value less costs to sell with
any subsequent decreases in fair value less costs to sell taken to consolidated profit or
loss.
It appears clear that management was immediately committed to the sale as
Hummings Co did not wish to have active involvement in the activities of Quaver Co.
Quaver Co is therefore a subsidiary acquired exclusively with a view to resale. In
accordance with IFRS 5, Quaver should be presented as a discontinued operation and
so its earnings for the year must be disclosed separately in the consolidated statement
of profit or loss.
21 0
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Tutorial note
Students are generally good at spotting issues about assets held for sale, but tend to
omit discussion of discontinued operations. Remember that disposing of (or holding for
sale) a separate major line of business, or the operations within a specific geographical
area, would also qualify as a discontinued operation.
(d)
Year ended 31 December 20X3
Tutorial note
The question asks you to consider the accounting treatment as at 31 December 20X3
and for the year ended 31 December 20X4.
Make sure that you discuss the accounting treatment of the bond itself, as well as the
impairment rules.
The business model of Hummings Co is to collect the contractual cash flows of the
bonds over the life of the asset, so the bonds should be measured at amortised cost.
The financial asset should be recognised at fair value (plus fees if applicable), which is
equal to the $10,000,000 paid to purchase the bonds.
Tutorial note
State the relevant principles in IFRS 9 Financial Instruments with respect to financial
asset impairments before applying them to the scenario.
IFRS 9 Financial Instruments requires entities to calculate expected credit losses for
investments in debt instruments that are measured at amortised cost or fair value
through other comprehensive income.
On acquisition, the bonds are low risk and are not credit impaired. This means that
Hummings Co should calculate 12-month expected credit losses. The 12-month
expected credit loss is defined as a portion of the lifetime expected credit losses which
represent the expected credit losses resulting from a default within the next
12 months.
Hummings Co should therefore recognise an allowance of $10,000 as at 31 December
20X3. This will be expensed to the investing section of the statement of profit or loss
and a separate allowance created. The allowance is netted off the $10,000,000 bond
in the statement of financial position of Hummings Co as at 31 December 20X3. The
carrying amount of the bonds in the statement of financial position at 31 December
20X3 will be $9.99 million ($10 million – $10,000).
KA PL AN P U BLI SH IN G
21 1
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Year ended 31 December 20X4
Interest income at the effective rate of 8% should be recognised in the investing
section of the statement of profit or loss and added to the carrying amount of the
financial asset. This is calculated on the gross carrying amount of the financial asset
($10m) and amounts to $800,000 ($10m × 8%).
The coupon interest of $500,000 ($10m × 5%) is deducted from the carrying amount
of the bonds. This means that the bonds would have a carrying amount of $10,300,000
($10m + $0.8m – $0.5m) at 31 December 20X4 before considering any impairment
issues.
Tutorial note
Discuss the principles regarding the measurement of the loss allowance before you
calculate it.
At 31 December 20X4, there has been a significant increase in credit risk. This means
that Hummings Co should make an allowance to recognise the lifetime expected credit
losses. This is defined as the expected credit losses (cash shortfalls) which result from
all possible default events over the expected life of the bonds. An allowance is required
equal to the present value of the expected loss in contractual cash flows as weighted
by the probability of default. The expected default losses are discounted using the
original effective rate of interest of 8%.
Date
31/12/X5
31/12/X6
Cash flow working
3% × $462,963
5% × $6,858,710
PV of default ($)
13,889
342,936
––––––––
356,825
––––––––
Tutorial note
Don’t stop with the calculation of the loss allowance, discuss how it is accounted for.
The expected loss allowance should be increased to $356,825 with an expense
recorded in the investing section of the statement of profit or loss of $346,825
($356,825 – $10,000). The net carrying amount of the bonds reported in the statement
of financial position as at 31 December 20X4 would be $9,943,175 ($10,300,000 –
$356,825).
21 2
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
ACCA Marking scheme
(a)
Autonomy from parent
Determination of functional currency
Marks
2
3
–––
5
(b)
(i)
Identifiable criteria and recognition
Need to amortise
–––
3
1
–––
Goodwill calculation
Discussion of impairment and exchange
Recognition of split between shareholders
–––
4
1
1
–––
4
(ii)
6
(c)
Discussion of asset held for sale criteria
Application of above to Quaver Co
–––
2
2
–––
4
(d)
Amortised cost identification
12 month credit loss discussion
12 month credit loss calculation
Amortised cost calculation
Explanation of lifetime credit losses
Calculation of lifetime credit losses
Total
–––
1
2
1
1
3
3
–––
11
–––
30
–––
Examiner’s comments
Answers to part (a) were generally good, with most candidates displaying a good application
of primary economic environment principles by which the functional currency is determined,
leading to a valid conclusion.
In part (b) (i), weaker answers expanded beyond the requirement, to include general
consolidation techniques, or erroneously focused on IFRS 15 Revenue from Contracts with
Customers rather than IFRS 3 Business Combinations. In part (b) (ii), the calculation at the
acquisition date was generally well-answered, provided candidates followed the guidance:
calculating goodwill first at local currency, including a fair value adjustment highlighted in
part (b) (i), and then translating. Fewer candidates achieved full marks as they neglected to
explain the impact of both impairment and exchange difference on the consolidated financial
statements.
Answers to part (c) in general showed a good appreciation of the rules and applied these to
the scenario. Most candidates were able to score well from applying their knowledge.
KA PL AN P U BLI SH IN G
21 3
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Part (d) had the most marks allocated to it but was often the shortest answer compared to
the other parts. Few candidates demonstrated a clear understanding of the expected value
approach to impairment losses under IFRS 9 Financial Instruments, and a general lack of
confidence in this area is evident. The second year treatment was less-well explained, with
very few candidates calculating the appropriate probability-weighted allowance. The net
increase in this allowance was rarely presented. Explanations tended to be too brief or, if
provided, were not applicable to the scenario. The focus tended to be on calculations despite
the requirement explicitly asking for ‘calculation and discussion’. Weaker answers presented
a table of discounted cashflows, or recommended treatment at fair value through profit or
loss, which illustrated a lack of preparation in this area.
10
LUPLOID (SEP/DEC 2019)
Walk in the footsteps of a top tutor
Key answer tips
Question 1 always examines group accounting, but other issues will be tested as well. This
question requires a good knowledge of IFRS 13 Fair Value Measurement, IAS 36 Impairment
of Assets and IFRS 2 Share-based Payment.
Part (b) is worth 11 marks. To score well your answer must contain more than just a series of
calculations. Explain how the impairment review is performed, which assets are written
down, and where the impairment loss is recorded.
(a)
(i)
Fair value measurement
Tutorial note
Fair value measurement is a popular exam topic. Make sure that you know the
definition of fair value.
IFRS 13 Fair Value Measurement defines fair value as the price which would be
received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Fair value is therefore
not supposed to be entity specific but rather market focused. Essentially the
estimate is the amount that the market would be prepared to pay for the asset.
Tutorial note
The fair value of a non-financial asset should be determined based on its highest
and best use. Non-financial assets include property, plant and equipment,
inventories, intangible assets, and investment properties.
21 4
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
The market would consider all alternative uses for the assessment of the price
which they would be willing to pay. For non-financial assets, fair value should
therefore be measured by consideration of the highest and best use of the asset.
There is a presumption that the current use would be the highest and best use
unless evidence exists to the contrary.
The highest and best use of the asset appears to be as residential property and
not the current industrial use. The intentions of Colyson Co are not relevant as
fair value is not entity specific. The alternative use would need to be based upon
fair and reasonable assumptions. In particular, it would be necessary to ensure
that planning permission to demolish the factory and convert into residential
properties would be likely. Since several nearby sites have been given such
permission, this would appear to be the case.
The fair value of the factory site should be valued as if converted into residential
use. Since this cannot be determined on a stand-alone basis, the combined value
of the land and buildings is calculated. The $1 million demolition and planning
costs should be deducted from the market value of $24 million. The fair value of
the land and buildings should be $23 million. The fair value of the identifiable
net assets at acquisition are $88 million ($65m + $23m).
Depreciated replacement cost
Depreciated replacement cost should only be considered as a possible method
for estimating the fair value of the asset when other more suitable methods are
not available. This may be the case when the asset is highly specialised. This is
not the case with the factory site. Depreciation is unlikely to be an accurate
reflection of all forms of obsolescence including physical deterioration.
Moreover, the rise in value of land and properties particularly for residential use
would mean that to use depreciated replacement cost would most likely
undervalue the asset.
(ii)
Goodwill calculations
Tutorial note
This part of the question only asked for ‘calculations’. No marks are awarded for
discussion of the goodwill calculations.
Goodwill should be calculated as follows:
Consideration
Non-controlling interest (NCI) at acquisition
Net assets at acquisition
Goodwill
Fair value
method
$m
90
22
(88)
––––
24
––––
Proportional
method
$m
90
17.6
(88)
–––––
19.6
–––––
NCI at acquisition under proportional method is $17.6m (20% × $88m).
The fair value of the net assets at acquisition is $88m as per part (a) (i) ($65m +
$23m).
KA PL AN P U BLI SH IN G
21 5
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
(b)
Impairment
An impairment arises where the carrying amount of the net assets exceeds the
recoverable amount.
Where the cash flows cannot be independently determined for individual assets, they
should be assessed as a cash generating unit. That is the smallest group of assets which
independently generate cash flows. Impairments of cash generating units are allocated
first to goodwill and then to the other assets in proportion to their carrying amounts.
No asset should be reduced below its recoverable amount.
Fair value method
The overall impairment of Colyson Co is $30 million ($106m + goodwill $24m – $100m).
The damaged building should be impaired by $4 million with a corresponding charge
to profit or loss in the operating section. Since $4 million has already been allocated to
the land and buildings, $26 million of impairment loss remains to be allocated.
The full $24 million of goodwill should be written off and expensed in the operating
section of the consolidated statement of profit or loss.
Of the remaining $2 million impairment ($30m – $4m – $24m), $1.25 million will be
allocated to the plant and machinery ((15/(15 + 9)) × 2m) and $0.75 million will be
allocated to the remaining intangibles ((9/(9 + 15)) × 2m). As no assets have been
previously revalued, all the impairments are charged to profit or loss.
Tutorial note
If the NCI has been measured at fair value at acquisition then ‘full goodwill’ has been
calculated (i.e. the goodwill attributable to the owners of the parent company and the
goodwill attributable to the NCI). As such, the NCI must be attributed its share of the
goodwill impairment charge.
Of the impairment loss, $24 million (80% × $30m) will be attributable to the owners of
Luploid Co and $6 million (20% × $30m) to the NCI in the consolidated statement of
profit or loss.
The allocation of the impairment is summarised in this table:
Land and buildings
Plant and machinery
Intangibles other than goodwill
Goodwill
Current assets (at recoverable amount)
Total
21 6
Original CA
$m
60
15
9
24
22
––––
130
––––
Impairment
$m
(4.00)
(1.25)
(0.75)
(24.00)
–
–––––
(30)
–––––
Revised CA
$m
56
13.75
8.25
0
22
–––––
100
–––––
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Proportionate method
The basic principles and rule for impairment is the same as the fair value method and
so $4 million will again first be written off against the land and buildings.
When NCI is measured using the proportional share of net assets, no goodwill
attributable to the NCI is recognised. This means that the goodwill needs to be grossed
up when an impairment review is performed so that it is comparable with the
recoverable amount.
The goodwill of $19.6 million is grossed up by 100/80 to a value of $24.5 million. This
extra $4.9 million is known as notional goodwill. The overall impairment is now
$30.5 million ($106m + $24.5m – $100m) of which $4 million has already been
allocated to land and buildings.
Since the remaining impairment of $26.5 million ($30.5m – $4m) exceeds the total
notional goodwill, this is written down to zero. However, as only $19.6 million goodwill
is recognised within the consolidated accounts, the impairment attributable to the
notional goodwill is not recognised. The impairment charged in the operating section
of the consolidated statement of profit or loss is therefore $19.6 million and this is fully
attributable to the owners of Luploid Co.
Of the remaining $2 million ($30.5m – $4m – $24.5m), $1.25 million will be allocated
to the plant and machinery (15/(15 + 9) × 2m) and $0.75 million will be allocated to
the remaining intangibles (9/(9 + 15) × 2m). As no assets have been previously
revalued, all the impairments are charged to profit or loss in the operating section.
Tutorial note
If goodwill is calculated using the proportionate method, then the goodwill impairment
recognised in the consolidated financial statements is all attributable to the owners of
the parent company. However, any impairment loss related to other assets must be
allocated between the owners of the parent company and the non-controlling interest.
The impairment expense attributable to the owners of Luploid Co is $24.4 million
($19.6m goodwill impairment + (80% × ($4m building + $2m plant and machinery and
other intangibles))). The impairment expense attributable to the NCI is $1.2 million
(20% × $6m). This is summarised below:
Land and buildings
Plant and machinery
Intangibles other than goodwill
Goodwill
(Notional goodwill)
Current assets (at recoverable amount)
Total
KA PL AN P U BLI SH IN G
Original CA
$m
60
15
9
19.6
4.9
22
–––––
130.5
–––––
Impairment
$m
(4.00)
(1.25)
(0.75)
(19.60)
(4.90)
–
–––––
(30.5)
–––––
Revised CA
$m
56
13.75
8.25
0
0
22
––––––
100
––––––
21 7
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
(c)
(i)
Consideration
IFRS 3 Business Combinations requires all consideration to be measured at fair
value on acquisition of a subsidiary.
Deferred shares should be measured at the fair value at the acquisition date
with subsequent changes in fair value ignored. Luploid Co will issue 2.4 million
(60% × 10m × 2/5) shares as consideration. The market price at the date of
acquisition was $30, so the total fair value is $72 million (2.4m × $30).
Since Luploid Co is obliged to replace the share-based scheme of Hammond Co
on acquisition, the replacement scheme should also be included as
consideration (but only up to the fair value of the original scheme as at 1 July
20X7). The fair value of the replacement scheme at the grant date was
$18 million. However the fair value of the original Hammond Co scheme at the
acquisition date was only $15 million. As such, only $15 million should be added
to the consideration.
The total consideration should be valued as $87 million ($72m + $15m).
(ii)
Expense related to replacement scheme
The $3 million ($18m – $15m) not included within the consideration (see above)
should be treated as part of the post-acquisition remuneration package for the
employees and measured in accordance with IFRS 2 Share-based Payment. As
there are no further vesting conditions it should be recognised as a postacquisition expense immediately.
Expense related to additional scheme
Tutorial note
When dealing share-based payment questions, students tend to provide answers
that are wholly numerical. Make sure that you discuss and apply the principles
from IFRS 2 Share-based Payments or you will miss out on some very easy marks.
The condition relating to the share price of Luploid Co is a market based vesting
condition. These are adjusted for in the calculation of the fair value at the grant
date of the option. An expense is therefore recorded in the consolidated profit
or loss of Luploid Co (and a corresponding credit to equity) irrespective of
whether the market based vesting condition is met or not.
The additional two years’ service is a non-market based vesting condition. The
expense and credit to equity should be adjusted over the vesting period as
expectations change regarding the non-market based vesting condition.
The correct charge to the operating section of the statement of profit or loss
and credit to equity in the year ended 30 June 20X8 is $9.6 million ((10,000 ×
96%) × 100 × $20 × ½).
21 8
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
ACCA Marking scheme
Marks
(a)
(i)
(ii)
–
–
application of the following discussion to the scenario:
how FV should be determined
why depreciation replacement cost is unsuitable
calculation marks for:
correct FV of net assets
correct NCI figures
(b)
–
–
–
–
–
discussion of what constitutes an impairment and CGUs
correct calculation of impairment losses for both methods
notional goodwill
impairment allocation
discussion of how and why methods differ
(c)
(i)
–
–
–
(ii)
–
–
calculation FV of deferred shares
calculation of FV of options
discussion of the above calculations and application to the
scenario
calculation share expense
application of the following discussion to the scenario:
Calculations
vesting conditions
Total
5
2
–––
7
–––
1
2
–––
3
–––
2
2
1
3
3
–––
11
–––
1
1
2
–––
4
–––
1
2
2
–––
5
–––
30
–––
Examiner’s comments
Answers to part (a) (i) were generally good, with most candidates outlining the methods by
which fair value is determined under IFRS 13. 11 marks were available for part (b) and most
answers allocated an appropriate amount of their answer to this part. Whilst almost all
answers described the basic impairment process, a surprising number of candidates excluded
goodwill from their impairment calculation. This may have limited their opportunities for
marks, particularly where their explanations did not explain the process by which an
impairment loss is allocated to assets of a cash generating unit. Very few candidates
explained the need for grossing-up goodwill under the net assets NCI valuation method, and
how this is then allocated between group and NCI. Explanations of how the impairment loss
is apportioned between group and NCI were generally quite basic. Indeed, most candidates
identified that there is no goodwill attributable to NCI under the proportion of net assets
valuation, but then suggested none of the impairment need be apportioned to NCI).
Part (c) (i) required an explanation of how consideration in the form of shares in a second
acquisition should be valued. Most answers correctly calculated the fair value of the share
exchange. Part (c) (ii) asked for the resulting share-based expense and a discussion of the
vesting conditions – unfortunately this was less-well answered.
KA PL AN P U BLI SH IN G
21 9
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
11
CARBISE (MAR/JUN 2019)
Walk in the footsteps of a top tutor
Key answer tips
This question examines the topic of overseas subsidiaries. As should be expected, the
question requires the calculation of key figures in the consolidated financial statements (such
as goodwill and foreign exchange differences), but also explanations of the accounting
principles behind those calculations.
(a)
Subject: Foreign subsidiary Bikelite
(i)
Presentation currency
Tutorial note
Start off with the definition of presentation currency.
The presentation currency is the currency in which the financial statements are
presented. IAS 21 The Effects of Changes in Foreign Exchange Rates permits an
entity to present its individual financial statements in any currency. It would
therefore be up to the directors of Bikelite to choose a presentation currency
for its individual financial statements. Factors which might be considered
include the currency used by major shareholders and the currency in which debt
finance is primarily raised.
Functional currency
Tutorial note
Start off with the definition of functional currency.
The functional currency is the currency of the primary economic environment in
which the entity operates. Since transactions are initially recorded in an entity’s
functional currency, the results and financial position would need to be
retranslated where this differed to the presentation currency.
Tutorial note
Remember that a subsidiary is likely to have the same functional currency as its
parent if certain factors apply – such as if the subsidiary operates with little
autonomy from its parent.
22 0
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
When determining the functional currency of Bikelite, consideration should first
be given to whether the functional currency of Bikelite should be the same as
Carbise, at least whilst under the control of Carbise.
It appears that Bikelite has considerable autonomy over its activities. Despite
being acquired to make more efficient use of the surplus inventory of Carbise,
purchases from Carbise were only 5% of Bikelite’s total purchases. Revenue is
invoiced in a range of currencies suggesting a geographically diverse range of
customers which, although this allows Carbise access to new international
markets, is unlikely to be classified as an extension of the parent’s operations.
The volume of the transactions involved between Carbise and Bikelite would
seem to be far too low to come to this conclusion. Bikelite also appears free to
retain cash in a range of currencies and is not obliged to remit the cash to Carbise
in the form of dividends. Nor does Bikelite appear to be dependent on financing
from Carbise with other investors taking up the bond issue at the start of 20X6.
The functional currency of Bikelite is not necessarily the same as Carbise.
Tutorial note
State the primary factors used to determine functional currency and then apply
them to the scenario.
In determining its functional currency, Bikelite should consider the following
primary factors: the currency which mainly influences the sales price for their
goods, the currency of the country whose competitive forces and regulations
determine the sales price and also the currency which influences labour,
material and overhead costs. The key determinant here is the currency which
the majority of the transactions are settled in. Bikelite invoices and is invoiced
in a large range of currencies and so it would not be immediately clear as to the
appropriate functional currency. Nor is there detail about whether there is a
currency in which competitive forces and regulations could be important. We
do not know, for example, what currency Bikelite’s major competitors invoice
in.
Tutorial note
If the primary factors used to determine functional currency are inconclusive
then an entity must apply secondary factors.
Secondary factors include the currency in which financing activities are obtained
and the currency in which receipts from operating activities are retained. Funds
were raised in dinars from the bond issue and so it would appear that the dinar
should probably be the functional currency for Bikelite.
KA PL AN P U BLI SH IN G
22 1
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
(ii)
Goodwill
Tutorial note
Be careful – the acquisition of the subsidiary was not in the current year. The
question asks you for the current year foreign exchange gain on goodwill, not
the cumulative gain.
Goodwill in dinars on the acquisition of Bikelite would be dinar 42 million. This
is calculated as follows:
Dinars millions
100
22
(80)
––––
42
––––
Consideration
FV of NCI
Less net assets at acquisition (60 + 20)
Goodwill at acquisition
On acquisition, the goodwill in dollars would have been $84 million (dinar
42m/0.5).
An impairment of dinars 6 million arose in the year ended 31 December 20X5.
Tutorial note
This would have been translated at the average rate in the prior reporting period.
The impairment charge of $15 million (dinar 6m/0.4) would have been recorded
in the statement of profit or loss in the prior period.
The remaining goodwill of dinars 36 million (dinars 42m – dinars 6m) would have
been translated as at 31 December 20X5 using the closing rate of $1:0.38.
Goodwill in the consolidated statement of financial position as at 31 December
20X5 would have been $94.7 million (dinars 36m/0.38).
Goodwill of dinar 36 million at 30 September 20X6 will be translated at the rate
on that date of $1:0.35. This amounts to $102.9 million (dinars 36m/0.35).
This is summarised below:
Dinar millions
rate
$ millions
Goodwill at 31 December 20X5
(dinar 42m – dinar 6m)
Exchange gain (bal. fig.)
36
0.38
Goodwill at 30 September 20X6
–––
36
–––
0.35
94.7
8.2
––––––
102.9
––––––
The exchange gain arising in the current year is therefore $8.2 million ($102.9m
– $94.7m).
22 2
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
(iii)
Explanation of goodwill calculation and exchange gain
Tutorial note
You need to briefly explain how to calculate goodwill and the treatment of the
foreign exchange differences arising on its retranslation. Make sure you identify
all the requirements or you will lose easy marks.
On a business combination, goodwill is calculated by comparing the fair value of
the consideration plus non-controlling interests (NCI) at acquisition with the fair
value of the identifiable net assets at acquisition.
An adjustment of dinar 20 million is required to the property of Bikelite to
ensure the net assets at acquisition are properly measured at fair value.
Carbise measures NCI using the fair value method. This means that goodwill
attributable to the NCI is included within the overall calculation of goodwill.
At each year end, all assets (including goodwill) and liabilities are retranslated
using the closing rate of exchange. Exchange differences arising on the
retranslation are recorded within other comprehensive income. Since the noncontrolling interest is measured under the fair value method, the exchange
difference would be apportioned 80%/20% between the owners of Carbise and
the non-controlling interest.
Tutorial note
If the non-controlling interest had been valued at its proportionate share of the
fair value of the subsidiary’s identifiable net assets, then the foreign exchange
gain on goodwill would have been wholly attributable to the owners of Carbise.
Only the current year exchange difference would be recorded within other
comprehensive income for the year ended 31 December 20X6. The cumulative
exchange differences on goodwill at 30 September 20X6 (i.e. the exchange gain
in the prior and current period) would be held in equity prior to the disposal of
Bikelite.
(b)
Exchange differences on net assets and profit
Tutorial note
Easy marks are available for explaining why foreign exchange differences arise.
The net assets of Bikelite would have been retranslated each year at the closing rate
of exchange. There is therefore an exchange difference arising each year by comparing
the opening net assets at the opening rate of exchange with the opening net assets at
the closing rate of exchange.
KA PL AN P U BLI SH IN G
22 3
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
An additional exchange difference arises through the profit or loss of Bikelite each year
being translated at the average rate of exchange in the consolidated statement of
comprehensive income. The profit or loss will increase or decrease the net assets of
Bikelite respectively which, as is indicated above, will be translated at the closing rate
of exchange for inclusion in the consolidated statement of financial position.
As with goodwill, the current year exchange differences are presented in other
comprehensive income with 80% attributable to the shareholders of Carbise and 20%
to the NCI. Cumulative exchange differences will be included in equity on the
consolidated statement of financial position.
Tutorial note
The figures from the separate financial statements of Bikelite will not include any
consolidation adjustments.
The carrying amount of the net assets of Bikelite in the separate financial statements
on 1 January 20X6 was dinar 48 million. This would not include the dinar 20 million fair
value adjustment, or subsequent depreciation arising on this. The carrying amount of
Bikelite’s opening net assets in the consolidated financial statements would therefore
be dinar 64 million (dinar 48 + (dinar 20 million × 16/20)).
Bikelite would only be consolidated for the first nine months of the year because
Carbise loses control on 30 September 20X6. Losses per the separate financial
statements for the year ended 31 December 20X6 were dinar 8 million, so only dinar
6 million would be consolidated. Additional depreciation of dinar 0.75 million (dinar
20m/20 × 9/12) would be charged for the first nine months of the year in the
consolidated financial statements. Therefore, the total loss of Bikelite in the
consolidated financial statements is dinar 6.75 million.
Net assets at disposal in dinars would therefore be dinar 57.25 million (dinar 64 –
dinar 6.75).
Tutorial note
It is important to learn the pro-formas for calculating foreign exchange differences.
Remember that a profit in the period will increase the opening net assets, but a loss
will reduce the opening net assets. Profits and losses are translated at the average rate.
22 4
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
The exchange gain for the year ended 31 December 20X6 would be $13.4 million
calculated as follows:
Opening net assets at opening rate (dinar 64/0.38)
Loss for 9 months at average rate (dinar 6.75/0.37)
Current year exchange gain (bal. fig.)
Net assets at 30 September 20X6 (dinar 57.25/0.35)
$ millions
168.4
(18.2)
13.4
––––––
163.6
––––––
This exchange gain is presented in other comprehensive income. Of the total,
$10.7 million is attributable to the shareholders of Carbise (80% × $13.4m) and
$2.7 million to the NCI.
Tutorial note
Don’t be too disheartened if you make mistakes in your calculations. Lots of students
would forget to adjust the opening net assets and loss of Bakelite for the impact of the
fair value adjustment. Those students would still score marks for demonstrating
knowledge of the key principles involved when translating an overseas subsidiary.
(c)
(i)
Group profit or loss on disposal on Bikelite
Tutorial note
This is an important pro-forma to learn. You will not be penalised if your figures
from previous parts of the question are incorrect. Lots of students would forget
to reclassify the group’s share of the previously recognised foreign exchange
gains to profit or loss.
Proceeds
Net assets at disposal (see (b))
Goodwill at disposal (see (a)(ii))
NCI at disposal (see calc. below)
Exchange gains recycled to profit and loss
Group profit on disposal
KA PL AN P U BLI SH IN G
$ millions
150
(163.6)
(102.9)
48.5
76.6
–––––
8.6
–––––
22 5
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Workings
Exchange gains at 1 January 20X6 per the question are $74.1 million. Current
year exchange differences on goodwill are $8.2 million (see (a)(ii)) and on the
net assets are $13.4 million (see (b)). Cumulative exchange gains at
30 September 20X6 are therefore $95.7 million ($74.1m + $8.2m + $13.4m). On
disposal, the parent’s share should be recycled to profit or loss. This amounts to
$76.6 million (80% × $95.7m).
NCI at disposal is calculated as follows:
NCI at 1 January 20X6 per question
NCI share of loss to 30 September 20X6
(20% × $18.2m (part (b)))
NCI share exchange gains for 9 months to 30 September 20X6
(20% × ($13.4m + $8.2m))
NCI at 30 September 20X6
(ii)
$ millions
47.8
(3.6)
4.3
––––
48.5
––––
Treatment and presentation of Bikelite
For the year ended 31 December 20X6, Carbise will consolidate Bikelite for the
first nine months of the year up to the date of disposal of the shares and
subsequent loss of control.
Exchange differences on the translation of the net assets, profits and goodwill
in relation to the nine months to 30 September 20X6 will initially be recognised
in other comprehensive income.
On 30 September 20X6, a consolidated profit or loss on disposal will be
calculated in the consolidated financial statements of Carbise. In effect, the
proceeds are compared to the net assets and unimpaired goodwill not
attributable to the non-controlling interest at the disposal date. The cumulative
exchange differences on the translation of Bikelite would be reclassified to profit
or loss.
Tutorial note
The presentation of a subsidiary that has been sold during the period, or which
is held for sale, depends on whether it qualifies as a discontinued operation.
State the relevant principles used to determine whether a component of a
business is a ‘discontinued operation’, and then apply these to the scenario.
Consideration should be given as to whether the disposal of Bikelite would be
presented as a discontinued operation. According to IFRS 5 Non-current Assets
Held for Sale and Discontinued Operations, for Bikelite to be classified as a
discontinued operation, it would need to represent a separate major line of
business or geographical area of operations. Since Bikelite was initially acquired
by Carbise to gain easier access to international markets, it is likely that the
criterion would be met.
22 6
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
ACCA Marking scheme
(a)
(i)
–
–
discussion of presentation and functional currency
application of the above discussion to the scenario
Maximum
(ii)
–
–
calculation of goodwill
calculation of the exchange difference on goodwill
(iii)
–
explanation of the goodwill calculation and application to the
scenario
explanation of the exchange gain and application to the scenario
–
Maximum
(b)
–
–
explanation of Bikelite exchange differences
calculation of Bikelite exchange differences for y/e 20X6:
translation
split between parent and NCI
Maximum
(c)
–
–
calculation of group profit or loss on disposal
explanation of the accounting treatment of Bikelite
Total
Marks
2
5
–––
7
–––
2
3
–––
5
–––
2
2
–––
4
–––
3
3
1
–––
7
–––
3
4
–––
30
–––
Examiner’s comments
In the first part, weak answers tended to list the factors determining the functional currency
with little application to the scenario.
The technical parts of a consolidation, in this case part (ii), are generally well-answered
although some candidates are often less prepared to perform a translation from a foreign
currency. Likewise, explanations of calculations within the consolidation process, part (iii),
are often well-answered provided that the calculations have been performed well. Although
the question is broken into several sections, some candidates insist on answering as if it is
one question. Candidates are advised against this because it makes it difficult for markers to
mark.
KA PL AN P U BLI SH IN G
22 7
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
12
MOYES (DEC 2018)
Walk in the footsteps of a top tutor
Key answer tips
This question examines consolidated statements of cash flow. However, note that the
calculation of cash from operating activities was only worth six marks. In contrast, discussion
of the adjustments made to operating profit (part (a) (ii)) and discussion of the impact of a
change in group structure (part (b)) were worth twelve marks. To succeed in SBR, you must
feel confident with the discursive requirements.
When preparing a statement of cash flows (or extracts from the statement), pay careful
attention to whether the figures need brackets.
(a)
Explanatory note to: The directors of Moyes
Subject: Cash from operating activities
(i)
Cash from operating activities before income taxes
Tutorial note
Make sure that your reconciliation is clearly labelled. This will help the markers
to award you credit if you have made mistakes.
Operating profit
Service cost component
Contributions into the pension scheme
Impairment of goodwill
Depreciation
Impairment of property, plant and equipment ($43m – $20m)
Reduction in inventories ($126m – $165m + $6m)
Loss on inventory
Increase in receivables
Increase in payables
Cash from operating activities before income taxes
22 8
$m
142
24
(15)
10
99
23
33
6
(7)
18
––––
333
––––
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Tutorial note
Note that the same answer would have been obtained if no separate adjustment
was made for the $6 million loss on inventories and if the reduction in inventories
was presented as $39 million ($126m – $165m).
(ii)
Explanation of adjustments
Tutorial note
Work through your calculation of cash from operating activities before income
taxes and discuss the rationale behind each adjustment you have made to profit
before tax.
Indirect method
Cash flows from operating activities are principally derived from the key trading
activities of the entity. This would include cash receipts from the sale of goods,
cash payments to suppliers and cash payments on behalf of employees. The
indirect method adjusts profit or loss for the effects of transactions of a noncash nature and any deferrals or accruals from past or future operating cash
receipts or payments.
Non-cash flows
Non-cash flows which have reduced profit and must subsequently be added
back include the service cost component, depreciation, exchange losses and
impairments. With the impairment of property, plant and equipment, the first
$20 million of impairment will be allocated to the revaluation surplus so only
$23 million would have reduced operating profits and should be added back.
Pension
In relation to the pension scheme, the remeasurement component can be
ignored as it is neither a cash flow nor an expense to operating profits. Cash
contributions should be deducted, though, as these represent an operating cash
payment ultimately to be received by Moyes’ employees. Benefits paid to
retired employees are a cash outflow for the pension scheme rather than for
Moyes and so should be ignored.
KA PL AN P U BLI SH IN G
22 9
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Working capital
The movements on receivables, payables and inventory are adjusted so that the
timing differences between when cash is paid or received and when the items
are accrued in the financial statements are accounted for.
Inventory is measured at the lower of cost and net realisable value. The
inventory has suffered an overall loss of $6 million (Dinar 80 million/5 – Dinar
60 million/6). This is not a cash flow and would be added back to profits in the
reconciliation. However, the loss of $6 million should also be adjusted in the
year-on-year inventory movements. The net effect of this on the statement of
cash flows will be nil.
(b)
Change in structure
Tutorial note
Students are generally good at dealing with changes in group structures in numerical
questions. Make sure that you understand the principles behind the numerical
treatment so that you are able to address discursive questions as well.
When the parent company acquires or sells a subsidiary during the financial year, cash
flows arising from the acquisition or disposal are presented as investing activities.
In relation to Davenport, no cash consideration has been paid during the current year
because the consideration consisted of a share for share exchange and deferred cash.
The deferred cash would be presented as a negative cash flow within investing
activities when paid in two years’ time.
This does not mean that there would be no impact on the current year’s statement of
cash flows. On gaining control, Moyes would consolidate 100% of the assets and
liabilities of Davenport which would presumably include some cash or cash equivalents
at the date of acquisition. These would be presented as a cash inflow at the date of
acquisition net of any overdrafts held at acquisition.
Adjustments would also need to be made to the opening balances of assets and
liabilities by adding the fair values of the identifiable net assets at acquisition to the
respective balances. This would be necessary to ensure that only the cash flow effects
are reported in the consolidated statement of cash flows.
On the disposal of Barham, the net assets at disposal, including goodwill, are removed
from the consolidated financial statements. Since Barham is overdrawn, this will have
a positive cash flow effect for the group. The overdraft will be added to the proceeds
(less any cash and cash equivalents at disposal) to give an overall inflow presented in
investing activities. Care would once again be necessary to ensure that all balances at
the disposal date are removed from the corresponding assets and liabilities so that
only cash flows are recorded within the consolidated statement of cash flows.
23 0
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Dividends
Tutorial note
The question asked about changes in group structure and dividends. Make sure that
you address both aspects. The examining team regularly comment that students fail to
address all parts of the exam questions.
Dividends received by Moyes from Davenport are not included in the consolidated
statement of cash flows since cash has in effect been transferred from one group
member to another.
The non-controlling interest’s share of the dividend would be presented as a cash
outflow in financing activities.
(c)
Assets held for sale
Tutorial note
Start with the definition of an asset held for sale and then apply it to the scenario.
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations defines an asset
held for sale as one where the carrying amount will be recovered principally through a
sales transaction. To be classified as held for sale, a sale has to be highly probable and
the asset should be available for sale in its present condition.
At face value, Watson would not appear to meet this definition as no sales transaction
is to take place.
IFRS 5 does not explicitly extend the requirements for held for sale to situations where
control is lost. However, the Board have confirmed that in instances where control is
lost, the subsidiary’s assets and liabilities should be derecognised. Loss of control is a
significant economic event and fundamentally changes the investor – investee
relationship. Therefore situations where the parent is committed to lose control
should trigger a reclassification as held for sale. Whether this should be extended to
situations where control is lost to other causes would be judgemental. It is possible
therefore that Watson should be classified as held for sale.
Discontinued operations
Tutorial note
Start with the definition of a discontinued operation and then apply it to the scenario.
Remember you were asked to discuss both Barham and Watson.
KA PL AN P U BLI SH IN G
23 1
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
IFRS 5 defines a discontinued operation as a component of an entity which either has
been disposed of or is classified as held for sale, and
(i)
represents a separate major line of business or geographical area of operations,
or
(ii)
is a single co-ordinated plan to dispose of a separate major line or area of
operations, or
(iii)
is a subsidiary acquired exclusively for resale.
Barham has been sold during the year but there appears to be other subsidiaries which
operate in similar geographical regions and produce similar products. Little guidance
is given as to what would constitute a separate major line of business or geographical
area of operations. The definition is subjective and the directors should consider
factors such as materiality and relevance before determining whether Barham should
be presented as discontinued or not.
The same is true for Watson. Assuming it can be classified as held for sale, it would
need to be a separate major line of business or geographical area of operation to be
presented as a discontinued operation.
(d)
Probability
Tutorial note
This question requires knowledge of the recognition criteria in a range of IFRS and IAS
Standards, as well as in the Conceptual Framework. This content is core. If your
knowledge here is lacking then you should revisit the Study Text.
Different accounting standards use different levels of probabilities to discuss when
assets and liabilities should be recognised in the financial statements. For example,
economic benefits from property, plant and equipment and intangible assets need to
be probable to be recognised. To be classified as held for sale, the sale has to be highly
probable.
Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, a provision
should only be recognised if an outflow of economic resources is probable. Contingent
assets, on the other hand, can only be recognised if the inflow is economic benefits is
virtually certain. This could lead to a situation where two sides of the same court case
have two different accounting treatments despite the likelihood of pay-out being
identical for both parties.
Contingent consideration transferred on a business combination is recognised in the
financial statements regardless of the level of probability. Instead the fair value is
adjusted to reflect the level of uncertainty of the contingent consideration.
In the 2018 Conceptual Framework, the Board confirmed a new approach to
recognition which requires decisions to be made with reference to the qualitative
characteristics of financial information. The Conceptual Framework says than an item
is recognised if it meets the definition of an element and if recognition provides users
of financial statements with:
23 2
–
relevant information
–
a faithful representation of the asset or liability.
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
The key change in the 2018 Conceptual Framework was therefore to remove the
probability criterion. The Conceptual Framework will inform the revision of current
IFRS and IAS Standards as well as the development of new standards, and this may
mean that more assets and liabilities with a low probability of inflow or outflow of
economic resources will be recognised in the future. The Board accepts that prudence
could still mean there will be inconsistencies in the recognition of assets and liabilities
within financial reporting standards but may be a necessary consequence of providing
investors and lenders with the most useful information.
ACCA Marking scheme
(a)
–
–
calculation of cash from operating activities before taxes
explanation of the adjustments and use of the scenario
(b)
–
application of the following discussion to the scenario:
purchase consideration (shares and deferred cash) impact on
consolidated statement of cash flows of:
subsidiary acquisition (including dividend)
subsidiary disposal
(c)
–
–
–
(d)
–
–
IFRS 5 definition of discontinued operation and application to
the scenario
consideration of held for sale and application to the scenario
consideration of loss of control and application to the scenario
inconsistent application of the probability criterion (including
examples)
Conceptual Framework
Total
Marks
6
6
–––
12
–––
1
3
2
–––
6
–––
3
1
2
–––
6
–––
3
3
–––
6
–––
30
–––
Examiner’s comments
Statements of cash flow will be examined regularly in the SBR exam as they form part of the
group accounting aspect of the syllabus. Many candidates ignored the fact that they had to
draft an explanatory note and simply showed the calculation of cash from operating activities
before income taxes. Some candidates showed the accounting entries for the various
elements set out in the question even though this was not required. The maximum marks
available for simply showing the calculation was 6 marks which represented only half of the
marks for this part of the question. To gain these marks, candidates had to ensure that the
cash flow adjustments were in the right direction. For example, depreciation had to be added
back to profit before tax and not deducted in order to gain credit. Candidates performed well
on this part of the question, gaining full marks in many cases.
The second part of the question required an explanation of how the changes to the group
structure and dividend would impact upon the consolidated statement of cash flows. This
aspect of the syllabus has historically been examined as a calculation but in this exam,
candidates were required to explain the principles behind the adjustments to the statement
of cash flows. Where attempts were made at explanations in this question then candidates
performed quite well.
KA PL AN P U BLI SH IN G
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SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
The third part of the question required candidates to advise the directors as to the held for
sale and discontinued operation classifications. It is important for candidates to realise that
there is only a small number of marks available for simply setting out the rules in IFRS 5 and
that the majority of the marks are awarded for the application of the principles in the
standard. Also, the question asked for a discussion of both held for sale and discontinued
operation criteria and thus it is important for candidates to deal with both issues. However,
several candidates focussed on held for sale with little discussion of discontinued operations.
13
BANANA (SEP 2018)
Walk in the footsteps of a top tutor
Key answer tips
This question examines core issues in group accounting, such as the calculation of goodwill
and the accounting treatment of associates.
In SBR you will be asked to ‘discuss’ the correct accounting treatment of transactions.
Calculations are not enough to pass the exam.
Part (a) (iii) tests financial instrument derecognition issues. This is a common exam topic.
Make sure that you know the key principles that govern the classification, recognition,
measurement, derecognition and impairment of financial instruments.
(a)
(i)
Goodwill
Tutorial note
This answer involves some calculations but the majority of it is discursive. If you
neglect the discussion element then you will not pass.
According to IFRS 3 Business Combinations, goodwill should be calculated by
comparing the fair value of the consideration with the fair value of the
identifiable net assets at acquisition.
Contingent consideration should be included at its fair value which should be
assessed taking into account the probability of the targets being achieved as well
as being discounted to present value. It would appear reasonable to measure
the consideration at a value of $4 million ($16 million × 25%). A corresponding
liability should be included within the consolidated financial statements with
subsequent remeasurement. This would be adjusted prospectively to the
operating section of profit or loss rather than adjusting the consideration and
goodwill.
23 4
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
The finance director has measured the non-controlling interest using the
proportional method rather than at fair value. Although either method is
permitted on an acquisition-by-acquisition basis, the accounting policy of the
Banana group is to measure non-controlling interest at fair value. The fair value
of the non-controlling interest at acquisition is $17 million (20% × 20 million ×
$4.25).
Net assets at acquisition were incorrectly included at their carrying amount of
$70 million. This should be adjusted to fair value of $75 million with a
corresponding $5 million increase to land in the consolidated statement of
financial position.
Tutorial note
Goodwill calculations are a common exam topic. Learn the pro-forma.
Goodwill should have been calculated as follows:
Fair value of share exchange
Contingent consideration
Add NCI at acquisition
Less net assets at acquisition
Goodwill at acquisition
(ii)
$m
68
4
17
(75)
––––
14
––––
Disposal of associate
Tutorial note
Show all of your workings. Make sure they are clearly labelled.
At 1 October 20X6, Strawberry would have been carried in the consolidated
financial statements at $20.4 million ($18 million + (40% × ($50 million –
$44 million))).
On disposal of 75% of the shares, Banana no longer exercises significant
influence over Strawberry and a profit on disposal of $3.1 million would have
been calculated.
$m
Proceeds
19.0
Fair value retained
4.5
Carrying amount of associate (part (ii))
(20.4)
–––––
Profit on disposal
3.1
–––––
KA PL AN P U BLI SH IN G
23 5
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Tutorial note
The definition of a financial asset includes an investment in the equity shares of
another entity. Lots of students forget this.
If no designation was made to measure the shares at fair value through other
comprehensive income then Banana would measure them at fair value through
profit or loss.
The retained 10% investment is a financial asset. Per IFRS 9 Financial Instruments
it is initially recognised at fair value of $4.5 million. Banana does not intend to sell
their remaining interest so, as long as they make an irrecoverable election, they
can treat the remaining interest at fair value through other comprehensive
income. The investment will be restated to its fair value of $4 million at the
reporting date with a corresponding loss of $0.5 million reported in other
comprehensive income.
(iii)
Bonds
Tutorial note
The bonds have been ‘sold’ so a key issue in this question concerns derecognition.
In other words, should the financial asset be removed from the statement of
financial position? Begin your answer with the rules governing derecognition
from IFRS 9 Financial Instruments. Then apply these rules to the bond sale.
IFRS 9 Financial Instruments requires that a financial asset only qualifies for
derecognition once the entity has transferred the contractual rights to receive
the cash flows from the asset or where the entity has retained the contractual
rights but has an unavoidable obligation to pass on the cash flows to a third
party. The substance of the disposal of the bonds needs to be assessed by a
consideration of the risks and rewards of ownership.
Banana has not transferred the contractual rights to receive the cash flows from
the bonds. The third party is obliged to return the coupon interest to Banana
and to pay additional amounts should the fair values of the bonds increase.
Consequently, Banana still has the rights associated with the interest and will
also benefit from any appreciation in the value of the bonds. Banana still retains
the risks of ownership as it has to compensate the third party should the fair
value of the bonds depreciate in value. Additionally, Banana is likely to exercise
their option to repurchase the bonds.
It can be concluded that no transfer of rights has taken place and therefore the
asset should not have been derecognised. The proceeds received of $8 million
should have been recognised as a financial liability (and presented as current on
the statement of financial position).
23 6
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Tutorial note
Once you have reached a conclusion about derecognition, then you need to think
in more detail about the specific financial statement impact of the transaction in
the year ended 30 June 20X7.
The adjusting entry is:
Dr Financial asset
$10 million
Cr Financial liabilities
$8 million
Cr Profit or loss
$2 million
Tutorial note
The difference between the $8 million proceeds received and the $8.8 million
repurchase amount should be recognised as an interest expense in the year
ended 30 June 20X8.
The interest income recognised in profit or loss should have been based on the
effective rate of 7%. This amounts to $0.7 million (7% × $10m). The interest
recognised in the investing section of the statement profit or loss was $0.5 million
(5% × $10m). Interest income should therefore be increased by $0.2 million.
(b)
Dr Financial asset
$0.2 million
Cr Profit or loss (investing)
$0.2 million
Consolidated statement of financial position as at 30 June 20X7
Tutorial note
There are a lot of marks for processing the goodwill corrections from part (a)(i). Make
sure that you are posting both sides of each adjustment or you will miss out on these
marks.
Remember that adjustments to profit will affect retained earnings, whereas those
posted to other comprehensive income will affect other components of equity.
KA PL AN P U BLI SH IN G
23 7
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Draft
1
2
3
4
5
6
$m
Final
$m
Assets
Non-current Assets
Property, plant and
equipment
264
Goodwill
47
Financial assets
15
Current Assets
Total Assets
Equity
Equity attributable
to equity holders
of the company
Share capital
Other components
of equity
Retained earnings
Non-controlling
interest
Liabilities
Non-current
liabilities
Current liabilities
Total liabilities
Total equity and
liabilities
4.0
3.0
5.0
269.0
(5.0)
49.0
(0.5)
10
0.2
24.7
––––––
––––––
326
342.7
––––––
––––––
109
109.0
––––––
––––––
435
451.7
––––––
––––––
100
100.0
45
98
––––––
243
(0.5)
2
38
––––––
281
––––––
44
110
––––––
154
––––––
3.0
44.5
100.2
––––––
244.7
41.0
––––––
285.7
––––––
4.0
435
––––––
0.2
8
48.0
118.0
––––––
166.0
––––––
451.7
––––––
Adjustments
1
2
3
4
5
6
23 8
Contingent consideration
Non-controlling interest adjustment
Land fair value adjustment
Strawberry
Bond sale
Interest
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
(c)
Melon
Tutorial note
Make sure that you state the relevant rules from the accounting standard and then
apply them to the scenario.
Melon should only be treated as an asset acquisition if it does not meet the definition
of a business.
Tutorial note
State the definition of a business and then apply it to the scenario.
IFRS 3 Business Combinations defines a business as an integrated set of activities and
assets that can be managed to provide goods or services, generate investment income
(such as dividends or interest), or generate other income from ordinary activities. To
meet this definition, the acquisition must comprise inputs and processes that
significantly contribute to the ability to turn those inputs into outputs. To qualify as a
business, outputs are not required.
Tutorial note
Don’t forget the optional concentration test.
The Board has introduced an optional concentration test that helps entities to
conclude whether an acquisition is not a business. The concentration test is met if
substantially all of the fair value of the total assets acquired is concentrated in a single
identifiable asset or group of similar identifiable assets.
In the case of Melon, two types of assets appear to have been acquired: a licence, and
research activities. The research activities appear to be at a very early stage and, whilst
in substance are very different in nature to the licence itself, are likely to be of
relatively low value. It is therefore plausible that substantially all of the fair value is
concentrated in the licence itself. If so, the acquisition would not be treated as a
business combination.
Should it be determined that the research activities are of sufficient value then this
means that not all the fair value is concentrated in a single asset. This would
necessitate a more detailed assessment of the inputs and processes acquired.
KA PL AN P U BLI SH IN G
23 9
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
The licence and the research activities are inputs. However, to qualify as a business, a
process must have been acquired that would significantly contribute to the ability to
turn these into output. Per IFRS 3 an acquired process is only substantive if:
•
it is critical to convert an input to an output, and
•
inputs acquired include a knowledgeable, skilled, organised workforce able to
perform that process on other acquired inputs to produce outputs.
A skilled and knowledgeable workforce with the ability to complete the research has
not been acquired because there are no employees and the outsourcing contracts
have expired. As such, Banana has not acquired a substantive process. The directors’
proposal to treat Melon as an asset purchase, rather than a business combination, was
therefore correct.
ACCA Marking scheme
(a)
(b)
(c)
Total
24 0
(i)
Contingent consideration
Non-controlling interest
Land
(ii)
Profit on disposal
Retained interest
(iii)
IFRS 9 principles
Conclusion about derecognition
Calculations
Amendment of spreadsheet for the following
Contingent consideration
Non-controlling interest
Fair value adjustment
Adjustment to goodwill
Strawberry revaluation loss
Fair value adjustment in OCE
Adjustment to bond carrying amount
Proceeds from bonds sale recognised as a liability
Retained earnings impact of bond adjustments
Discussion – 1 mark per point
Marks
2
2
1
–––
5
–––
3
2
–––
5
–––
2
1
2
–––
5
–––
1
1
1
1
1
1
1
1
2
–––
10
–––
5
–––
30
–––
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
14
JOCATT
Walk in the footsteps of a top tutor
Key answer tips
There are always easy marks in cash flow questions – read the question very carefully and
you should find some figures that can be put straight into your pro-forma. Make sure that
you get your brackets the right way around or you will lose marks.
(a)
Acquisition of Tigret
Jocatt obtained control over Tigret in stages (also known as a ‘step acquisition’). On
30 June 20X2, Jocatt should have revalued the previous 8% investment to its fair value
of $5 million and included it in the goodwill calculation. This revaluation adjustment
will increase goodwill by $5 million. A gain of $1 million ($5m – $4m) should have been
recorded in the investing section of the consolidated statement of profit or loss. The
adjusting entry is:
Dr Goodwill $5m
Cr Financial assets $4m
Cr Profit or loss $1m
The identifiable net assets of Tigret at acquisition are consolidated at their fair value
of $45 million. The fair value adjustment creates a taxable temporary difference of
$10 million because the carrying amount of the net assets in the consolidated financial
statements exceeds the tax base of $35 million. A deferred tax liability arises for
$3 million ($10m × 30%) in the consolidated statement of financial position. This
deferred tax liability is treated as part of the subsidiary’s acquisition net assets and
therefore goodwill at acquisition will also increase by $3 million:
Dr Goodwill $3m
Cr Deferred tax liabilities $3m
Goodwill at the acquisition date is calculated as follows:
Fair value of consideration ($15m + $15m)
Fair value of previous equity interest
Fair value of non-controlling interest
Fair value of net assets at acquisition (excl. deferred tax)
Deferred tax
Goodwill on acquisition
KA PL AN P U BLI SH IN G
$m
30
5
20
(45)
3
––––
13
––––
24 1
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Tutorial note
An alternative calculation for goodwill would be:
$5m draft + $5m step acquisition adjustment + $3m deferred tax adjustment =
$13 million
(b)
Extracts from Jocatt Group: Statement of Cash flows for the year ended 30 November
20X2
Draft
$m
Cash flows from
operating activities:
Operating profit
Adjustments for:
Pension service cost
Cash paid to
retirement scheme
(W1)
Depreciation
Decrease in
inventories
Decrease in trade
and other
receivables
Increase in trade
and other payables
Cash from
operating activities
before income
taxes
Cash from
operating activities
before income
taxes
Income taxes paid
Net cash from
operating activities
Cash flows from
financing activities
Interest paid
Proceeds from the
issue of shares
Repayment of longterm borrowings
($71m – $64m)
Dividends paid to
NCI (W2)
Net cash generated
from financing
activities
24 2
1
2
3
4
5
6
44
Final
$m
44
16
16
(7)
(7)
27
27
23
23
51
5
56
89
(6)
83
207
242
207
(18)
242
(18)
189
224
(8)
(8)
15
15
(7)
(7)
(11)
7
(11)
(11)
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Workings
(W1) Defined benefit scheme
Tutorial note
The movement on the defined benefit plan during the year comprises the service
cost component, the net interest component and the remeasurement component.
Remember that the remeasurement component is taken to other comprehensive
income for the year – it is therefore not an item that should be adjusted for within
operating activities. The cash contributions paid into the plan are presented in
operating activities.
Opening balance at 1 December 20X1
Service cost component
Net interest component
Net remeasurement component gain for year (per OCI)
Contributions paid (bal. fig.)
Closing balance at 30 November 20X2
$m
22
16
2
(8)
(7)
––––
25
––––
(W2) Non-controlling interest
Tutorial note
Don’t forget the step acquisition here – at the date that Tigret became a
subsidiary, the non-controlling interest balance would be recognised in equity
based on the fair value at the acquisition date.
Non-controlling interest at 1 December 20X1
Non-controlling interest share of profit for the year
Step acquisition of Tigret (part a)
Dividends paid to non-controlling interest (bal. fig.)
Non-controlling interest at 30 November 20X2
KA PL AN P U BLI SH IN G
$m
36
10
20
(11)
––––
55
––––
24 3
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
(c)
Indirect and direct method
The direct method presents separate categories of cash inflows and outflows, whereas
the indirect method is a reconciliation of operating profit reported in the statement of
profit or loss to the cash flow from operating activities before income taxes.
A problem for users is the fact that entities can choose the method used. This choice
limits comparability.
The majority of companies use the indirect method for the preparation of statements
of cash flow. Most companies justify the use of this method on the grounds that the
direct method is too costly.
Users often prefer the direct method because it reports operating cash flows in
understandable categories, such as cash collected from customers, cash paid to
suppliers, cash paid to employees and cash paid for other operating expenses. When
presented in this way, users can assess the major trends in cash flows and can compare
these trends to the entity’s competitors.
The complicated adjustments required by the indirect method are difficult to
understand and can be confusing to users. In many cases these adjustments cannot be
reconciled to observed changes in the statement of financial position.
(d)
Investment in Abuelo Co
Tutorial note
This part of the question tests a foreign associate. You may be more familiar with the
treatment of a foreign subsidiary, but don’t panic, the same translation rules apply to
associates as well.
Jocatt Group’s proposed 30% investment in Abuelo Co will cause Jocatt to exert
significant influence on Abuelo Co. Therefore, Abuelo will be accounted for as an
associate, using equity accounting.
Equity accounting recognises an ‘Investment in associate’ under non-current assets
within the statement of financial position. The investment in associate balance consists
of the consideration paid, plus the parent’s share of any post-acquisition movement in
the net assets of the associate. No consolidation of the assets or liabilities of the
associate occurs as no control is exerted.
As Abuelo Co is a foreign currency associate, the investment in associate must be
translated at the closing rate for inclusion within the group accounts. This retranslation
may create foreign currency gains or losses on translation that will be recorded within
group equity and other comprehensive income. The investment in associate line is
calculated as $3.4m (see W1) for inclusion within the Jocatt Group non-current assets
as at 30 November 20X3.
The statement of profit or loss and other comprehensive income includes, in separate
lines, the parent’s share of the associate’s profit after tax (above group profit before
tax) and the associate’s other comprehensive income (within group OCI).
24 4
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
The share of Abuelo Co’s profits would be translated at the average rate for inclusion
in the group accounts. Thus a share of associate’s profit figure of $1m ((30% × (40 ×
6/12))/5.8) would be recorded above group profit before tax.
The group OCI would include the annual foreign currency loss of $0.6m (see W1) arising
from the translation of the foreign currency associate. This loss would also be debited
to a translation reserve within the group statement of financial position (located within
the equity section). Abuelo Co does not anticipate recording any items of OCI for the
year ended 30 November 20X3 so no share of associate’s OCI is required.
Working
Cost of associate
– Cash
– Shares (1m × $2m) translated at
6 dinars (HR)
Share of profit
(30% × (40m dinars × 6/12))
Exchange gain
Closing investment in associate
Dinars m
Exchange rate
6.0
6
1.0
12.0
6
2.0
6.0
5.8
bal. fig
1.0
(0.6)
–––––
3.4
–––––
–––––
24.0
–––––
7
$m
ACCA Marking scheme
(a)
Acquisition of Tigret – 1 mark per point
(b)
Adjustment to the spreadsheet for the following:
Pension service cost
Cash paid to defined benefit scheme
Interest expense – pension scheme
Working capital movements
Depreciation
Repayment of long-term borrowings
Non-controlling interest dividend
(c)
1 mark per point
(d)
Explanation of the impact of the foreign currency associate on:
Statement of financial position
Statement of profit or loss
Other comprehensive income
Total
KA PL AN P U BLI SH IN G
Marks
6
1
3
1
2
1
1
3
–––
12
–––
6
–––
3
1
2
–––
6
–––
30
–––
24 5
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
15
ZIPPY
Walk in the footsteps of a top tutor
Key answer tips
In the Strategic Business Reporting exam, you may be asked to amend draft consolidated
financial statements. Make sure that you practise this carefully as you may otherwise run out
of time in the exam.
(a)
(i)
Ginny
First nine months
Tutorial note
Don’t jump straight to the disposal calculation. After all, Zippy did not dispose of
the shares until nine months into the reporting period.
For the first nine months’ of the year Zippy had control over Ginny and so Ginny
was a subsidiary during this time. Zippy must consolidate Ginny’s income and
expenses and other comprehensive income (OCI) on a line-by-line basis for the
first nine months’ of the year.
Loss of control
Tutorial note
Remember that not all share sales lead to a loss of control. If control is retained
then no profit or loss arises and the transaction is instead accounted for in equity.
The share sale results in Zippy’s holding in Ginny falling from 60% to 40% of the
equity shares. Zippy has therefore lost control of Ginny. The difference between
the proceeds from the disposal (including the fair value of the shares retained)
and the goodwill, net assets and NCI of Ginny at the disposal date will give rise
to profit or loss on disposal, which is presented in the operating section of the
consolidated statement of profit or loss.
When preparing the consolidated statement of profit or loss, the gain of
$14 million reported in Zippy’s individual financial statements must be removed
from investment income.
24 6
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
The remaining investment
Tutorial note
After a subsidiary disposal, students commonly forget to account for the
remaining investment. Very easy marks can be scored here.
The remaining 40% investment in Ginny gives Zippy significant influence. As
such, Ginny is an associate of Zippy and should be accounted for using the equity
method. This means that the group recognises its share of the associate’s profit
after tax in the investing section of the consolidated statement of profit or loss,
and its share of the associate’s OCI.
(ii)
Ten floor office block
Tutorial note
In this part of the question, there are more marks available for the discussion
than for calculations.
IAS 40 Investment Property says that portions of a property can be classified as
investment property if they can be sold or leased out separately from the rest
of the building.
Property occupied by a subsidiary does not qualify as investment property in the
consolidated financial statements, because it is being used by the group. The
first two floors of Zippy’s office block should therefore be classified as property,
plant and equipment in the consolidated financial statements.
Depreciation of $1.2 million (($90m × 0.2)/15 years) should therefore be
charged to administrative costs in the operating section.
The first two floors should be revalued to $19.2 million ($96m × 0.2) in the
statement of financial position. A revaluation gain should be recorded within
other comprehensive income of $2.4 million ($19.2m – (($90m × 0.2) – $1.2m)).
The remaining eight floors qualify as investment property. Investment property
measured at fair value is not depreciated. Fair value gains relating to investment
properties are recorded in profit or loss. The gains should be presented in the
investing section of profit or loss.
These eight floors should be revalued to $76.8 million ($96m × 0.8) in the
statement of financial position. A revaluation gain of $4.8 million will be
recorded in investment property income in the investing section of the
statement of profit or loss ($76.8m – ($90m × 0.8)).
KA PL AN P U BLI SH IN G
24 7
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
(iii)
Individual financial statements
According to IFRS 10 Consolidated Financial Statements, consolidated financial
statements present the parent and its subsidiaries as a single economic entity.
The second floor of the ten floor office block is being used by another group
member. This means that it is being used within the single economic entity for
administrative purposes. The second floor must therefore be classified as
property, plant and equipment in the consolidated financial statements.
In the individual financial statements of Zippy, the second floor qualifies as an
investment property because it is part of a building held to earn rental income
(even though no rent is currently charged on the second floor).
As a result of this classification difference, the depreciation charge in the
individual financial statements will be lower than in the consolidated financial
statements. The carrying amount of investment properties within the individual
accounts of Zippy will be higher than in the consolidated financial statements.
The revaluation gain in OCI will be lower and the gain in profit or loss will be
higher within Zippy’s individual accounts than in the consolidated financial
statements of Zippy Group. This is all due to the second floor being classified as
an investment property in the individual accounts compared to being classified
as property, plant and equipment within the group financial statements.
(b)
Consolidated statement of profit or loss and other comprehensive income
Tutorial note
Accounting for Ginny is worth a lot of marks. Remember that Ginny was under group
control for nine months of the year and so the income and expense during this period
must be recognised in the consolidated statement of profit or loss and other
comprehensive income.
Memorise the pro-forma for calculating the loss on disposal. A lot of learners struggle
with calculating the NCI at disposal.
With a disposal, do not forget to account for the remaining shareholding, in this case,
using equity accounting for the last 3 months.
24 8
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Revenue
Cost of sales
Gross profit
Administrative costs
Other expenses
Loss on disposal of
subsidiary
Operating profit
Share of profit of
associate
(40% × 3/12 × $32m)
Investment income
Profit before financing
and income taxes
Interest expense
Profit before tax
Income tax expense
Profit for the year
Other comprehensive
income
Items that will not be
reclassified to profit or
loss in future accounting
periods
Gains on property
revaluation
Share of OCI of associate
(40% × 3/12 × $16m)
Total comprehensive
income
Adjustment
1
2
3
4
5
KA PL AN P U BLI SH IN G
Group
– draft
$m
267.0
(154.0)
–––––
113.0
(65.0)
(23.0)
1
2
3
4
5
99.0
(57.0)
(9.0)
(13.5)
(1.2)
(8.0)
3.2
14.3
366.0
(211.0)
–––––
155.0
(75.2)
(36.5)
(8.0)
–––––
35.3
–––––
25.0
24.0
–––––
Group
– final
(14.0)
4.8
49
3.2
29.1
–––––
67.6
(8.0)
–––––
41.0
(13.0)
–––––
28.0
–––––
(4.5)
(5.3)
5.0
12.0
(12.5)
–––––
55.1
(18.3)
–––––
36.8
–––––
2.4
1.6
19.4
–––––
1.6
–––––
33.0
–––––
57.8
–––––
Details
Add 9 months of Ginny’s results
Loss on disposal (W1)
Removal of gain recorded in investment income
Equity accounting
Property
24 9
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Workings
(W1) Loss on disposal of Ginny
$m
44.0
62.0
–––––
106.0
Proceeds
Fair value of residual holding at disposal date
Carrying amount of Ginny at disposal:
Goodwill at disposal (W2)
Net assets at disposal (W3)
NCI at disposal (W4)
Loss on disposal
26.0
154.0
(66.0)
–––––
(114.0)
–––––
(8.0)
–––––
(W2) Goodwill at disposal
Consideration
Fair value of NCI at acquisition
Fair value of net assets at acquisition
$m
90.0
50.0
(114.0)
–––––
26.0
–––––
(W3) Net assets at disposal
Net assets at 1 July 20X5 – per question
Profit to 31 March 20X6 (9/12 × $32m)
OCI to March 20X6 (9/12 × $16m)
$m
118.0
24.0
12.0
–––––
154.0
–––––
(W4) NCI at disposal
NCI at acquisition
NCI share of post-acquisition net asset movement
(40% × ($154m (W3) – $114m))
25 0
$m
50.0
16.0
–––––
66.0
–––––
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
(c)
Other comprehensive income
Tutorial note
Other comprehensive income is a popular exam topic. Make sure that you are aware
of the contents of the Conceptual Framework around its nature and use.
Profit or loss includes all items of income and expense except those which are
recognised in other comprehensive income (OCI) as required or permitted by IFRS
Standards.
The Conceptual Framework states that profit or loss is the primary source of
information about the financial performance of an entity and so income and expenses
are normally recognised in that statement. According to the Conceptual Framework,
an income or expense is presented in other comprehensive if it results from
remeasuring an item to current value and if it means that:
•
profit or loss provides more relevant information, or
•
a more faithful representation is provided of an entity’s performance.
The Board makes decisions about OCI on a standard-by-standard basis, as these are
revised or issued.
Income and expenditure included in other comprehensive income should be
reclassified to profit or loss when doing so results in profit or loss providing more
relevant information. Again these decisions are made on a standard-by-standard basis.
The Board may decide that reclassification is not appropriate if there is no clear basis
for identifying the amount or timing of the reclassification.
ACCA Marking scheme
(a)
(i)
(ii)
(iii)
(b)
Amendment of spreadsheet for the following:
9 months of income and expense
Loss on disposal
Removal of gain from investment income
Equity accounting for profit and OCI
Depreciation charged to admin costs
Revaluation gain to OCI
Revaluation gain to SPL
Marks
5
5
4
Discussion – 1 mark per point
Property discussion and calcs – 1 mark per point
Individual financial statements – 1 mark per point
Maximum
(c)
OCI – 1 mark per point
Total
KA PL AN P U BLI SH IN G
2
5
1
2
1
1
1
–––
13
–––
12
–––
4
–––
30
–––
25 1
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
16
ASHANTI
Walk in the footsteps of a top tutor
Key answer tips
Parts (a) (i) and (ii) require you to explain the treatment of the share sales. Easy marks are
available for your discussion – do not jump straight into calculations or you will miss these.
Present workings clearly. You can still score highly even if you get the wrong answer.
If you don’t know how to deal with a specific number or a transaction, then leave it out (or
guess!). There is no negative marking.
(a)
(i)
Sale of shares in Bochem
Tutorial note
When dealing with the sale of shares in a subsidiary company, it is vital to
establish whether or not the parent has lost control.
Ashanti’s sale of shares in Bochem does not lead to a loss of control. Consequently
there is no gain or loss to the group arising on this transaction and goodwill is
not recalculated. Instead, the transaction is accounted for within equity, as an
increase in the non-controlling interest (from 30% to 40%).
The non-controlling interest (NCI) in equity will be increased by $25.1 million
(W1). The proceeds received from the sale exceed the increase in the NCI by
$8.9 million (W1), and so other components of equity will be increased by this
amount.
Tutorial note
Note that the NCI’s share of profit in the consolidated statement of profit or loss
is unaffected by the change in ownership because the sale occurs on the last day
of the year. Next year the NCI would be allocated 40% of the profit of Bochem.
25 2
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Workings
(W1) Control-to-control calculation
Proceeds of share disposal
Carrying amount of Bochem at sale date:
Net assets (W2)
Goodwill (80% × $44m)
$m
34.0
216.0
35.2
–––––
251.2
Change in NCI (10% × 251.2)
(25.1)
–––––
8.9
–––––
Increase in OCE
(W2) Net assets
Equity shares
Retained earnings
Other equity components
FVA – plant (bal fig)
Dep’n ($10m/5 × 2 years)
Acquisition
date
$m
55
85
10
10
–––
160
–––
(ii)
Reporting
date
$m
210
10
(4)
–––
216
–––
Sale of shares in Ceram
Tutorial note
If control over a company is lost, then a profit or loss on disposal must be
recorded in the consolidated statement of profit or loss. Remember you are
asked to explain the treatment in this part of the question. If you struggle with
this, you may want to attempt the calculation in the spreadsheet response for
part (b) and then come back to the explanation here.
Ashanti controlled Ceram for the first 6 months of the year, and so will only
consolidate 6/12 of its revenues and costs. Therefore, 6/12 of Ceram’s income
and expenses needs to be removed from the draft consolidated statement of
profit or loss.
Mid-way through the year, Ashanti has lost control over Ceram. At this point
Ceram is derecognised from the consolidated statement of financial position
and a gain or loss on disposal arises in the consolidated statement of profit or
loss. This would be presented in the operating section.
To calculate the gain or loss, the proceeds are compared to the net assets and
goodwill attributable to the owners of Ashanti at the disposal date.
KA PL AN P U BLI SH IN G
25 3
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Given the fact Ashanti has another subsidiary in the same industry, this disposal
doesn’t constitute a major a line of business and therefore wouldn’t be treated
as a discontinued operation.
Tutorial note
Don’t forget to discuss the treatment of the remaining shares.
The remaining 30% interest in Ceram gives Ashanti significant influence.
Therefore, from this date, Ceram is an associate and is accounted for using the
equity method. The investing section of the consolidated statement of profit or
loss will include Ashanti’s share of profits from associates from the 1 November
20X8, so a 30% share of six months of Ceram’s profit. This equals $2.1m (30% ×
6/12 × $14m).
(iii)
Sale to Spice
IFRS 15 Revenue from Contracts with Customers says that a contract with a
customer should only be accounted for if:
•
The parties have approved the contract
•
Rights and obligations can be identified from the contract
•
Payment terms can be identified
•
The contract has commercial substance
•
It is probable that the seller will collect the consideration they are entitled
to.
Based on the information available, it would seem that the final criterion was
not met. Therefore, the contract cannot be accounted for and no revenue
should have been recognised.
The revenue recognised by Ashanti on this date must be reversed:
Dr Revenue $5m
Cr Receivables $5m
(b)
Consolidated statement of profit or loss for the year ended 30 April 20X9
Tutorial note
Work through each area of adjustment one by one.
For the disposal of Ceram, take time to memorise the pro-forma for calculating the
profit or loss and set out your workings clearly.
Most consolidated profit or loss questions involve intra-group trading. Make sure that
you are happy with the required adjustments because they are a source of easy marks.
Consider carefully whether each adjustment affects the profit belonging to the group
or the group and non-controlling interest.
25 4
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Revenue
Cost of sales
Gross profit
Operating expenses
Profit on disposal of
subsidiary
Operating profit
Share of associate’s
profit
(6/12 × $14m × 30%)
Investment income
Profit before financing
and income taxes
Interest expense
Profit before tax
Income tax expense
Profit for the year
Profit attributable to:
Owners of parent
Non-controlling
interest
Adjustment
1
2
3
4
5
6
KA PL AN P U BLI SH IN G
Group
– draft
$m
1,045.1
(823.6)
––––––
221.5
(114.1)
1
2
(71.4)
42.2
3
(15.0)
15.0
4
5
6
Group
– final
(5.0)
953.7
(767.4)
–––––
186.3
(94.9)
(1.0)
19.2
3.8
3.8
–––––
95.2
––––––
107.4
2.1
2.1
14.3
–––––
14.3
––––––
121.7
(8.9)
––––––
112.8
(36.5)
––––––
76.3
––––––
111.6
(7.8)
–––––
103.8
(34.6)
–––––
69.2
–––––
1.1
1.9
70.5
(5.6)
5.8
––––––
76.3
––––––
(1.4)
3.8
(1.0)
2.1
(5.0)
64.8
4.4
–––––
69.2
–––––
Details
Remove 6 months of Ceram’s results and adjust share
of profits attributable to parent and NCI (W2)
Profit on disposal of Ceram (W3)
Intragroup sales
Unrealised profit adjustment (W1)
Equity accounting Ceram
Sale to Spice
25 5
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Workings
(W1) Unrealised profits
Sales to Bochem $10m × ½ × 20% = $1.0m
(W2) Adjustment to share of profits attributable to NCI
$m
7.0
1.4
Ceram’s profit (6/12 × $14m) incorrectly consolidated
NCI share to be removed (20% × $7m)
(W3) Gain on disposal of Ceram
$m
90.0
45.0
–––––
135.0
Proceeds
Fair value of residual holding at disposal date
Carrying amount of Ceram at disposal:
Net assets at disposal
Goodwill at disposal (W4)
NCI at disposal
Profit on disposal
160.0
6.2
(35.0)
–––––
(131.2)
–––––
3.8
–––––
(W4) Goodwill
Proceeds
Fair value of NCI at acquisition
Fair value of net assets at acquisition
Goodwill
(c)
$m
95.2
26.0
(115.0)
–––––
6.2
–––––
Control
Tutorial note
Start by stating the definition of control, as found in IFRS 10 Consolidated Financial
Statements. Apply this definition to the scenario and reach an explicit conclusion about
whether Ashanti will assume control over Night.
According to IFRS 10 Consolidated Financial Statements, an investor controls an
investee if the investor has:
25 6
•
power over the investee
•
exposure, or rights, to variable returns from its involvement with the investee
•
the ability to use its power over the investee to affect the amount of the
investor’s returns.
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
When assessing whether control exists, the following should be considered:
•
The size of the entity’s holding compared to the size of the holding of other
investors
•
Whether the entity can direct the relevant activities of the investee (such as
decisions about operations, capital expenditure, and the appointment and
remuneration of key personnel)
•
How dispersed the other shareholdings are
•
Any potential voting rights (such as those arising from convertible instruments
or options) held by the entity or by other entities
•
Whether investors are related parties of one another, or if they have close
business relationships.
A 49.9% holding is less than 50%, meaning that Ashanti will not have a controlling
holding in the voting shares of Night. However, a 49.9% holding is very close to a
majority shareholding.
One of the investors will have a holding of greater than 20%, which suggests significant
influence. This might place doubt on the ability of Ashanti to control Night. However,
IFRS 10 states that it is possible to control an entity when another investor has
significant influence. Whilst the other shareholders could vote together as a block and
therefore have the controlling vote, this is unlikely. This is because:
•
The shareholdings are relatively dispersed
•
The other investors do not have a close relationship with one another
•
Based on past practice, it is likely that at least one of the other investors will not
attend the Annual General Meeting, thus giving Ashanti the majority of the
voting rights.
Ashanti controls the board of directors, thus enabling it to make key operating
decisions that will affect the profits and returns of Night.
All things considered, it would seem that Ashanti will control Night. Night should
therefore be accounted for as a subsidiary from the acquisition date.
ACCA Marking scheme
(a)
(i)
Discussion – 1 mark per point
Calculations
(ii)
Discussion – 1 mark per point
(iii)
Discussion – 1 mark per point
KA PL AN P U BLI SH IN G
Marks
3
3
–––
6
–––
4
–––
4
–––
2
–––
2
–––
25 7
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
(b)
(c)
Adjustment of spreadsheet for the following
Removal of 6 months profit
Profit on disposal of Ceram
Equity accounting
Intra-group
PURP
Sale to Spice
Split between shareholders
Control – 1 mark per point
Total
17
JOEY
2
4
1
1
1
1
3
–––
13
–––
5
–––
30
–––
Walk in the footsteps of a top tutor
Key answer tips
Remember to allocate your time carefully when attempting question 1 in the SBR exam. It
would be very easy to get bogged down in a particular issue or adjustment and to then run
out of time. Spend your time on the areas of the question that you are most confident with.
(a)
Hulty
Tutorial note
Consideration transferred in a business combination and the identifiable net assets of
the subsidiary at the acquisition date should both be measured at fair value. If you
struggle to think about the double entries required for these adjustments then think
about how you would process them through the standard consolidation workings and
what impact this would have on the SFP balances.
Deferred consideration
IFRS 3 Business Combinations says that the consideration transferred to achieve
control over another business must be measured at fair value. Deferred consideration
should be measured at its present value.
The present value of the deferred consideration as at 1 December 20X3 was
$41.3 million ($50m × 1/1.102). Goodwill should be increased by this amount and a
corresponding liability recognised. The correcting entry is:
25 8
Dr Goodwill
$41.3m
Cr Liabilities
$41.3m
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Tutorial note
Don’t forget to unwind the discount on the liability.
Interest on the liability should be charged to the financing section of the statement of
profit or loss in the year. This amounts to $4.1 million ($41.3m × 10%). The entry to
record this in the consolidated statement of financial position is:
Dr Retained earnings
$4.1m
Cr Liabilities
$4.1m
Franchise right
IFRS 3 Business Combinations says that the identifiable net assets of a subsidiary should
be measured at fair value at the acquisition date.
The fair value of the identifiable net assets exceeds their carrying amounts by
$20 million ($980m – $960m). This relates to an unrecognised intangible franchise
right that must be recognised in the consolidated financial statements as at the
acquisition date. This adjustment reduces the amount of goodwill recognised. The
correcting adjustment is:
Dr Intangible asset – franchise right
$20m
Cr Goodwill
$20m
The intangible asset should be amortised over its remaining useful life. The current
year charge that needs to be recorded in the operating section of the consolidated
statement of profit or loss is $5 million ($20m/4 years). The franchise right is an asset
held by the subsidiary, so the charge in profit or loss should be allocated between the
owners of the parent company and the non-controlling interest based on their
respective shareholdings. The entry required to record this in the consolidated
statement of financial position is:
Dr Retained earnings ($5m × 80%)
$4m
Dr NCI ($5m × 20%)
$1m
Cr Intangible asset – franchise right
$5m
Total goodwill arising on Hulty
Total goodwill arising on the acquisition of Hulty is therefore $61.3 million ($40m draft
+ $41.3m – $20m).
(b)
Margy
Step acquisition
Joey has achieved control over Margy in stages. On the date that control was achieved
the previous shareholding should been included in the goodwill calculation at its fair
value. Any gain or loss on revaluing this shareholding to fair value is recorded in the
consolidated statement of profit or loss (or in other comprehensive income if the
previously held shares were measured at fair value through other comprehensive
income).
KA PL AN P U BLI SH IN G
25 9
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
The equity accounted investment in Margy of $700 million should therefore have been
eliminated and included in the goodwill calculation at its fair value of $705 million. A
$5 million gain would arise in consolidated profit or loss in the investing section.
This adjustment means that the gain on bargain purchase of $655 million is eliminated.
The adjusting entry required in the statement of financial position is:
Dr Retained earnings (to remove gain on bargain purchase)
$655m
Dr Goodwill ($705m – $655m)
$50m
Cr Investment in associate
$700m
Cr Retained earnings (gain on step acquisition)
$5m
Building adjustment
During the measurement period, the acquirer must retrospectively adjust the amounts
recognised at the acquisition date if further facts and information are obtained. The
measurement period ends 12 months after the acquisition date.
The revision of the building’s fair value at the acquisition date was determined within
12 months of the business combination so it must therefore be adjusted for as at the
acquisition date. This will reduce the amount of property, plant and equipment (PPE)
in the consolidated statement of financial position and will increase the goodwill
arising on the acquisition of Margy. The adjustment required is:
Dr Goodwill
$40m
Cr PPE
$40m
If the building is worth less than originally estimated then it increases the risk that Joey
overpaid for Margy and therefore that goodwill might be impaired. However, no
information is provided about this.
Tutorial note
It is common in exams to have to charge depreciation on a fair value uplift. However,
if a building was over-valued as at the acquisition date then it is likely that the
depreciation subsequently charged is also too high.
The property, plant and equipment has been included in the consolidated financial
statements at $200 million, rather than $160 million, and so too much depreciation will
have been charged. Depreciation of $2 million ($40m/20 years) must be removed from
the operating section of the statement of consolidated profit or loss. The PPE is held by
a subsidiary and so this adjustment must be allocated to the owners of the parent and
the non-controlling interest based on their respective shareholdings. The adjustment
required in the consolidated statement of financial position is:
Dr PPE
$2m
Cr Retained earnings ($2m × 70%)
$1.4m
Cr NCI ($2m × 30%)
$0.6m
Total goodwill arising on Margy
Total goodwill arising on the acquisition of Margy is therefore $90 million ($50m +
$40m).
26 0
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
(c)
Joint arrangement
Tutorial note
A joint arrangement is an arrangement over which two or more parties have joint
control. Remember that joint arrangements may take the form of joint operations or
joint ventures. A joint venture, which normally involves the establishment of a separate
entity, is accounted for using the equity method.
For the period to 31 May 20X4, the requirement for unanimous key strategic decisions
means this is a joint arrangement. Since there is no legal entity, it would be classified
as a joint operation. Joey should therefore account for its direct rights to the
underlying results and assets.
Up until 31 May 20X4, the joint operation had the following results:
Revenue (5m × 6/12)
Cost of sales (2m × 6/12)
Gross profit
$m
2.5
(1.0)
–––––
1.5
–––––
The amount that belongs to CP is therefore:
10% × Sales (10% × 2.5m)
30% of gross profit 30% × $1.5m)
Amount due to CP
$m
0.25
0.45
–––––
0.7
–––––
Joey has recorded all of the sales proceeds and costs for the six month period, hence
recording a profit of $1.5 million. Joey’s profits must therefore be reduced by
$0.7 million, and a payable to CP recorded for the same amount. The adjustment
required is:
Dr Profit or loss (operating)
$0.7m
Cr Accounts payable CP
$0.7m
Tutorial note
The question requires you to ‘discuss’. Easier marks are available for the narrative part
of your answer.
KA PL AN P U BLI SH IN G
26 1
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
From 1 June 20X4, Joey has a share of the net assets of the joint arrangement rather
than direct rights. This means that the joint arrangement would be classified as a joint
venture and must be accounted for in the consolidated financial statements using the
equity method.
Joey has accounted for all proceeds and costs of the joint venture. This should be
removed from its statement of profit or loss and a payable recorded to transfer this
back to JCP.
Dr Profit or loss (operating)
$1.5 m
Cr Payable to JCP
$1.5 m
Joey should then equity-for its share of JCP’s profit of $0.75 million ($1.5m × 50%). This
will be recorded in profit or loss in the investing section and recognised as an
investment in the statement of financial position.
(d)
Dr Investment in joint venture
$0.75 m
Cr Profit or loss (investing)
$0.75 m
Debt and equity
Tutorial note
This is a very common exam requirement. You must memorise the definition of a
financial liability.
IAS 32 Financial Instruments: Presentation says that a financial liability is a contractual
obligation to deliver either cash or another financial asset to the holder. Equity is any
contract which evidences a residual interest in the entity’s assets after deducting all of
its liabilities.
However, a contract may involve the delivery of the entity’s own equity instruments.
A contract which will be settled by the entity delivering a fixed number of its own
equity instruments in exchange for cash or another financial asset is an equity
instrument. If there is any variability in the number of own equity instruments to be
delivered then the contract is a financial liability.
B shares
The B shares should be classified as equity because there is no contractual obligation
to pay the dividends or to redeem the instrument. Dividends can only be paid on the
B shares if dividends have been declared on the A shares. However, there is no
contractual obligation to declare A share dividends.
Share options
The classification of the share options is dependent on whether there is variability in
the number of equity shares delivered. Joey will settle the contract by issuing a fixed
number of its own equity instruments in exchange for cash, so the share options would
be classified as an equity instrument.
26 2
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
ACCA Marking scheme
(a)
(b)
(c)
(d)
Marks
9
9
8
4
–––
30
–––
Hulty – 1 mark per point
Margy – 1 mark per point
CP – 1 mark per point
IAS 32 classifications
Total
18
PARSLEY
Walk in the footsteps of a top tutor
Key answer tips
Part (a) focusses mainly on group accounting issues. Parsley obtained control of Sage during
the year. Sage is therefore consolidated from the date that control is obtained. Prior to this
point the investment is an associate and therefore measured using the equity method.
Saffron is an overseas subsidiary, which has already been translated into the group’s
presentation currency. Exchange differences on the retranslation of Saffron’s opening net
assets, profit and goodwill need to be recorded in other comprehensive income.
(a)
Group structure
Parsley
30% for 9/12 year
60% for full year
70% for 3/12 year
Sage
(i)
Saffron
Sage
Tutorial note
With a step acquisition, the initial investment is remeasured to fair value and
goodwill calculated as if the entire 70% was purchased in one go. The gain on
remeasurement is recorded in profit or loss, or in other comprehensive income if
the shares were designated as fair value through other comprehensive income.
The acquisition of the additional shares increases Parsley’s shareholding from
30% to 70%. Parsley is now assumed to have control over Sage as its
shareholding is over 50%, which means Sage should be treated as a subsidiary
from 31 January 20X4.
KA PL AN P U BLI SH IN G
26 3
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Up until this date, Parsley has significant influence meaning the investment in
Sage is an associate. Sage should be equity accounted for in the consolidated
statement of profit or loss. The group will show its share of the associate’s profit
as a single line in the investing section of the consolidated statement of profit
or loss. The share of the associate’s profit amounts to $1.4 million ($6m × 9/12
× 30%).
On 31 January 20X4, Parsley should have remeasured its previously held interest
to fair value, with the gain or loss being recognised in the investing section of
the consolidated statement of profit or loss.
The carrying amount of the investment in Sage at 31 January 20X4 is as follows:
Initial cost of 30%
Share of post-acquisition movement in net assets
(30% × ($13m – $5m))
Carrying amount at 31 January 20X4
$m
2.5
2.4
––––
4.9
––––
A gain of $1.6m ($6.5m – $4.9m) should therefore be recognised in the
consolidated profit or loss (investing section).
For the final 3 months, Sage is treated as a subsidiary in the consolidated
accounts. Sage made a profit for the year of $6 million, of which Parsley will
consolidate $1.5 million ($6 million × 3/12). Of this, $1.1 million ($1.5 million ×
70%) is attributable to the equity owners of the Parsley group and the remaining
$0.4 million is attributable to the non-controlling interest.
(ii)
Saffron
Profit or loss
IFRS 3 Business Combinations says that the identifiable net assets of a subsidiary
should be consolidated at fair value. It would seem that Saffron has a brand that
is unrecognised in its individual financial statements but which must be
consolidated at its fair value.
The fair value of this brand is calculated as follows:
Fair value of net assets
Carrying amount of net assets
Fair value of brand
FRm
70
(60)
––––
10
––––
Amortisation must be charged on the brand. In the current period, this will be
FR2 million (FR10m/5 years). The amortisation is translated at the average rate
of 4.6 giving $0.4m (being FR2m/ 4.6) to be recorded as an expense in the
operating section of the CSPL.
26 4
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Saffron is an overseas subsidiary. Its results, including the above amortisation
adjustment, must be translated for inclusion in the consolidated statement of
profit or loss and other comprehensive income at the average rate. The results of
Saffron will then be consolidated line-by-line. The net impact on consolidated
profit will be $6.1 million ((FR30 per SPL – FR2 amortisation)/4.6)). Of this
$3.7 million ($6.1m × 60%) is attributable to the equity owners of the parent. The
remaining $2.4 million is attributable to the non-controlling interest.
Goodwill impairment and foreign exchange
Tutorial note
Calculate goodwill in the subsidiary’s currency and then translate it at the closing
rate. The foreign exchange gain or loss is recorded in other comprehensive
income, as an item that may be reclassified to profit or loss in the future.
The goodwill of Saffron is calculated as follows:
FRm
71
29
––––
100
(70)
––––
30
(4)
––––
26
––––
Cost of acquisition
FV of NCI at acquisition
Less FV of net assets at acquisition
Goodwill at acquisition
Impairment
Goodwill at reporting date
Goodwill is translated at the reporting date using the closing rate. This translation
gives rise to a foreign exchange gain, calculated below:
FX gain on retranslation
Acquisition
Impairment
FX gain on retranslation
Rep date
FRm
30
(4)
––––
26
––––
Rate
5.0
4.6
Bal fig
4.0
$m
6.0
(0.9)
1.4
––––
6.5
––––
The impairment of $0.9 million is recorded in profit or loss (operating section).
Of this, $0.5 million ($0.9m × 60%) is attributable to the equity owners of the
parent. The remaining $0.4 million is attributable to the non-controlling interest.
The translation gain of $1.4 million is recorded in other comprehensive income.
The forex gain attributable to the equity owners of the parent is $0.8 million
($1.4m × 60%) and the remaining $0.6 million is attributable to the noncontrolling interest.
KA PL AN P U BLI SH IN G
26 5
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Foreign exchange gain on opening net assets and profit
A foreign exchange gain arises on the translation of Saffron’s opening net assets
and profit:
Opening net assets
Profit
(FR30m – FR2m amortisation)
FX gain on retranslation
FRm
70
Rate
5.0
$m
14.0
28
4.6
Bal fig
6.1
4.4
––––
24.5
––––
––––
98
––––
Rep date
4.0
The gain of $4.4 million is recorded in other comprehensive income. The forex
gain attributable to the equity owners of the parent is $2.6 million ($4.4m × 60%)
and the remaining $1.8 million is attributable to the non-controlling interest.
(iii)
Loan to charity
Tutorial note
The loan is a financial instrument because Parsley has a contractual right to
receive cash.
IFRS 9 Financial Instruments says that financial assets should be recognised
initially at fair value. According to IFRS 13 Fair Value Measurement, the fair value
is the selling price of an asset in an orderly transaction between market
participants.
Market rate loans attract interest of 6%, whereas the loan advanced to the
charity only attracts interest at 3%. As such, the amount received by Parsley of
$50 million is not indicative of the asset’s fair value. The fair value of the
financial asset must therefore be determined. This fair value can be achieved by
calculating the present value of all future cash receipts using the prevailing
market interest rate for a similar instrument.
Fair value of the financial asset
30 April 20X4
30 April 20X5
30 April 20X6
Cash flows
$m
1.5
1.5
51.5
Discount factor
1/1.06
1/1.062
1/1.063
Present value
$m
1.4
1.3
43.3
–––––
46.0
–––––
The financial asset should have been recognised at $46 million rather than
$50 million. The $4 million difference between the fair value of the asset and
the amount of cash advanced should have been recognised as an expense in
profit or loss (investing section).
26 6
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
The correcting entry is:
Dr Profit or loss $4.0m
Cr Financial assets $4.0m
The financial asset is then measured at amortised cost because, as per IFRS 9,
Parsley intends to hold the asset to maturity to collect the contractual cash
flows. Interest is credited to profit or loss using the effective rate and is
presented in the investing section. Cash receipts reduce the carrying amount of
the asset.
1 May 20X3
Interest
credit (6%)
$m
2.8
$m
46.0
Cash received
30 April 20X4
$m
(1.5)
$m
47.3
The cash receipt has been correctly accounted for. The correcting entry should
therefore be:
Dr Financial assets $2.8m
Cr Profit or loss $2.8m
(b)
Draft consolidated statement of profit or loss and other comprehensive income for
year ended 30 April 20X4
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative costs
Operating profit
Profit on disposal of
associate
Share of associate’s
profit
Investment income
Profit before
financing and
income taxes
Interest expense
Profit before tax
Income tax expense
Profit for the year
KA PL AN P U BLI SH IN G
Group –
draft
$m
256.7
(130.4)
–––––
126.3
(19.0)
(39.3)
–––––
68.0
1
2
(51.0)
31.5
3
4
5
6
(0.4)
4.5
7.5
(0.9)
1.6
1.6
1.4
3.0
–––––
71.0
(1.5)
2.8
(6.7)
–––––
64.3
(14.7)
–––––
49.6
–––––
3.0
(4.0)
1.5
Group
– final
$m
205.7
(99.3)
–––––
106.4
(14.5)
(32.7)
–––––
59.2
1.4
4.3
–––––
66.5
(7.7)
–––––
58.8
(13.2)
–––––
45.6
–––––
26 7
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Group
– draft
$m
Other comprehensive
income
Remeasurement loss
on pension scheme
Gain on translation of
subsidiary (1.4 + 4.4)
Total comprehensive
income
Adjustment
1
2
3
4
5
6
1
2
3
4
5
6
(1.4)
Group
– final
$m
(1.4)
–––––
5.8
5.8
–––––
48.2
–––––
50.0
–––––
Details
Remove 9 months of Sage’s results
Remeasurement of Sage as an associate and equity account
Brand amortisation (W1)
Goodwill impairment – Saffron
Gain on translation of Saffron
Loan to charity
(W1) Brand amortisation
Translated at average rate (FR2m/4.6)
$m
0.4
ACCA Marking scheme
(a)
(b)
Total
26 8
(i)
Step acquisition – 1 mark per point
Gain on step acquisition calculation
(ii)
Saffron – 1 mark per point
(iii)
Loan to charity discussion – 1 mark per point
Calculations
Adjustment of spreadsheet for the following
Removal of 9 months profit of Sage
Gain on step acquisition
Equity accounting for Sage
Brand amortisation – Saffron
Goodwill impairment – Saffron
Other comprehensive income – Saffron
Loan to charity loss and interest income
Marks
4
2
–––
6
–––
8
–––
3
3
–––
6
–––
2
1
1
1
1
2
2
–––
10
–––
30
–––
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
19
TRAVELER
Walk in the footsteps of a top tutor
Key answer tips
This is a good question for testing your knowledge of a number of consolidation issues. In
particular, this group uses both the share of net assets method and the fair value method to
value the non-controlling interest at acquisition. This has important implications for
subsequent goodwill impairments – goodwill calculated under the share of net asset method
must be grossed up to include the non-controlling interest’s share when performing an
impairment review.
This question also involves the parent company increasing its shareholding in a subsidiary
from 60% to 80%. Goodwill is calculated on the date that control is achieved and is not recalculated. Instead, this increase in the group’s shareholding is accounted for in equity.
(a)
Consolidated Statement of Financial Position at 30 November 20X1
$m
Assets:
Non-current assets:
Property, plant and equipment (W8)
Goodwill (W3)
Financial assets ($108m + $10m + $20m)
Current assets ($1,067m + $781m + $350m)
Total assets
Equity and liabilities
Equity attributable to owners of parent
Share capital
Retained earnings (W5)
Other components of equity (W5)
Non-controlling interest (W4)
Total non-current liabilities ($455m + $323m + $73m)
Current liabilities ($274m + $199m + $313m)
Total liabilities
Total equity and liabilities
KA PL AN P U BLI SH IN G
1,845
69.2
138
2,198
–––––––
4,250.2
–––––––
1,120
1,058
91.7
–––––––
2,269.7
343.5
–––––––
2,613.2
–––––––
851.0
786.0
–––––––
1,637.0
–––––––
4,250.2
–––––––
26 9
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Workings
(W1) Group structure
Traveler
60% 1 Dec X0 – 30 Nov X1
80% on 30 Nov X1
80% 1 Dec X0 – 30 Nov X1
Data
Captive
(W2) Net assets
Tutorial note
The identifiable net assets of a subsidiary are consolidated at fair value. Make
sure that fair value adjustments are processed through your net asset workings.
Data
Share capital
Retained earnings
Other Equity
Fair value adjustment
– Land (bal. fig)
Acq’n date
$m
600
299
26
Rep date
$m
600
442
37
10
––––
935
––––
10
–––––
1,089
–––––
Of the net asset movement of $154 million ($1,089m – $935m), $11 million
($37m – $26m) relates to other components of equity and the remaining
$143 million relates to retained earnings.
Captive
Share capital
Retained earnings
Other Equity
Fair value adjustment – Land (bal. fig)
Acq’n date
$m
390
90
24
22
––––
526
––––
Rep date
$m
390
169
45
22
––––
626
––––
Of the net asset movement of $100 million ($626m – $526m), $21 million ($45m
– $24m) relates to other components of equity and the remaining $79 million
relates to retained earnings.
27 0
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
(W3) Goodwill
Tutorial note
Pay attention to whether the NCI at acquisition is being measured at its share of
the subsidiary’s identifiable net assets or at fair value.
Remember that goodwill is calculated at the date control is achieved over
another company. It is not recalculated for any further share purchases.
Data
Fair value of consideration for 60% interest
Fair value of non-controlling interest
Fair value of identifiable net assets acquired (W2)
Goodwill at acquisition
Impairment (W6)
Goodwill at reporting date
$m
600
395
(935)
––––––
60
(50)
––––––
10
––––––
Captive
Fair value of consideration
NCI at acquisition ($526 × 20%)
Less fair value of identifiable net assets (W2):
Goodwill
Impairment (W6)
$m
541
105.2
(526)
––––––
120.2
(61)
––––––
59.2
––––––
Total goodwill at the reporting date is $69.2m ($10 + $59.2).
The assets transferred as part of the consideration need to be removed from
non-current assets, and the gain on disposal needs to be calculated. The sale
consideration of $64 million has been recorded in profit. The carrying amount
of the asset is $56 million, giving a gain on disposal of $8 million.
The adjustment required to arrive at the gain is:
Dr Retained earnings (W5) $56m
Cr PPE (W8) $56m
KA PL AN P U BLI SH IN G
27 1
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
(W4) Non-controlling interest
NCI in Data at acquisition (W3)
NCI % of Data’s post acquisition net assets
(40% × $154m (W2))
Reduction in NCI (W7)
Impairment of Data goodwill (W6)
NCI in Captive:
NCI in Captive at acquisition (W3)
NCI % of Captive’s post-acquisition net assets
(20% × $100m (W2))
$m
395
61.6
(228.3)
(10)
105.2
20.0
––––––
343.5
––––––
(W5) Reserves
Retained earnings
Traveler
Sale of non-current asset (W3)
Impairment of Data goodwill (W6)
Impairment of Captive goodwill (W6)
Post-acquisition retained earnings:
Data (60% × $143m (W2))
Captive (80% × $79m (W2))
$m
1,066.0
(56.0)
(40)
(61)
85.8
63.2
––––––
1,058
––––––
Other components of equity
Traveler
Data (60% × $11m (W2))
Captive (80% × $21m (W2))
Positive movement in equity (W7)
27 2
$m
60.0
6.6
16.8
8.3
––––––
91.7
––––––
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
(W6) Impairment of goodwill
Tutorial note
Pay close attention to whether the non-controlling interest has been valued
using the share of net assets method or the fair value method.
If the share of net assets method has been used, then only the goodwill
attributable to the parent has been calculated. When performing an impairment
review, this goodwill must be notionally grossed up to include the NCI’s share.
Data
$m
60
1,089
–––––
1,149
(1,099)
–––––
50
–––––
Goodwill (W3)
Identifiable net assets (W2)
Total
Recoverable amount
Goodwill impairment
The goodwill impairment relating to Data will be split 80%/20% between the
group and the NCI. Thus retained earnings will be debited with $40 million (W5)
and NCI with $10 million (W4).
Tutorial note
It could be argued that a 60:40 allocation between group and NCI is also
appropriate as this was how profits that arose in the year have been apportioned
and the impairment is a loss that arose in the year, albeit calculated at the year
end.
Captive
Goodwill (W3)
Notional NCI ($120.2 × 20/80)
Total notional goodwill
Identifiable net assets (W2)
Total
Recoverable amount
Impairment
KA PL AN P U BLI SH IN G
$m
120.2
30.1
–––––
$m
150.3
626.0
––––––
776.3
(700.0)
––––––
76.3
––––––
27 3
SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
The impairment is allocated to the notional goodwill. However, only 80% of the
notional goodwill has been recognised in the consolidated statements and so
only 80% of the impairment is accounted for. This means that the goodwill
impairment recognised is $61m ($76.3 × 80%). This expense is all attributable to
the group and therefore retained earnings (W5) must be debited with $61m.
(W7) Increase in shareholding
Tutorial note
If the group increases its shareholding in a subsidiary, goodwill is not
recalculated. Instead, this transaction is accounted for in equity. The difference
between the cash paid and the decrease in the NCI is recorded in other
components of equity.
$m
Fair value of consideration
NCI in Data at acquisition (W4)
NCI % of Data’s net assets movement (W4)
NCI per share purchase
$m
220
395
61.6
––––––
456.6
––––––
Reduction in NCI (20/40 × $456.6m)
228.3
––––––
8.3
––––––
Positive movement in equity (W5)
(W8) Property, plant and equipment
Traveler
Data
Captive
Increase in value of land – Data (W2)
Increase in value of land – Captive (W2)
Less disposal of asset (W3)
(b)
$m
439
810
620
10
22
(56)
––––––
1,845
––––––
Lease arrangement
Lessee
Traveler Ltd is the lessee in a head lease for a factory with Tent Ltd. On 1 December
20X1, Traveler Ltd will record a right-of-use asset and a lease liability. The lease liability
is initially recorded at the present value of the future repayments, being $4.5m. The
right-of-use asset is initially recorded at the lease liability plus direct costs and
payments already made. The initial journal is:
Dr Right-of-use asset $4.5m
Cr Lease liability $4.5m
27 4
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
The lease liability is subsequently increased by interest costs, recorded at the rate
implicit in the lease, and reduced by any lease rental payments.
The right-of-use asset is depreciated over the shorter of the lease term (5 years) or the
useful life of the asset (15 years). If ownership was to transfer at the end of the lease
term, then the useful life would be used. In this case, there is no indication that
ownership is transferred to Traveler Ltd at the end of the lease term. As the lease term
of 5 years is the shorter, depreciation of $0.9m ($4.5m/5) is charged each year to the
operating section of profit or loss. The carrying amount of the right-of-use asset at the
time of the sublease is $2.7m ($4.5m – ($0.9m × 2)).
Sublease
As stated, Traveler Ltd is the lessee in a head lease for a factory with Tent Ltd. Then on
the 1 December 20X3, after 2 years, Traveler Ltd enters into a sublease with Hitch Ltd
for the right-of-use asset, therefore becoming the intermediate lessor.
Finance lease or operating lease?
On entering the sublease, Traveler Ltd must classify the sublease as either an operating
or a finance lease, through referencing the right-of-use asset (not by referencing the
factory itself). The sublease is for a 3-year period, a period equal to the remaining
head-lease lease term (the period Traveler Ltd has the right-of-use of the factory
before the end of the lease agreement with Tent Ltd).
Therefore, the risks and rewards of the right-of-use asset (arising from the head lease
with Tent Ltd) will fully transfer from the intermediate lessor, Traveler Ltd, to the
lessee, Hitch Ltd.
As a result, the sublease should be classified by Traveler Ltd as a finance lease, not an
operating lease as proposed by the directors of Traveler Ltd.
Accounting treatment for the intermediate lessor with a finance lease
Traveler Ltd must:
–
derecognise the right-of-use asset (with a carrying amount of $2.7m) and stop
charging depreciation
–
record a lease receivable at the net investment in the sublease (being the
present value of minimum lease payments of $3m)
–
record a gain on disposal of $0.3m in the operating section of the statement of
profit or loss
–
retain the lease liability relating to the head lease (with Tent Ltd) and continue
to record as per lessee accounting.
On 1 December 20X3, when entering the sublease, Traveler Ltd will post the following
journal:
Dr Lease receivable)
$3m
Cr Right-of-use asset
$2.7m
Cr Profit on disposal (operating)
$0.3m
KA PL AN P U BLI SH IN G
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SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
The lease liability from the head lease will continue to be recorded as per IFRS 16
Leases rules (adding interest expense at 3.5% and reduced by rental repayments). As
the amount of repayments are not given, the carrying amount of the liability and the
interest expense cannot be quantified without further information. Traveler Ltd must
still incur the original head lease repayments, despite no longer having the right-of-use
of the underlying asset, and the lease liability will be reduced by these payments.
The interest expense will increase the head lease liability and will be recorded as an
expense in profit or loss within the financing section:
Dr Interest expense (SPL)
Cr Financial liability
The sublease receivable will be increased by the interest income at the rate implicit in
the sublease of 5%. The interest income increases profit by $150,000 (being $3m × 5%)
in the year ended 30 November 20X4.
Dr Lease receivable
$150,000
Cr Profit or loss (investing)
$150,000
The lease receivable will be reduced by the rental received in cash. Again, this amount
is not provided.
ACCA Marking scheme
(a)
Property, plant and equipment
Goodwill
Other assets/liabilities
Share capital
Retained earnings
Other components of equity
Non-controlling interest
(b)
IFRS 16 principles – head lease and sublease
Finance lease or operating lease
Initial recognition of sublease
Subsequent treatment of lease receivable and lease liability
Total
27 6
Marks
2
3
2
1
5
3
4
–––
23
–––
2
2
2
3
–––
7
–––
30
–––
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
SECTION A QUESTIONS – REPORTING AND ETHICAL IMPLICATIONS
20
APANIIWA (SEP/DEC 2024)
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Key answer tips
You may have been surprised to see the consolidated statement of cash flows cropping up in
question two, but it’s important to note that group accounts can be tested in questions other
than just question one question in the exam.
Consolidated cash flows are generally an unpopular topic, but don’t let that deter you from
attempting part (a). You could, if you prefer, attempt part (b) first of all. Part (b) focuses on
ethical issues and actions and you may well find it easier to pick up marks in this part of the
question.
Whilst the ethical scenario has a contemporary context with the reference to IFRS
Sustainability Disclosure Standards, students should be able to find a range of fairly typical
ethical issues in exhibit two. As always, it’s important to use the details of the scenario as
much as possible and also to provide tailored action points. Refer to the individuals from the
scenario in your answer as much as you can!
(a)
Long-term borrowing
Tutorial note
The scenario states that the net movement in long-term borrowings has been
presented as a single cash inflow. Generally speaking, cash flows shouldn’t be netted
off and instead they should be shown separately.
There are four movements to address here – the bank loan receipt, the lease liability
payments, the acquisition of the subsidiary and the new leases . If you can make a point
about each one that should be sufficient to score you half marks on part (a).
You may find it easier to identify the movements that have a cash impact first, being
the receipt of the bank loan and the lease liability payment, and then set out the fact
that the other two movements do not impact cash and therefore wouldn’t be shown in
the consolidated statement of cash flows.
IAS 7 Statement of Cash Flows requires Apaniiwa Co to explain the changes in liabilities
arising from financing activities and not simply to show the net movement of
$11.1 million ($21.1m – $10m).
KA PL AN P U BLI SH IN G
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SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
The initial recognition of the lease liability of $8 million does not involve a cash flow
and should not be reported in the consolidated statement of cash flows. Similarly, the
recognition of the subsidiary’s loan of $1.5 million at acquisition is not a cash flow and
should also not be reported in the consolidated statement of cash flows.
The increase in long-term borrowings of $2.5 million and the repayment of lease
liabilities of $0.9 million should be shown as separate cash flows from financing
activities.
High-interest bank account
Tutorial note
Start your answer with the definition of a cash equivalent per IAS 7.
IAS 7 defines cash equivalents as short-term, highly liquid investments which are
readily convertible to known amounts of cash and which are subject to an insignificant
risk of changes in value. IAS 7 states that an investment normally qualifies as a cash
equivalent when it has a short maturity of three months or less from the date of
acquisition.
The money in the high-interest account does not appear to meet this definition
because it cannot be withdrawn until six months have passed. The lack of contractual
right to early termination prevents the classification of the deposits as cash equivalents
even though Apaniiwa Co considers that the bank would release the funds. As such,
the money in the high-interest account does not meet the definition of a cash
equivalent.
Tutorial note
Once you have concluded that it is not a cash equivalent, set out where the cash outflow
should be presented in the consolidated statement of cash flows.
The money paid into the high-interest account during the year should be presented as
a cash outflow from investing activities. Any interest received should be presented as
a cash inflow from investing activities.
(b)
Sustainability
Tutorial note
Don’t be tempted to write everything you know about the sustainability standards
here. The issue in the scenario is a lack of knowledge of the standards, which links to a
breach of professional competence and due care. No knowledge of the actual
standards is required in this particular question.
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KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
In order to produce a sustainability report, Mr Lennox requires knowledge of IFRS S1
General Requirements for Disclosure of Sustainability-related Financial Information
and IFRS S2 Climate-related Disclosures. Preparing the report without this knowledge
would be a breach of the principle of professional competence and due care.
Mr Lennox should inform Ms Ruiz of his knowledge gaps. If possible, he should attend
external training courses on the application of these standards. If not, then he should
not perform the work. Apaniiwa Co may need to pay a third party to assist with the
preparation of this report.
Cash flow statement
It is difficult for Mr Lennox to act with objectivity when he has been threatened with
dismissal and replacement.
It appears that Ms Ruiz is purposefully concealing the extent of her dividend payment,
and this demonstrates a lack of integrity and objectivity. This has been driven by the
fact that Ms Ruiz is a major shareholder who wants to hide the value of her dividend
from third parties, creating a self-interest threat.
Tutorial note
The question asks for actions for Mr Lennox, so it’s important to include some in your
answer. These action points should be tailored to the scenario. For example, the
scenario refers to two specific errors that have been made in the statement of cash
flows, so it would be sensible for Mr Lennox to check the other primary financial
statements to make sure those specific errors haven’t been repeated elsewhere.
Mr Lennox should document the relevant facts. Additionally, he should examine the
other financial statements in order to see if the foreign currency loss and dividends
paid have also now been misstated in them. He should collect evidence from the
financial records that indicate that the two amounts are incorrectly presented and
should identify the parties which will be affected by the errors.
Mr Lennox needs to determine with whom he can discuss the matter, as under normal
circumstances, he would discuss such issues with his immediate line manager.
However, in this case, his immediate line manager is Ms Ruiz, which could pose a
problem for him as he is likely to receive a response which is not appropriate. He
should discuss the matter with other recipients of the financial statements, which is
likely to be board members and possibly the audit committee.
He may consider contacting ACCA for advice and guidance. In any event, it will be
helpful to document his involvement, the substance of any discussions held with
Ms Ruiz and other parties, and the basis of any decisions which were made. If there is
no satisfactory resolution of the issue which could easily be the case, he should
consider his position with the company.
KA PL AN P U BLI SH IN G
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SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
ACCA Marking scheme
(a)
Long-term borrowings
High-interest bank account
Maximum
(b)
Sustainability principles
Sustainability actions
Cash flow ethical principles
Cash flow actions
Maximum
Professional skills marks
Total
Marks
5
7
––––
8
––––
1
3
5
5
––––
10
––––
2
––––
20
––––
Examiner’s comments
Part (a)
Long-term borrowings
Most candidates explained that the new loan and the repayment of the finance lease should
be presented in financing activities. Fewer specified the need to disclose each separately, as
one was an inflow and the other an outflow. A mark was available for explaining the need for
separate disclosure of inflows and outflows. Likewise, a significant minority of candidates
failed to explain that the loan recognised as a part of the net assets of an acquired subsidiary
and the initial recognition of the new lease liability did not represent cash flows and should
not be in the statement of cash flow at all.
High-interest bank account
A short paragraph described the reporting of the bank account as cash equivalent because,
although the company cannot withdraw funds until four months after the reporting date, the
accountant thinks the bank would release the funds if the company faced liquidity issues.
Despite the relatively short description, this issue has the potential for half of the marks for
part (a). This is because candidates can display knowledge of IAS 7 Statement of Cash Flows
and then apply that knowledge to the scenario for further marks. A good answer often
started with a definition of cash equivalents and then described the maximum three-month
maturity period (from acquisition) which is normally an indication of ‘readily convertible’.
This knowledge was then applied to the circumstances to show that the maturity period was
higher, and there was no contractual right for the loan to be terminated early. Having
reached a conclusion, marks were available for outlining the correct presentation: the initial
loan as an outflow and interest as an inflow, both from investing activities.
Few candidates seemed aware of the three-month maximum maturity period, but did
conclude that the loan was not a cash equivalent. A significant minority failed to explain
where the amounts should be presented in the cashflow or suggested – without justification
– that it should be a financing activity rather than investing. This part of the question was,
however, generally better answered than the first part.
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KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
In part (b), the discussion of ethical issues is well answered by candidates who are, generally,
well prepared for this type of question. Candidates should not expect to earn any marks by
merely presenting a summary of the Code’s ethical principles and threats. Instead,
candidates must apply their knowledge of principles and threats to the situation. In most
questions, candidates are asked to also recommend actions to resolve the ethical issues they
have identified, as was the case here.
Weaker answers tend to repeat the information from the exhibit without commentary or
contextualising the information in an ethical perspective. Unfortunately, some candidates
continue to copy and paste significance chunks of the exhibit into their answer which adds
nothing and should be avoided. Candidates should stick to the requirements and avoid
discussing business and financial reporting issues which are not needed. Answers which
simply identified issues as ‘unethical’ without explaining how, or why, also failed to earn
marks. Concise answers which focused on each issue identified from the scenario and
explained which ethical principles were breached and why, scored very well.
Some candidates showed a lack of care in reading the scenario and thus came to weak
recommendations of actions. Some answers cast suspicions on Mr Lennox's motives rather
than recognising that the issue was in fact with the finance director. Others identified
intimidation as an ethical issue but failed to recognise that speaking to the finance director
was not an option in this case. Suggested actions were often limited to ‘boilerplate’ solutions,
such as resignation, rather than those more appropriate to the scenario, such as examining
the financial statements and collecting evidence.
21
ABASI (MAR/JUN 2024)
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Key answer tips
This is another contemporary business involving the use of crowdfunding.
Part (a) tests a number of financial reporting issues, including revenue recognition and
financial instruments, which both crop up regularly in the SBR exam.
The ethical requirement differs from some past sittings in that there is no need to include
action points needed to resolve the ethical issues. This means your marks will come solely
from identifying and explaining the ethical issues and linking to the issues to the ethical
principles, so it’s important to try and identify a range of ethical issues.
(a)
Accounting treatment of the money received
Tutorial note
There are two separate issues to address in part (a) – the receipt from a director and
the crowdfunding campaign. Be sure to cover both parts and split your answer up using
subheadings to make it clear to the marker that you have done so.
KA PL AN P U BLI SH IN G
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SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
There are a number of IFRS Accounting Standard you can refer to when answering this
question, so don’t restrict your answer to just one standard per issue. With financial
instruments, remember to consider both the initial and subsequent treatment, and with
transactions involving the company directors don’t forget about related parties!
Mr Pain can demand repayment of the $0.5 million, meaning that Abasi Co has a
contractual obligation to transfer cash. In accordance with IAS 32 Financial
Instruments: Presentation, this should be accounted for as a financial liability.
As per IFRS 9 Financial Instruments, financial liabilities are initially recognised at fair
value. For a loan, this is normally the amount received, which in this case is
$0.5 million. However, there does not seem to be an interest rate on the loan, and so
the transaction has not taken place on terms equivalent to those in an arm’s length
transaction. As such, the fair value of the financial liability should be calculated as the
present value of the future expected cash flows. The discount rate used should be
Abasi Co’s usual rate of borrowing.
The financial liability would be measured at amortised cost because it is not held for
trading.
According to IFRS 18 Presentation and Disclosure in Financial Statements, an entity
presents a liability as current if it does not have the right to defer settlement for at
least 12 months after the reporting date. The financial liability is repayable on demand
so should be presented as a current liability.
Related party transaction
Mr Pain is a director of Abasi Co. This means that, in accordance with IAS 24 Related
Party Disclosures, Mr Pain and Abasi Co are related parties. The loan provided to Abasi
Co is a related party transaction.
Disclosure is required of the nature of the related party relationship as well as
information about the amount of the loan, the outstanding balance, and the terms and
conditions.
In the disclosure note, Abasi Co cannot state that the loan was provided on terms
equivalent to those which prevail in arm’s length transactions because the loan
appears to be interest-free.
Crowdfunding
In accordance with IFRS 15 Revenue from Contracts with Customers, a contract exists
between Abasi Co and each contributor which establishes the obligations of each party
and the payment terms. There appears to be one performance obligation – to provide
each contributor with a drone.
Abasi Co must determine if the performance obligation is satisfied over time or at a
point in time. Control of a drone does not transfer to a customer over time, but on
delivery and so this is the date when revenue should be recognised.
The drones have not been delivered and so revenue should not be recognised. The
$2.4 million received should be recorded as a contract liability on the statement of
financial position.
The $1.5 million cost of producing the drones should be recorded as inventories.
28 2
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
(b)
Ethics
Tutorial note
If you struggle to generate a sufficient number of points for this type of question, try
working through the exhibit one paragraph at a time and identifying an ethical issue
for each paragraph. You may find it helpful to do a brief answer plan. Present each
point in a separate paragraph as well, so you can see how many points you have
generated.
From the outset, there was a lack of integrity displayed by Mr Mavic. He should have
been straightforward and honest in his business relationships with the contributors.
Integrity also means he should not have knowingly been associated with misleading
information. The Zolo drone was advertised at a trade show where it was not capable
of performing adequately and he knew that the crowdfunding campaign video was
misleading as to the existing capabilities and readiness of the Zolo. The fact that
Mr Mavic honestly thought that the company would be able to develop and produce
the Zolo by the estimated delivery date does not mitigate the fact that he knew that
the company was misleading contributors. The communications from him to the
contributors were regular and honest, however, they were also incomplete and
reflected a lack of awareness of the problems the company was facing. This
demonstrated a lack of professional competence and due care which Abasi Co could
expect from its finance director.
Financial pressures led Mr Mavic to ship Zolo drones to favour new customers in the
hope of receiving additional revenues. This action was unethical at least in respect of
the crowdfunding contributors. Whilst not being creditors, the contributors are
consumers, and Abasi Co has a duty of care to them. The contributors obviously had
faith in the project as there was only one contributor who reported the project on the
CrowdPeople platform.
Mr Mavic knew that the Zolo drones were not functional and, whilst shipping to new
customers was earning revenue, a significant amount of the revenue was being
refunded because of the poor quality of the drone. This again showed a lack of
objectivity and professionalism in dealing with these customers. Mr Mavic made a
serious error in committing the business to extremely high initial levels of component
parts in the absence of proven production models. Also, the cost of producing a Zolo
had increased by 300%, but he naively felt that these costs would ultimately be
covered by the monies raised from crowdfunding. He should have produced a cash
budget which may have indicated a shortfall in cash required to produce the Zolo.
The fact that Mr Mavic awarded himself a market-based salary and leased an executive
car for himself is not by itself an issue, unless he felt that the company was going to
suffer financial problems which at the time of the award (1 May 20X7) was unlikely.
Also, at 31 December 20X7, there was no sign of sustained extravagance or criminal
fraud, which would lead to a conclusion that Mr Mavic acted in an honest manner but
he lacked integrity, objectivity and professional competence.
KA PL AN P U BLI SH IN G
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It appears from the outset that Mr Mavic and Mr Pain did not possess the technical or
commercial competencies necessary to deliver the Zolo drone as specified in the
original campaign. The directors managed their business poorly and seemed to spend
their money irresponsibly. Mr Mavic demonstrated a lack of professional behaviour
which might discredit the profession. He should have avoided any conduct which he
knew or should have known might discredit the profession.
ACCA Marking scheme
Marks
(a)
1 mark per discussion point of key principles and application to the
scenario:
Financial liability
Related parties
Revenue
Inventories
Maximum
(b)
Application and discussion of ethical principles to scenario, including:
Integrity in relation to misleading information
Professional competence in relation to awareness of project
Impact of financial pressure on decisions
Issues relating to salary and car
Duty of care/responsibility to customers
Responsibilities to investors
Maximum
Professional skills marks
Total
5
3
4
1
––––
10
––––
3
2
2
2
1
1
––––
8
––––
2
––––
20
––––
Examiner’s comments
(a) Exhibit 1 explains how one of the directors (holding half of the ordinary shares) had paid
the company $0.5 million to help in the development of a drone. The money was repayable
on demand. Most candidates correctly identified this as a loan because the company has a
contractual obligation to transfer cash. Answers should then have discussed the accounting
treatment of such financial liabilities, although answers to this part were generally weak. A
significant number of candidates failed to consider the implications of such ‘interest-free’
terms according to IFRS 9 Financial Instruments. Very few answers discussed how an
amortised cost approach should be applied, using Abasi Co’s borrowing rate as an applicable
cost of borrowing, and discounting the receipt to the present value of the future expected
cash flows.
Candidates who identified the director as a related party were then able to gain marks by
explaining the need for a disclosure note of the terms of the loan agreement under IAS 24
Related Party Disclosures. This means that the nature of the relationship, as well as
information about the loan (balance, terms and conditions) should have been disclosed. Most
answers were able to explain this provided the related party was identified.
28 4
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
The crowdfunding issue in exhibit 1 was well-answered provided candidates recognised the
need to apply IFRS 15 Revenue from Contracts with Customers. The exhibit describes how
each contributor to the crowdfunding campaign paid $300 and, in exchange, was promised
a drone when production was complete. Candidates who identified this as a performance
obligation answered this part of the requirement well. Good answers considered how the
provision of the drone was a single obligation which would be complete when control was
transferred (so recognition would be at a point in time, not over time). Production delays
meant the obligation was still outstanding, and many answers correctly identified that the
$2.4 million receipts should be recognised as a contract liability at the reporting date.
A final issue related to the accounting treatment of $1.5 million of drone manufacturing
costs. Most candidates correctly identified that these should be recognised as inventories.
(b) In most questions on ethics, candidates are asked to recommend actions to resolve the
ethical issues which they have identified. In this case, the requirement did not ask for these.
This may be why candidates seemed to find this requirement harder than normal.
As in previous diets, some candidates provided answers which discussed business issues. For
example, some answers spent a significant amount of time explaining how crowdfunding
works and its advantages, which gained no marks as it was not what the question required.
Answers which simply identified issues as ‘unethical’ without explaining how, or why, also
failed to earn marks.
Candidates at this level of their studies are also expected to go beyond presenting and
defining the ethical principles outlined in the ACCA Code of Ethics and Conduct.
Concise answers which focused on each issue in turn and explained the ethical principles
which had been breached scored well. Spending a few minutes on an answer plan may help
candidates to present a relatively short but well-structured answer which scores highly.
22
DARIO (SEP/DEC 2023)
Walk in the footsteps of a top tutor
Key answer tips
In recent SBR exam sittings, the examiners have illustrated a penchant for ethical
conundrums within contemporary business scenarios. This question sees an FD asked to take
a pay cut (speculatively due to rising costs) and features potential issues caused by the
practice of remote working. All very topical! Do consider the current economic environment
before the exam, no matter when you sit the paper, as current conditions may well feature
in your exam.
As 10 marks are available for part (a), there are a variety of ethical issues to present. Aim for
coverage of issues across all of the potential factors e.g. remote working, relationship with
CEO, impact of the pay cut, the FD’s contract renewal. Use the mark allocation to allocate the
time spent and to guide the number of points raised.
Part (b) covers IFRS 8 Operating Segments and represents a great question from which to
learn the main concepts of disclosing under IFRS 8. All the main rules/issues feature here –
definitions, aggregation and which segments are reportable.
KA PL AN P U BLI SH IN G
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(a)
Ethics
One area of concern for the finance director (FD) is that of maintaining independence
in his decision making. His relationship with the chief executive officer (CEO) can create
familiarity and self-interest threats. These threats have manifested themselves by the
CEO’s request and pressure to reduce his fee. The CEO has stated that the FD’s contract
is more likely to be renewed if he is prepared to take a fee reduction. This is effectively
an intimidation threat which can affect competence and due care obligations.
This pressure has resulted in the FD not submitting his going concern review to the
board. This could result in a lack of professional scepticism by the FD and a delayed
review of the situation by the board. The consequence is that the subsequent
disclosure of the going concern issue may be too late to save the company. This is not
because the FD is unaware of the need for disclosure, but because his non-disclosure
is due to the pressure which he is under. His personal friendship with the CEO has
resulted in the offer of support and this may have compromised his objectivity. The
going concern review is likely to have created some stress in his business relationship
with the CEO.
The pressures on cash flow cannot be allowed to cloud the FD’s judgement when
preparing and presenting information accurately, without misleading in any way. This
challenge has arisen because of the need to present a submission to the government
for funding. The advocacy threat can create the potential for biased information as the
FD is considering overstating future potential return on investments. Information must
represent the true nature of business activities, and the fundamental principle of
integrity of the professional accountant is critical.
The risk of data theft through the remote working of employees should have been
anticipated. IT and data risk assessments should be periodically carried out. However,
there is a capacity issue within Dario Co in dealing with data theft. In the FD’s case,
there are competence and due care issues which have potentially led to a lapse in the
assessment of internal controls and governance structures. Also, personal integrity is
extremely important, when dealing with such challenges. It is also vital for him to
recognise the importance of sharing his concerns with the board to enable the decision
makers to address the problems.
The FD wishes to implement productivity monitoring software to determine how much
the employees are working. This is not of itself an unethical practice, but he wishes to
implement this change without the knowledge or agreement of the employees. When
the employees are confronted, it will send a message to the employees that he does
not trust them and shows a lack of integrity on his part. He should remind the
employees that they should use company-issued equipment for business purposes
only, and not spend time on non-business websites. This is simply good business
practice and is not unethical on the part of the FD. However, to threaten the
employees with immediate disciplinary action does not seem to be a considered
approach and further emphasises the FD’s need for training and professional
development.
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KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
(b)
Operating segments
Tutorial note
Break your answer down into the 3 separate components – definition, aggregation and
which segments are reportable.
State the rules from IFRS 8 and then apply them to the scenario.
To meet the definition of an operating segment, the segment must:
–
engage in business activities from which it earns revenues and incurs expenses
–
be reported to the chief operating decision-maker
–
have discrete financial information available.
IFRS 8 Operating Segments states that an operating segment is a component of an
entity which engages in business activities from which it might earn revenues or incur
expenses (including revenues and expenses relating to transactions with other
components of the same entity), whose operating results are regularly reviewed by
the entity’s the chief operating decision maker (CODM), to make decisions about
resources to be allocated to the segment and assess its performance, and for which
discrete financial information is available.
Division C is not an operating segment. This is because division C does not generate
revenue from any internal or external source. It is purely a cost centre.
Divisions A, B and D all generate revenues. The divisions have heads who are directly
accountable to the CEO and these heads regularly discuss the operating activities
including the research and development activities, financial results, forecasts and
plans for their division. It therefore seems reasonable to conclude that divisions A, B
and D are separate operating segments.
Aggregation of operating segments
Two or more operating segments may be aggregated into a single operating segment
if aggregation is consistent with the core principle of IFRS 8, the segments have similar
economic characteristics and the segments are similar in each of the following
respects:
•
the nature of the products and services
•
the nature of the production processes
•
the type of customer for the products and services
•
the distribution methods for the products, and
•
the nature of the regulatory environment.
Divisions A and B both produce and sell pharmaceutical products and the nature of the
products could be deemed to be similar, although the production processes for
vaccines and allergy testing kits are likely to be different. Also, the type of customer
for these products is very different, being governments compared to pharmaceutical
wholesalers.
KA PL AN P U BLI SH IN G
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In addition, operating segments often display similar long-term financial performance
if they have similar economic characteristics. Divisions A and B report significantly
different long-term average gross margins. Therefore, it would be inappropriate to
aggregate divisions A and B into one operating segment for reporting purposes.
Reportable segments
Tutorial note
To determine if a segment is reportable, 2 main rules are employed.
Firstly, the 10% rule is considered.
Then, after determining the reportable segments under the 10% rule, the 75% rule is
applied.
An entity should report separately the information about an operating segment which
meets any of the following quantitative thresholds:
(a)
Its reported revenue, including both sales to external customers and intersegment sales or transfers, is 10% or more of the combined revenue (internal
and external) of all operating segments.
(b)
The absolute amount of its reported profit or loss is 10% or more of the greater,
in absolute amount, of
(c)
(i)
the combined reported profit of all operating segments which did not
report a loss, and
(ii)
the combined reported loss of all operating segments which reported a
loss.
Its assets are 10% or more of the combined assets of all operating segments.
If total external revenue reported by operating segments constitutes less than
75% of the entity’s revenue, additional operating segments must be identified
as reportable segments.
The revenues of divisions A, B and D exceed the 10% quantitative threshold for
total revenues. Because this first threshold is met, it is not necessary to apply
the remaining threshold tests. Divisions A, B and D will be reported separately.
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KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
ACCA Marking scheme
Marks
(a)
Application and discussion of ethical principles to scenario, including:
Familiarity re personal relationships
Self-interest/objectivity re contract
Professional responsibilities re completion of work
Objectivity/integrity re forecasts
Competence re data theft
Issues with productivity monitoring
Maximum
(b)
1 mark per discussion point of key principles and application to the
scenario:
Definition of operating segments
Aggregation of operating segments
Identification of reportable segments
Maximum
Professional skills marks
Total
2
2
2
2
2
2
–––
10
–––
4
3
3
–––
8
–––
2
–––
20
–––
Examiner’s comments
(a)
Two professional marks were available: one mark for identifying relevant ethical
principles, and a second mark for then applying these principles to the scenario.
Weaker answers to part (a) were unstructured and presented a list of rote learned ethical
principles with minimal reference to the scenario. Other poorly answered attempts
presented lengthy extracts from the scenario without providing any comments on which
ethical principles were being breached, or why the information was relevant. Answers which
simply identified issues as ‘unethical’ without explaining how, or why, did not earn marks.
Weaker answers to part (a) tended to focus on only one or two of the many issues which
were available for comment, and marks earned were lower as a result. On the other hand,
concise answers which focused on each issue identified from the scenario and explained the
ethical issues breached scored very well. Maximum marks were possible for a relatively short
but well-structured answer.
The professional marks comment in the requirement is a helpful guide for candidates who
are unsure what is needed, in this case, the identification of relevant ethical principles and
then the application to the scenario. Application to the scenario is likely to require a
comment on the implications of the breached principles, and any actions which could prevent
them.
(b)
Answers to this question were mixed. Many candidates provided definitions and
principles from IFRS 8, although some struggled to separate the answer into the three
areas recommended in the requirement (the definition and aggregation of operating
segments, and the identification of reportable segments). Some answers identified
only whether each was an operating segment and failed to then identify reportable
segments. A good answer presented subheadings which matched the three bullet
points within the requirement, so that an attempt is made to answer each and ensure
every possible mark is earned. These three sections were:
KA PL AN P U BLI SH IN G
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1
Definition of an operating segment
Well-prepared candidates provided the definition of an operating segment from IFRS 8.
Better answers then applied this to each of the four divisions, to consider which ones met
the definition. Divisions A, B and D all met the definition, but C did not generate any revenue
(externally or internally) and – as the scenario describes – ‘is purely a cost centre.’ Division C
can therefore be eliminated from being a reportable segment: it is not even an operating
segment.
2
Aggregation of operating segments
Marks were available for knowledge of the standard, and for application to the scenario.
Aggregation is permitted where the segments have similar economic characteristics and
candidates could have provided examples of what this means, for example, similar products,
production, customers, regulatory environment. A good answer would apply this principle to
the information in the exhibit to conclude that aggregation was not possible.
3
Identification of reportable segments
The final area required candidates to explain and apply IFRS 8’s quantitative thresholds above
which a segment becomes reportable. These relate to 10% or more of revenue, including
internal transactions, profit/loss-making segments, and combined assets. Candidates should
then have applied these to the information on the three divisions A, B and D to conclude that
all three exceeded the 10% revenue threshold and should be reported. Marks were also
available for a discussion of how the 75% revenue rule was also met under these
circumstances.
Overall, part (b) was well-answered by candidates who were familiar with the principles of
IFRS 8 and able to apply them to the exhibit information.
23
CUTHERD (MAR/JUN 2023)
Walk in the footsteps of a top tutor
Key answer tips
Another contemporary scenario. Part (a) focuses on the ever growing ethical impacts on an
accountant caused by information technology. The suggested answer here, as provided by
the examiner, may not be exhaustive. Markers will mark on a ‘one mark for each reasonable
comment’ basis. Relevant points that highlight specific IT developments (e.g. AI) and the
subsequent ethical issues can still get credit even if not mentioned in this answer. Do not go
over your time allocation here. It is only worth 4 marks.
Part (b) looks at the ethical issues for an accountant and the internal auditor when faced with
some rather rogue decision-making by the head of their division.
Part (c) tests the application of IAS 38 Intangible Assets and IAS 36 Impairment to the costs
incurred in purchasing the new procurement systems. These are commonly tested areas
under SBR and were originally covered in the previous Financial Reporting module. As such,
candidates should be familiar with the contents of these standards. If you aren’t, then take
some time to revise these important and regularly examinable areas.
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AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
(a)
Information technology and the impact on ethics
The ethical responsibilities of an accountant helps the organisation build trust with
internal and external stakeholders. Information technology may have an impact on the
technical knowledge that an accountant requires to maintain professional
competence, but it does not change the importance of being ethical.
Ethical behaviour and responsibilities in this context would ensure the protection of
information which only needs to be available to authorised individuals, and the
creation of a secure means of sharing data.
The fundamental principles for accountants still apply and remain relevant as
technology advances. The principles of integrity, objectivity, professional competence
and due care, confidentiality, and professional behaviour are not highly prescriptive
rules to cover every scenario. Instead, they are a set of principles to be interpreted and
applied to any given context, and this will require the exercise of judgement.
(b)
Ethical issues
Tutorial note
Separate your answer to reflect the requirement. Subheadings for both Mr Ebrima and
for the internal auditor will ensure that the marker sees you have answered all required
aspects. It may also enable you to think of further points for your answer by forcing a
change of perspective in your thinking.
The divisional head (Mr Bookman) has bypassed the centralised procurement system
and a division specific system can result in inefficient procurement which does not
meet the needs and opportunities for the organisation as a whole. Once the
accountant (Mr Ebrima) has become aware of this issue, he must determine how these
bad decisions have occurred, rather than just assessing the impact after they have
been made. Failure to do this is unprofessional in acknowledging and dealing with the
problem. Mr Ebrima should not allow himself to be pressurised by Mr Bookman but
should listen to any legitimate concerns which Mr Bookman has about the centralised
processes. However, the behaviour of Mr Bookman sets the standard for how the
organisation prioritises and displays ethical behaviour.
Mr Ebrima and the internal auditor must assess why and how a purchasing strategy
has been allowed to occur which has resulted in a system which is incompatible with
the company’s centralised systems. The impact of the unfavourable pricing of the
system on the company’s financial position must also be assessed. As the divisional
head, Mr Bookman is a very dominant figure and a personal friend of the internal
auditor, and there will be pressures placed upon the two accountants which they must
safeguard against.
Compliance with the fundamental principles of ethics may potentially be threatened
by a broad range of circumstances. There is an intimidation threat as Mr Ebrima could
be deterred from acting objectively by pressure exerted by Mr Bookman. This may be
actual or perceived.
KA PL AN P U BLI SH IN G
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An internal auditor must be professionally competent to perform a key role in
determining the impact of the division specific system and any lack of adherence to
company policy. The internal auditor should also determine any underlying problems
in the central procurement process, assess the relative impact and advise management
on their resolution. Internal auditors have a duty to ensure that shareholder value is
not affected by such issues. They should be independent and outside the reporting line
of Mr Bookman and have full authority to probe the division’s practices.
The internal auditor is a qualified member of ACCA but is known to be a personal friend
of Mr Bookman. Thus, there is a familiarity threat. The threat occurs because of the
close relationship which may cause the internal auditor to become too sympathetic to
the interests of Mr Bookman. However, as a qualified ACCA accountant, he should
safeguard against this influencing any actions he feels are necessary or reporting his
findings to the management committee.
(c)
IAS 38 Intangible Assets
An intangible asset is an identifiable non-monetary asset without physical substance.
According to IAS 38, if the procurement system meets the definition of an intangible
asset, the $5 million should be removed from profit or loss and recognised as an
intangible asset. This would then be amortised over the useful life of four years, based
on the pattern of benefits, with straight‑line amortisation being the default method.
However, as the system is not yet fully operational because of incompatibilities,
amortisation should not yet commence.
There are doubts as to the probable future benefits of the system because of security
issues and technological obsolescence, and these may cast doubt on whether the
expenditure can be classified as an asset. If it does not meet the definition of an asset,
then it is correct to expense the full $5 million in the operating section of the statement
of profit or loss.
Tutorial note
Remember the PIRATE criteria! If you cannot, they are listed below.
Apply the rules to Cutherd’s development costs and make a conclusion on the
accounting treatment.
The internal development costs of $100,000 should be charged to expenses unless
certain conditions are met, namely:
29 2
•
probable future benefits (profitable)
•
intent to use the software
•
resources to complete the software
•
ability to use the software
•
technological feasibility
•
expenses incurred can be measure and are identifiable.
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
If the procurement system is capitalised as an intangible asset, then the payroll costs
in the development of the system would also be capitalised because they are directly
attributable costs of preparing the asset for its intended use. If the system is not
capitalised, then the development costs of $100,000 should remain as an expense in
profit or loss in the operating section.
IAS 36 Impairment of Assets
At the end of each reporting period, an entity is required to assess whether there is
any indication that an asset may be impaired. An asset is impaired if its carrying
amount is higher than its recoverable amount. IAS 36 has a list of external and internal
indicators of impairment. If there is an indication that an asset may be impaired, then
the asset’s recoverable amount must be calculated.
The recoverable amounts of certain types of intangible assets are measured annually,
whether or not there is any indication that it may be impaired. In some cases, the most
recent detailed calculation of recoverable amount made in a preceding period may be
used in the impairment test for that asset in the current period. An intangible asset
not yet fully available for use falls into this category. Thus, the cost of the procurement
system, if capitalised as an intangible asset, would have to be tested for impairment at
the year end.
It should be noted that it may be difficult to calculate the recoverable amount of the
procurement system. The recoverable amount of the internal development costs is
more likely to be zero and further justifies it being written off to profit or loss.
ACCA Marking scheme
Marks
(a)
1 mark per discussion point
Maximum
(b)
Generally, 1 mark for identifying the issue in the scenario and 1 mark for
linking it to ethical principles plus a further 1 mark for each relevant action
suggested.
Application and discussion of ethical principles to scenario, including:
Procurement
Intimidation
Competence
Familiarity
Maximum
(c)
–––
4
–––
Professional marks
1 mark awarded for quality of the discussion and 1 mark for appropriate
actions
1 mark per discussion point of key principles and application to the scenario:
IAS 38 knowledge
Potential capitalisation and amortisation of $5m
Potential expense of $5m
Development cost treatment
IAS 36 knowledge
Application of IAS 36, including requirement to perform annual review
and difficulties in determining recoverable amount
Maximum
Total
KA PL AN P U BLI SH IN G
–––
6
–––
2
2
2
2
2
2
2
–––
8
–––
20
–––
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Examiner’s comments
Part (a) required candidates to discuss how the advancement of information technology
impacts on the ethical responsibilities of an accountant. There was a range of answers which
were possible and acceptable in answering the question. Generally, candidates were
awarded 1 mark for each valid discussion point.
Part (a) was generally answered well with a significant number of candidates achieving full
marks. Candidates tended to be knowledgeable regarding advancements in technology and
were able to apply themselves by mentioning that accountants need to be competent, up to
date, and undertake continuing professional development. Candidates also demonstrated
their understanding of the principle of confidentiality.
Some candidates answered part (a) and part (b) in one section, which causes problems for
the marker. Candidates must make it clear which requirement they are answering.
Part (b) required candidates to discuss the ethical issues faced by an accountant and an
internal auditor and any actions they should take to address these issues. Candidates needed
to discuss the fundamental principles of ethics that could potentially be threatened by a
broad range of circumstances. For example, intimidation threats, lack of objectivity, and lack
of professional competence. Candidates were required to identify both actual and perceived
ethical threats. Candidates should always discuss the ethical principle and then apply this
principle to the scenario. It should be noted that simply cutting and pasting elements of the
scenario without appropriate discussion will not attract any marks.
Professional marks were awarded in part (a) and (b) for the quality of the ethical discussion
and identification of appropriate actions. The actions identified by candidates need to be
realistic and specific to the circumstances. The accountant should take whatever actions
might be available, as soon as possible, to address the consequences of the breach of the
ethical code. These actions will differ depending upon the circumstances in the scenario.
Therefore, when a candidate simply gives a standard set of actions such as resign, call ACCA
etc without application to the scenario, the candidate will score very few marks. It is true that
an accountant should determine whether to report the breach to the relevant parties.
However, the relevant parties are not just ACCA but include those who might have been
affected by the breach, as well as another professional or regulatory body, or an oversight
authority. There are also actions which should be considered before a breach of the ethical
code is reported to the relevant authorities.
This part of the question was generally answered well. In the past candidates have struggled
with applying specific ethical principles and, more importantly, mentioning any threats to
those principles. This was not the case with this question. However, there were still many
candidates who cut and paste the exhibit into their answer without relevant comment.
Part (c) required candidates to explain the possible effects of IAS 38 Intangible Assets and
IAS 36 Impairment of Assets on the accounting treatment of the purchase of a procurement
system and development costs. Part (c) was answered well with the majority of candidates
able to present the definition of an intangible asset and the conditions required to capitalise
development costs. However, as discussed previously, rote-learnt knowledge does not
attract many marks, so it is a mistake for candidates to simply give definitions without
applying them to the scenario. Of the marks available for this part of the question only
2 marks were given for IAS 38 and IAS 36 definitions.
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AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
This requirement gave candidates a good opportunity to achieve full marks. The lack of
possible future benefits of the system and potential technological obsolescence cast doubt
on its classification as an asset. As a result, the expenditure on the system may have been
correctly expensed in the statement of profit or loss. However, if candidates discussed
reasons why the system should have been classified as an intangible asset, then due credit
was given.
The cost of the procurement system, if capitalised as an intangible asset, would have to be
tested for impairment at the year end, although it is difficult to calculate the recoverable
amount of a procurement system. The recoverable amount of additional internal development
costs is more likely to be zero thus justifying the write off to profit or loss.
Candidates often didn’t discuss the arguments for and against capitalisation, simply stating
that the system and development costs should or should not be capitalised.
Conclusion
Overall, the question was answered well.
24
JASSIE (SEP/DEC 2022)
Walk in the footsteps of a top tutor
Key answer tips
Part (a) tests some of the principles of IFRS 15 Revenue from Contracts with Customers. This
is one the most commonly tested standards in SBR, so it is essential that you are comfortable
with the details of the standard.
Part (b) tests ethical issues and actions. It is worth 10 marks plus 2 professional marks and it
is typically easier to score well here, so allow enough time to attempt this part thoroughly.
(a)
Revenue
Tutorial note
The requirement directs you to the relevant IFRS 15 steps to consider by asking you to
discuss the number of performance obligations in the contract (Step 2 – identify the
performance obligations) and if revenue should be recognised at a point in time (Step 5
– recognise revenue as the performance obligation is satisfied).
There are marks available for these relevant principles from IFRS 15, so start by
outlining the concepts before moving onto the application of the principles to the
scenario.
KA PL AN P U BLI SH IN G
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Under IFRS 15 Revenue from Contracts with Customers, a performance obligation is a
promise to transfer to the customer a good or service or a bundle of goods or services
which is distinct. A good or service is distinct if both of the following criteria are met:
–
the customer can benefit from the good or service either on its own or together
with other resources which are readily available to the customer, and
–
the entity’s promise to transfer the good or service to the customer is separately
identifiable from other promises in the contract (in other words: the promise to
transfer the good or service is distinct within the context of the contract).
Entities should assess whether the good or service is capable of being distinct and
whether this good or service is distinct within the context of the contract. If a promised
good or service is not distinct, it should be combined with other promised goods or
services until they become distinct together (‘a bundle’). A bundle is then treated as a
single performance obligation.
A good or service promised to the customer is not separately identifiable from other
promises in the contract when, in substance, the customer contracted for a combined
good or service. In such cases, goods or services which seem to be distinct are in fact
only inputs to the combined item.
The final licence provided to the customer relies on the data collected and processed
during the course of the service phase, and the data and the processing have no use
or relevance without the licence. The licence and data services are highly
interdependent and highly interrelated. Furthermore, there is no added value for the
customer before the survey is completed as it cannot process the data by itself and
obtain a licence. The licence does not form part of a separate performance obligation.
Before the survey is complete, customers have access to data through presentations
and reports but at this stage, there is no granting of a licence. Once the licence has
been granted, there is no further analysis or service provided to the customer.
Consequently, revenue should be recognised at a point in time when the licence is
granted (or when the contract is exited) and as a single performance obligation. Any
service phase component does not have any significant value. The customers of Jassie
Co contract for a combined good or service which includes the survey data, processing
and granting of the licence. These are not separate performance obligations, but they
are inputs to a combined item.
(b)
Ethical issues and resolutions
Tutorial note
There are plenty of ethical issues to spot in this scenario. Take each paragraph in turn
and identify which ethical principles have been breached and make sure you explain
why.
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AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Big data analytics and the use of algorithms are important to businesses. Accountants
may not have the necessary skills or experience to take responsibility for big data and
algorithms. Jassie Co has appointed a chief data officer to ensure clear accountability
within the company. The finance director needs someone to reliably interpret the
results in order that he can effectively deal with the customer. However, Mr Betso
does need some understanding of the technology in order to determine company
strategy and uphold company values and culture. The view is that accountability for
the use of big data lies with senior management which includes Mr Betso.
Even when correctly manipulated and processed, big data may not deliver the
expected outcome. In this case, Mr Betso insisted that the data was run again to
include historical data which would then result in a more favourable outcome for a
customer. As the revised report used historic data, it may be embedded with bias from
the past due to the way in which it was collected or acquired. If this is the case, it may
be illegal or unethical to use this data for customer decision making. Mr Betso has
obviously put the chief data officer under pressure to rerun the data to find a more
favourable result. This would appear to be self-interest behaviour on the part of
Mr Betso. Olio Co should feel confident that they are dealing with a company where
the fair treatment of customers is central to the corporate culture.
Mr Betso should ask himself whether he has maintained the necessary skills and
experience to carry out his role as finance director. Another example of his possible
lack of professional competence is recommending to his friend that she use IFRS 16
Leases to account for the right-to-use licence to explore for oil. IFRS 16 specifically
excludes licences of this nature from its scope. The main issue is that Mr Betso has
given advice without first checking the nature of that advice. It demonstrates a lack of
due care and poor professional behaviour which would discredit himself and possibly
Jassie Co. Mr Betso has demonstrated a lack of expertise and knowledge in several
areas, the result of which could impact on himself and the company. He has acted in a
way which conflicts with ACCA’s professional values.
In addition, Mr Betso knows that Ms Stylos holds shares in Olio Co and has suggested
to his friend that the share price of Olio Co was likely to fall because there was little
chance of oil being found as a result of the granting of the licence.
There are several ethical issues here. Mr Betso has manipulated data to produce a
report for Olio Co which shows a more favourable outcome for locating oil than is
necessarily the case. He has then disclosed confidential information about the report
to his friend, Ms Stylos, which will affect the share price. Because this confidential
information is not accessible to other shareholders and investors, Mr Betso is giving
his friend an unfair advantage over the rest of the market which is ethically immoral
since they affect others unfairly. However, the main issue is that the report was
manipulated in the first place and a false report given to Olio Co.
KA PL AN P U BLI SH IN G
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Tutorial note
In order to score the two professional marks, once you have explained the ethical
issues, you must also make sure you set out how to resolve the issues (as this is
specifically required). Signpost these with a separate heading for your marker. These
may be trickier to identify than in other ethical scenarios, but try to think logically about
some sensible steps that could be taken, not forgetting that it’s always important to
keep a written record of any conversations held and the outcome of such conversations.
Mr Betso should try to identify the parties affected by his actions and lack of expertise.
He should consider who should be involved in the resolution of the problems which he
has created. He may consider contacting ACCA for advice and guidance. He may
approach colleagues with whom he can discuss his position and should consider
involving the board of directors in its resolution.
Mr Betso should discuss his lack of knowledge with the directors of Jassie Co and the
potential consequences to the business. If the directors of Jassie Co do not agree to a
particular course of action, it may be appropriate to consider his position within the
company.
During the resolution process, he should document the substance of the discussions
held, who was involved, and the reasons for the decisions which were made.
ACCA Marking scheme
Marks
(a)
(b)
1 mark per discussion point of key principles in IFRS 15 and application to
the scenario:
–
IFRS 15 principles
–
Services are highly interdependent and highly interrelated
–
Recognised at a point in time
Generally, 1 mark for identifying the issue in the scenario and 1 mark for
linking it to ethical principles plus a further 1 mark for each relevant action
suggested
Application and discussion of ethical principles to scenario, including:
–
Understanding of big data
–
Rerunning of data
–
IFRS 16
–
Professional behaviour
–
Biased report
–
Resolutions
Professional marks
Total
29 8
3
3
2
–––
8
–––
10
–––
10
–––
2
–––
20
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KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Examiner’s comments
Generally speaking, candidates perform well on the ethics part of question 2 but not as well
on the accounting element. It is important that candidates set out the ethical principle
involved and then apply this principle to the scenario. In this way the marks can be
maximised. Also, if the question asks for actions or resolutions, the professional marks will
be lost if the candidate’s answer does not contain them.
(a) This type of question requires the application of the basic requirements of IFRS 15.
Candidates needed to determine whether the performance obligation is a promise to
transfer to the customer a good or service or a bundle of goods or services which is distinct.
If a promised good or service is not distinct, it should be combined with other promised goods
or services. Many candidates knew the requirements of IFRS 15 as regards a promised good
or service being distinct, and when revenue should be recognised at a point in time but found
it difficult to apply their knowledge to the scenario.
(b) The marking scheme is written to allow candidates a mark for every valid point made.
Often candidates can make two valid points in a single sentence by discussing the ethical or
moral principle involved and then applying that principle to the scenario. However, only one
mark in total is given for just quoting ethical guidance without any application to the scenario.
Many candidates scored the maximum 10 marks from this part of the question. The scenario
was used well by candidates and the answers were very pleasing given that it also dealt with
contemporary issues. The professional marks were allocated on the basis of appropriate
actions being discussed by candidates. The resolutions were required to be realistic and not
just a generic list of every ethical resolution possible.
It is important for accountants to keep their knowledge of technology up to date, so that the
accountant essentially knows when they need to take expert advice. Many candidates
realised professional competence was a core ethical value of an accountant.
Candidates recognised that by the finance director insisting that a report be run again, he
was putting the chief data officer under pressure. This occurred because the finance director
did not like the initial outcome of the report. Candidates realised that this appeared to be
self-interest behaviour on the part of the finance director. The finance director also
demonstrated a lack of due care and poor professional behaviour and a lack of expertise and
knowledge in several areas. He manipulated data and disclosed confidential information
about the report to his friend which affected the share price. Accountants should be fair and
act in a moral way at all times. Unfortunately, candidates often apply the wrong ethical
concept to facts in the scenario. For example, some candidates felt that this behaviour
showed a lack of independence.
Candidates often did not realise that to remedy the situation, the finance director should try
contact and discuss matters with the parties affected by his actions. Several candidates
produced resolutions that were not logical such as immediate resignation of the finance
director. In practice, the first step would always be a discussion of the issues in an attempt
to resolve the problem.
KA PL AN P U BLI SH IN G
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SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
25
RENSHU (MAR/JUN 2022)
Walk in the footsteps of a top tutor
Key answer tips
In this question, the ethical issues are slightly different to a typical SBR exam question 2, with
the inclusion of professional dilemmas in the requirement and the need to discuss the moral
aspect of the business’ activities. More typically, there are then a number of financial
reporting issues to cover (recognition of intangibles, derecognition of intangibles, impairment
and prior period errors).
Allocate your time to each requirement in proportion to the allocated marks. You should
spend about half your allotted time on part (a) the ethics requirement (8 marks plus
2 professional marks) and the remaining time on parts (b) and (c).
(a)
Ethical and professional dilemmas
Tutorial note
It is essential to use the scenario in order to maximise your marks. From the scenario,
try to identify a number of issues and don’t limit yourself to just one or two. Then for
each issue apply the relevant ethical principles.
There were plenty of clues in the scenario to work with, including commission based on
the number of loans granted, extortionate interest rates, use of artificial intelligence
systems subject to cyber attacks and laws on consumer credit.
The requirement also mentions professional dilemmas, which still requires the
consideration of how an accountant would be expected to behave in the scenarios
described, but also extends to a ‘moral element’.
The financial accountant must ensure that the artificial intelligence (AI) system
complies with applicable laws and regulations. For Renshu Co, this means that the
system must take into account the laws on consumer credit. This is a fundamental
principle of professional behaviour.
There is a requirement for the AI system to be robust from a technical perspective and
be secure against a cyber-attack and data leakage. AI should adhere to ethical
principles and values, including fairness and explicability. It is morally unacceptable to
provide credit to group A as it appears that this group cannot afford to repay the loan.
It could be argued that providing credit to group A could lead to stabilising or improving
an individual’s position. Alternatively, it could lead to the reverse whereby the
individual spends the money on gaming and defaults on the loan. The bias in the
granting of loans to group A is such that the financial accountant knows that this group
is unlikely to repay the amounts on time and, therefore, the individuals will be subject
to a high interest charge on the loan. The financial accountant should act with integrity
and be straightforward and honest in all professional and business relationships.
Acting ethically would preclude the targeting of group A. He should be straightforward
and honest and not allow bias to override his professional judgement.
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KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
The financial accountant has the responsibility to oversee loans and therefore he
should ensure that the system uses the same score threshold for granting credit to
both groups of individuals in order for the process to be fair. The likelihood of the
approval of the loan from Renshu Co should be based on credit-worthiness using the
same criteria for all individuals thus ensuring demographic parity. Renshu Co should
have systems which build and calibrate separate score card models for the two groups
to ensure that they have the same positive rate of acceptance.
It may be necessary to develop systems which segment a population. However, in this
case, there is a difficulty that arises due to the application of a clear cut label based
around social demographics. It is possible to create segments based upon social
demographics but the financial accountant of Renshu Co should not allow the use of
such a feature for ethical and legal reasons.
The financial accountant is demonstrating a lack of integrity and a degree of self-interest
by defending the use of the AI system. He receives a commission based upon the number
of loans approved which will influence his decision making. Also, there is a moral
dilemma for the financial accountant as he authorises loans to customers who use the
money on the gaming app and the loan interest rate is extortionate at 1076% per annum.
Tutorial note
In order to score both professional marks, you need to include some actions as well as
a discussion of the ethical issues. Leave some time to include these in your answer. It’s
advisable to put them under a separate sub-heading so it’s nice and clear that you have
addressed this element.
The financial accountant should consider his position with the company. He is in a
situation where there are many moral dilemmas. He should revisit and reflect upon
the ethical guidelines which should be used as a basis for his professional conduct.
Once he has reflected upon his position, he could discuss it further with his superior
and try to change company policy but this is unlikely to happen. If company policies
remain steadfast, he should consider contacting ACCA for advice which may include
disassociating himself from Renshu Co and leaving the company.
(b)
Customer databases and domain names
Tutorial note
There were three elements to cover here – the recognition of the database, recognition of
the domain names and the allocation of the purchase price. When broken down like this
it’s clear to see that you don’t have to write a huge amount on any one element in order
to score a passing mark. There are only 4 marks available in total for 3 separate issues!
When addressing the recognition of intangibles, start by stating the relevant rules from
IAS 38 and then apply to each intangible in turn.
For the allocation of the purchase price, remember that under IFRS 3 identifiable assets
are measured at fair value on acquisition.
The arbitrary allocation of the purchase price to the two intangible assets is inaccurate.
KA PL AN P U BLI SH IN G
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SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Renshu Co has a present right to receive future cash flows under the contractual
arrangement in relation to the customer database and therefore, in accordance with
IAS 38 Intangible Assets, an intangible asset should be recognised for the customer
database as it is probable that the expected future economic benefits will flow to
Renshu Co.
In addition, Renshu Co also acquired domain names for websites which have gaming
content. This acquisition will satisfy the separability criterion for recognition in IAS 38
and should therefore be recognised as an intangible asset.
The arbitrary allocation of the purchase price on a 50:50 basis to the domain names
and customer database is not in accordance with IFRS 3 Business Combinations. New
purchase price allocations for the separate intangible assets should be carried out in
accordance with IFRS 3 whereby the purchase price should be allocated to the
individual identifiable assets and liabilities on the basis of their relative fair values. The
fair value of the separate intangible assets should be identified using appropriate
valuation techniques in accordance with IFRS 13 Fair Value Measurement.
(c)
Payments for the app
Tutorial note
For part (c) you had two scenarios to address. Try to allocate your time evenly so you
cover each one in enough detail. Note here the recognition of the intangible was in the
prior period, so you are not asked to discuss whether that was correct, but the
implications of such treatment on the current year.
Be mindful that although the question is asking about intangibles, there are other
accounting standards that are also relevant.
IAS 38 requires an entity to recognise an intangible asset if it is probable that the future
economic benefits which are attributable to the asset will flow to the entity, and the
cost of the asset can be measured reliably.
(i)
If the payments met the criteria for recognition of intangible assets, then
according to IAS 38, the intangible asset should have been recognised prior to
the current period.
The intangible asset should be derecognised only on disposal or when no future
economic benefits are expected from its use or disposal. It seems that neither
of these tests for derecognition have been met by Renshu Co. Therefore, it is
not appropriate to derecognise the intangible assets.
If there are doubts over the recoverable amount of the intangible asset, then
Renshu Co should assess whether the intangible assets are impaired at
31 December 20X8, in accordance with IAS 36 Impairment of Assets. If
Renshu Co considers that the intangible assets’ carrying amounts exceed their
recoverable amounts, then the company should recognise an impairment loss
in profit or loss in the operating section.
For any apps that are now generating an economic benefit for Renshu,
amortisation should be charged to the operating section of the statement of
profit or loss over the expected useful life of the asset.
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KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
(ii)
Renshu Co should have considered whether the recognition criteria in IAS 38 or
the recognition criteria for internally generated intangible assets were fulfilled
at the time Renshu Co capitalised the intangible assets prior to the current
period. If in the current period it is discovered that the criteria were not met and
the payments should have been expensed, Renshu Co will have to recognise a
prior period error correcting the effects retrospectively, as if the error had never
occurred. This would mean adjusting the opening balance of each affected
component of equity (likely to be retained earnings) for the earliest prior period
presented and the other comparative amounts disclosed for each prior period.
The reclassification of intangible assets to be expensed as research and
development costs does not constitute a change in an accounting estimate.
Estimates must be revised when new information becomes available which
indicates a change in circumstances upon which the estimates were formed.
However, the payments for the app are not estimates of the cost of developing
the assets.
Thus, if the payments were intangible assets, then they should be recognised
and tested for impairment. If the payments did not qualify as intangible assets,
then the amounts should be treated as prior period errors.
ACCA Marking scheme
Marks
(a)
(b)
Generally, 1 mark for identifying the issue in the scenario and 1 mark for linking
it to ethical principles plus a further 1 mark for each relevant action suggested
Application and discussion of ethical principles to scenario, including:
–
Artificial intelligence (AI) system
–
Loans to group A
–
Fair and equitable system
–
Self-interest
–
Relevant actions
1 mark per discussion point of key principles in IAS 38 and IFRS 3 and
application to the scenario:
–
Recognition of intangible assets IAS 38
–
New purchase price allocations IFRS 3/IFRS 13
Maximum
(c)
1 mark per discussion point of key principles and application to the scenario:
If the payments met the criteria for recognition as an intangible, including:
–
Correct to recognise as an intangible asset
–
Derecognition rules
–
Impairment IAS 36
If the payments did not meet the criteria for recognition as an intangible,
including:
–
Should have been expensed
–
Prior period error not accounting estimate
–
Retrospective adjustment
Maximum
Professional marks
Total
KA PL AN P U BLI SH IN G
–––
8
–––
3
3
–––
6
–––
4
–––
4
4
–––
8
–––
6
–––
2
–––
20
–––
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SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
Examiner’s comments
Part (a) of the question required candidates to discuss the ethical issues surrounding the
granting of loans to customers with various social backgrounds.
Many candidates stated that the financial accountant‘s decision-making was influenced by
the fact that he receives a commission based upon the number of loans approved and that
there was a moral dilemma for the financial accountant as he authorises loans with a loan
interest rate of 1076% per annum. Additionally, many candidates discussed the bias shown
in the granting of loans to group A as the financial accountant knew that this group was
unlikely to repay the amounts on time and therefore, the customers will be subject to the
high interest charge on the loan.
It is always important for a professional accountant to ensure that the company they work
for is complying with applicable laws and regulations, which meant for Renshu that the
AI system should take into account the laws on consumer credit. This is a fundamental
principal of professional behaviour. Accountants should be fair and act in a moral way at all
times, therefore it was morally unacceptable to provide credit to a social demographic group
(group A) knowing that they would not be able to afford to repay the loan. Many candidates
discussed the ethical issues but not the moral implications of what is right and wrong.
Candidates were also asked to discuss the appropriate actions which the accountant should
take in this situation.
The marking scheme is written to allow candidates a mark for every valid point made. Often
candidates can make two valid points in a single sentence by discussing the ethical or moral
principle involved and then applying that principle to the scenario. Markers would give a
mark for identifying the problem from the scenario and a mark for the ethical issue. However,
only one mark in total was given for just quoting ethical guidance without any application to
the scenario. Many candidates scored the maximum marks of 8 from this part of the
question. The scenario was used well by candidates and the answers were very pleasing given
that it also dealt with artificial intelligence systems and cyberattacks. The professional marks
were allocated on the basis of one mark for the discussion of the dilemmas and one mark for
appropriate actions.
If candidates summarise the key issues from the scenario, link these issues with ethical and
moral principles involved and set out appropriate and sensible actions, then very high,
possibly full, marks can be obtained.
(b) Many candidates recognised that an intangible asset should be recognised for contractual
rights as it was probable that expected future economic benefits would flow to Renshu Co.
Renshu Co also acquired domain names which satisfied the separability criterion for
recognition as an intangible asset. Few candidates made this point in their answer.
Candidates were told that the company had to allocate the purchase price to the individual
identifiable assets in accordance with IFRS 3. The arbitrary allocation of the purchase price
50:50 between the customer database and the domain names was not in accordance with
IFRS 3. The purchase price should be allocated on the basis of their relative fair values, but
few candidates discussed this principle.
It is safe to assume that in a short question such as this for 4 marks, that 2 marks will be
awarded for each part of the question. However, if candidates answered the recognition part
very well then 3 marks could have been awarded for that part. Similarly for the discussion of
the purchase price allocation, 3 marks could be awarded if discussed in detail. The total mark
would be limited to 4 marks.
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KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
The question was quite well answered with most candidates setting out the recognition
criteria for intangible assets and gaining good marks. However fewer candidates realised that
the purchase price should be allocated based upon the relative fair values. In general, the
question attracted marks above a pass mark.
Part (c)(i) of the question dealt with the recognition of payments for a gaming app on the
basis that they had been recognised as intangible assets in a previous period. It was not
appropriate to derecognise the intangible assets in this case, but instead Renshu Co should
have assessed whether the intangible assets were impaired in accordance with IAS 36
Impairment of Assets.
Part (c)(ii) dealt with the situation where the payments for apps had been accounted for as
intangible assets in previous periods but the accounting was being changed to derecognise
the assets and expense the payments. In this case, the amounts should be treated as prior
period errors. Candidates performed better when answering why the payments should be
recognised as intangible assets rather than why they should not have been recognised. There
was often some overlap in the answers as regards the recognition criteria and candidates were
given credit where this was relevant knowledge. Candidates often dealt incorrectly with the
prior period error. Overall, this part of the question was well answered. As in part (b), it was
safe to assume that in a short question such as this for 6 marks, that 3 marks will be awarded
for each part of the question. However, if candidates answered the first part very well then
4 marks could have been awarded for that part. Similarly for the discussion of part (c)(ii),
4 marks could be awarded if discussed in detail. The total mark would be limited to 6 marks.
26
AGENCY GROUP (SEP/DEC 2021)
Walk in the footsteps of a top tutor
Key answer tips
This is a typical SBR exam question 2 with some financial reporting knowledge and application
(foreign currency principles in group accounts, intangible assets and revenue recognition)
coupled with associated ethical issues.
Spend your time on each requirement in proportion to the marks allocated to it. Use most of
your allotted time on (a) (ii) the ethics requirement (6 marks plus 2 professional marks) and
least time on (a)(i) (3 marks).
(a)
(i)
Foreign exchange
Tutorial note
Identifying that the foreign currency gains are incorrectly treated (they should
be taken to other comprehensive income rather than the SPL) is the key learning
point here. Candidates should spot this issue fairly easily, and if not, must revise
the foreign currency consolidation principles as this is a fundamental concept.
The content regarding the disposal of the subsidiary and the subsequent
recycling out of OCI and into profit, whilst relevant, takes the discussion further
than most candidates would.
KA PL AN P U BLI SH IN G
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IAS 21 The Effects of Changes in Foreign Exchange Rates requires gains and
losses to be reclassified from equity to the statement of profit or loss (SPL) as a
reclassification adjustment. When a group has a foreign subsidiary, a group
exchange difference will arise on the re-translation of the subsidiary’s goodwill
and net assets. In accordance with IAS 21, such exchange differences are
recognised in other comprehensive income (OCI) and so accumulate in other
components of equity (OCE). On the disposal of the subsidiary, IAS 21 requires
that the net cumulative balance of group exchange differences be reclassified
from equity to the SOPL as a reclassification adjustment. Mr Raavi should not
have included the exchange gains arising on the re-translation of the foreign
subsidiary in the SOPL as it is currently only held for sale. When the subsidiary is
then sold, the gains accumulated in OCE may be reclassified to profit or loss.
(ii)
Ethics
Tutorial note
Do not think about the financial reporting requirements and the ethics issues as
mutually exclusive. Good answers will always strive to find the motivations for
any incorrect accounting treatments (in this case, within in (a)(i)) and link them
to potential ethical issues.
Be as specific as possible here. The requirement asks for the ethical issues caused
by Ms Malgun’s actions when managing Mr Raavi. Therefore, use the actual
names, roles and details provided within the scenario to demonstrate how the
actions of Ms Malgun cause ethical threats (e.g. Ms Malgun’s expertise, the
profit related payment received by Ms Malgun, Ms Malgun’s delegation to an
inexperienced Mr Raavi). Rote learned ethics answers do not score well,
application to the scenario does.
Although Mr Raavi is a student accountant, he is bound by the same ethical
codes as a qualified accountant. Mr Raavi is employed on the basis that either
he or Agency Co can choose to terminate his employment for no reason. Even
though the jurisdiction has laws which protect such employees from termination
due to discrimination, it can be argued that the ability to terminate employment
benefits the employer more than the employee. Thus, a primary issue is whether
this type of employment contract is fair to the employee and whether it can
result in unethical behaviour.
It can be argued that fear of termination acts as a motivation for Mr Raavi to act
unethically and that this type of employment has provided Mr Raavi with an
opportunity as he had struggled to be employed. It is arguable whether fear of
losing his job is an effective motivator for Mr Raavi. Also, allowing employees to
be arbitrarily dismissed amounts to treating them with very little respect. The
employer’s ability to terminate a contract without reason undermines Mr
Raavi’s potential to set and achieve goals for himself. Mr Raavi’s ability to
terminate employment without cause, on the other hand, has comparatively
little effect on the company’s ability to set and achieve its goals.
30 6
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Competitive markets are more likely to see unethical behaviour especially if
unethical behaviour benefits the organisation. Accountability can have a major
influence on ethical behaviour. People may behave unethically if they do not
have responsibility for their actions. Mr Raavi is only an ACCA student
accountant and therefore would not bear the ultimate responsibility for the
inaccurate accounting for foreign exchange gains. Ms Malgun obviously knew
that the accounting was inaccurate but because it benefited the company and
helped the performance targets, she was prepared to overlook it. Also, this can
be an unintended consequence of performance related pay as Ms Malgun is
partly remunerated through pay related to profit targets. However, in order to
preserve her position, she disciplined Mr Raavi after the financial statements
had been published, thus displaying a lack of integrity and professional values in
her dealings with Mr Raavi and stakeholders.
Ms Malgun should not have left the preparation of the year-end financial
statements to Mr Raavi as he is a student accountant and has only been with
the company for 3 months. She has significant experience and expertise in their
preparation. Work pressure can influence ethical behaviour. Difficult
performance goals and time pressure make unethical behaviour more likely.
When employees are under pressure, this not only affects their wellbeing and
motivation, but also their behaviour. Ms Malgun is an expert in IFRS Accounting
Standards and should have ensured that she allocated some time to assist
Mr Raavi in the preparation of the year-end financial statements. It is the
responsibility of both Ms Malgun and Mr Raavi to engage in fair and accurate
reporting with regard to the truthfulness of the data they provide as well as its
completeness. It is ethically important for accountants to present the financial
information in a way which is clear and honest.
Competition can influence unethical behaviour. Individuals are more inclined to
engage in unethical behaviour when their organisation is in competition with
other organisations or they have been given targets which have to be met. When
unethical behaviour leads to a gain for a company, managers choose less severe
disciplinary measures for their employees. Thus, although Ms Malgun knew of
the error in the financial statements, she only reprimanded Mr Raavi after the
financial statements had been published and even then, she then offered him a
full-time contract instead of his current temporary contract.
KA PL AN P U BLI SH IN G
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(b)
Sale of licence
Tutorial note
If this question considered the disposal of property, plant and equipment, most
candidates would identify that Agency would record a gain or loss on disposal (not
revenue). SBR will test similar situations for other, more complicated types of noncurrent asset (e.g. intangibles, financial assets). However, the result is no different to
that of the disposal of PPE – a gain or loss on disposal recorded in profit calculated as
proceeds less carrying amount.
The disposal of an intangible asset, as described in this scenario, will have the same
outcome. Do not let the complications described in the scenario (e.g. variable
consideration, development costs) prevent you from identifying this achievable
conclusion.
Agency Co had correctly capitalised development costs for Headon at a carrying
amount of $30 million. IAS 38 Intangible Assets states that an intangible asset, in this
case a proportion of the development costs, may be derecognised on disposal or when
no future economic benefits are expected from its use or disposal. The gain or loss
arising on derecognition is the difference between the net proceeds and the carrying
amount of the asset. Gains are not classified as revenue. The amount of gain or loss
arising from the derecognition will be affected by the determination of the transaction
price with reference to IFRS 15 Revenue from Contracts with Customers.
In assessing whether an entity’s promises to transfer goods or services to the customer
are separately identifiable, the objective of IFRS 15 is to determine whether the nature
of the promise is to transfer each of those goods or services individually or, instead, to
transfer a combined item.
Kokila Co can benefit from the licence without Agency Co’s manufacturing service
because there are other entities which can provide the manufacturing service.
Therefore, Agency Co’s promises to grant the licence and to provide the manufacturing
service are separately identifiable.
Tutorial note
As per IFRS 15, variable consideration will only be recorded if it is highly probable that
a significant reversal will not occur. Here, the reversal of the variable consideration can
only be refuted with confidence once the target of $35m sales has been met.
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AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
The consideration for the licence comprises the up-front payment of $15 million and a
variable consideration of $3 million. Initially, only the up-front payment will be
recognised as proceeds, which is used to calculate any gain or loss arising on the
disposal of the South American development costs. The variable consideration will be
recognised in SOPL when it occurs, i.e. when South American sales exceed $35 million.
The performance obligation needs to be satisfied before the payment is recognised.
Judgement is required to determine the portion of the carrying amount of the
intangible asset to derecognise, relative to the amount retained. Therefore, a gain is
recognised on disposal of the South American development costs of $9 million ($15m
– ($30m × 20%)).
(c)
Drug development
Tutorial note
Remember the PIRATE criteria! Development costs can only be capitalised if the project
is profitable, the company intends to use or sell the product, resources are available to
complete the project, the company has the ability to use or sell the product, the project
is technically feasible and the expenditure is identifiable.
Apply the rules to Agency’s development costs and make a conclusion on the
accounting treatment.
Development costs are capitalised as an intangible asset if certain criteria in IAS 38 are
met.
There is no definitive starting point for the capitalisation of internal development costs
and, therefore, Agency Co must use its judgement, based on the facts and
circumstances of each product. A strong indication that Agency Co has met all of the
IAS 38 criteria arises when regulatory approval is issued for the biosimilar drug as it
proves the technical feasibility of the asset. This is often the most difficult criterion to
demonstrate.
Another criterion to be met is that the asset should generate probable future
economic benefits and demonstrate the existence of a market, or the usefulness of
the asset if it is to be used internally. At present, this criterion has not been met as the
product is aimed at a small group of people who will only pay a notional amount if it is
an effective product.
In addition, regulatory approval has only been applied for, and there is a concern over
the limited market and revenue stream. Thus, the costs are unlikely to meet the
capitalisation criteria and all costs to date will be written off to profit or loss in the
operating section.
KA PL AN P U BLI SH IN G
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ACCA Marking scheme
(a)
(i)
(ii)
Discussion and appropriateness of the accounting policy
Application and discussion of ethical principles to scenario which
includes:
Employment contract
Accounting policy and profit related pay
Time pressures
Competition
Less severe discipline
(b)
Discussion of key principles of IFRS 15 and relate to scenario
Derecognition of intangible asset and IAS 38
Calculation of gain
(c)
Setting out principles for capitalisation
Application of principles to scenario
Professional marks
Total
Marks
3
6
–––
9
–––
2
2
1
–––
5
–––
1
3
–––
4
–––
2
–––
20
–––
Examiner’s comments
Requirement (a) was conveniently split into two parts, so providing a helpful guide as to how
long to spend on each aspect.
(a)(i) Three marks equates to just over five minutes, so your answer should be brief. On
disposal of the foreign subsidiary, the related net exchange differences are reclassified from
equity to the statement of profit or loss. So, had the subsidiary been disposed, the accounting
treatment would have been appropriate.
However, this was not a disposal – the subsidiary was reclassified as held for sale. Your
answer could have explained how the subsidiary should be accounted for under IFRS 5 Noncurrent Assets Held for Sale and Discontinued Operations and credit would be available for
this. However, given the brevity of the requirement, and the focus on the exchange
differences in the question, better (time-managed) answers explained that since no sale had
yet been made, transfer of the accumulated foreign exchange gains from the other
components of equity was not appropriate.
(a)(ii) This second requirement asks for a discussion of the ethical issues. Part (a)(ii) has a total
of eight marks (6 marks plus the two professional marks for the quality of your discussion).
A well planned answer that covers all the key areas and meets all the requirements is more
likely to gain both professional marks. A discussion of ethical issues will include the
identification of threats to impartiality, for example. You may want to begin by summarising
the key issues from the scenario, and then link these with concerns you may identify.
Note that these issues don’t just stem from what the finance director has done, but also the
pressures placed on the student, and the systemic pressures placed on the finance director
by the board. Remember that the requirement has six marks, so seven separate issues should
have a very good chance of gaining a high score.
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AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
(b) For five marks, this question offers candidates a lot to describe: principles of
derecognition under IAS 38 Intangible Assets, and principles of IFRS 15 Revenue from
Contracts with Customers. Good answers would cover each aspect of the question in turn,
leading to a short calculation of the gain on disposal of the development costs. Candidates
who misread the requirement described the accounting requirements for Kokila Co with
some answers describing lease accounting (wrongly assuming Agency Co retained control of
the entire rights).
(c) The scenario describes a number of situations which should be familiar to candidates from
their assumed knowledge of IAS 38 Intangible Assets. Candidates should be expected to apply
their knowledge of the recognition requirements relating to development costs to the
information provided in the scenario, and not merely list out the requirements. In this case
what is key to the treatment as research or development is whether regulatory approval of
the drug is achieved: without this, technical feasibility is not assured. Better answers
considered the effectiveness of the asset in generating future economic benefit where the
product is aimed at a small group of people who will only pay a notional amount. This last
point was overlooked by quite a few candidates.
27
BISMUTH (MAR/JUN 2021)
Walk in the footsteps of a top tutor
Key answer tips
This question includes some tricky, modern day accounting issues. However, do not get too
bogged down in the technical bits. State the rules, apply them to the scenario and move on.
In the question 2 style questions, you must get answers to the ethics part. There are 5 marks
each for the accounting issues but 8 marks plus 2 professional marks for the ethics section.
You must get answers to the ethics requirement to enable the marker to award the
professional marks.
(a)
Impairment testing of mines
Tutorial note
The important issue here is that an assessment as to whether the mines are impaired
occurs under IAS 36. You must compare the carrying amount to the recoverable amount
of the mines.
If you make a mistake (e.g. with the treatment of the decommissioning costs) it is still
possible to conclude that the mine is impaired. A description of the accounting
treatment of the impairment using your calculated figures will score subsequent OFR
(own figure rule) marks.
N.B. If you erroneously left the decommissioning costs out of both the carrying amount
and the recoverable amount, you will arrive at exactly the same impairment charge as
provided in the answer!
KA PL AN P U BLI SH IN G
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Most liabilities are ignored when calculating recoverable amounts in impairment
testing. However, certain liabilities, such as decommissioning liabilities, cannot be
separated from the related assets.
IAS 36 Impairment of Assets requires the carrying amount of a recognised liability to
be deducted from both the carrying amount of a cash generating unit (CGU) and the
amount determined using the value-in-use (VIU). The recoverable amount of the asset
should be determined using the VIU model in IAS 36.
The amount of the decommissioning provision is used to calculate the recoverable
amount by deducting it from the VIU amount. The recoverable amount is then
compared to the carrying amount of the CGU which should be adjusted to include the
decommissioning provision in accordance with IAS 37 Provisions, Contingent Liabilities
and Contingent Assets.
Cash flow projections should be based on reasonable and supportable assumptions,
the most recent budgets and forecasts, and extrapolation for periods beyond
budgeted projections. IAS 36 presumes that budgets and forecasts should not go
beyond five years; for periods after five years, extrapolation should be used from the
earlier budgets. In this case, the mines have a useful life of five years or less and,
therefore, the cash flow projections can be used in the impairment testing.
At 31 December 20X7
Present value of future cash inflows from the sale of components for re-use
Present value of future cash inflows from sale of mining output
Present value of future cash outflows from operating the mines
Carrying amount of decommissioning provision
Recoverable amount (NPV of cash flows)
Carrying amount of the mines
Carrying amount of decommissioning provision
Net carrying amount of mines
$m
20
203
(48)
(53)
––––
122
––––
200
(53)
––––
147
––––
The recoverable amount is less than the carrying amount and, hence, there is an
impairment charge of $25 million ($147 million – $122 million), which is recognised in
the operating section of the statement of profit or loss.
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KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
(b)
Class A and Class B shares
Tutorial note
Part (b) is particularly tricky and can take a while to decipher what is going on.
Remember, it is only worth 5 marks. A maximum of 9 minutes to think about and write
your answer. Therefore, keep your answer as simple as possible.
Answer the question – are Share A and Share B debt or equity? Use the definitions as
per financial liabilities or equity instruments to help structure your opinion (e.g. to be a
liability an obligation must exist so look for indications within the terms that suggest
an obligation is or is not present). Present an argument for A, present an argument for
B and quickly move on to the next requirement.
Do not think you must have an answer that uses exactly the same arguments as
provided here within the published answer. The marker knows this is technically
difficult and will reward candidates who show perseverance and the courage to provide
an argument either way.
IAS 32 Financial Instruments: Presentation states that a financial instrument is a
financial liability if it provides that, on settlement, the entity will deliver either:
(i)
cash or another financial asset, or
(ii)
its own shares whose value is determined to exceed substantially the value of
the cash or other financial asset.
Bismuth Co has discretion over whether ‘rewards’ are payable on class A shares and
class B shares. The rewards are essentially a dividend paid on the investment. This
would seem to indicate that both instruments should be classified as equity. The
Bitcoin can be readily converted into cash in Bismuth Co’s jurisdiction and therefore
can be treated in the same way as legal tender or cash (also known as fiat money).
The possibility of Bismuth Co listing on a stock exchange is a contingent settlement
provision. Bismuth Co is able to avoid listing shares on a stock exchange if it so chooses
but is unlikely to do so, as the listing is deemed to be highly probable. Thus, the class
A shares will be classified as a liability because the value of the share settlement of
1,000 class A instruments at 2 Bitcoin substantially exceeds that of the ‘cash’
settlement option of 1 Bitcoin for the same number of instruments and Bismuth Co is
implicitly obliged to redeem the instruments for a ‘cash’ amount of 1 Bitcoin.
If Bismuth Co fails to exercise its call option on the class B shares, it must transfer an
additional reward to the holder. An obligation must be established through the terms
and conditions of the financial instrument. Anything outside the contractual terms is
not relevant to the classification process in accordance with IAS 32. Therefore, the
potential failure to exercise the call option does not affect the classification of class B
shares as equity as there is no unavoidable contractual obligation to pay the reward or
to call the instrument. Also, if the call option is not exercised, the reward payable will
only constitute an increase in the dividend rate and not a redemption of the class B
shares. Hence the class B shares constitute equity shares.
KA PL AN P U BLI SH IN G
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(c)
Blockchain technology
Tutorial note
As always the ethics part has 2 professional marks associated with it, which makes it
even more important to get an answer to the scenario. If you do not attempt the
question, you cannot be awarded the professional marks.
The scenario here is very contemporary, focussing on issues arising from the
implementation of Blockchain technology. Do not let this distract you from the main
task of discussing the ethical issues. Candidates do not need a detailed understanding
of how the technologies work, but should appreciate how it may affect the accountants
involved. There are some very achievable ethical conundrums to consider here
regarding confidentiality, conflicts of interest and due competence and care.
The digital age and the problems it presents for accountants does seem to be a regular
occurrence within recent examinations (see the next question too).
Ms Pleasant is in a difficult position as regards information gained at a previous
employer. In general, she should respect the confidentiality of information acquired as
a result of professional and business relationships and, therefore, not disclose any such
information to third parties without proper and specific authority, unless there is a
legal or professional right or duty to disclose. In addition, she should not use the
information for her personal advantage. However, the situation will depend upon the
nature of the confidentiality agreement with her previous employer. This agreement
may have been made in order to protect commercially sensitive information and to
prevent her from sharing such information with Bismuth Co. However, if the
agreement is not clear or specific, then it will be left up to the ethical conscience of
Ms Pleasant as to whether she should disclose the information. The purpose of the
agreement is to prevent the disclosure of this type of sensitive information and the
chief accountant’s ethical conscience should prevail. In addition, the confidentiality
agreement may be legally binding.
Opportunities and challenges presented by technology, and new business models,
require an evolving level of digital literacy by accountants. Accountants should provide
relevant, decision-useful analysis to ensure that the right technological applications are
adopted in the best interests of the business. New business models present
opportunities for professional accountants to provide relevant advice on regulatory
matters. This development requires a growing set of competencies. These
competencies relate to, not only financial matters, but also social impact assessment,
environmental accounting or other non-financial capital valuation techniques.
Mr Fricklin is obviously not aware of the importance of the entity being environmentally
aware as he has told the chief accountant not to worry about ethically sourced material
data. Professional accountants need to expand their competency areas to include
digital and social awareness. The fundamental principle of professional competence
and due care requires that a professional accountant only undertake significant tasks
for which the professional accountant has, or can obtain, sufficient specific training or
experience. A professional accountant should not intentionally mislead an employer as
to the level of expertise or experience possessed such as is the case with Mr Fricklin
who has told the board that he has ‘in depth knowledge’ of the technology.
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Ms Pleasant is in a difficult position as regards the competence and sabotage of the
project by Mr Fricklin, as an act of ‘whistleblowing’ can cause a conflict of interest
between the personal, organisational and societal spheres. This conflict stems from
the way in which a whistle-blower is viewed. The chief accountant could be viewed as
someone sharing knowledge of misconduct for the benefit of others or as someone
who is acting ‘disloyal’ to their superior. Ms Pleasant will be torn between loyalty to
Mr Fricklin and her own moral commitment.
As long as her motivations are sound and she is confident in the system and her
knowledge, she should not hesitate to relay such information as she is helping to
create an environmentally aware project which will enhance the company’s business.
Tutorial note
The list of points raised here are not necessarily exhaustive. If you raise other ethical
issues which are reasonably justified by reference to specifics within the scenario, then
the may gain credit as well.
ACCA Marking scheme
(a)
–
–
Discussion and application of IAS 36 principles to scenario
Calculation of impairment
(b)
–
–
Discussion and application of IAS 32 principles to scenario
Contractual obligation discussion
(c)
Discussion of the following key ethical principles and application to the
scenario:
–
Confidentiality
–
Competence
–
Whistleblowing
Professional marks
Total
Marks
3
2
–––
5
–––
3
2
–––
5
–––
3
3
2
–––
8
–––
2
–––
20
–––
Examiner’s comments
(a) This part of the question was generally answered quite well, although many candidates
did not deduct the decommissioning provision from both the carrying amount and the
recoverable amount of the mines. Most candidates did identify that there was an impairment
loss often based upon inaccurate calculations. The own figure rule was used to assess the
acceptability of candidates’ conclusions.
However, there was little discussion of the acceptability of the use of the cash flow
projections in the impairment assessment.
KA PL AN P U BLI SH IN G
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(b) Many candidates discussed the issues but came to the wrong conclusion. This would
simply mean that no marks would be given for the incorrect conclusion but with marks for
sensible discussion still being available. This was an area were several candidates struggled.
Most candidates produced a definition of the financial liability and identified that
cryptocurrency could be treated as a ‘cash’ settlement. However, fewer candidates
recognised that the class A shares should be classified as a liability with the class B shares
being classified as equity. Marks were awarded for the application of the definitions of equity
and liability to the scenario on the basis of one mark per valid and well discussed point up to
a maximum of 5 marks.
(c) Generally, one mark is allocated for each well discussed point raised by candidates. If
candidates just listed ethical principles without application to the scenario, then a maximum
of two marks would have been given. Marks are allocated as a result of using the scenario to
demonstrate an understanding of the ethical issue. The actions required by the chief
accountant in the published answer were more subtle in this question and looked at the act
of whistleblowing and the issue surrounding such a process. However, if candidates discussed
actions such as seeking advice from a colleague or ACCA, then these were appropriate
answers and were awarded credit. Many candidates seem to think that accountants should
resign immediately if they meet an ethical dilemma. The professional marks were awarded
for a realistic discussion of the ethical issues set out in the scenario together with sensible
and appropriate actions. Most candidates identified the key ethical issues in this scenario and
achieved good marks, but fewer were able to suggest reasonable actions to resolve the
situation.
Also, some candidates simply cut and pasted large sections of the exhibit and then stated
’this is an ethical issue’. This action would attract no marks. Candidates have to be sensible
when using the cut and paste tool. Any examination would not reward a candidate for simply
repeating the question back to the examiner. If candidates wish to use the cut and paste tool,
then its use should be restricted to parts of a sentence that are relevant and they should add
their own comments, and in this question, appropriate actions. It is very easy for a marker to
recognise answers that have been cut and pasted.
28
CALIBRA (SEP/DEC 2020)
Walk in the footsteps of a top tutor
Key answer tips
It would be easy to get bogged down in the tricky accounting issues in part (a) and the
journals in part (b), but these two requirements are only worth 8 marks. Part (c) is worth
10 marks plus 2 professional marks – it is much easier to score well here, so leave yourself
plenty of time to attempt it thoroughly.
(a)
Revenue recognition
Control of the apartment block passes to the customer on completion. This is the point
at which revenue should be recognised. Calibra is therefore incorrect to recognise
revenue on receipt of payment.
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There is a two year delay between payment and the transfer of the underlying asset.
This means that, in accordance with IFRS 15 Revenue from Contracts with Customers,
these advanced payments contain a significant financing component. In such cases,
the revenue recognised should be the amount that the customer would have paid if
they had paid cash at the date the good was transferred – i.e. $9.55 million.
Tutorial note
Discuss the accounting treatment over the two year period – not just the initial entries
on receipt of the cash.
On receipt of the payment, Calibra Co should recognise a liability of $8.5 million. It
should subsequently accrue interest on this liability at 6% each year, which will
increase the carrying amount of the liability. After two years, the liability will have a
carrying amount of $9.55 million. When control of the apartment building is
transferred, the liability is derecognised, and revenue of $9.55 million recognised in
the statement of profit or loss.
Borrowing costs
Tutorial note
This topic would have surprised many students because it is rarely examined. SBR has
a big syllabus, but it is vital that you study it all.
IAS 23 Borrowing Costs states that borrowing costs that are directly attributable to the
acquisition, construction or production of a qualifying asset form part of the cost of
that asset. A qualifying asset is one that takes a long time to get ready for use.
Apartment buildings take two years to construct so are qualifying assets. Calibra Co’s
business model is construction and, therefore, the applicable borrowing costs should
be included in the cost of its inventory. Any other borrowing costs are recognised as
an expense.
(b)
Journal entries
Tutorial note
Many students struggle with journal entries, even though this is assumed knowledge
for SBR. Make sure that the debits and credits balance.
Below are the journals produced by the examining team. The scenario says that cash
received is posted to revenue, so your first journal might instead be:
Dr Revenue $8.5m
Cr Liability $8.5m
Removes the incorrect entry to revenue and records a liability.
KA PL AN P U BLI SH IN G
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Cash
Liability
Dr ($m)
8.5
Cr ($m)
8.5
Records liability on receipt of cash (1/1/X8)
Inventory
Liability
0.51
0.51
Interest accruing on liability to 31/12/X8 (6% × 8.5m) included in the costs of
inventory
Inventory
Liability
0.54
0.54
Interest accruing on liability to 31/12/X9 (6% × ($8.5m + $0.51m)) included in the
costs of inventory
Liability
Revenue
9.55
9.55
Revenue arising on sale of apartment block.
The balance on the contract liability at 31/12/X9 would be $9.55 million ($8.5m +
$0.51m + $0.54m). When control passes to the customer, Calibra Co derecognises the
liability and recognises revenue of $9.55 million.
(c)
Ethics
Tutorial note
This is an unusual scenario and you may not have heard about distributed ledgers
before. However, this does not mean that you can’t answer the question. All that is
required is knowledge of the ACCA ethical code and the ability to apply this.
ACCA’s model solution makes continuous reference to the scenario. Try and do the
same – it stops your answer becoming too generic and makes it more likely that you
will be awarded the two professional marks.
Make explicit reference to the principles in the ACCA ethical code that are under threat
– such as confidentiality and objectivity.
The chief accountant should not claim to have an understanding of distributed ledgers
if he only has a basic knowledge. He should have seen evidence of whether the
technology can be scaled up to the requirements of the directors before promising
that he can facilitate the move. Also, he must convince himself that the reliability of
the due diligence on the sale of property shares and that local regulations are complied
with. In order to maintain integrity, professional accountants must be honest about
whether they are comfortable with their knowledge of managing projects such as this.
The chief accountant should not manage the project if he has doubts as to his
knowledge as there may be significant issues as the project progresses. There may be
a need to engage specialist consultancy input from distributed ledger experts.
Similarly, the chief accountant should behave in a professional manner and determine
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AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
whether the data on the distributed ledger breaks any confidentiality principles. He
will need to consider the fact that local regulations may be violated and the
repercussions thereof. The technology allows resale of the shares in the property and
given the chief accountants worries over due diligence, illegal transfers of title
ownership could be costly and time consuming to resolve. The chief accountant must
also exercise independence of mind and not bow to political pressure from the board
even though it may be a high-profile project for the company. He should inform the
board of his reservations based upon his opinion and technical knowledge.
Tutorial note
The model answer written by ACCA is comprised of two large paragraphs. We would
recommend keeping your points separate with plenty of white space between each
one. This helps you keep track of how much you have written. It also makes the
marker’s job easier!
One of the main concerns for accounting professionals is the fear of losing objectivity
in their judgment due to pressures from clients, employers, or other stakeholders. This
occurrence would create a loss of professional identity for the person concerned.
Some individuals are more vulnerable to loss of objectivity than others. Young
accountants at the beginning of their career could be considered a vulnerable group,
as they may be more easily influenced due to a perceived lack of experience and
pressures from senior colleagues. The accountant has only just qualified and so might
be inexperienced to be in the position of chief accountant. In this case, he has created
a self-interest threat as the chief accountant has a personal interest in allowing Bodoni
Co to pay the reduced amount 1 month after the contract for the purchase of the
apartment block has been signed, as he wishes a good reference from the client when
he applies for the permanent position. The pressure of applying for this position has
inappropriately influenced his professional judgement and behaviour. Additionally,
there is a threat to the chief accountant’s objectivity which stems from a self-interest
threat from the fear of losing Bodoni Co as a client which in turn would affect the
accountant’s chances of securing his position on a permanent basis.
ACCA Marking scheme
Marks
(a)
(b)
(c)
Application of the following discussion to the scenario:
–
Revenue
–
Borrowing costs
Journal entries
Discussion and application of ethical principles to scenario
Professional marks
Total
KA PL AN P U BLI SH IN G
3
2
–––
5
–––
3
10
2
–––
20
–––
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Examiner’s comments
In part (a), a significant number of candidates outlined the option of recognition ‘over time’,
with some suggesting (incorrectly) that revenue can be recognised over the two-year period
using some systematic method. Some candidates repeated the journal entries in both part
(a) and part (b) which is wasting time. Make sure you read through all question requirements
to avoid this.
Most answers to part (b) were clear and gained full marks, although some answers neglected
to show the ultimate derecognition of the liability and recognition of revenue from the
contract.
Answers to part (c) were in general good and many candidates provided a clear identification
of the ethical issues and suggestions to resolve them. Conversely, a presentation of a “boiler
plate” list of ethical responsibilities did not meet the requirements and gained very few
marks, if any, unless applied to the two scenarios. Some candidates repeated too much
information from the question without adding any new insights or concerns, which limited
scope for marks. Overall, it is pleasing to see most answers identifying the threats and
recommending appropriate actions to mitigate these and maintain ethical standards.
29
BAGSHOT (MAR 2020)
Walk in the footsteps of a top tutor
Key answer tips
The accounting issues tested this question are not technically demanding: provisions and
related party transactions. Part (b) on ethics concentrates on a different issue than most
recent SBR exams: confidentiality. Make sure that you are confident applying the ACCA Code
of Ethics and Conduct to any situation that an accountant may face.
(a)
(i)
Restructuring
Tutorial note
State the criteria that must be satisfied for a provision to be recognised.
A provision for restructuring costs should only be recognised in the financial
statements of Bagshot Co where all of the following criteria are met:
•
A reliable estimate can be made of the amount of the obligation
•
It is probable that an outflow of resources embodying economic benefits
will be required to settle the obligation
•
There is a present obligation as a result of a past event.
IAS 37 Provisions, Contingent Liabilities and Contingent Assets states that it
would be extremely rare that no reliable estimate can be made.
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Tutorial note
The principles governing the measurement of provisions are also relevant here.
A best estimate of the expenditure required to settle the present obligation
should be provided as at 31 December 20X5 should all criteria be met. In the
case of a restructuring provision, this should only include direct expenditure
arising from the restructuring and not associated with ongoing activities. Hence
the relocation costs would not be included as, although they relate directly to
the restructuring, the costs would be classified as an ongoing activity.
Tutorial note
Apply the principles from the accounting standard to the scenario. Is there an
obligation from a past event? Is payment probable?
It is not clear yet that restructuring payments are probable. Mrs Dawes has
indicated that alternative strategies are possible and further clarification is
required. Only then may it be determined that such restructuring payments are
probable.
Tutorial note
Obligations can be legal or constructive. A constructive obligation arises when
an entity’s past behaviour creates expectations about its behaviour in the future.
A constructive obligation for restructuring only arises where a detailed formal
plan exists and a valid expectation to those affected by the restructuring that it
will take place has occurred. A plan is in place but management does not yet
appear committed as alternative strategies are possible. It is unlikely therefore
that the plan is detailed and specific enough for these criteria to be satisfied. For
example, the specific expenditure to be incurred, the date of its implementation
and timeframe which should not be unreasonably long must be identified. With
alternative strategies available, this does not appear to be the case.
Furthermore, Mr Shaw is the only member of staff who has been notified and
no public announcement has been made as at the reporting date. Consequently,
there is no obligation in existence as at 31 December 20X5 and no provision can
be recognised.
KA PL AN P U BLI SH IN G
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Mrs Dawes has identified that a final decision on the restructuring and
communication is likely to take place before the financial statements are
authorised. This would almost certainly be a material event arising after the
reporting date but should be treated as non-adjusting. Accordingly, Bagshot Co
should disclose the nature of the restructuring and an estimate of its financial
effect but recognition of a restructuring provision is still prohibited.
(ii)
Stewardship
Tutorial note
Stewardship is an important principle. According to the Conceptual Framework,
one of the main purposes of financial reporting is to enable user groups to assess
management’s stewardship of an entity’s resources.
Stewardship is an ethical principle which embodies the responsible planning and
management of resources. The directors of Bagshot Co perform a stewardship
role in that they are appointed by the shareholders to manage Bagshot Co on
their behalf. The directors therefore assume responsibilities to protect the
entity’s resources from unfavourable effects of economic factors such as price
and technological changes and to ensure that Bagshot Co complies with all laws,
regulations and contractual obligations. Group results have been disappointing
in recent years although no specific causes have been identified. It could be
argued, therefore, that the restructure is acting in good faith and reflecting good
principles of stewardship. It is anticipated that long-term shareholder value will
be enhanced from the proposals.
Tutorial note
The effectiveness of stewardship can only be assessed if an entity’s financial
statements faithfully represent its performance, position and cash flows.
A second factor of good stewardship is that it is important that investors, both
existing and potential, and lenders have reliable and accurate information about
the entity’s resources so that they can assess how efficiently and effectively the
entity’s management and governing board have discharged their
responsibilities. It is important therefore that the financial statements are
transparent, objective and comply fully with IFRS Accounting Standards.
Mrs Dawes wants Bagshot Co to include a restructuring provision as at
31 December 20X5 even though no obligation arises. Whilst prudence is a
guiding principle when dealing with issues of uncertainty, excessive prudence
cannot be justified. As a qualified member of ACCA, it should be apparent to
Mrs Dawes that no provision should be recognised and to include one would be
misleading to the stakeholders of Bagshot Co.
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AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
(iii)
Related parties
Mrs Shaw’s acquisition of the equity shares in Bagshot Co would be deemed a
related party transaction if the acquisition enabled her to control or have
significant influence over Bagshot Co.
Tutorial note
Control is assumed when an investor owns more than 50% of the voting rights of
the investee. Significant influence is assumed if the holding is between 20% and
50%.
A person is a related party of an entity that they control or have significant
influence over. Mrs Shaw has a 5% interest, which is way below the threshold to
exercise control. Mrs Shaw has a holding of less than 20% of the voting power
so it is very unlikely that she has significant influence over the entity.
Bagshot Co’s directors would be related parties of Bagshot Co. However Mrs Shaw
is unaware of the proposed restructure which suggests that she does not have
a board position.
Mrs Shaw would be deemed to be a close family member of Mr Shaw and so
would be a related party of Bagshot Co if it was concluded that Mr Shaw is a
member of key management personnel of Bagshot Co.
Tutorial note
Close family includes children, spouses or domestic partners.
Mr Shaw is the head accountant of Bagshot Co but it seems highly unlikely that
he would be deemed to be key management personnel. There is no evidence
that he has authority or responsibility for planning, directing and controlling the
activities of Bagshot Co. Nor does he appear to be a director of the entity.
Tutorial note
Make sure that you reach an explicit conclusion.
Based on the above, it can be concluded that Mrs Shaw’s acquisition of the 5%
of the equity in Bagshot Co is not a related party transaction.
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(b)
Ethics
Tutorial note
Explain which principles in the Code of Ethics have been breached – such as objectivity,
integrity and confidentiality.
Mr Shaw is facing a number of ethical dilemmas arising from the scenario. Mrs Dawes’s
insistence that a restructuring provision should be included could constitute an
intimidation threat to objectivity, although her motivation for including the provision
early is unclear. Mr Shaw is also a qualified member of ACCA and therefore should be
aware that the treatment is inconsistent with international accounting standards.
Mr Shaw must adhere to the ACCA Code of Ethics and prepare financial statements
diligently which are objective and fully comply with IFRS Accounting Standards. He
must not comply with Mrs Dawes’s requests and should politely remind her of her
professional responsibilities as a member of ACCA. Non-compliance with accounting
standards would be a breach of a range of ethical principles including professional
competence, professional behaviour and objectivity. Assuming that Mrs Dawes is
aware of the error, her integrity would also be questionable.
Tutorial note
Insider trading is an important issue in real life, although it has not been regularly
examined in SBR.
Mr Shaw could be accused of insider trading were he to inform his wife of the proposed
restructure. Insider trading involves the use of non-publicised information in order to
make decisions on financial investments based on the information which others do not
yet know about. It is clear that such behaviour would not be ethical since Mrs Shaw
would be in an advantageous position to make investment decisions which could
impact unfairly on the other shareholders. Insider traders have information which
others do not have such that the other stakeholders may act differently and make
different decisions should they have been privy to the same information. Such
activities are seen as fraudulent and are likely to be in breach of local money
laundering regulations.
Tutorial note
Clearly recommend actions to be taken. They can be very simple – e.g. do not disclose
the confidential information.
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Mr Shaw has become privy to confidential information regarding Bagshot Co. One of
ACCA’s key ethical principles is that of confidentiality. Information must not be
disclosed to others unless there is a legal or professional right or duty to disclose.
Professional accountants must also ensure that they do not use confidential
information for their own personal benefit. Mr Shaw has self-interest threats arising
both from his wife’s ownership of the shares and from his nephew facing potential
redundancy. His wife could use the information to consider whether she may wish to
sell her 5% ownership interest. Mr Shaw may also feel pressure to inform his nephew
of the potential redundancy he may be facing. This may allow his nephew to obtain an
unfair advantage over fellow employees by, for example, examining other
opportunities in the labour market. Mr Shaw must not disclose the confidential
information to his wife or his nephew.
ACCA Marking scheme
(a)
(b)
(i)
Discussion of IAS 37 criteria and restructuring
Application of above to scenario
Identification of non-adjusting event
(ii)
What is meant by good stewardship
Examples of good stewardship
(iii)
Control/significant influence criteria
Recognition of close family member
Intimidation threat
Insider trading
Confidentiality
Professional marks
Total
Marks
3
2
1
–––
6
–––
2
2
–––
4
–––
2
1
–––
3
–––
1
2
2
–––
5
–––
2
–––
20
–––
Examiner’s comments
Despite there being 6 marks available for answering part (a) (i), many answers were the same
length as for (a) (iii) despite the latter having only 3 marks. Answers to part (a) (ii) were rather
weak; many candidates overlooked the ‘knowledge’ aspect of explaining what constitutes a
related party; most answers did not consider the relevance of the proportion of shares held.
Such answers jumped straight to considering the position held by Mr Shaw and assumed that
he was in a position of key management (despite not being a director). Many answers gave
the wrong conclusion as a result. Answers to part (b) were generally good, with a clear
identification of the ethical issues and suggestions to resolve them (which in this case
includes simply maintaining confidentiality).
KA PL AN P U BLI SH IN G
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30
STENT (SEP/DEC 2019)
Walk in the footsteps of a top tutor
Key answer tips
Your discussion of the three accounting issues can only score you 11 marks. Make sure that
you manage your time carefully. Your answers should be much briefer than the model answer
below. Don’t forget to comment on the gearing impact – this will earn you three quick marks.
Easy marks can be obtained in ethics questions for discussing the actions that the
accountants in the scenario should take.
(a)
Cash advance
Tutorial note
Directors are members of key management personnel and therefore are related parties
of the reporting entity.
IAS 24 Related Party Disclosures requires an entity’s financial statements to contain
disclosures necessary to draw attention to the possibility that its financial statements
may have been affected by the existence of related parties and by transactions and
outstanding balances with such parties.
The finance director of Stent Co is a related party of Stent Co. The finance director
controls Budster Co and therefore Stent Co and Budster Co are related parties of one
another. As such, Stent Co must disclose the nature of the related party relationship
with Budster Co as well as information about all transactions and outstanding balances
between Stent Co and Budster Co.
According to the Conceptual Framework, the advance from Budster Co is a liability:
Stent Co has a present obligation (legally enforceable as a consequence of a binding
contract), the settlement of which involves Stent Co giving up resources embodying
economic benefits in order to satisfy the claim.
Tutorial note
Bar some exceptions, IFRS Accounting Standards do not permit offsetting.
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Except when it reflects the substance of the transaction or other event, offsetting
detracts from the ability of users to understand the entity’s transactions and to assess
the entity’s future cash flows. IFRS 18 Presentation and Disclosure in Financial
Statements states that an entity shall not offset assets and liabilities, unless required
or permitted by an IFRS Accounting Standard. Offsetting a financial asset and a
financial liability is permitted according to IAS 32 Financial Instruments: Presentation
when, and only when, an entity has a legally enforceable right to set off the recognised
amounts and intends either to settle on a net basis, or to realise the asset and settle
the liability simultaneously. No such agreement is evident in this case, so Stent Co
should report the receivables and the advance separately.
If the error was not corrected, Stent Co would be showing a lower current asset figure
and concealing the liability. If disclosed as a current liability it might be included in the
debt element of the gearing calculation, thus increasing gearing.
Convertible redeemable preference shares
Tutorial note
Memorise the definitions of financial assets, financial liabilities and equity. The
classification of financial instruments is a popular exam topic.
IAS 32 defines an equity instrument as any contract which evidences a residual interest
in the assets of an entity after deducting all of its liabilities. An equity instrument has
no contractual obligation to deliver cash or another financial asset, or to exchange
financial assets or financial liabilities under potentially unfavourable conditions. If
settled by the issuer’s own equity instruments, an equity instrument has no
contractual obligation to deliver a variable number of shares.
A critical feature in differentiating a financial liability from an equity instrument is the
existence of a contractual obligation of the issuer either to deliver cash or another
financial asset to the holder, or to exchange financial assets or financial liabilities with
the holder, under conditions which are potentially unfavourable to the issuer.
The preference shares offer the holder the choice of conversion into ordinary shares
as well as redemption in two years’ time. Stent should separately recognise a financial
liability (a contractual arrangement to deliver cash or another financial asset) and an
equity instrument (a call option granting the holder the right, for a specified period of
time, to convert it into a fixed number of ordinary shares of the entity).
Tutorial note
Don’t just tell the examiner that the instrument should be split into liability and equity
components. Explain how these components are measured.
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Stent Co would measure the fair value of the consideration in respect of the liability
component based on the fair value of a similar liability without any associated equity
conversion option. The equity component is assigned the residual amount.
Tutorial note
Remember to comment on gearing. The gearing ratio will deteriorate if liabilities
increase.
Correction of the error would increase non-current debt (the present value of the
future obligations) and decrease equity. This will increase gearing.
Deferred tax asset
Tutorial note
Recognition of a deferred tax asset in respect of unused tax losses is a common exam
topic. Make sure that you memorise the key principle below.
In accordance with IAS 12 Income Taxes, a deferred tax asset shall be recognised for
the carry-forward of unused tax losses to the extent that it is probable that future
taxable profit will be available against which the unused tax losses can be utilised.
However, the existence of unused tax losses is strong evidence that future taxable
profit may not be available. Therefore, when an entity has a history of recent losses,
the entity recognises a deferred tax asset arising from unused tax losses only to the
extent that it has convincing evidence that sufficient taxable profit will be available
against which the unused tax losses can be utilised. In such circumstances, the amount
of the deferred tax asset and the nature of the evidence supporting its recognition
must be disclosed.
The directors of Stent Co should consider whether it is probable that Stent Co will have
taxable profits before the unused tax losses or unused tax credits expire, whether the
unused tax losses result from identifiable causes which are unlikely to recur, and
whether tax planning opportunities are available to the entity which will create taxable
profit in the period in which the unused tax losses or unused tax credits can be utilised.
To the extent that it is not probable that taxable profit will be available against which
the unused tax losses or unused tax credits can be utilised, the deferred tax asset
should not be recognised.
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AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Tutorial note
Don’t forget gearing. The carrying amount of equity equals the carrying amount of net
assets – so a reduction in assets causes a corresponding reduction in equity, meaning
that the gearing ratio will deteriorate.
The removal of a deferred tax asset would reduce net assets and, therefore, equity.
Gearing would increase.
(b)
Ethical aspects
Tutorial note
Do not attempt the ethics requirement first. If you work through and understand the
accounting errors made then you will have more specific comments to make about
ethics in part (b). This will improve the quality of your answer and also make it more
likely that you will receive the professional marks available.
The ACCA Rulebook contains the bye-laws, regulations and Code of Ethics and Conduct,
which every ACCA member should follow. The accountant may feel pressured by the
finance director’s comments on job security given the accountant has only been in her
position for a few months. The accountant should comply with the fundamental ethical
principles set out in the ACCA Rulebook: to act with integrity, objectivity, professional
competence and due care, confidentiality and professional behaviour. The accountant
should be mindful of any threats to these fundamental ethical principles. In doing so,
the accountant should consider the relevant facts, the ethical issues involved, the
fundamental principles which are threatened, whether internal procedures exist which
mitigate the threats, and what alternative courses of action could be taken.
Tutorial note
Comment on the ethical principles that are threatened in the scenario and explain why
this is the case.
In this case, all fundamental ethical principles with the exception of confidentiality
appear under threat. The finance director appears to be allowing bias and undue
influence from the pressures imposed by debt covenant gearing and overdraft limits
into the choice of accounting treatment, rather than following accounting standards.
The company is in a precarious position, reporting losses in the year. The finance
director should act professionally, in accordance with applicable technical and
professional standards, comply with relevant laws and regulations, and avoid any
action which discredits the profession.
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The accountant faces an intimidation threat to objectivity given the comments from
the finance director, who presumably has an influence over career prospects.
Assuming the accountant wishes to keep her job, this intimidation threat also gives
rise to a self-interest threat to objectivity.
Tutorial note
What should the accountant do now?
Before acting, the accountant should speak with the finance director, try to confirm
the facts, and discuss the treatment with the finance director and explain the risks of
non-compliance. A record of conversations and actions should be kept. Stent Co may
also have internal procedures which mitigate the threats. It may be that the finance
director is not technically up-to-date, in which case a safeguard would be to undergo
continuing professional development. If the finance director refuses to comply with
accounting standards, then it would be appropriate to discuss the matter with other
directors or an audit committee (if applicable), to seek a solution, then seek
professional advice from ACCA, and consider legal advice if necessary. A final
consideration for the accountant, if matters cannot be satisfactorily resolved, would
be resignation.
Tutorial note
Resignation is often a last resort!
ACCA Marking scheme
Marks
(a)
(b)
–
–
–
application of the following discussion to the scenario:
cash advance from related party
preference shares: convertible
deferred tax asset
discussion of ethical principles
application of ethical principles to the scenario, and recommended
action
Professional marks
Total
33 0
4
4
3
–––
11
–––
2
5
–––
7
–––
2
–––
20
–––
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Examiner’s comments
A surprising number of candidates failed to comment on the impact of gearing; otherwise
however, answers to part (a) were good. Most candidates identified the accounting errors in
the described scenario; although in some cases failed to identify the need for a related party
disclosure. Candidates’ explanation for the accounting treatment of convertible preference
shares often lacked application to the scenario.
Marks were divided between identification of ethical issues and actions that the accountant
should take to resolve the issues. Answers were generally good, with a clear identification of
the ethical issues and suggestions to resolve them. However candidates that combined both
parts (a) and (b) tended to repeat themselves; and some answers to part (b) were segmented
on the basis of the accounting issues, which again lead to repetition, since the ethical issues
in most cases related to all of the three accounting issues. Despite these issues, the question
was very well-answered in general.
31
HUDSON (MAR/JUN 2019)
Walk in the footsteps of a top tutor
Key answer tips
Question 2 in the SBR exam requires students to discuss the accounting and ethical
implications of particular transactions. Pay careful attention to the mark allocation because
these are lower in question 2 than in other parts of the paper. For instance, part (b) is only
worth 5 marks and so you only need to write five separate points. It would be easy to write
too much here and therefore waste time.
Remember that your answer to part (c) must be specific to the scenario. Comment on the
particular errors made by Hudson, the specific ethical principles breached, and the actions
that should be taken. If you do this then you will be awarded 2 professional marks.
(a)
Settlement costs
Tutorial note
On first read through this question seems quite tricky. However, there are easy marks
if you adopt a logical approach. Begin your answer by describing the nature of a
remeasurement component.
According to IAS 19 Employee Benefits, the remeasurement component is presented
in other comprehensive income. It comprises:
•
Actuarial gains and losses
•
Returns on plan assets not included in the net interest component
•
Changes in the asset ceiling not included within the net interest calculation.
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Actuarial gains and losses result from differences between actuarial assumptions and
what actually occurred during the period. These will arise in instances such as
unexpected movements on interest rates, unexpectedly high or low rates of employee
turnover or unexpected increases or decreases in wage growth.
The effects of the redundancy exercise are not part of the remeasurement component.
A redundancy exercise is an example of a curtailment because it significantly reduces
the number of employees covered by the plan. Per IAS 19, the present value of the
change in the defined benefit obligation as a result of a curtailment is a past service
cost and should be recognised in profit or loss in the operating section.
Tutorial note
Make sure that you discuss both the basic enhancement and the additional
enhancement.
The basic enhancement is an obligation that Hudson must pay as compensation for
terminating the employee’s services regardless of when the employee leaves the
entity. IAS 19 Employee Benefits requires such payments to be recognised at the earlier
of when the plan of termination is announced and when the entity recognises the
associated restructuring costs associated with the closure of Wye. Hudson should
therefore have provided in full for the cost of the basic settlement regardless of
whether the staff have left or not. This should be recognised as part of the past service
cost in the operating section of the statement of profit or loss of Hudson for the year
ended 31 December 20X2.
The additional pension enhancement is only received by employees who complete
service up to the closure of division Wye. In effect, the enhancement is in exchange for
the period of service until redundancy. Hudson should estimate the number of
employees who will remain with Hudson until the closure of Wye and spread the
estimated total cost over the period of service. This should be included within the
current service cost, thus having an adverse effect on the profit or loss in both 20X2
and 20X3.
Redundancy costs
As set out in IAS 37 Provisions, Contingent Liabilities and Contingent Assets, an
‘obligating event’ must have arisen before a provision can be recognised. With regards
to restructuring, a present obligation from a past event arises if:
•
a detailed formal plan for the restructuring is in place, and
•
a valid expectation has been created in those affected that the restructuring will
be carried out, either by starting to implement the plan or publicly announcing
its main features.
Tutorial note
Apply the criteria in IAS 37 to Hudson.
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AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
In the case of Hudson, a valid expectation has been created because the restructuring
has been announced, the redundancies have been confirmed and the directors have
approved the restructuring in a formal directors’ meeting. A restructuring provision
should therefore be recognised.
Tutorial note
Many students will simply discuss whether a provision should be recognised, and omit
any reference to how the provision should be measured.
IAS 37 specifies that only the direct expenditure which is necessary as a result of
restructuring can be included in the restructuring provision. This includes costs of
making employees redundant and the costs of terminating certain contracts. However,
the provision cannot include the costs of retraining or relocating staff, marketing or
investment in new systems and distribution networks, because these costs relate to
future operations.
(b)
Deferred tax
Tutorial note
State the principles from IAS 12 with respect to the recognition of a deferred tax asset
for unused tax losses. The question is only worth five marks – you would not be
expected to reproduce the content below.
IAS 12 Income Taxes says that a deferred tax asset shall be recognised for the carry
forward of unused tax losses and unused tax credits to the extent that it is probable
that future taxable profit will be available against which the unused tax losses and
unused tax credits can be utilised. However, the existence of unused tax losses is
strong evidence that future taxable profit may not be available. Therefore, when an
entity has a history of recent losses, the entity recognises a deferred tax asset arising
from unused tax losses or tax credits only to the extent that the entity has sufficient
taxable temporary differences or there is convincing other evidence that sufficient
taxable profit will be available against which the unused tax losses or unused tax
credits can be utilised by the entity.
Tutorial note
Use the information from the scenario to explain whether it is probable that Hudson
will make taxable profits before its tax allowable losses expire.
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Hudson operates under a tax jurisdiction which only allows losses to be carried forward
for two years. The maximum total losses that can be utilised are therefore equal to
total unused losses for 20X1 and 20X2. Losses incurred before 20X1 can no longer be
carried forward and so no deferred tax asset should be recognised in respect of them.
The directors of Hudson should base their forecast of future profitability on reasonable
and supportable assumptions. There appears to be evidence that this is not the case.
Hudson has a recent history of trading losses and there is little evidence that there will
be an improvement in trading results within the next couple of years. The market is
depressed and sales orders for the first quarter of 20X3 are below levels in any of the
previous five years. It is also likely that Hudson will incur various costs in relation to
the restructuring which would increase losses into 20X3 and possibly 20X4. Only
directly attributable expenses such as redundancies should be included within a
provision and expensed in 20X2 which would increase the current year loss. On-going
expenses may be incurred such as retraining and relocating costs but these should only
be expensed from 20X3. The forecast profitability for 20X3 and subsequent growth
rate therefore appear to be unrealistically optimistic.
Tutorial note
Reach an explicit conclusion about whether a deferred tax asset can be recognised.
Given that losses can only be carried forward for a maximum of two years, it is unlikely
that any deferred tax asset should be recognised.
(c)
Ethics
Tutorial note
Your answer must be specific to Hudson. Discuss particular issues in the scenario that
increase the likelihood of financial statement manipulation (e.g. performance related
bonuses).
Directors have an ethical responsibility to produce financial statements which are a
faithful representation of the entity’s transactions. The directors of Hudson are paid a
bonus based upon earnings before interest, tax depreciation and amortisation
(EBITDA) and so a self-interest threat to objectivity arises. The directors have an
incentive to manipulate the financial statements in order to try to minimise the losses
and maximise profits. Similarly the directors have an incentive to maximise assets and
minimise liabilities so that Hudson complies with its debt covenants.
Tutorial note
Discuss the particular errors made by Hudson – such as the treatment of the pension
enhancements, the restructuring provision, and the deferred tax asset.
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AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
There is evidence that the directors are willing to manipulate the financial statements
in a way directly contrary to the ethical principles of integrity and objectivity. The
expenses arising from the basic and additional pension enhancements should be
recorded in profit or loss but the directors wish to recognise this within other
comprehensive income despite knowing that it is contrary to IFRS Accounting
Standards. This would improve profitability.
The directors also have not recognised a restructuring provision despite the terms
being communicated to staff. As a result, profit and net assets are overstated. This may
make it more likely that the bonus target is met and that the debt covenants are not
breached. It is possible that restructuring would be treated as an exceptional cost in
profit or loss and may therefore not impact the bonus. It would therefore be useful to
examine the precise terms of the contracts in order to assess the potential impact on
the bonus.
The deferred tax asset is based upon forecasts for too long a period and is also based
on unrealistic assumptions. Net assets will be overstated, helping Hudson to meet its
debt covenant obligations.
The directors’ explanation for their proposed treatments are not justified. Directors
are appointed to run the business on behalf of the company’s shareholders who are
the primary stakeholder. It will be in the shareholders’ interests for the company to be
profitable and to maintain net assets within the debt covenant stipulations. However,
this should not be at the expense of the credibility and transparency of the financial
statements. Deliberate manipulation of financial statements will reduce stakeholders’
confidence in the reliability of the financial statements and the accountancy profession
as a whole.
Tutorial note
Discuss the specific ethical principles that the directors are contravening. Do not simply
list all of the ethical principles in the ACCA Code of Ethics and Conduct.
The directors’ actions with regard to the accountant are contrary to the ethical
principles of professional behaviour. It appears that the directors have put the
accountant under undue pressure to falsify the financial statements to meet their own
needs. An intimidation threat to objectivity arises from the directors’ implying that the
accountant would lose their job should they not comply with the directors’
instructions.
Tutorial note
State the actions needed to resolve the above.
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The accountant would also be bound by the ACCA Code of Ethics and Conduct and must
adhere to the same ethical principles. They must not therefore comply with the
directors’ instructions and should instead remind the directors of their obligations to
comply with this code. Should the accountant feel unable to approach the directors
directly, they could consider talking to those charged with governance and, in
particular, non-executive directors to explain the situation. The accountant could also
seek help from the ACCA ethical helpline and take legal advice. Ultimately, if the
situation cannot be resolved, the accountant could consider resigning and seeking
employment elsewhere.
ACCA Marking scheme
Marks
(a)
–
–
application of the following discussion to the scenario:
what should be included in the remeasurement component
correct treatment of the basic enhancement
correct treatment of the additional pension enhancement
discussion of restructuring costs
Maximum
(b)
–
–
an explanation of IAS 12 principles
application of above discussion to the scenario
Maximum
(c)
–
–
application of the following discussion of accounting issues to the
scenario:
termination payments
tax losses
consideration of the ethical implications and their resolution
Maximum
Professional marks
Total
2
2
2
2
–––
8
–––
2
3
–––
5
–––
2
1
2
–––
5
–––
2
–––
20
–––
Examiner’s comments
Better answers apply ethical principles to the scenario. Indeed, it was pleasing to see fewer
answers merely ‘listing out’ rote-learned ethical requirements in this sitting. Most candidates
identified that there was a second requirement to outline the implications for the accountant
and many answers included suggestions for how the accountant might resolve the ethical
issue.
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AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
32
FISKERTON (DEC 2018)
Walk in the footsteps of a top tutor
Key answer tips
Read the question properly. Part (a) has three requirements: discuss the accounting
treatment of the building, explain the impact on the financial statements, and explain the
impact on debt covenants. You will miss out on valuable marks if you only discuss the correct
accounting treatment.
Part (b) tests revenue recognition. To answer this you need to know the criteria for when
revenue is recognised over time.
Nearly half of the available marks in this question are allocated tor ethics (part (c)). Do not
neglect this. Make sure that your answer details with the specific accounting issues in the
question, and the specific ethical principles that have been breached.
(a)
Accounting treatment
According to IFRS 16 Leases, the lease is a finance lease. This is because the lease term
is equal to the useful life and its residual value is deemed to be minimal. As such, the
property should not be held as an investment property but instead derecognised. The
fair value gain of $8 million must be reversed. Fiskerton should record a lease
receivable equal to the net investment in the lease.
Tutorial note
If the lease was an operating lease then the property should have been presented as
an investment property. Rental income would be recognised in profit or loss in the
investing section on a straight line basis.
Note that the fair value gains were incorrectly calculated since adjustments should
have been made for the differences between the Halam building and the one sold due
to the different location and quality of the materials between the two buildings.
Tutorial note
IFRS 13 Fair Value Measurement states that fair value is the price received when an
asset is sold in an orderly transaction between market participants at the measurement
date. When deciding on a sale/purchase price, participants would factor in the
condition and location of an asset and any restrictions on its use.
A more accurate reflection of fair value would have been $22 million.
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Impact on financial statements
Tutorial note
Easy marks are available for recalculating the gearing ratio.
The incorrect treatment has enabled Fiskerton to remain within its debt covenant
limits. Gearing per the financial extracts is currently around 49.8% (50/(10 + 20.151 +
70.253)). Fair value gains on investment properties are reported within profit or loss.
Retained earnings would consequently be restated to $62.253 million ($70.253m –
$8m). Gearing would subsequently become 54.1% (50/10 + 20.151 + 62.253).
Furthermore, retained earnings would be further reduced by correcting for rental
receipts. These presumably have been included in profit or loss rather than deducted
from the net investment in the lease. This would in part be offset by interest income
which should be recorded in profit or loss at the effective rate of interest.
After correcting for these errors, Fiskerton would be in breach of its debt covenants.
They have a negative cash balance and would appear unlikely to be able to repay the
loan. Serious consideration should therefore be given as to whether Fiskerton is a
going concern. If it is determined that Fiskerton is not a going concern then noncurrent assets and non-current liabilities should be reclassified to current and recorded
at their realisable values.
Tutorial note
According to IAS 8 Basis of Preparation of Financial Statements, going concern
uncertainties must be disclosed in the financial statements.
If Fiskerton can renegotiate with the bank then the uncertainties surrounding their
ability to continue to trade must be disclosed.
(b)
Revenue
Tutorial note
Do not simply recite the five steps of the revenue recognition model. A lot of this is
irrelevant to answering the question. The requirement asks you about the timing of
revenue recognition – so only the fifth step is relevant.
Make sure that you know the criteria for recognising revenue over time.
According to IFRS 15 Revenue from Contracts with Customers, at the inception of the
contract, Fiskerton must determine whether its promise to construct the asset is a
performance obligation satisfied over time.
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During the production of the asset Fiskerton only has rights to the initial deposit and
has no enforceable rights to the remaining balance as construction takes place.
Therefore Fiskerton would not be able to receive payment for work performed to date.
As such, revenue should not be recognised over time but at the point in time when
control passes to the customer (most likely on delivery of the asset to the customer).
(c)
Ethics
It is concerning that the property has been incorrectly classified as an investment
property. Accountants have an ethical duty to be professionally competent and act
with due care and attention. It is fundamental that the financial statements comply
with the accounting standards and principles which underpin them. This may be a
genuine mistake but even so would not be one expected from a professionally
qualified accountant. The financial statements must comply with the fair presentation
principles embedded within IAS 8 Basis of Preparation of Financial Statements.
Tutorial note
Outline the specific ethical principles that have been breached.
The managing director appears to be happy to manipulate the financial statements. A
self-interest threat to objectivity arises from the issue over the debt covenants. It is
likely that the managing director is concerned about his job security should the bank
recall the debt and deem Fiskerton to no longer be a going concern. It appears highly
likely that the revaluation was implemented in the interim financial statements to try
to maintain a satisfactory gearing ratio. Even more concerning is that the managing
director has deliberately overstated the valuation for the year-end financial
statements, even though he is aware that it breaches accounting standards. Such
deliberate manipulation is contrary to the ethical principles of integrity, professional
behaviour and objectivity. It appears that the managing director is trying to defraud
the bank by misrepresenting the liquidity of the business to avoid repayment of the
loan.
Tutorial note
Make explicit reference to the impact of the revenue error on the financial statements.
The sales contract is further evidence that the managing director may be attempting
to manipulate the financial statements. The proposed treatment will overstate both
revenue and assets which would improve the gearing ratio.
A governance issue arises from the behaviour of the managing director. It is important
that no one individual is too powerful and domineering in running an entity’s affairs. An
intimidation threat arises from the managing director pressurising the accountant to
overstate revenue from the contract. It was also the managing director who
implemented the excessive revaluations on the property. It would appear that the
managing director is exercising too much power over the financial statements.
KA PL AN P U BLI SH IN G
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Tutorial note
Outline specific actions that the accountant should take.
The accountant must not be influenced by the behaviour of the managing director and
should produce financial statements which are transparent and free from bias.
Instead, the managing director should be reminded of their ethical responsibilities. The
accountant may need to consider professional advice should the managing director
refuse to correct the financial statements.
ACCA Marking scheme
Marks
(a)
(b)
–
–
–
(c)
–
–
application of the following discussion to the scenario:
correct accounting treatment of the lease
implications for the financial statements
implications for the debt covenant
consideration of whether it is performance satisfied over time or at a
point in time and application to the scenario
conclusion and implications for revenue
application of the following discussion of ethical issues to the scenario:
classification of property as investment property
revaluation and manipulation of the debt covenant
consideration of the ethical implications and their resolution
Professional
Total
3
2
2
–––
7
–––
3
1
–––
4
–––
2
3
2
–––
7
–––
2
–––
20
–––
Examiner’s comments
Many candidates felt that the investment property classification was justified. Where a
candidate concluded, with some justification, that the property was an investment property,
some marks were awarded. Where candidates made a reasonable attempt at calculations,
then the Own Figure Rule was used to justify the conclusions reached by the candidate.
The second part of the question required a discussion as to whether revenue arising from a sales
contract should be recognised on a stage of completion basis under IFRS 15. Any mention of
IFRS 15 in a question seems to prompt a regurgitation of the five steps to revenue recognition.
This type of answer gains very few marks as this level of exam requires candidate knowledge of
the specific requirement in IFRS 15. Thus in this case, candidates should have stated that the
entity should determine whether its promise to construct the asset is a performance obligation
satisfied over time. Generally, candidates obtained at least half marks on this part.
The final part of the question was generally well answered and full marks were often
awarded. The main issue was that some candidates simply quoted ethical guidance without
applying it to the scenario. Also, the professional marks were awarded for the quality of
ethical discussion and thus where candidates did not apply ethical guidance to the scenario,
further marks were lost.
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33
FARHAM (SEP 2018)
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Key answer tips
This question shows the marks available for each part. Use this to help you with timings.
Almost half of the marks are for ethics, so make sure that you write enough. You will score
one mark for each valid point that you make.
Ethical issues are never clear-cut. To score the two professional marks, your discussion must
demonstrate an understanding of the reality of a problem.
(a)
Factory subsidence
Tutorial note
Use sub-headings so that it is clear which issue you are addressing.
In accordance with IAS 36 Impairment of Assets, the subsidence is an indication of
impairment in relation to the production facility.
The impairment review would be performed on a suitable cash generating unit as
presumably the factory, as a standalone asset, would not independently generate cash
flows for Farham.
Tutorial note
A cash generating unit is the smallest group of assets that generate cash flows that are
independent from the rest of the business.
The recoverable amount of the unit would need to be assessed as the higher of fair
value less costs to sell and value in use.
Reference to IFRS 13 Fair Value Measurement would be required in estimating the fair
value of the facility. This may involve considering whether similar facilities have been
on the market or recently sold.
Value in use would be calculated by estimating the present value of the cash flows
generated from the production facility discounted at a suitable rate of interest to
reflect the risks to the business.
Where the carrying amount exceeds the recoverable amount, impairment has
occurred. Any impairment loss is allocated to reduce the carrying amount of the assets
of the unit. This cannot be netted off the revaluation surplus as the surplus does not
specifically relate to the facility impaired. As such the impairment should be recorded
in profit or loss.
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No provision should be recognised for the costs of repairing the factory. To recognise
a provision, IAS 37 Provisions, Contingent Liabilities and Contingent Assets would
require a legal or constructive obligation to repair the factory. No such obligation
exists.
Sale of Newall
The disposal of Newall appears to meet the criteria to be held for sale as per IFRS 5
Non-current Assets Held for Sale and Discontinued Operations. Management has
shown commitment to the sale by approving the plan and reporting it to the media. A
probable acquirer has been found, the sale is highly probable, and it is expected to be
completed six months after the year end (well within the 12-month criteria).
Tutorial note
A disposal group is a group of assets that will be disposed of in a single transaction.
Newall would be treated as a disposal group because a single equity transaction is the
most likely form of disposal.
If Newall is deemed to be a separate major component of business or geographical
area of the group, the losses of the group should be presented separately as a
discontinued operation within the consolidated financial statements of Farham.
Assets held for sale are valued at the lower of carrying amount and fair value less costs
to sell. The carrying amount consists of the net assets and goodwill relating to Newall
less the non-controlling interest’s share.
Assets within the disposal group which are not inside the scope of IFRS 5 are adjusted
for in accordance with the relevant standard first. This includes leased assets. The
right-of-use asset deemed surplus to requirements will most likely be written off with
a corresponding expense recognised in profit or loss.
Any further impairment loss recognised to reduce Newall to fair value less costs to sell
would be allocated first to goodwill and then on a pro rata basis across the other noncurrent assets of the group.
Tutorial note
A constructive obligation is where an entity’s past behaviour and practice indicates to
other parties that it will accept certain responsibilities.
The chief operating officer is wrong to exclude any form of restructuring provision from
the consolidated financial statements. The disposal has been communicated to the
media and a constructive obligation exists. However, only directly attributable costs of
the restructuring should be included and not ongoing costs of the business. The legal
fees and redundancy costs should be provided for. Future operating losses should not
be provided for because no obligating event has arisen. No provision is required for
the impairments of the owned assets as this would have been accounted for on
remeasurement to fair value less costs to sell.
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Tutorial note
If the lease will be terminated then the lease term has changed.
If the early termination penalty is likely to be paid then the lease term has changed.
Per IFRS 16 Leases, the lease liability must be remeasured and should now include the
present value of the penalty (but should exclude any payments scheduled after this
date). When the lease liability is remeasured, a corresponding adjustment is posted
against the right-of-use asset. If the right-of-use asset has been written down to zero
an expense should instead be charged to profit or loss in the operating section.
(b)
Ethics
Tutorial note
Financial statement errors are an ethical issue, even if they were accidental.
Accountants have a responsibility to be professionally competent so that primary user
groups are not misled.
Accountants have a duty to ensure that the financial statements are fair, transparent
and comply with accounting standards. The accountant has made mistakes that would
be unexpected from a professionally qualified accountant. In particular, the
accountant appears unaware of which costs should be included within a restructuring
provision and has failed to recognise that there is no obligating event in relation to
future operating losses. Accountants must carry out their work with due care and
attention for the financial statements to have credibility. They must therefore ensure
that their knowledge is kept up to date and that they do carry out their work in
accordance with the relevant ethical and professional standards. Failure to do so
would be a breach of professional competence. The accountant must make sure that
they address this issue through, for example, attending regular training and
professional development courses.
Tutorial note
Discuss the specific impact of the errors on the financial statements.
There are a number of instances which suggest that the chief operating officer is happy
to manipulate the financial statements for their own benefit. She is not willing to account
for an impairment loss for the subsidence despite knowing that this is contrary to IFRS
Accounting Standards. She is also unwilling to reduce the profits of the group by properly
applying the assets held for sale criteria in relation to Newall nor to create a restructuring
provision. All of the adjustments required to ensure the financial statements comply
with IFRS Accounting Standards will reduce profitability. It is true that the directors do
have a responsibility to run the group on behalf of their shareholders and to try to
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maximise their return. This must not be to the detriment, though, of producing financial
statements which are objective and faithfully represent the performance of the group.
It is likely that the chief operating officer is motivated by bonus targets and is therefore
trying to misrepresent the results of the group. The chief operating officer must make
sure that she is not unduly influenced by this self-interest threat to her objectivity.
The chief operating officer is also acting unethically by threatening to dismiss the
accountant should they try to correct the financial statements. It is not clear whether
the chief operating officer is a qualified accountant but the ethical principles should
extend to all employees and not just qualified accountants. Threatening and
intimidating behaviour is unacceptable and against all ethical principles. The
accountant faces an ethical dilemma. They have a duty to produce financial statements
which are objective and fair but to do so could mean losing their job.
Tutorial note
Remember to discuss actions that the accountant should take.
The accountant should approach the chief operating officer and remind them of the
basic ethical principles and try to persuade them of the need to put the adjustments
through the consolidated accounts so that they are fair and objective. Should the chief
operating officer remain unmoved, the accountant may wish to contact the ACCA
ethical helpline and take legal advice before undertaking any further action.
ACCA Marking scheme
(a)
Subsidence as impairment indicator
Fair value
Allocation of impairment loss
Held for sale criteria, valuation and impairment
Required accounting treatment
(b)
Discussion of ethical principles
Application of ethical principles to scenario
Professional marks
Total
Marks
2
2
1
3
3
–––
11
–––
2
5
–––
7
–––
2
–––
20
–––
Examiner’s comments
Candidates with good exam technique should briefly plan the content of their written answer
to avoid repetition: writing the same point twice loses valuable time and certainly will not
score marks twice. Good practice is to have separate headings for each ‘situation’, with lines
left in between them for ease of marking.
Part (b) was well-answered in most cases, with better answers applying ethical principles to
the scenario. It was pleasing to see fewer answers merely ‘listing out’ rote-learned ethical
requirements in this sitting.
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SECTION B
34
CIAL (SEP/DEC 2024)
Walk in the footsteps of a top tutor
Key answer tips
This question tests a range of accounting standards and the structure of the requirement
should enable students to manage their time well across each sub requirement. There is one
exhibit per requirement, so read the exhibits as you go, rather than reading all of them
upfront.
This is a good example of a question where it is important to begin your answer with the rules
from the relevant standard to obtain knowledge marks.
The requirements vary in difficulty. Part (a) tests IFRS 15 Revenue from Contracts with
Customers, which is a popular exam topic that candidates should be able to score well on.
Whereas part (d) is more difficult and tests whether or not a contract should be treated as a
derivative, complicated by the fact that the contract is in a foreign currency.
It's always best to attempt every requirement, but do not worry too much if you find some
parts more challenging then others. Attempting every part gives you the best chances of
passing the question.
(a)
Transaction price
Tutorial note
The key to answering a question that tests IFRS 15, is to focus on the relevant step from
the five-step approach. In this case, the requirement specifically asks you to discuss
how to allocate the transaction price, therefore your answer should start with setting
out the relevant rules from step four (allocating the transaction price to the
performance obligations).
In accordance with IFRS 15 Revenue from Contracts with Customers, Cial Co should
allocate the transaction price in proportion to relative stand-alone selling prices. This
is the price at which an entity would sell the good or service on a separate basis at
contract inception. IFRS 15 states that the observable price of a good or service sold
separately provides the best evidence of a stand-alone selling price. If stand-alone
selling prices are not readily available, the entity should estimate the stand-alone
selling price of each element of the contract using all information which is reasonably
available.
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Cial Co regularly sells the computers separately for $1,720, but the individual selling
prices of the printers and display screens are not available. Because the stand-alone
selling prices for printers and display screens are not directly observable, Cial Co must
estimate them using all available information, maximising the use of observable
inputs.
To estimate the stand-alone selling prices, Cial Co will use an ‘adjusted market
assessment’ approach for the printers and an ‘expected cost plus a margin’ approach
for the display screen.
The ‘adjusted market assessment’ approach focuses on the amount which the entity
believes the market, to which it sells goods or services, is willing to pay for a good or
service. In this case, Cial Co can refer to competitors’ prices for similar goods or
services. Because Cial Co believes that the competitors’ prices reflect the entity’s own
costs and margins, a stand-alone price of $180 can be used for the printer.
Tutorial note
When calculating the stand-alone price be careful to apply the correct cost structure.
In this case the cost structures uses a 25% margin, which means the cost of the goods
represents 75% of the selling price.
If you calculated the price as $187.5 ($150/100 × 125), then you have applied a 25%
mark-up, instead of a 25% margin.
The ‘expected cost plus a margin’ approach focuses on the entity’s cost of production
but must reflect the margin the market would be willing to pay. Cial Co achieves a
profit margin of 25% on the selling price of its products. Therefore, the stand-alone
selling price of the monitor will be $200 ($150/75 × 100).
The sum of the stand-alone selling prices of $2,100 ($1,720 + $180 + $200)) exceeds
the promised consideration of $2,000. In this case, the total transaction price is
allocated proportionately across the three products based on the stand-alone selling
prices, as follows:
Tutorial note
You have a spreadsheet response option for this question, so it would be sensible to use
it for the calculations set out below.
You may have presented your working differently but still achieved the same answer,
which is fine, but always make sure you show your workings.
For example, you will achieve the same answers as below by taking the bundle price as
a proportion of the total stand-alone selling prices and applying this percentage to the
stand-alone price of each element (for the computer: $2,000/$2,100 × $1720 =
$1,638.1).
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Computer
Printer
Monitor
Total
(b)
Stand-alone
price
$
1,720
180
200
–––––
2,100
–––––
Working
$1,720/$2,100 × $2,000
$180/$2,100 × $2,000
$200/$2,100 x $2,000
Transaction
price
$
1,638.1
171.4
190.5
–––––
2,000
–––––
Discontinued operation
Tutorial note
IFRS 5 covers the treatment of assets held for sale and discontinued operations. This
requirement focuses on the profit on the sale of a licence and whether it should be
presented as a discontinued operation. You are not asked about whether the asset
should be classified as held for sale, as this is irrelevant as the licence has been sold by
the year end. Always read the requirements carefully!
Start by setting out the definition of a discontinued operation as best you can, which
will earn you some knowledge marks. Then, to make sure your answer is sufficiently
detailed, work through each element and discuss whether you think the licence meets
the definition.
A discontinued operation is a component of the entity, which has either been disposed
of, or is classified as held for sale, and
–
represents a separate major line of business or geographical area of operations,
or
–
is part of a single coordinated plan to dispose of a separate major line of business
or a separate major geographical area of operations, or
–
a subsidiary acquired exclusively with a view to resale.
In accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations,
the term ‘component of an entity’ comprises operations and cash flows which can be
clearly distinguished from the rest of the entity. A component of an entity may be a
reportable segment or an operating segment, a reporting unit, a subsidiary, or an asset
group. A component is usually identified at a level higher than a single cash-generating
unit. As such, a licence is unlikely to be a component of an entity.
The assessment of a separate major line of business is based upon the size and relative
importance of the business. The licensing revenue from the piece of software was
relatively small in the context of the overall business. However, a numerical
determination alone is not necessarily going to determine whether the disclosure is in
accordance with the guidance in IFRS 5.
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The sale of a licence was not due to a coordinated strategic decision to end a specific
line of business but appears to be part of the normal course of business, which includes
continuous change to the composition of licences.
Even though the licence had been purchased with a view to reselling, it does not
constitute a ‘subsidiary acquired exclusively for resale.’ Therefore, the licence sold was
just one of several individual sales.
Tutorial note
To score a final mark, make sure to finish you answer with a conclusion that ties in with
your discussion points.
In conclusion, none of the criteria in IFRS 5 are fulfilled and the classification of the
profit on sale of the licence within discontinued operations was inappropriate.
(c)
Change in use
The cost of the land was correctly recognised as property, plant and equipment on
31 December 20X6. However, with the change of use from business purposes to a
property which will earn rental income, it should be recognised as an investment
property from 1 September 20X7.
IAS 40 Investment Property gives the entity the choice of accounting policy of either
the fair value model or the cost model. IAS 40 states that if the fair value of an
investment property is not reliably measurable, the entity should measure that
investment property using the cost model. It is only in exceptional cases that the fair
value of an investment property cannot be measured reliably. Cial Co had a good
understanding of how to determine the fair value of the land when determining the
purchase price it was willing to pay. Moreover, similar plots of land had recently been
sold for $11 million. Per IFRS 13 Fair Value Measurement, this would most likely
constitute a level 2 or 3 input to a market-based approach.
Tutorial note
Look out for the dates in this scenario. There is a change of use of the land part way
through the year. When an asset is transferred from PPE to investment property
measured at fair value, the asset needs to be revalued in line with the IAS 16 rules,
before then being transferred into investment property at fair value.
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When an owner-occupied property becomes an investment property carried at fair
value, Cial Co should record any difference at that date between the carrying amount
of the property and its fair value in the same way as a revaluation in accordance with
IAS 16 Property, Plant and Equipment. On 1 September 20X7, Cial Co should have
recognised a gain of $1 million ($11m – $10m) in other comprehensive income.
The subsequent gain of $0.5 million ($11.5m – $11m) at 31 December 20X7 would be
recognised in profit or loss in the investing section.
(d)
Payment to acquire option
Tutorial note
An option is an example of a derivative contract, so your initial thought may have been
to treat this as a financial asset and apply the rules of IFRS 9. However, in this scenario,
Cial is planning to physically purchase the building using the option contract, so the
option is not being used for speculative purposes, nor risk management, so the option
is not treated as a derivative. Not an easy issue to spot!
The requirement is only interested in the accounting of the initial payment at the year
end 31 December 20X7, meaning that discussion of the accounting on 1 July 20X8 will
not get credit.
The option to buy the building is for the purpose of receipt of a non-financial asset and,
as such, is outside the scope of IFRS 9 Financial Instruments. The reason for this is that
the contract will be settled by physical delivery of the building. This ‘own use’
exemption means that it is not accounted for as a derivative.
The payment made will be recognised as an asset. This would be a non-financial asset,
although it would not meet the definition of investment property. In accordance with
IAS 21 The Effects of Changes in Foreign Exchange Rates, it should be translated into
the company’s functional currency using the exchange rate on the purchase date. The
asset is non-refundable, so is a non-monetary item, which means it will not be
retranslated at the reporting date.
ACCA Marking scheme
Marks
(a)
Discussion of the following:
IFRS 15 principles
Discussion of computer
Discussion of printer and monitor
Allocation calculation
Maximum
(b)
Discussion of the following:
IFRS 5 principles
Application of principles to scenario
Conclusion
Maximum
KA PL AN P U BLI SH IN G
2
1
5
2
––––
8
––––
3
6
1
––––
7
––––
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(c)
Discussion of the following:
PPE/investment property classification
Fair value
Measurement and gains
Maximum
(d)
Discussion of the following:
IFRS 9 principles
Discussion of asset recognition
IAS 21 principles and application
Maximum
Total
2
3
3
––––
6
––––
1
3
1
––––
4
––––
25
––––
Examiner’s comments
(a) This part of this question was answered the best overall. Well-prepared candidates
discussed the stand-alone selling prices and how to arrive at them either directly, or indirectly
using the information given. Stronger candidates discussed each item in the package, the
relevant part of IFRS 15, and how this applied to the calculation. The candidates who
performed best saw that the combined stand-alone prices were more than the total price
being charged and moved on to allocate the transaction price on a proportionate basis
between the items. This was both discussed and shown through a calculation.
Weaker candidates often started their answer with the IFRS 15 ‘five steps’ or regurgitated
everything they knew about IFRS 15. Whilst marks are available for IFRS 15 rules and
principles, marks are only awarded if these are relevant to the scenario.
Weaker candidates often got confused between a mark-up and a margin and therefore made
calculation errors.
In conclusion, it was good to see some strong performance with some candidates scoring
maximum marks.
(b) Like part (a), this element was fairly well answered. Better-prepared candidates set out
the principles in IFRS 5 around discontinued operations and then applied each of these in
turn to the question. They also gave a clear conclusion, stating that the profit on sale should
not be presented as arising from a discontinued operation. There were candidates who knew
some, but not all, of the criteria in relation to discontinued operations, and so their answers
did not score as well as they could have done.
Weaker candidates seemed to get mixed up between discontinued operations and noncurrent assets held for sale, with many explaining the non-current asset held for sale criteria.
Most candidates were able to come to a sensible conclusion that the profit from the sale of
the licence should not be presented as a discontinued operation, even if they were unable to
discuss in any depth why this was the case.
(c) Many candidates answered this part of the question well, presenting their answers in a
clear, chronological order. These candidates discussed what should be recognised, when it
should be recognised, and why this was the case. Dates were important as the requirement
asked for the accounting treatment in the year ended 31 December 20X7. Stronger
candidates identified that there was a change of use on 1 September 20X7 and discussed
that. They then discussed the correct accounting treatment at the year end.
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Good candidates identified the move from IAS 16 Property, Plant and Equipment to IAS 40
Investment Property and the need to revalue to fair value on 1 September 20X7, with the fair
value gain being recognised in other comprehensive income. These candidates identified the
fair value using level 2 in the IFRS 13 fair value hierarchy and explained why this was the case.
They then discussed the land at the year end, this time explaining that the gain or loss should
be recognised in the statement of profit or loss.
Weaker candidates did not identify the two key dates in question. This meant that they only
discussed the accounting treatment at one date, usually the year end. As such, there was no
distinction made between the revaluation gains in accordance with IAS 16 on 1 September
20X7 and the fair value gains in accordance with IAS 40 at the year end. Weaker candidates
spent too much time discussing fair value, often explaining everything they knew about
IFRS 13, rather than just the parts which were relevant to the scenario.
(d) This part of the question was answered very poorly overall. Because the contract was
settled by physical delivery, and was for ‘own use’, it should not have been accounted for in
accordance with IFRS 9 Financial Instruments – most candidates missed this point. Many
candidates also stated that the asset should be retranslated at the year end at the closing
rate. This was incorrect because it was a non-monetary asset. Candidates should question
the accounting treatment adopted in the scenario and not just accept that it is the correct
treatment.
35
KIMIMILA (SEP/DEC 2024)
Walk in the footsteps of a top tutor
Key answer tips
This question tests topics that were new to the syllabus for 2024/25 – namely the IFRS
Sustainability Standards and the difference between these standards and the European
Sustainability Reporting Standards.
It’s always a good idea to make sure you are well prepared to answer questions on new
syllabus topics and that your preparation includes reading any recent technical articles
published by the examining team.
Part (b) was on the topical theme of climate change and focussed on two particular financial
reporting standards, IFRS 9 Financial Instruments and IAS 12 Income Taxes. Candidates may
not feel overly confident discussing loss allowances, however there were no calculations
required here, so don’t shy away from attempting to answer this part of the question.
Part (c) tests IFRS 2 Share-based Payment, with the focus on the final year of the vesting
period. As always, it pays to read the requirement carefully!
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(a)
(i)
Materiality
Tutorial note
If you had revised this particular topic, then this requirement should allow to you
to pick up two straight forward marks. That said, if you couldn’t remember the
details of the differences, you may be able to score one of the two marks by
describing materiality in the context of the IFRS Sustainability Disclosure
Standards.
Materiality in the IFRS Sustainability Disclosure Standards is based on financial
materiality, which focuses on how sustainability issues affect the financial
performance, financial position and cash flows of an entity.
Materiality in the European Sustainability Reporting Standards is based on a
concept referred to as double materiality. This focuses on financial materiality,
as above, but also focuses on impact materiality, which is how the entity impacts
the environment and society. This means that entities consider both what is
material to the environment and what is material to them, and that the two
assessments are interrelated and interdependent.
(ii)
Tutorial note
A fairly detailed exhibit was provided for this requirement. Take each paragraph
in turn and use the clues in the scenario to help you identify the key points. In
particular, look out for relevant issues that are omitted from the sustainability
report.
Using your knowledge of the IFRS Sustainability Disclosure Standards will help
you score additional marks here, including the professional marks.
To add more depth to your answer, consider the nature of the company – it is a
company that manufactures petrol car engines. This is a company that is
definitely going to be affected by a move towards a lower-carbon economy and
therefore users will want to know about risks related to this issue.
The use of subheadings here will help you see how many distinct points you have
made.
Timing of reporting
According to IFRS S1 General Requirements for Disclosure of Sustainabilityrelated Financial Information, the sustainability report should cover the same
reporting period as the financial report, which is the 12-month period to
31 December 20X7.
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Risks
According to IFRS S2 Climate-related Disclosures, users should be informed
about both climate-related physical risks and climate-related transition risks
that might reasonably be expected to affect an entity’s prospects. These are
likely to be significant for Kimimila Co because it manufactures petrol car
engines, and the market for these is likely to diminish as the demand for lowercarbon alternatives increases.
For the risks and opportunities identified, Kimimila Co has disclosed information
about the impact on future financial performance and position. Kimimila Co
should also disclose information about the impact on cash flows. Moreover,
Kimimila Co has only disclosed information about the impact over the next
12 months. IFRS S2 states that companies should disclose the impact over the
short, medium, and long term.
Greenhouse gas emissions
Kimimila Co has only disclosed its Scope 1 greenhouse gas emission. IFRS S2
states that entities should also disclose information about Scope 2 and Scope 3
greenhouse gas emissions. Note that Kimimila Co would be exempt from
disclosing Scope 3 greenhouse gas emissions in its first annual report produced
under the IFRS Sustainability Disclosure Standards.
Although it can be difficult to measure greenhouse gas emissions, particularly
Scope 3, S2 prescribes the use of the Greenhouse Gas Protocol: A Corporate
Accounting and Reporting Standard when doing so (unless the entity’s
jurisdiction or exchange requires use of a different method) to increase
comparability between entities. Measurement uncertainty will arise, but
Kimimila Co should disclose information about its measurement approach, as
well as the inputs and assumptions used.
Targets
According to IFRS S2, companies should disclose climate-related targets which it
has set to monitor its progress. The share-based payment was based on a clear
target to reduce greenhouse gas emissions by an average of 10% per year. As
such, Kimimila Co should have disclosed the metric used, the objective of the
target and the period over which the target applied. It should also disclose the
fact that it did not satisfy this climate-related target.
Carbon credits
Kimimila Co uses carbon credits. According to IFRS S2, Kimimila Co should have
disclosed the fact that 50% of its carbon reduction target is based on the use of
carbon credits. It should also have disclosed the types of carbon credit used
(i.e. whether they are based on carbon reduction or removal), and other factors
to help the users assess the credibility and integrity of its carbon credits.
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(b)
Financial assets
Tutorial note
Your answer can be broken down into two clear sections here (the financial asset due
to supplier loans and the deferred tax assets), with approximately three marks for each
section.
For the supplier loans, Kimimila has the intention of holding the loans to maturity to
collect the contractual cash flows, hence the loans are measured at amortised cost. The
key question here is whether the loans are recoverable. IFRS 9 uses an expected loss
approach, which uses estimates to determine the potential impairment loss for a
financial asset. The uncertainty created by the impact of climate change increases the
risk of an actual impairment occurring, but it also makes it more difficult to estimate
the expected credit losses.
If you spot that a loss allowance would be required, set out the basic rules in your
answer to help score any available knowledge marks. Remember, a 12-month expected
credit loss is recognised for all financial assets that require a loss allowance. For
financial assets where there has been a significant increase in credit risk, the loss
allowance will need to be increased to the lifetime expected credit losses amount.
The financial assets are measured at amortised cost and therefore fall within the
impairment requirements of IFRS 9 Financial Instruments.
Climate-related matters may affect Kimimila Co’s exposure to credit losses. The
wildfires, floods and policy and regulatory changes could negatively affect a borrower’s
ability to meet its debt obligations to Kimimila Co. Further, assets could be affected by
climate change, which would result in the reduction of their worth as security for the
loans. In recognising and measuring expected credit losses, IFRS 9 requires use of all
reasonable and supportable information which is available without undue cost or
effort. Climate-related matters may therefore be relevant as they will affect the range
of potential future economic outcomes. Kimimila Co will need to assess whether there
has been a significant increase in credit risk and whether the loans are credit‑impaired.
In turn, expected credit losses are required to be measured through a loss allowance
at an amount equal to the 12-month expected credit losses or full lifetime expected
credit losses.
Deferred tax assets
Tutorial note
If a company has recognised a deferred tax asset in respect of losses, you should
question whether it should be recognising an asset, because an entity will need to make
sufficient profits in the near future in order to utilise those losses. For a loss-making
entity, the chances of quickly making a profit in the future may be unlikely unless
something significant is going to change.
In this scenario, Kimimila’s trading conditions appear to be deteriorating, throwing into
question the validity of recognising a deferred tax asset.
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Deferred tax assets for deductible temporary differences and unused tax losses and
credits are recognised under IAS 12 Income Taxes to the extent that it is probable that
future taxable profits will be available against which those amounts can be utilised.
Suppliers are likely to increase their prices, and this will lead to lower profits in future
periods.
Some of Kimimila Co’s products are likely to become less popular and, once again, this
will have a negative impact on future profits.
The impact of climate change is creating uncertainty. This is likely to mean that
Kimimila Co cannot forecast future profits with much certainty.
As a result of the above, future profits may be less likely. Kimimila Co may be unable
to recognise deferred tax assets or could be required to derecognise its deferred tax
assets which were previously recognised.
(c)
Share-based payment
Tutorial note
Remember to include an explanation of how to treat the share-based payment in your
answer, calculations alone aren’t sufficient to fully answer the question.
Pay careful attention to the dates. The share-based payment was issued on 1 January
20X4 and the current reporting period is 20X7, the year when the options are expected
to vest. As the expectations used in the share-based payment were accurate (that no
directors would leave between 20X4-20X6) then the same expense is recorded each
year. In 20X7, the conditions haven’t been met and the options do not vest, hence the
cumulative equity and expense are released. Therefore, the answer below calculates
the cumulative expense that would have been recognised across the prior years, to
determine the amount to be released.
In accordance with IFRS 2 Share-based Payment, an expense should be recognised in
respect of the share-based payment scheme over the four-year vesting period based
on the number of options expected to vest. As an equity-settled scheme, the expense
is measured using the fair value of the options at the grant date, which is $8 per option.
The greenhouse gas target is a non-market performance condition. As at 31 December
20X6, this was expected to be met. The total expense and equity recognised by this
date would have been $900,000 (10 directors × 15,000 options × $8 fair value × 3/4).
In the year ended 31 December 20X7, the share options did not vest because the nonmarket performance condition was not met. As such, the $900,000 expense and equity
recognised to-date should be reversed. The expense would have recorded in the
operating section of the statement of profit or loss so the reversal would be recorded
there as well.
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ACCA Marking scheme
Marks
(a)
(i)
(ii)
Discussion and appropriateness of the accounting policy
IFRS approach
ESRS approach
1
1
–––
2
–––
Discussion of the following:
Timing of reporting
Risks
Greenhouse gas emissions
Target
Carbon credits
Maximum
(b)
Discussion of the following:
IFRS 9 principles
Application to measurement of credit losses
IAS 12 principles
Application to ability to forecast future profits
Maximum
(c)
Discussion of the following:
IFRS 2 principles
Non-market performance conditions
Expense and equity in 20X6
Discussion of reversal in 20X7
Maximum
Professional marks
Total
1
4
4
2
2
–––
10
–––
1
3
1
3
–––
6
–––
2
1
2
2
–––
5
–––
2
–––
25
–––
Examiner’s comments
(a)(i) Disappointing answers were given for this question. Many candidates just described
materiality in accordance with IFRS Sustainability Disclosure Standards. However, wellprepared candidates who had read the comparison between the two sets of standards within
the Examinable Documents were able to describe the ‘double materiality’ concept in ESRS
and scored full marks as a result.
(a)(ii) This was fairly well attempted by the majority of candidates. There were, however,
some blank answers and some very weak answers, suggesting that there was a lack of
preparation for this topic, even though a technical article had been published.
The scenario contained several short paragraphs with information about the sustainability
disclosure Kimimila Co had made. Candidates who attempted the question in a logical
fashion, taking each paragraph in turn and discussing why it was compliant or not scored the
most marks. For example, good candidates started with the fact that the report only covered
an 11-month period (paragraph 1) and progressed through each paragraph discussing each
issue in turn.
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Another feature of good answers was more in-depth discussion and those who scored the
best marks developed their answers and gave more detail. As an example, a basic answer
would state that disclosure of physical risks only was not enough. A more developed answer
would then discuss the importance of transition risk. A better answer again would discuss
the impact of risks over the short-, medium- and long term.
Weaker responses either gave brief answers or did not understand the applied nature of this
question. The examining team will not be awarding many marks for candidates quoting
sustainability disclosure standards in a verbatim manner. Instead, questions will be applied
in nature. For example, candidates might be provided with a sustainability disclosure, which
requires critiquing.
(b) Again, this was well attempted by most candidates. The best candidates realised that this
was two questions (one on financial assets and one on deferred tax) which were worth
approximately three marks each. Therefore, an adequately prepared candidate did not find
it difficult to score four to six marks on this part.
Most candidates highlighted that the financial assets would have been measured at
amortised cost and discussed how climate factors increased the exposure to credit losses.
Weaker answers talked fair value rather than amortised cost and talked generally about the
climate and the business model of the company.
The deferred tax element was generally very well answered. Weaker candidates often missed
the point of the requirement and started talking about the business needing to change how
it operates, rather than focussing on financial reporting.
Weaker candidates wasted time discussing irrelevant implications of environmental effects
– such as the impairment of property, plant and equipment and the need for provisions for
environmental regulation non-compliance – despite the requirement clearly being specific to
financial assets and deferred tax.
(c) Fair attempts were made by most candidates. Basic issues were often discussed well. For
example, most candidates correctly used the fair value at the grant date and spread the cost
over the four-year vesting period. However, some candidates struggled with the fact that the
non-market vesting condition was not met, and completely ignored this. Those who knew
the accounting implications of this scored highly.
The examining team were keen to ensure that this question was accessible, breaking down
the scenario and requirements into manageable elements. This seemed to work well for the
majority of candidates, who were able to score solid marks across each of the individual
requirements by taking a logical approach. Weaker candidates need to consider this
approach as they move forward.
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36
JOBON (MAR/JUN 2024)
Walk in the footsteps of a top tutor
Key answer tips
This question tests some commonly examined standards that are assumed knowledge,
highlighting the important of being up to speed with the financial reporting standards from
the previous level of the qualification.
Part (a) tests IAS 36 Impairment of Assets. There is a detailed scenario that enables you to
get a good degree of application to the scenario, but avoid the temptation to write down
everything you know about impairment reviews – answer the question set and not the
question you want to answer!
Part (b) tests IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Having a
good recall of the rules from this standard should help you to score highly on this part.
Part (c) test IAS 10 Events After the Reporting Period, which is less commonly tested in SBR
and therefore students might struggle with the underlying knowledge of the standard. This
may be a topic that you still need to revise to make sure you are clear on the treatment of
adjusting and non-adjusting events.
(a)
Impairment review
Tutorial note
Read the question carefully. You are asked to explain why the cash-generating units
should have been tested for impairment, not how to perform an impairment review or
how to allocate an impairment loss.
IAS 36 Impairment of Assets requires an entity to assess at the end of each reporting
period whether there is any indication that an asset or cash generating unit (CGU) may
be impaired. If any such indication exists, the entity should estimate the recoverable
amount of the asset or CGU. This requirement also applies to goodwill, indefinite life
intangible assets, and intangible assets not yet ready for use.
Generally, internal indicators would provide reasonably direct evidence that a specific
asset or CGU may be impaired. For example, internal reports might show that actual
net cash flows are significantly worse than those budgeted. However, external sources
of information will more typically be broader and less clearly linked to a specific asset
or CGU. For example, a decline in market capitalisation to less than the carrying
amount of the entity’s net assets.
In this case, there has been an increase in customers using online shopping. Therefore,
Jobon Co was correct in the assumption that an impairment review was necessary.
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Value in use
Tutorial note
If you find yourself struggling to recall the details of a particular financial reporting
standard, use the scenario provided to help you. The scenario provides specific details
about how the value in use has been determined, so try to identify areas of treatment
that may not seem quite right.
In accordance with IAS 36, it may be necessary to consider liabilities to determine the
recoverable amount of a CGU. This can occur if the disposal of a CGU requires the
buyer to assume the liability. If this is the case, the carrying amount of the liability is
deducted from both the CGU’s VIU and its carrying amount. Jobon Co has deducted
the lease liabilities from the carrying amount of the CGU but has not deducted the
same amount from the VIU of the CGU. Therefore, the lease payment outflows should
be excluded from the determination of VIU and the carrying amount of the lease
liabilities should be deducted instead.
When determining VIU, IAS 36 states that projections based on budgets or forecasts
should cover no more than five years (unless a longer period can be justified). Jobon Co
is incorrectly using budgets for a ten-year period. Instead, IAS 36 states that cash flows
beyond five years should be determined by extrapolating budgets using a steady or
declining growth rate.
The future cash flows used to determine VIU should include estimated costs necessary
to maintain the level of economic benefit expected to arise from the CGUs in their
current condition. They should exclude any estimated costs ($5 million) to enhance
their performance and the estimated increase in cash flows anticipated from
enhancing its performance.
Discount rate
Jobon Co should not use the weighted average cost of capital of a different company
in the sector. The discount rate for a VIU model must be the pre-tax rate which reflects
current market assessments of the time value of money and the risks specific to the
asset for which the future cash flow estimates have not been adjusted. This would
mean that Jobon Co should incorporate the implicit interest rate relating to the lease
liabilities.
The lease payment outflows have been discounted at 5% for value in use (VIU)
purposes whereas the interest rate implicit in the lease is 4%. Thus, the lease payment
outflows would be stated at a lesser amount than the lease liabilities. This would
therefore mean that the VIU is higher using Jobon Co’s method which could mean that
the asset is under impaired.
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(b)
Year ended 31 December 20X6
Tutorial note
Ensure you have addressed all elements of the requirement in your answer. Your
answer should cover both reporting dates, as well as both aspects of the treatment of
the subsidiary – specifically, whether the subsidiary be classified as held for sale and
whether the subsidiary’s results constitute a discontinued operation.
In accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations, the following conditions must be met for an asset (or ‘disposal group’) to
be classified as held for sale:
•
management is committed to a plan to sell
•
the asset is available for immediate sale
•
an active programme to locate a buyer is initiated
•
the sale is highly probable, within 12 months of classification as held for sale
(subject to limited exceptions)
•
the asset is being actively marketed for sale at a sales price reasonable in
relation to its fair value
•
actions required to complete the plan indicate that it is unlikely that the plan
will be significantly changed or withdrawn.
The presentation of the investment in the subsidiary, Tilte Co, as a disposal group held
for sale would seem to apply for the year ended 31 December 20X6. This is because of
the shareholders of Jobon Co authorising management on 1 May 20X6 to sell all the
shares held in Tilte Co within the next 12 months. At the same time, Jobon Co had
instructed its agents to sell the shares as soon as possible at the current market price.
The actions of Jobon Co, at this stage, seem to indicate also that it is unlikely that the
plan will change. The shareholders’ approval is required in the jurisdiction and
therefore should be considered as part of the assessment of whether the sale is highly
probable.
In accordance with IFRS 5, a discontinued operation is a component of an entity which
has been disposed of or is classified as held for sale, and which:
•
represents a separate line of business or geographical area, or
•
is part of a co-ordinated plan to dispose of the above, or
•
is a subsidiary acquired exclusively with a view to resale.
Tilte Co is a distinct geographical component which meets the criteria to be classified
as held for sale. Therefore, its results were correctly presented as arising from
discontinued operations in the year ended 31 December 20X6.
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Year ended 31 December 20X7
A disposal group can, exceptionally, be classified as held for sale/discontinued after a
period of 12 months if it meets certain criteria. These criteria refer to the occurrence
of circumstances arising which were previously considered unlikely. As a result, the
non-current asset (or disposal group) previously classified as held for sale is not sold
by the end of that period. However, the sale still has to meet the criteria to be classified
as held for sale, even after the 12-month period has elapsed.
There is no real evidence that Tilte Co met the held for sale criteria for classification as
a disposal group over the extended period beyond 12 months. The instructions to the
agents now stated that they were authorised to sell the shares in Tilte Co if the losses
suffered by Tilte Co exceeded $20 million. Tilte Co made quarterly losses of
approximately $4.5 million per quarter during 20X7 which cumulatively did not reach
the threshold of $20 million. In addition, Jobon Co transferred additional activities to
Tilte Co during February 20X7, meaning that Tilte Co recruited new employees and
invested in new assets. This fact confirmed that Tilte Co was not available for sale in
its present condition. At the shareholders meeting in May 20X7, there was no further
discussion on or approval for the sale of Tilte Co. The authorisation to sell the shares
in Tilte Co was only granted for one year and this was not authorised again by the
subsequent shareholders meeting in May 20X7. Shareholder approval is required in
the jurisdiction in order to sell shareholdings in subsidiaries.
Based on the above, the investment in Tilte Co should not have been shown as a
disposal group in the consolidated financial statements as at 31 December 20X7. As
such, its results should not have been presented as discontinued for the year ended
31 December 20X7 either. The classification of Tilte Co as held for sale in the
comparative figures for the year ended 31 December 20X6, and the presentation of its
results, would need to be restated.
(c)
Signed letter of intent to purchase
Tutorial note
Close attention must be paid to the dates in this part of the question. The first part of
this requirement refers to your answer in part (b), which covers the years ending
31 December 20X6 and 20X7, whereas the second part refers to the years ending
31 December 20X7 and 20X8. It may be worthwhile spending some time reading the
requirement and planning an answer. Set up subheadings to help you correctly identify
what you need to do e.g. 20X6, 20X7.
In accordance with IAS 10 Events After the Reporting Period, an event after the
reporting period is one which could be favourable or unfavourable, and which occurs
between the end of the reporting period and the date when the financial statements
are authorised for issue. An adjusting event is one which provides further evidence of
conditions which existed at the end of the reporting period whereas a non-adjusting
event is one which is indicative of a condition which arose after the end of the
reporting period.
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Although the preliminary results of the group had been published by 1 April 20X8, the
financial statements had not been authorised for issue, therefore the signing of the
letter of intent should be taken into account before the authorisation of the financial
statements. The sale of Tilte Co is now highly probable. However, the issue arises as to
whether the signing of the letter of intent constitutes an adjusting or non-adjusting
event. As the held for sale criteria were only met on 1 April 20X8, the conditions did
not exist at the end of the reporting period. This means that the investment in Tilte Co
should still not be shown as a disposal group held for sale, or its results presented as
arising from discontinued operations, in the consolidated financial statements for the
year ended 31 December 20X7. The treatment in the year ended 20X6 would also
remain unadjusted.
Deferred tax asset
In accordance with IAS 12 Income Taxes, an entity should recognise a deferred tax
asset for all deductible temporary differences arising from investments in subsidiaries
to the extent that, and it is probable that, the temporary difference will reverse in the
foreseeable future and taxable profit will be available against which the temporary
difference can be utilised.
Jobon Co’s treatment of the deferred tax asset does not conflict with the requirements
of IAS 12. This is because the sale of Tilte Co is highly probable, and the tax allowable
loss can be used to relieve future taxable profits.
However, a deferred tax asset should be recognised when the held for sale conditions
of IFRS 5 are met. This did not occur until 1 April 20X8 and, therefore, the deferred tax
asset of $3.6 million will be recognised in the financial statements for the year ended
31 December 20X8. No adjustment is required in the consolidated financial statements
for the year ended 31 December 20X7.
ACCA Marking scheme
Marks
(a)
1 mark per discussion point of key principles and application to the
scenario:
IAS 36 impairment indicators
Application of above to scenario
Comparability/consistency of VIU and carrying amount
Length of forecasts
Future costs
Discount rate
Maximum
(b)
1 mark per discussion point of key principles and application to the
scenario:
IFRS 5 principles
Application to year ended 31 December 20X6
Application to year ended 31 December 20X7
Comparative figures
Maximum
36 2
2
1
4
2
1
2
––––
9
––––
3
3
5
1
––––
8
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(c)
1 mark per discussion point of key principles and application to the
scenario:
IAS 10 principles
Application of above to scenario
IAS 12 principles
Application of above to scenario
Maximum
Total
2
3
1
4
––––
8
––––
25
––––
Examiner’s comments
(a) IAS 36 is a well-understood and well-tested IFRS Accounting Standard so there was some
strong candidate performance displayed. Good candidates read the question which was set
and tailored their answers accordingly. Weaker answers were not always because of a lack
of technical knowledge but rather due to candidates answering the question they wanted to
answer rather than the one being asked. In the first bullet point, the question asked why the
CGU should have been tested for impairment. Strong candidates gave a good discussion of
internal and external indicators of impairment and then went on to use the specific example
which was given in the scenario of a fall in revenue due to online shopping as an indicator.
Weaker candidates seemed to concentrate on the words ‘cash-generating unit’ and spent a
long time explaining how an impairment loss is calculated and allocated amongst a CGU
rather than why there should have been an impairment test.
The calculation of the VIU received mixed answers. A large number were able to discuss the
incorrect use of a 10-year budget when determining future cash flows and the incorrect
inclusion of $5 million of future expenditure on advertising technology. However, many
struggled with the use of different discount rates on the lease liabilities compared to the
lease payments and failed to see the significance of this to the VIU. It was promising to see a
large number stating that an incorrect discount rate had been used, with some correctly
stating it should be a risk adjusted pre-tax rate.
(b) Generally, good attempts were made by candidates, and this was the strongest answered
part of the question overall. The best candidates established they had four questions (i.e. can
the subsidiary be classed as held for sale and discontinued operation for two year-ends) and
provided an answer which was structured in this way using headings for each part of their
answer. Many candidates displayed good knowledge of the IFRS 5 criteria with many scoring
the maximum marks available for this. Good candidates then went on to apply the
information given in the scenario to the criteria to decide upon the correct classification.
Weaker candidates presented confused answers which did not differentiate between ‘held
for sale’, ‘discontinued’ or the different year ends. Presenting well-structured and clear
answers which address all parts of the question is a higher-level skill and something which is
expected in the SBR exam.
(c) This was the weakest area of the question overall. A large part of this seemed to be
because of not reading the dates correctly in the question. The lack of attention to dates
affected the first part of (c) with many discussing impacts on the financial statements for the
year ended 20X8, rather than the years which were covered in part (b) as is clearly flagged in
the requirement.
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A main knowledge gap in part (c) was around IAS 10. Many candidates seem to have the
misunderstanding that events occurring after the year end are always non-adjusting. Often
candidates just stated that the letter was a non-adjusting event without explaining that it
was because it did not impact on conditions in existence at the year end. Candidates need to
be willing to fully develop their answer by saying why they have chosen the accounting
treatment, not just what the treatment is.
Candidates who reached the correct conclusion regarding non-adjusting events often scored
good marks on the deferred tax implications.
Overall, this question contained three scenarios testing core syllabus areas. It was pleasing
to see that candidates seemed to have a good knowledge and understanding of some areas
of the syllabus and were able to apply this in this question. To improve performance,
candidates need to read the questions carefully. Candidates who spend time considering the
layout and presentation of their answers generally score higher marks because they address
every part of the requirements.
37
MAPLE (MAR/JUN 2024)
Walk in the footsteps of a top tutor
Key answer tips
This question tests some commonly examined standards – IAS 32 Financial Instruments:
Presentation and IFRS 9 Financial instruments – and also includes a discussion of a disclosure
note. Additionally, you are asked to refer to the Conceptual Framework, which, although is
tested less frequently, is an important topic as it underpins the IFRS Accounting Standards.
The Conceptual Framework can also serve as a useful reference point when explaining the
treatment of a transaction and cannot recall details of the specific accounting standard.
Parts (a) and (b)(ii) can be answered without referring to a specific exhibit. You typically don’t
need to read all the exhibits up front before answering a question. Use your time effectively
by answering part (a), then reading exhibit 1 before answering part (b) and then reading
exhibit 2 and answering part (c).
The requirement has been broken down into a number of parts, so it’s important to manage
your time so that you are able to attempt each sub requirement. You may well find there are
some ‘easier’ marks to pick up on the very last part, rather than trying to earn the final few
more difficult marks on an earlier requirement.
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(a)
(i)
Disclosure of judgements and estimates
Tutorial note
When discussing the importance of financial statement information, a good
place to start is by outlining the purpose of financial reporting according to the
Conceptual Framework and identifying the information investors need to make
informed investment decisions. Following this, you can explain how the specific
information in the question, in this case disclosures related to judgements and
estimates, can help meet these information needs.
According to the IASB’s Conceptual Framework for Financial Reporting, the users
of financial statements require information which will help them to make
decisions about advancing resources to the reporting entity. To make these
decisions, they require information which will help them to assess the entity’s
future profits and net future cash flows.
An entity always makes judgements and estimates in preparing financial
statements, some of which will have a significant effect on the reported results
and financial position. An explanation of the key judgements made in
determining an element of the financial statements is valuable to investors as it
helps them to assess an entity’s financial position and performance. It also
enables an understanding of the sensitivities to changes in assumptions.
A description of management’s thinking in an area with possible quantification
of information or a range of possible outcomes will enable investors to assess
the quality of management’s accounting policy decisions.
It may also allow investors to gauge how changes to estimates could affect the
future results. Often, disclosure of management’s judgements can help
investors understand the potential cash flow implications and help investors in
their future cash flow modelling. However, only the judgements in applying
accounting policies which have the most significant effect on amounts
recognised are included in the IAS 8 Basis of Preparation of Financial Statements
disclosure of key judgements.
(ii)
Judgements and estimates when accounting for business combinations
Tutorial note
Do make sure your three examples are linked to business combinations.
Examples of potential areas where judgements and estimates may arise when
accounting for a business combination include:
•
whether an investee is a subsidiary or associate
•
whether an acquisition is of a business or group of assets
•
which entity is the acquirer in a business combination
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(b)
(i)
•
determining the acquisition date
•
estimated goodwill impairment
•
classification of joint arrangements
•
the fair value of the subsidiary’s identifiable net assets, and
•
the fair value of the non-controlling interest at acquisition.
Usefulness of disclosure note
Tutorial note
The requirement asks you to ‘critically assess’ the disclosure note, so ensure that
you do not focus solely on criticisms. Your answer should also include ways in
which the note provides useful information.
Use the structure of the exhibit to help with the structure of your answer. You
may wish to have a subheading assessing the overall content and structure of
the note, and then have a subheading for each of the three areas identified in
the note.
When asked to consider how useful information is, make sure you refer to the
fundamental and enhancing characteristics in the Conceptual Framework. If the
information disclosed embodies these characteristics, then the information will
be useful to the users of the financial statements.
The note clearly states financial statement areas affected by judgements and
estimates, thus giving investors an insight into the areas most significantly
affected in the financial statements. This is relevant information because it will
help investors assess the level of risk associated with their investment.
The note is clearly structured. This will make it more understandable for
financial statement users.
Property, plant and equipment (PPE)
Depreciation is an estimate and Maple Co is clearly outlining the methodology
used. This enables investors to assess its adequacy. They will also be able to
make comparisons with other businesses in the same sector.
The depreciation recognised in the period is based upon estimates of unmined
ore. This information is determined by Maple Co’s own engineers. This may give
investors confidence about the technical knowledge of those involved in this
estimation process. Conversely, investors may believe that the use of external
experts, who are less likely to be influenced by management, will lead to a more
faithful representation of the underlying PPE balance.
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Provisions
Tutorial note
Remember, there are two professional marks for this part of the question. Keep
referring to investors and their information needs in your answer to get both marks.
Provisions are liabilities of uncertain timing or amount. Due to this, they can be
an area of high risk for investors, who require information to help determine the
future net cash flows of the entity.
The investors are informed in the note that the measurement of provisions is
subject to significant judgements and uncertainty. This is important because, if
the mines are closed earlier than expected, cash outflows might be required
sooner than anticipated.
Maple Co has made reference to external, independent experts who are
involved in estimating future restoration costs. This means that the estimates
are more likely to be based on a recognised method, rather than on estimates
and assumptions made by the directors. Investors may therefore have more
confidence that the provision is faithfully represented and that the actual future
cash outflows will not significantly differ from the provision which has been
recognised.
Maple Co has not provided a sensitivity analysis in relation to the impact of mine
closure plans on its restoration and decommissioning provisions. This
information would help users to quantify the potential impact of this uncertainty
on the entity’s future profits and future cash outflows.
Inventories
Maple Co states that the assumptions are periodically updated but there is no
information about how frequently estimates were revised or the date when the
assumptions were made. The assumptions underlying significant estimates
should be quantified if possible as investors need this information to fully
understand their effect. This is particularly relevant in this industry where there
are significant sources of estimation uncertainty and where investors wish to
make comparisons with other companies.
(ii)
Accounting policies
In the absence of a specific IFRS Accounting Standard, the management of
Maple Co will need to apply the hierarchy in IAS 8 Basis of Preparation of
Financial Statements to develop and apply an accounting policy. IAS 8 states that
management must use its judgement in developing and applying an accounting
policy which results in information which is relevant and reliable. In making that
judgement, management must refer to, and consider the applicability of, the
following sources in descending order:
•
the requirements and guidance in IFRS Accounting Standards dealing with
similar and related issues, and
•
the definitions, recognition criteria and measurement concepts for assets,
liabilities, income and expenses in the IASB’s Conceptual Framework for
Financial Reporting.
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(c)
Financial instruments
Tutorial note
Assets and liabilities are only allowed to be offset in specific circumstances, so typically
they will need to be presented separately.
When explaining how the loan and shares should be treated in the financial statements,
be sure to cover both the initial classification in accordance with IAS 32 Financial
Instruments: Presentation, and the initial measurement as per IFRS 9 Financial
Instruments.
Although both agreements stipulate the same payment date, there is no contractual
obligation binding these agreements. Accordingly, Maple Co collects $3 million from
the third party on its own behalf, to fulfil its obligations towards its preference
shareholders. The lack of a contractual link between the two agreements means that
Maple Co is subject to two separate contracts which result in the receipt and payment
of cash on the same day, 1 May 20X8.
The definition of a financial asset in IAS 32 Financial Instruments: Presentation includes
a contractual right to receive cash. The definition of a financial liability given by IAS 32
includes a contractual obligation to deliver cash. IFRS 9 Financial Instruments states
that an entity should recognise financial assets and liabilities when they become party
to the contract.
The third-party loan creates a right to receive cash in the future, and therefore a
financial asset should be recognised on 1 January 20X7. IFRS 9 states that financial
assets are recognised at fair value, which is $3 million.
The preference shares create a separate obligation to repay cash in the future and
therefore should be recognised as a financial liability on 1 January 20X7. Financial
liabilities should be recognised at fair value, which is $3 million.
Although the financial asset and financial liability are both recognised at fair value of
$3 million, they should not necessarily be offset. IAS 32 states that a financial asset and
a financial liability should be offset and the net amount presented in the statement of
financial position when an entity:
•
currently has a legally enforceable right to set off the recognised amounts, and
•
intends either to settle on a net basis, or to realise the asset and settle the
liability simultaneously.
The financial asset and financial liability are held with different parties and cannot be
offset.
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Tutorial note
The requirement specifically refers to recognition. However, credit would also be given
if candidates approach this question using principles from IFRS 9 on derecognition.
An alternative derecognition focussed answer that would lead to the same conclusions
is outlined below:
IFRS 9 states that a financial asset should be derecognised when the contractual rights
to the cash flows from the financial asset expire, or the entity transfers the financial
asset. The rights to the cash flows will not expire until 1 May 20X8 and not on 1 January
20X7.
For the transfer of an asset to occur, the entity must have an obligation to remit any
cash flows it collects on behalf of the eventual recipients without material delay. This
is not the case for Maple Co, as there is no obligation to use the cash received from the
repayment of the loan to redeem the preference shares.
Similarly, a financial liability should be derecognised only when it is extinguished, which
is when the obligation specified in the contract is discharged, cancelled or expires. This
will occur on 1 May 20X8 and not 1 January 20X7. Therefore, the liability should not be
derecognised on 1 January 20X7.
Therefore, the financial asset does not qualify for derecognition and the financial
liability resulting from preference shares was not extinguished. Both should be
presented in the statement of financial position as at 31 December 20X7.
ACCA Marking scheme
(a)
(b)
(i)
(ii)
(i)
1 mark per relevant discussion point
1 mark per specific example
Discussion of good practice and areas to improve, in relation to:
General usefulness
PPE
Provisions
Inventories
Maximum
(c)
(ii)
Discussion of IAS 8
Application and discussion of:
IFRS 9/IAS 32 principles
Application to scenario
Maximum
Professional skills marks
Total
KA PL AN P U BLI SH IN G
Marks
3
3
2
3
3
2
––––
7
––––
3
4
5
––––
7
––––
2
––––
25
––––
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Examiner’s comments
(a)(i) Most candidates answered this part of the question well. Strong candidates commented
how disclosures on judgements and estimates provide relevant information which helps
investors with decision making. Weaker candidates did not refer to the Conceptual
Framework as required in the question.
(a)(ii) Most candidates were able to give three examples. However, some candidates
provided examples of judgements and estimates in other areas, such as ‘provisions’ and ‘bad
debts’, without any reference to business combinations.
(b)(i) Candidates who struggled seemed to have two main issues. Firstly, many of these
candidates simply copied and pasted parts of the disclosure into the response option without
much comment on the usefulness to users. Secondly, it was clear that some candidates didn’t
understand the requirement to ‘critically assess’.
Strong answers were balanced and commented on what was useful about the disclosures as
well as what is wrong and/or missing. The disclosure note contained a mixture of information
which was useful and less useful, but not all candidates seemed to realise that.
Candidates who scored highly on this question used headings to structure their answer and
provided balanced comments on the usefulness of the disclosures given in all three areas of
the financial statements which were asked about. Good candidates gave comprehensive
answers which commented on why the disclosure was useful/not useful to investors rather
than just saying whether it was useful or not.
Part (b)(ii) of the question asked candidates how accounting policies should be established
in the absence of an accounting standard. Only the strongest candidates referenced IAS 8
Basis of Preparation of Financial Statements. Those who did, scored well, as they were able
to discuss the IAS 8 requirements to use other accounting standards as well as the Conceptual
Framework. Those who didn’t mention IAS 8 were still able to accrue marks for the parts of
their answers which were relevant.
(c) This element of the question was well-answered by most candidates. Good candidates
referenced IAS 32 Financial Instruments: Presentation with regards to the classification of the
financial instruments and the netting off criteria, correctly stating that the asset and liability
should not be netted off. Those candidates also used the recognition criteria in IFRS 9 to
discuss the amounts which the asset and liability should be recognised at in the financial
statements.
Overall, the examining team worked hard to make this question accessible, breaking down
the requirements into manageable elements. This seemed to work well for the majority of
candidates, who were able to score solid marks across each of the individual requirements.
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38
JACINTA (SEP/DEC 2023)
Walk in the footsteps of a top tutor
Key answer tips
This question tests some commonly examined standards – IFRS 9 Financial instruments,
IFRS 15 Revenue from Contracts with Customers and also includes some group accounting.
Part (a) includes a debt financial asset with a loss allowance based on expected credit losses.
Technical areas like this can cause candidates to skip the requirement.
For those who do attempt this seemingly tricky question, do not overrun your time in an
attempt to produce a perfect answer. Parts (b) is, arguably, much simpler and offers more
marks than (a).
Part (b) (i) tests IFRS 15. Candidates should be very familiar with IFRS 15 Revenue from
Contracts with Customers as it is tested regularly.
Part (b) (ii) tests group accounting and IAS 21 The Effects of Changes in Foreign Exchange
Rates. It includes some consolidation basics (specifically intra-group transactions) as well as
foreign currency implications. The requirement also needs the impact on the individual
accounts so do not forget these easy marks!
(a)
Financial asset
Tutorial note
Testing technical areas regarding financial instruments often causes candidate
consternation and leads to omitted answers galore. If you do not attempt the question,
it’s impossible to score any marks at all. That’s a guarantee.
Here the examiner has tested expected credit loss calculations as part of the required
loss allowance.
You maybe unsure of the treatment of the expected credit losses but that doesn’t mean
you will not score well on the question. Focus on the basic accounting of the financial
asset to chip away at credit. Here the initial recognition of a financial asset (at fair
value) and subsequent treatment (at amortised cost – this is helpfully given to you in
the question if you forgot the rule) will get you a whopping 7 marks. The maximum is 8.
The horrible bits are close to being surplus to requirements.
Moral of the story – never leave requirements out as you may surprise yourself with
the marks available for the basic treatments.
IFRS 9 Financial Instruments requires recognition of impairment losses on a forwardlooking basis, which means that impairment losses are recognised before the
occurrence of any credit event. These impairment losses are referred to as expected
credit losses (ECL). IFRS 9 requires that a loan be reported with its risk of expected loss,
regardless of whether the risk has already materialised or will materialise in the future.
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Tutorial note
Outline the rule for initial recognition of a financial asset, then apply them to the
scenario. This gets 2 marks per the mark scheme.
The purchased credit-impaired financial assets are recorded on initial recognition at
the transaction price without presentation of an allowance for expected contractual
cash shortfalls. This is because the expected shortfalls are implicit in the purchase
price. On initial recognition, the following journal entry is required:
Dr Loan asset
$32m
Cr Cash
$32m
Tutorial note
Outline the rule for the subsequent treatment of a financial asset, then apply them to
the scenario. This gets 3 marks per the mark scheme.
At 31 December 20X6, Jacinta Co would calculate interest income of $1.25 million by
applying the effective interest rate (EIR) of 3.9%:
Opening
31 December 20X6
$m
32
Effective
interest at 3.9%
$m
1.25
Cash flow
Closing
$m
(8.8)
$m
24.45
Jacinta Co must record the following entries:
Dr Loan asset
$1.25m
Cr Profit or loss (investing)
$1.25m
Dr Cash
$8.8m
Cr Loan asset
$8.8m
Tutorial note
The ECL part is likely to cause problems, but by this stage you may well have passed
anyway. Outline what you understand regarding the loss allowance and move on.
Remember the loss allowance is always included for debt financial assets classified as
amortised cost or FVOCI. Think about it like an allowance for bad debt against the
financial asset.
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AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
The amount recognised as a loss allowance for these assets is not the total amount of
lifetime ECL, but instead the change in lifetime ECLs since initial recognition of the
asset. Any favourable changes in lifetime ECL are recognised as an impairment gain.
Tutorial note
The discount factors are calculated using 1/(1+r)n. Meaning for the cash flow discount
in 1 year, a discount factor calculated as 1/1.039 is used, 1/1.03922 in 2 years etc.
The revised expected cash flows should be discounted using the original EIR and
compared to the original expected cash flows as at 31 December 20X6:
Date
31 December 20X7
31 December 20X8
31 December 20X9
Cash flow
$m
8.8
8.8
8.8
Discount factor
3.9%
0.962
0.926
0.892
Previously
Date
31 December 20X7
31 December 20X8
31 December 20X9
Cash flow
$m
10
10
10
Discount factor
3.9%
0.962
0.926
0.892
Currently
Present value
$m
8.47
8.15
7.85
––––––
24.47
––––––
Present value
$m
9.62
9.26
8.92
––––––
27.80
––––––
The resulting favourable change in lifetime ECLs is therefore $3.34 million ($27.8m –
$24.47m). An impairment gain of $3.34 million is recognised in profit or loss at
31 December 20X6.
Dr Loss allowance
$3.34m
Cr Profit or loss (investing)
$3.34m
Tutorial note
An alternative approach is to calculate that the revised cash flows show an increase
of $1.2 million per annum from 20X7 onwards and discount this change to calculate
$3.34 million ($1.2m/1.039 + $1.2m/1.0392 + $1.2m/1.0393).
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At 31 December 20X6, the following amounts will be recognised in the statement of
financial position:
Loan carrying amount will be $24.45 million.
Loss allowance will be a debit balance of $3.34 million.
(b)
(i)
Internet service contract
Tutorial note
Outline the IFRS 15 approach for recognising revenue and apply it as specifically
as possible to both transactions – the internet service contract and the
equipment sale.
In accordance with IFRS 15 Revenue from Contracts with Customers, each
performance obligation requires the determination of whether it is satisfied by
transferring the control of goods or services over time or at a point in time.
With regards to the internet service contract, the customer simultaneously
receives and consumes the economic benefits of the provided service as Jacinta
Co performs it. Revenue is therefore recognised over time.
Revenue of $1 million will be recognised in each year of the contract. At
31 December 20X6, a contract liability of $1 million will be presented as a
current liability on the statement of financial position.
Equipment
Tutorial note
Discuss the implication of the right to return. Think about the likelihood of the
asset being returned and a refund being processed based on the specific terms
presented. You may have seen other similar scenarios that had different
economic terms. This means that the conclusions used may not be relevant to
this situation. You cannot always just roll forward what you have seen before.
Conclude on the terms you find in this scenario.
IFRS 15 states that if a customer has a right to require the entity to repurchase
the asset at a price which is lower than the original selling price, then the entity
must assess whether the customer has a significant economic incentive to
exercise the right. A key factor to consider is the relationship between the
repurchase price and the expected fair value of the asset at the date of
repurchase.
If the customer has a significant economic incentive to require the entity to
repurchase the asset, then the entity accounts for the agreement as a lease,
unless the contract is part of a sale and leaseback transaction. If the customer
does not have a significant economic incentive, then the entity accounts for the
agreement as the sale of a product with a right of return.
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Sear Co does not have a significant economic incentive to require Jacinta Co to
repurchase the asset because the repurchase price of $20,000 is lower than the
expected fair value of $75,000. Additionally, the market for second-hand
equipment is very strong and Sear Co would be able to sell the equipment easily
at the end of the two-year agreement.
Therefore, Jacinta Co has transferred control of the equipment to Sear Co on
1 January 20X6. This is because Sear Co is not limited in its ability to direct the
use of the equipment, or its ability to obtain substantially all of the remaining
benefits from the equipment. Jacinta Co will account for the transaction as a
sale with a right of return.
Revenue will be measured at the gross transaction price of $500,000, less the
expected level of returns, which, in this case, will be nil. This means no refund
liability or return asset will be recognised. Jacinta Co will update its
measurement of the refund liability and return asset at each reporting date for
changes in expectations about the amount of the refunds.
(ii)
Sale of inventories
Tutorial note
Use the requirement to break down your answer. The requirement needs the
impact to the individual accounts of Jacinta (the parent), the subsidiary and the
group financial statements.
In the individual accounts, a normal sale is recorded in Jacinta and a foreign
currency purchase (recorded at historic rate) in the individual accounts of the
subsidiary.
Jacinta Co at 1 September 20X6
When recording the sale of $2 million as revenue on 1 September 20X6, and the
cost of the inventories in cost of sales of $1.35 million, Jacinta Co has realised
profit of $650,000 ($2m – $1.35m) in its individual financial statements.
The subsidiary at 1 September 20X6
The subsidiary has recorded the cost of the inventories at €2.5 million ($2m ×
1.25). At 1 September 20X6, the cost of the inventories includes the original cost
to Jacinta Co of €1,687,500 ($1.35m × 1.25) plus the intragroup profit of
€812,500 ($650,000 × 1.25) charged by Jacinta Co.
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Consolidated financial statements at 31 December 20X6
Tutorial note
In the group accounts, the impact of the intra-group transactions would need to
be eliminated, including any unrealised profit.
As the group includes a foreign subsidiary, consideration of the effect of
translating the foreign subsidiary would also receive credit.
On consolidation at 31 December 20X6, the intra-group revenue and cost of sales
should be eliminated. The intra-group profit of $650,000 (€812,500) is also eliminated
as the inventories have not been sold and the profit is not realised outside the group.
When the subsidiary’s financial statements are translated into the presentation
currency of the group, the cost of the inventories of €1,687,500 is translated at the
current exchange rate at 31 December 20X6 and inventories of $1,298,077 (€1,687,500
÷ 1.30) are recognised in the group statement of financial position. Therefore, at
31 December 20X6, Jacinta Group will recognise a loss on exchange on inventories of
$51,923 ($1.35m – $1,298,077) as part of the translation reserve associated with the
subsidiary.
Because the subsidiary is wholly-owned, there is no non-controlling interest.
ACCA Marking scheme
Marks
(a)
1 mark per discussion point of key principles and application to the
scenario:
IFRS 9 principles
Initial recognition
Amortised cost
Movement in ECLs
Maximum
(b)
(i)
1 mark per discussion point of key principles and application to the
scenario:
Internet service contract
Equipment
Maximum
(ii)
1 mark per discussion point of key principles and application to the
scenario:
Parent
Subsidiary
Group
Maximum
Total
37 6
3
2
2
4
–––
8
–––
4
9
–––
10
–––
2
2
5
–––
7
–––
25
–––
KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Examiner’s comments
(a) Part (a) of the question dealt with a credit-impaired loan measured at amortised cost.
IFRS 9 is a core SBR topic area. Despite this, candidates’ performance on this requirement
was very weak. This requirement was often not attempted or very little was written. Those
who did attempt part (a) often gave answers which were technically incorrect or far too short
to achieve a good mark. Those who did attempt the question often omitted the journal
entries. It can only be assumed that candidates did not know what journals to give.
Nevertheless, there were strong performances by candidates who did attempt this part.
Good candidates were able to both explain the rules of IFRS 9 with regards to credit-impaired
loans and use the numerical example given to demonstrate that they could apply their
knowledge to a scenario. Strong candidates correctly identified that the purchased creditimpaired financial assets should be recorded on initial recognition at the transaction price.
The calculation of interest income was correct. They then went on to calculate revised
cashflows and calculate an impairment gain. Credit was given to candidates who made a good
attempt at these calculations and recognised that an impairment gain had arisen, even if
their calculations contained errors.
Part (b)(i) of the question provided candidates with a scenario where a contract for internet
services had been provided to a customer for a fixed period, along with the sale of some
equipment which could be returned by the customer or sold by the customer at the end of
the contract. IFRS 15 is an important part of the SBR syllabus. Many candidates demonstrated
a good understanding of the IFRS 15 rules and how they should be applied in this scenario.
They were very comfortable with the internet service contract, correctly saying that revenue
on this part of the contract should be recognised over time. They could apply their knowledge
to the numerical scenario with many correctly stating the amount of revenue which should
be recognised. Fewer candidates were able to state that there would also be a liability, as the
full amount of the revenue had been paid in advance.
The treatment of the equipment was not as well answered. However, stronger candidates
stated IFRS 15 knowledge, and then went on to apply this to the numerical scenario provided.
The strongest candidates discussed refund liabilities and how they should be treated.
Part (b)(ii) of this question provided a brief scenario where a parent had sold inventories to
a wholly-owned overseas subsidiary. Unfortunately, a significant number of candidates did
not attempt this requirement. This was surprising considering the focus given to consolidated
financial statements by candidates, and the relative simplicity of the scenario.
From those that did answer this requirement, most were able to deal with the individual
financial statement entries, but there was much confusion over what exchange rates to use
when considering the sale/purchase from the viewpoint of the parent/subsidiary. Very few
candidates commented on the consolidated financial statements aside from a general
comment about removing intra-group sales and profit. Again, this was disappointing given
the scenario was on a very examinable topic area. Many candidates did not use subheadings
and it was not always clear what set of financial statements they were discussing.
Overall, this was a succinct question with short scenarios testing core syllabus areas.
Candidates seemed to lack knowledge and understanding of some areas and seemed to
struggle with the applied nature of this question. SBR is a high-level exam where application
of knowledge is expected.
KA PL AN P U BLI SH IN G
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39
BENITO (SEP/DEC 2023)
Walk in the footsteps of a top tutor
Key answer tips
Part (a) and (b) test sales and leasebacks under IFRS 16 Leases in an extensive fashion. This is
a great question to learn the principle of a sale and leaseback as all angles are covered!
Part (c) considers how the various options of accounting for the sale and leaseback could
affect a variety of KPIs. Two professional marls here so ensure you have a good attempt.
Apply your marks scheme to allocate time wisely to avoid omitting part (c).
(a)
(i)
Assessing whether the transfer qualifies as a sale
Tutorial note
Assessing whether a sale has occurred is the first task to perform whenever
dealing with a sale and leaseback arrangement.
The entity assesses whether the transfer qualifies as a sale by using the guidance
in IFRS 15 Revenue from Contracts with Customers. A sale has occurred when
the seller has satisfied a performance obligation by transferring control of the
asset. Control refers to the ability to direct the use of the asset and to obtain
substantially all of its remaining benefits.
(ii)
Accounting treatment if the transfer QUALIFIES as a sale
Tutorial note
If the arrangement qualifies as a sale, 2 steps are required.
1
Derecognise the asset and record any gain or loss on disposal
2
Record the lease – a right-of-use asset and a lease liability are recognised.
The seller-lessee derecognises the asset.
A right-of-use (RoU) asset is recognised, and is measured at the proportion of
the previous carrying amount of the asset which relates to the rights retained
by the seller-lessee.
A lease liability is recognised, equal to the present value of the lease payments
to be made.
A profit or loss is reported in the statement of profit or loss, based on the rights
transferred to the buyer-lessor.
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Tutorial note
Proceeds in excess of the fair value are complications that may arise within a
sale and leaseback arrangement and would represent prize-winner points. Do
not worry if you failed to spot this as few people did. If you answered using the
basic accounting treatments described above, you would pass the requirement.
Note that if the consideration received for the asset exceeds its fair value, this
is accounted for as additional financing. If the consideration is below the asset’s
fair value, then this is accounted for as a prepayment of lease payments.
Subsequently, the RoU asset is depreciated over the lease term. Interest is
charged on the lease liability using the rate implicit in the lease.
(iii)
Accounting treatment if the transfer DOES NOT QUALIFY as a sale
Tutorial note
If the arrangement does not qualify as a sale, it is accounted for as a financing
arrangement – the proceeds represent a loan.
The seller-lessee continues to recognise the asset on its statement of financial
position. The seller-lessee accounts for proceeds from the sale and leaseback as
a financial liability in accordance with IFRS 9 Financial Instruments.
(iv)
The effect if an agreement contains a call option
Tutorial note
The presence of the call option to repurchase means that control of the asset will
only transfer once the option expires. Therefore, the treatment is the same as if
the transaction did not qualify as a sale.
If the transaction contains a call option under which the seller-lessee can, at its
option, repurchase the property, then such an option generally precludes sale
accounting under IFRS 15. This is because the existence of the call option means
that the seller-lessee retains control of the property. Therefore, sale and
leaseback accounting does not apply, with the asset remaining on the statement
of financial position and the cash received treated as a financial liability.
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(b)
Head office transfer qualifies as a sale
Because the consideration for the sale of the head office is not at fair value, Benito Co
recognises the $0.75 million excess over fair value ($7.5m – $6.75m) as additional
financing provided by Otine Co. The present value of the annual payments amounts to
$5.47 million of which $0.75 million ($7.5m – $6.75m) relates to the additional
financing and $4.72 million ($5.47m – $0.75m) relates to the lease.
At 1 January 20X7, Benito Co measures the RoU asset arising from the leaseback of the
building at the proportion of the previous carrying amount of the head office which
relates to the right of use retained. This is calculated as $3.75 million (the carrying
amount of the head office) ÷ $6.75 million (the fair value of the building) × $4.72 million
(the discounted lease payments for the RoU asset), that is $2.62 million.
Benito Co recognises only the amount of the gain which relates to the rights
transferred to Otine Co. The gain on sale is $3 million ($6.75m – $3.75m), of which
$2.1 million ($3m ÷ $6.75m × $4.72m) relates to the right to use the head office
retained by Benito Co. The rights transferred to Otine Co are measured at $0.9 million
($3m ÷ $6.75m × ($6.75m – $4.72m)), which is recognised in the operating section of
the statement of profit or loss.
At 1 January 20X7, Benito Co accounts for the transaction as follows.
Cash
RoU asset
Property, plant and equipment
Liabilities (lease liability and financial liability)
Gain on rights transferred (SOPL)
Dr
$m
7.50
2.62
Cr
$m
3.75
5.47
0.90
Head office transfer does not qualify as a sale
The head office will continue to be recognised by Benito Co at its carrying amount of
$3.75 million. A financial liability is recognised equal to the transfer proceeds of
$7.5 million.
Cash
Financial liability
(c)
Dr
$m
7.5
Cr
$m
7.5
Financial statements
Tutorial note
Think about the impacts of your journals on the KPIs (including any mistakes- you will
not have perfect journals as above under exam conditions).
Make sure you get answers for each of the KPIs. Do not focus on just one. To be
professional (and get the full professional marks), you will need to consider every KPI
mentioned in the task. Brief answers on all 4 KPIs would receive more credit than a long
answer covering only 1 KPI.
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AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
The presence of the call option to repurchase means that control of the asset will only
transfer once the option expires. Therefore, the treatment is the same as if the
transaction did not qualify as a sale.
The decision as regards whether the sale and leaseback can be treated as a sale under
IFRS 15 can significantly affect performance ratios. If the sale and leaseback cannot be
treated as a sale under IFRS 15, the gross assets and liabilities will be greater for the
seller-lessee as the asset remains on the statement of financial position and the cash
received is treated as a financial liability. Total debt will be higher and this may have
an impact with loan covenants based on total debt levels as it may lead to breaches.
The difference in treatment will also affect some profitability ratios because of two
elements: the depreciation and the interest charge. The depreciation and interest
charge will be higher in this case as the carrying amount of the property is recorded at
a higher value than the RoU asset and the interest charge will be higher as the financial
liability is higher than the lease liability. Also, there will be no gain recorded on the sale
of the asset, thus reducing profit.
Key performance indicators (KPIs)
KPI
Calculation
Effect of sale and leaseback on KPI if the
transaction is NOT a sale
Gearing
Debt/equity
Gearing will be higher because the
financial liability of $7.5 million is greater
than the combined lease and financial
liability of $5.47 million.
EBIT
Earnings before
interest and tax
EBIT will be lower because of a higher
depreciation charge (based on original
carrying amount of $3.75 million rather
than RoU asset of $2.62 million) and no
gain on sale.
Interest has no impact on EBIT.
Asset turnover
Sales/total assets
Asset turnover will be lower because the
property remains on SOFP at its carrying
amount of $3.75 million. This is higher
than the RoU asset of $2.62 million if the
transfer is a sale.
Return on capital
employed (ROCE)
EBIT/equity plus
financial liabilities
ROCE will be lower because EBIT will be
lower. Also, financial liabilities will be
higher if the asset is not sold.
If the transfer is a sale, equity will be
higher because of the gain on sale and the
reduced deprecation, but also EBIT will be
higher.
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ACCA Marking scheme
(a)
(b)
Marks
9
1 mark per discussion point of key principles
1 mark per application point made:
Qualifies as a sale
Does not qualify as a sale
Maximum
(c)
7
2
–––
7
–––
1 mark per discussion point, which might include the following issues:
Statement of financial position
Statement of profit or loss
Gearing
EBIT
Asset turnover
ROCE
Maximum
Professional skills marks
Total
–––
7
–––
2
–––
25
–––
Examiner’s comments
This question was a Question 4 in the examination. Question 4 is often the last question
attempted by candidates. Those with poor time management leave themselves without
adequate time to think, plan and answer this question.
A significant number of candidates did not answer all parts of the question. Candidates
should be mindful that it is much easier to gain the first marks from a new question, or part
of a question, than the final higher level marks in another question in which they have
overallocated their time.
Question 4 tests candidates’ knowledge and application of a range of IFRS Accounting
Standards and often how the implication of applying these standards impacts on the
stakeholders of the financial statements, namely the investors. In this question the
knowledge and application of sale and leaseback accounting was tested, along with the
implication of the accounting on a range of key performance indicators (KPIs).
Part (a) of this question comprised four short requirements relating to sale and leaseback
accounting. This allowed those candidates with sound knowledge and good technique to
benefit as they were able to recognise that they needed to give a small number of points per
sub requirement. This part was generally answered well.
In part (a) (i) candidates were asked to describe how an entity assesses whether the transfer
of an asset qualifies as a sale in sale and leaseback accounting. Overall, candidates
demonstrated good general knowledge of both IFRS 15 and IFRS 16 Leases. Many candidates
could comfortably describe the importance of control passing and how that could be
evidenced. They were also very good at discussing performance obligations and referring to
IFRS 15 guidance in this regard.
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AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
In part (a) (ii) candidates were asked to explain how sale and leaseback transactions are dealt
with by the seller-lessee if the transfer is a sale. Many candidates correctly stated that the
underlying asset should be derecognised. They then went on to explain right-of-use assets
and the recognition of gains or losses in the statement of profit or loss. Not many candidates
explained what would happen if the sale proceeds were not equivalent to the fair value of
the underlying asset.
Part (a) (iii) asked candidates to explain how sale and leaseback transactions are dealt with
by the seller-lessee if the transfer is not a sale. A significant number of candidates discussed
the need to recognise a financial liability and to account for this in accordance with IFRS 9.
Some candidates missed the basic point that the underlying asset should continue to be
recognised as no sale had been made.
Part (a) (iv) asked candidates to explain the accounting treatment with regards to sale and
leaseback if a call option was in place. Many candidates did not attempt this element and
those that did attempt it did not give strong answers. Only a minority of candidates were
able to state that no sale has occurred because control is retained, and therefore that a
liability must be recognised.
Part (b) required candidates to apply what they had described in part (a) to a numerical
situation.
Most candidates were able to give a fair answer where the transfer qualified as a sale,
although various errors were made. The main error was not recognising that the sale
proceeds exceeded the fair value of the underlying asset, thus resulting in a financing/liability
element. This then impacted the rest of the answer. However, candidates did not lose all
subsequent marks and appropriate award was attributed to candidates who could explain
the accounting entries as if the transaction was at fair value.
Where a sale had not occurred, most correctly stated that a financial liability is recognised at
the value of the proceeds received. Some missed basic marks by not stating that the asset
continues to be recognised at its carrying amount.
In this question, the accounting entries were not specifically asked for; however, many
candidates did take this approach. It is concerning that some candidates who took this
approach struggled with basic double entry concepts.
Part (c) of this question asked candidates how the impact of the sale and leaseback qualifying
as a sale or not qualifying as a sale would affect a range of key performance indicators (KPIs)
which were provided in the scenario.
Those who attempted this question often scored well as they were able to demonstrate their
accounting knowledge and the impact of the different accounting treatments on the financial
statements. Well prepared candidates made concise and relevant points about each of the
KPIs provided. Unfortunately, a significant number of candidates did not attempt this
element of the question at all.
KA PL AN P U BLI SH IN G
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40
FERNANDA (MAR/JUN 2023)
Walk in the footsteps of a top tutor
Key answer tips
Part (a) covers a relatively straight-forward IAS 37 Provisions, contingent liabilities and
contingent assets scenario.
Part (b) includes a tricky put option and non-redeemable preference share with characteristics
of both debt and equity.
Part (c) tests every candidates’ favourite topic – consolidated statements of cash flow (CSCF).
It’s an unusual requirement but if you know the formats of the CSCF and have practiced other
CSCF questions then there are easy marks to be achieved.
Watch your timing and make sure you attempt each part of each requirement.
(a)
Provisions and contingencies
Tutorial note
State the IAS 37 rules then apply them to this scenario. Do not always assume that the
approach taken by the company will be incorrect. Sometimes you will need to clarify,
using the standards, that the conclusions made are accurate.
IAS 37 is a standard covered in previous studies but is still regularly tested at SBR.
IAS 37 Provisions, Contingent Liabilities and Contingent Assets states that a provision
should be recognised when:
•
an entity has a present obligation (legal or constructive) because of a past event
•
it is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation, and
•
a reliable estimate can be made of the amount of the obligation.
If these conditions are not met, no provision is recognised.
In accordance with IAS 37, the conditions for establishing a liability are not fulfilled. At
31 December 20X7, there was no present obligation for Fernanda Co as no legal action
had been brought in connection with the accident and the accident investigators were
still assessing the responsibilities of the various parties. It was not yet probable that an
outflow of resources embodying economic benefits would be required to settle the
obligation, as the extent of the damage and the details of any compensation payments
to be made had not as yet been determined. Also, if compensation were payable to
third parties by the issuer, the insurance is expected to cover the amount payable.
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However, Fernanda Co should disclose a contingent liability, unless the possibility of
an outflow of resources embodying economic benefits is remote. There is a possible
obligation as the decision outcome is determined by the accident investigators and not
Fernanda Co. There is a level of uncertainty attached to the investigation of the
accident relating to the nature and liability of individuals. The extent of the damage
and any compensation which may be payable remains to be established. The degree
of uncertainty is not such that the possibility of an outflow of resource can be
considered remote.
(b)
(i)
Put options
Tutorial note
The answer here focusses on the IAS 32 justification as to why the contract is a
financial liability. The same conclusion would be made if a candidate used IAS 37
Provisions, contingent liabilities and contingent assets. An obligation exists
meaning a liability is created. If your conclusion is similar, you will not be
penalised despite taking an alternative route to the answer. It is the discussion
of the obligation created by the put option that is important.
Fernanda Co’s treatment of non-controlling interest put options as contingent
liabilities is not in accordance with IAS 32 Financial Instruments: Presentation.
This standard states that a contract which contains an obligation for an entity to
purchase its own equity instruments for cash or another financial asset gives rise
to a financial liability for the present value of the redemption amount. The noncontrolling interest put options are contracts which contain an obligation for an
entity to purchase its own equity instruments for cash. The financial liability
should be recognised in the statement of financial position at 31 December 20X7
rather than disclosed as a contingent liability in the notes to the accounts.
(ii)
Compound instrument
Tutorial note
It is very, very unusual for a departure from the IFRS Accounting Standards to be
acceptable. I would always be sceptical when an argument is presented to justify
such a departure.
Fernanda Co should have applied IAS 32 to the non-redeemable preference
shares and not invoked the exception in IAS 8 Basis of Preparation of Financial
Statements. IAS 8 acknowledges that, in extremely rare circumstances,
management may conclude that compliance with an IFRS Accounting Standard
requirement would be so misleading that it would conflict with the objective of
financial statements set out in the Conceptual Framework. In such a case, the
entity is required to depart from the IFRS Accounting Standard requirement,
with detailed disclosure of the nature, reasons, and impact of the departure.
KA PL AN P U BLI SH IN G
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Tutorial note
Discussion of the definition of liabilities and equity will carry credit. There are
characteristics of both elements within these preference shares.
The last line of the scenario and the requirement gives a little helping hand for
any candidates who may have failed to identify that having characteristics of
both a liability and equity instrument would be treated as a compound
instrument. Compound instruments are recording using ‘a bit of both’ – a bit of
liability and a bit of equity.
An equity instrument is any contract which evidences a residual interest in the
assets of an entity after deducting all of its liabilities. A financial liability is a
contractual obligation to transfer cash or another financial asset. A compound
financial instrument is one which has both an equity and liability component.
The obligation to transfer a fixed annual cash dividend meets the definition of a
financial liability. However, it can be argued that the preference shares have
both an equity and liability component as the holders have the right to a
participating dividend.
IAS 32 requires the separate presentation in an entity’s statement of financial
position of liability and equity components of a single financial instrument.
Under IAS 32, nearly all of the carrying amount of the non-redeemable
preference shares would be treated as the liability component due to the
entitlement to the fixed dividend. The carrying amount of the equity component
would be the residual amount after deducting the separately determined
liability component from the fair value of the instrument as a whole.
A fair presentation could have been achieved by treating the instrument as a
compound instrument, in accordance with IAS 32, and providing additional
disclosures to explain the characteristics of the preference shares.
(c)
Investing activities and financing activities
Tutorial note
Use the 3 bullets within the requirement to help structure your answer with subheadings. This will make the answer easier for the marker to allocate marks. There will
be separate marks available for each part. Sub-headings draw attention to the fact that
all aspects of the answer have been attempted.
The requirement asks for explanations of the importance of and the distinction
between cash flows from investing activities and from financing activities. Ensure you
attempt an explanation and do not just list what is included in the relevant headings.
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Investing activities are the acquisition and disposal of long‑term assets and other
investments not included in cash equivalents. IAS 7 Statement of Cash Flows states
that the separate disclosure of cash flows arising from investing activities is important
because the cash flows represent the extent to which expenditures have been made
for resources intended to generate future income and cash flows. Only expenditures
which result in a recognised asset in the statement of financial position are eligible for
classification as investing activities.
Financing activities are activities which result in changes in the size and composition
of the contributed equity and borrowings of the entity. The separate disclosure of cash
flows arising from financing activities is important because it is useful in predicting
claims on future cash flows by providers of capital to the entity.
Net basis
Tutorial note
Think about any previously attempted consolidated cash flow questions and consider if
the answers included cash flows that were netted off against other cash flows.
Hopefully this approach may help you recall some examples that are relevant to this
requirement.
This requirement illustrates the benefits of attempting non-exam standard examples
(ones that include preparation of the full group financial statements) to improve your
comprehension of group syllabus areas. The actual exam may not require you to
produce any financial statements from scratch but knowing the processes involved will
improve your answers in questions like this one.
Cash flows arising from the following operating, investing, or financing activities may
be reported on a net basis:
•
cash receipts and payments on behalf of customers when the cash flows reflect
the activities of the customer rather than those of the entity, and
•
cash receipts and payments for items in which the turnover is quick, the
amounts are large, and the maturities are short.
The amount of cash transferred to acquire control of a subsidiary is presented net of
the subsidiary’s cash and cash equivalents balance. Similarly, the cash proceeds from
disposing of a subsidiary are presented net of the subsidiary’s cash and cash
equivalents balance.
Cash from operating activities before income taxes is commonly presented as a net
figure on the face of the statement of cash flow, with further detail provided in the
accompanying disclosure notes.
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Fernanda Co
Tutorial note
Knowledge of the appropriate classification of cash flows between operating, investing
and financing activities will help here.
Operating activities include cash from operating activities before income taxes and tax
paid.
Investing activities include sale and purchase of non-current assets (PPE, intangibles,
financial assets and subsidiaries/associates), dividend received and interest received.
Financing activities include cash flows from or repayments of loans, cash from share
issues, interest paid and dividend paid.
Also remember, a cash flow just includes actual cash movements – cash coming in and
cash coming out. If there is no cash movement there is no impact on the statement of
cash flows. You’ll get credit for mentioning if a described scenario does not create any
cash flow e.g. the intra-group loan to finance the disposal of the sub.
Impacts to operating profit will affect the indirect method of calculating cash from
operating activities before income taxes.
The loan between Fernanda Co and Interactive Co was previously an intra-group
balance and so would have been eliminated from the consolidated financial
statements. As a result of the sale of Interactive Co, the loan must be recorded in the
consolidated statement of financial position at 31 December 20X7. The movement in
the carrying amount of the loan for the year is therefore a non-cash transaction.
Fernanda Co has incorrectly shown the loan amount as an outflow in investing
activities, and so this should be removed. The recognition of the loan in the
consolidated financial statements would reduce the profit (or increase the loss)
recorded on the disposal of the subsidiary. This profit (or loss) should be eliminated
when calculating cash generated from operations.
The cash receipt from the sale of the subsidiary ($10 million) was incorrectly shown in
investing activities as it should have been reported net of cash and cash equivalents
disposed ($3 million) at $7 million as required by IAS 7.
In addition, the cash flow effects of losing control should not be deducted from those
of obtaining control. Therefore, the cash from the sale of the subsidiary ($10 million)
should not be reported net of the cash paid ($8 million) to acquire its subsidiary,
Runda Co, at $2 million. These should be separately presented.
The acquisition of Runda Co should be shown as a cash outflow in investing activities
($8 million) net of any cash and cash equivalents which have been acquired. The
disposal of Interactive Co should be shown as a separate cash inflow net of any cash
which has been disposed of within the subsidiary ($7 million).
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ACCA Marking scheme
Marks
(a)
1 mark per discussion point of key principles and application to the
scenario:
IAS 37 knowledge
Discussion of provisions in relation to the scenario
Discussion of contingent liabilities in relation to the scenario
Maximum
(b)
(i)
1 mark per discussion point of key principles and application to the
scenario:
IAS 32 knowledge
Application of IAS 32 to scenario
Conclusion
Maximum
(ii)
1 mark per discussion point of key principles and application to the
scenario:
IAS 8 and departure from IFRS Accounting Standards
IAS 32 definitions
Application of IAS 32 to scenario
Conclusion
Maximum
(c)
1 mark per discussion point of key principles and application to the
scenario:
Investing and financing activities
Net cash flows
Subsidiary issues and cash flows
Maximum
Total
2
3
4
–––
7
–––
2
2
1
–––
4
–––
2
3
2
1
–––
6
–––
5
2
5
–––
8
–––
25
–––
Examiner’s comments
Part (a) of the question dealt with an industrial accident and the consequences from a
financial reporting perspective. This is an application of IAS 37, a core topic from the ACCA
Financing Reporting module. However, a surprising number of candidates appeared illprepared to deal with the requirement, which asked for a discussion on whether the decision
not to record a liability for a roof collapse in a building the company had constructed was
acceptable.
The scenario described how ‘no legal action’ had been brought against Fernanda Co by the
reporting date (relating to the existence or not of an obligation), and that ‘investigators were
assessing the responsibilities’ for the collapse which was expected two months after the
reporting date (relating to the determination of probable outflow). A well-presented answer
applied this information to the recognition criteria to conclude that no liability was required
at the reporting date.
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Whilst not explicitly mentioned in the requirement, it is expected that candidates should then
apply the IAS 37 decision tree to further consider whether disclosure of a contingent liability
is needed (or whether the outcome is remote). This was often discussed in answers, although
a surprising number of candidates confused contingent liabilities with provisions, and
disclosure with recognition. Even when successfully concluding that a contingent liability
existed, answers sometimes incorrectly proposed it would be recognised as a liability in the
statement of financial position.
Where candidates considered the offset issues relating to a successful insurance claim, they
often failed to identify the insurance claim as a separate issue from the implications of the
accident.
Part (b)(i) related to put options in a business combination. Candidates were required to
discuss the acceptability of disclosing a contingent liability for the cost of redeeming put
options.
Good answers began with a definition of financial instruments (the title of this exhibit) to
consider whether the put options meet the definition of a financial liability.
Candidates who picked up that the scenario stated that the company ‘would be obliged’ to
purchase the shares if the options were exercised by another party, often gained full marks,
provided they then explained why (the obligation is under the control of another party) and
how this should be recognised (at the present value of the redemption amount).
IAS 32 is regularly examined at this level, however a surprising number of answers either
ignored this part of the question or failed to identify the obligation and the subsequent
impact on the financial statements, instead incorrectly agreeing with the accounting
treatment taken by the company.
Part (b)(ii) The requirement here related to a complex financial instrument. The scenario
describes how a ‘fixed cash dividend’ was payable, and that the company argues that
compliance with IAS 32 ‘would conflict with’ the Conceptual Framework.
The majority of answers correctly explained how the preference dividend represented, in
part, an obligation to transfer cash flows which created a financial liability, with the equity
element being the residual part of the share issue. However, very few candidates discussed
whether the remote chance that a Conceptual Framework override could apply here or what
disclosure requirements would arise should such treatment take place.
Part (c) comprised three short requirements relating to IAS 7. The first two did not require
reference to the related exhibit but questioned the candidate's knowledge and
understanding of the uses of cash flow classifications and rules about reporting on a net basis.
Answers to these first two requirements should be relatively straightforward at this level.
The third requirement raised more challenging application aspects relating to the accounting
treatment described in the exhibit. Candidates may have picked up on the fact that this third
requirement applies the knowledge relating to the first two requirements (classification and
reporting on a net basis) and could use this to help present their answer to the third
requirement.
In the first bullet requirement, candidates were asked to explain the importance and
distinction of cash flow classifications (investing and financing activities). A surprising number
of answers were limited to rather simplistic statements that investing cash flows related to
the investing part of the business and financing cash flows to business financing. Better
answers supported this with appropriate examples, and further marks were earned where
answers were expanded to describe the importance of investing and financing activities to
an entity, in terms of capital expenditure commitments and overall funding and its sources.
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AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
In the second bullet requirement, candidates were asked to outline when cash flows can be
reported on a net basis. Answers were varied, with a surprising number of candidates not
answering this section. Where answered, candidates often provided only one circumstance
in which cash flows can be netted off.
In the third bullet requirement, candidates needed to consider the exhibit and discuss the
issues relating to the company’s treatment of cash flows for the reporting period. Wellpresented answers explained how an existing loan to a now disposed subsidiary would no
longer be eliminated on consolidation. This cannot be recorded as a cash flow, and so should
not be included in investing activities (the exhibit states there was no cash movement on the
loan during the year).
A second issue relating to the incorrect netting of cash inflow from the subsidiary disposal
with a cash outflow to acquire another subsidiary was better answered. However, weaker
answers failed to spot the implications of the cash held by the disposed subsidiary, which
should be netted against consideration received to present the net cash inflow on disposal.
41
ELOA (MAR/JUN 2023)
Walk in the footsteps of a top tutor
Key answer tips
Part (a) (i) & (ii) and part (b) tests knowledge and application of IFRS 8 Operating Segments.
This is an examiner’s favourite for 2023 as it was also tested within the Sep/Dec 2023 diet.
State the definition of an operating segment and the rules for reportable segments (10% rule
and 75% rule). If you’ve already attempted Dario from Sep/Dec 2023, these rules should be
familiar to you and you can see how the same principles are applied again in this question,
within a different scenario. The rules from the standards will not change but the scenarios in
which you apply them in practice will vary. This concept is what SBR is all about! Spend time
learning the rules so that you can apply them in whatever scenario arises.
Part (c) tests the analysis syllabus area through linking operating segments to the need of the
investors. Make sure your discussion focuses on the benefits (or not) to investors to ensure
you address the requirement. Professional marks are awarded here. You cannot get these
marks if leaving parts of a question unanswered so ensure your time management allows a
proper attempt at part (c).
(a)
(i)
Operating segments
Eloa Co is a listed entity and therefore is required to comply with IFRS 8
Operating Segments. The company’s view that the disclosure of segment
information would be competitively harmful or misleading is difficult to
understand as the IASB writes accounting standards on the basis that they
provide transparent, useful information to investors. Eloa Co should identify the
information which would be useful to investors and how that information can
be appropriately reported.
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Tutorial note
State the rules from IFRS 8 and then apply them to the scenario.
IFRS 8 states that an operating segment is a component of an entity:
•
which engages in business activities from which it may earn revenues and
incur expenses
•
whose operating results are regularly reviewed by the entity’s chief
operating decision maker, and
•
for which discrete financial information is available.
An operating segment includes components of an entity which sells primarily or
exclusively to other operating segments. Information about the components
engaged in each stage of production is particularly important for understanding
vertically integrated entities in certain businesses, for example, Eloa Co.
Therefore, the Casualwear division can be an operating segment even though it
sells 90% of its production to the other divisions.
Eloa Co appears to have four operating segments: Tennisgear, Badmintonwear,
Squashracket, and Casualwear. This is because each segment:
•
engages in business activities which recognise revenues and incur
expenses as a profit or loss account is prepared quarterly
•
has the CEO/chief operating decision maker reviewing their operating
results quarterly to assess performance and allocate resources via the
budgets, and
•
has discrete financial information available quarterly for each brand
including additional performance measures such as EBITDA.
Each of the brand managers is directly accountable to and meets quarterly with
the CODM to discuss performance and compare the actual results to the
budgeted figures.
Since Casualwear is an overseas entity, it is likely that separate disclosure is
necessary so that users can better assess its performance and its significance to
the group.
(ii)
Separate reportable segments
Tutorial note
To determine if a segment is reportable, 2 main rules are employed.
Firstly, the 10% rule is considered.
Then, after determining the reportable segments under the 10% rule, the 75%
rule is applied.
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IFRS 8 requires an entity to report financial and descriptive information about
its reportable segments. Reportable segments are operating segments or
aggregations of operating segments which meet any of the specified criteria:
•
its reported revenue, from both external customers and intersegment
sales or transfers, is 10% or more of the combined revenue, internal and
external, of all operating segments, or
•
the absolute measure of its reported profit or loss is 10% or more of the
greater, in absolute amount, of (i) the combined reported profit of all
operating segments which did not report a loss and (ii) the combined
reported loss of all operating segments which reported a loss, or
•
its assets are 10% or more of the combined assets of all operating
segments.
Two or more operating segments may be aggregated into a single operating
segment if aggregation is consistent with the core principles of the standard, the
segments have similar economic characteristics and are similar in various
prescribed respects. If the total external revenue reported by operating
segments constitutes less than 75% of the entity’s revenue, additional operating
segments must be identified as reportable segments (even if they do not meet
the quantitative thresholds set out above) until at least 75% of the entity’s
revenue is included in reportable segments.
Division
Tennisgear
Badmintonwear
Squashracket
Casualwear
Total
10% =
Revenue
External
$million
16
1.6
Internal
$million
nil
nil
1.8
nil
1.2
10.8
––––
––––
20.6
10.8
––––
––––
(20.6 + 10.8) ×
10% = 3.14
Profit
Assets
$million
2
0.3
$million
15
3
0.5
3.6
––––
6.4
––––
0.64
4
20
––––
42
––––
4.2
Meet 10%
threshold
individually

x
Meet 10% in aggregate
 (in aggregate 3.4m revenue,
0.8m profits and 7m assets)
x

Tennisgear and Casualwear are separately reportable since they meet all three
size criteria – although only need to meet one of the thresholds to be reportable.
Badmintonwear and Squashracket do not meet any of the quantitative criteria
and, on the face of it, are not separately reportable. The external revenue of
Tennisgear is 77.7% (16/20.6) of the total external revenue so the '75%
threshold' is achieved by Tennisgear alone.
However, Badmintonwear and Squashracket are likely to share similar economic
characteristics because they sell the same clothing with different brand names.
If aggregated, they would exceed the 10% threshold for revenue, profit and net
assets and so could be reported as a combined segment.
In addition, IFRS 8 gives entities discretion to report information regarding
segments which do not meet the size criteria. Entities can report on such
segments if, in the opinion of management, information about the segment
would be useful to users of the financial statements.
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(b)
Investment in Ganic Co
Tutorial note
In this scenario, consideration of more than one IFRS Accounting Standard is required
simultaneously. Both IFRS 11 Joint arrangements and IFRS 8 Operating Segments
should be discussed.
In such circumstances, approach each standard individually. Think about the rules per
IFRS 11 then apply it to the scenario. Is Ganic a joint arrangement as per the rules from
IFRS 11?
Then do the same for IFRS 8. Should Ganic be an operating segment per the rules from
IFRS 8?
Do not attempt to muddle the rules up or provide conclusions in one go. This will
overcomplicate the process and likely cause you confusion.
IFRS 11 Joint Arrangements states that a joint arrangement is an arrangement where
two or more parties share joint control. Joint control exists when decisions about the
relevant activities require the unanimous consent of the parties sharing control.
Even though the call option would give an additional 10% voting interest to Eloa Co,
Ganic Co’s governance still requires the unanimous vote of all investors to make key
decisions, as outlined in an agreement between the venturers. Therefore, the
investment would be under joint control regardless of the substance of the call option,
which would change only the economic ownership percentage rather than the
governance to control.
A joint venture is a joint arrangement whereby the parties who have joint control of
the arrangement have rights to the net assets of the arrangement. This normally
involves the establishment of a separate entity. Therefore, Eloa Co should recognise
its interest in Ganic Co as a joint venture. In accordance with IAS 28 Investments in
Associates and Joint Ventures, it should account for this investment in the consolidated
financial statements using the equity method.
Operating segment
In this instance, the joint venture, Ganic Co, could represent an operating segment as
it engages in business activities (racket production) from which it recognises revenues
and incurs expenses and the CODM regularly reviews the joint venture’s operating
results to allocate resources and assess performance. Also, discrete financial
information is available for the venture.
A joint venture can be considered an operating segment even though the investor only
has joint control over the performance of the investee. The operating results should
be regularly reviewed by the CODM to contribute to decisions about resources to be
allocated to the segment and assess its performance. Management may regularly
review the operating results and performance of an equity method investee for
purposes of evaluating whether to retain the relationship. However, management
does not need to be responsible for making decisions about resources to be allocated
or which affect its operations and performance. Therefore, control over the joint
venture is not a criterion for it to be considered an operating segment.
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(c)
Segmental information and investors
Tutorial note
The answers provided here are not exhaustive. If you are able to make relevant points
linking operating segment disclosures to investors, even if not addressed in the mark
scheme, you will get credit.
Remember investors will want a return on their investment, whether through increased
dividends or via growth in investment value. For each point you make, attempt to link
it to the investor’s objectives to ensure your point scores. Generic points that fail to
address the requirement will not get credit.
According to the Conceptual Framework, the objective of financial reporting is to
provide information which is useful to existing and potential investors when making
decisions about providing resources to the reporting entity. When making decisions
about buying, selling or holding equity investments, investors require information
about the amount, timing and uncertainty of future cash inflows to the reporting
entity.
Investors are interested in as much detail as possible on the discrete business sections
of an entity so that they can see the return on those segments relative to their
investment. Entities which operate in many countries, for example, will be exposed to
varying risks and growth rates. It may be that some areas of operation are in decline,
and this will impact investors’ assessments of future net cash flows. Segmental
reporting therefore gives more insight into the organisation’s potential long‑term
performance.
Segmental information is derived from the financial statements, but there is a degree
of subjectivity in how an entity may apply IFRS 8. The information can differ from that
reported in the financial statements. Therefore, from an investor’s viewpoint, the
nature and amount of the reconciliation to the financial statements are useful pieces
of information. The usefulness of the reconciliation will depend on the extent and
magnitude of changes to the financial statement amounts. The reconciliations can,
however, be complex and difficult to understand.
Segmental information is more useful if based on information used by management
when making decisions. This allows investors to see the business through the eyes of
management. The information disclosed should enable investors to evaluate the
nature and financial effects of the business activities in which it engages and the
economic environments in which it operates. The use of the management approach
should have a positive effect on the quality of the segment information, from the
perspective of usefulness and relevance.
Companies with clear and comprehensive segmental disclosure notes have an
opportunity to differentiate themselves from their competitors.
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ACCA Marking scheme
Marks
(a)
1 mark per discussion point of key principles and application to the
scenario:
IFRS 8 listed company requirements
IFRS 8 operating segment definitions
Application of operating segment definitions
IFRS 8 reportable segment criteria
Application of reportable segment criteria
IFRS 8 aggregation rules and application
Maximum
(b)
1 mark per discussion point of key principles and application to the
scenario:
IFRS 11/IAS 28 definitions of joint control and joint ventures
Application to call option
Conclusion about accounting treatment
IFRS 8 operating segment definitions and application
Maximum
(c)
2
1
3
2
3
2
–––
9
–––
2
3
1
3
–––
7
–––
1 mark per discussion point of key principles and application to the
scenario:
Issues include, but not limited to:
Conceptual Framework
Different segments have different returns
Different risks
Different rates of growth/decline
Helps assess long-term performance
Preparation involves subjectivity
Gives a management perspective
Allows comparisons with competition
Maximum
Professional marks
1 mark awarded for clarity of the discussion and 1 mark for the quality of
the answers provided
Total
–––
7
–––
2
–––
25
–––
Examiner’s comments
Part (a) A common theme of the examiner’s report from previous sittings relating to question
4 is that this is often the final question attempted. Candidates with weak time management
may fail to allocate the appropriate time to plan and write their answer to their final question
and struggle to earn sufficient marks to gain a pass on this question. The marking team saw
evidence of this again in answers to this question.
A relatively high number of submissions were noted as providing no answer for one (or more)
parts to the question. Candidates risk losing out on the 2 professional marks awarded in
question four if requirements are not attempted.
Candidates who are taking this examination should be mindful that it is much easier to gain
the first marks from a new question (or part of a question) than the final (higher level) marks
in another question in which they have overallocated their time.
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Allow yourself time to think, plan and answer each question to increase your opportunity to
earn the most marks. Be strict with your time and use the mark allocation as an indication of
the time to spend. Translating marks into minutes and noting the time by which each part of
a question should be completed is good exam technique. Within this time, set aside a few
minutes to identify what is required and plan your answer to ensure you keep on track and
make the most of your time allocation on the question. If you don’t answer all parts of a
question, you are more likely to struggle to pass it.
Generally, part (a)(i) was well-answered, particularly where the candidate’s answer
presented knowledge first, and then applied that knowledge to the scenario. Candidates
should carefully review the scenario description, as marks might be available for discussing
specific issues raised in the narrative. In this case, Eloa Co has not disclosed segment
information on the basis that this ‘might affect its competitive position and be misleading.’
Whilst relatively few answers considered this, those that commented on how IFRS
Accounting Standards are designed to provide information that is transparent, useful and not
misleading would gain a mark. Likewise, credit would be given for an explanation on how
Eloa Co, being a listed entity, should comply with IFRS 8 and make appropriate disclosures on
operating segments.
As with any question asking for a discussion on an accounting treatment under IFRS
Accounting Standards, an answer should begin with the candidate’s relevant knowledge. In
this case, the discussion should first outline IFRS 8’s definition of an operating segment, as
this would then be applied to determine whether each division meets that definition. It may
be tempting to leap to a conclusion without first considering the attributes of an operating
segment; but without first identifying these attributes, the discussion may be limited. Marks
are therefore likely to be lost without this discussion as it is key to the requirement (which is
to ‘discuss’).
A good answer first describes the attributes of an operating segment. Candidates should have
noted, when reading through the scenario, how one division sells 90% of production to the
other three divisions. This should be commented upon, although some answers overlooked
it. Even if you are not sure if this should be included as an operating segment, a discussion of
whether the CODM would value such information (in terms of a vertically integrated
business) may well lead you to the correct conclusion. The discussion should also consider
the implications of this division operating overseas to the CODM and, more generally, the
user of the financial statements. Separate disclosure of this division is likely to help users to
better assess its performance and significance to the group.
Weaker answers to part a(i) merely copied and pasted chunks of the exhibit information,
without adding any substance or comments to their answer, before concluding. This
approach scores few, if any, marks as it fails to meet the requirement of a discussion.
Furthermore, some answers struggled to distinguish between defining an operating segment
and determining which segments are reportable (the requirement for part (a)(ii)).
In part (a)(ii), most candidates correctly outlined the reportable criteria under IFRS 8,
although some answers merely referred to the ‘10% rules’ (relating to sales, net assets and
profit) and some answers seemed confused about how to apply the ‘75% rule’ (relating to
total revenue reported by operating segments). Calculations and conclusions for part a(ii)
were, on the whole, correctly reached provided the right rules were applied. Those who
described the reportable criteria, including aggregation of divisions, applied the criteria to
the scenario and scored very well on this part. Many produced a table with calculations to
support their conclusions.
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Part (b) required a discussion on how to account for a joint venture in the group financial
statements and whether it can be classified as an operating segment. Candidates who had a
good understanding of IAS 28 Investment in Associates and Joint Ventures generally
answered this well. As with most requirements, the best answers were divided into a display
of knowledge of IAS 28 and then an application of this knowledge based on the information
from the scenario, leading to a conclusion. Candidates familiar with the concept of joint
control and joint arrangement came to the right conclusion, although some incorrectly
suggested that it was an associate.
Candidates should review the scenario for descriptions that flag the arrangement to be a
joint venture. All key decisions require a unanimous vote by all three shareholders. Each
venturer owns their share of the net assets. Weaker answers seemed confused by the
implications of the option to purchase a further 5% of the other two venturers in the future.
Many answers failed to discuss how control would not be achieved if the option was
exercised, as shareholding would only rise from 33% to 43%, still below 50%.
Marks were often missed by failing to address the issue of whether the venture should be
classed as an operating segment. Where this was discussed, it tended to be very brief, and
conclusions were often incorrect. It is important that candidates attempt all parts of the
requirement to maximise opportunities for marks. In this case, a good answer would quickly
apply the operating segment characteristics (from a(i)) to this case. The aspect that
candidates tended to struggle with was whether joint control might influence the
determination of an operating segment. Even where candidates were unsure of this, a
discussion on the fact that the joint venture’s activities incur expenses and generate revenue,
whose discrete financial information is regularly reviewed by the CODM would earn marks.
Part (c) was a general requirement, without the need to refer to exhibits, to explain why
segmental information is important to investors. Candidates often scored well in this part,
provided their focus was on how segment information addresses the needs of the investor.
The question provided some guidance by referencing the need for investors to make
‘informed decisions’ and citing an entity with ‘diversified segments’.
Answers often generated some good points, provided the focus remained on the investor’s
needs. Where this was done, candidates were able to achieve the two professional marks
(in which the guidance specifically mentions the importance of segmental reporting
‘to investors’). Weaker candidates overlooked the investor focus requirement, either
expanding their answer to wider stakeholders’ needs, or considering only the perspective of
management.
Part (c) amounted to a total of 9 marks including the professional marks, and candidates
should be allocating the same amount of time to this answer as they do to part (a). However,
some answers were provided in brief bullet point format, which indicated a lack of time
management. Since there is no need to refer to an exhibit, candidates could have answered
this part first had they felt this would have aided their time management.
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42
RUBUL (SEP/DEC 2022)
Walk in the footsteps of a top tutor
Key answer tips
Parts (a) and (b) of this question test some commonly examined standards – IFRS 15 Revenue
from Contracts with Customers and IAS 37 Provisions, Contingent Liabilities and Contingent
Assets. Candidates should be very familiar with IFRS 15 Revenue from Contracts with
Customers and need to be able to apply the principles and rules of the standard to a range of
scenarios. A basic level of knowledge of this standard is not sufficient for SBR.
Part (c) tests IAS 21 The Effects of Changes in Foreign Exchange Rates. Part (c) demonstrates
how students need to be able to go beyond simply stating the rules of a standard and may
need to consider the validity of alternative treatments.
Similar to other section B questions, there were no numbers to deal with here, which
provides a good test of candidate’s ability to explain the accounting treatment relevant to a
scenario, without the comfort of the calculations.
(a)
Consignment arrangement
Tutorial note
Note that there are two aspects to cover here – the treatment of the consignment
arrangement and an explanation as to why the proposed treatment is not in line with
IFRS 15.
Rubul Co has despatched furniture to garden centres but has retained control of the
goods until the sale to the final customer. Rubul Co has to evaluate when the garden
centres have obtained control of the furniture and recognise the revenue at that point
in time.
The furniture is controlled by Rubul Co until a specified event occurs, which is the sale
of the furniture to a customer of the garden centre. This control is further evidenced
by the fact that the furniture can be transferred to another retailer or Rubul Co can
request to have the furniture returned to Rubul Co if required. Revenue should not be
recognised on delivery of the goods to the garden centres.
Rubul Co should only recognise revenue when the garden centre sells the product to a
customer. Although the garden centre has physical possession of the products, it does
not obtain title, only a right to sell, and it does not have an unconditional obligation to
pay Rubul Co. The inventory should also continue to be recognised by Rubul Co until
the sale to the final customer.
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Tutorial note
Use the clues in the scenario to help you. The garden centres deduct an ‘agent’s
commission’ which is a prompt for you to consider whether Rubul is the principal in the
arrangement.
Rubul Co should also assess whether it is the principal to the transaction with the
customer. In this event, it would recognise as revenue the amount received from the
customer and any amount retained by the garden centre would be a commission
expense.
Rubul Co should not include the sales value of all furniture delivered to and held by
garden centres in revenue. This recognition policy would create a measure that reflects
revenue recognised on an accelerated basis as if Rubul Co had earned revenue when
it despatched the furniture to garden centres. This approach is misleading because it
is an individually tailored accounting method and is not in accordance with IFRS 15
Revenue from Contracts with Customers.
(b)
Provisions
Tutorial note
There are two potential provisions to consider relating to sales tax and income tax. It’s
important that you cover both areas, otherwise you will limit the number of marks you
can score. You can use sub-headings to highlight to the marker that you have
considered both areas.
It’s a good idea to start with the criteria that need to be met in order to recognise a
provision, which will score you an easy mark.
IAS 37 Provisions, Contingent Liabilities and Contingent Assets states that an entity
must recognise a provision if, and only if:
•
a present obligation (legal or constructive) has arisen as a result of a past event
(the obligating event)
•
payment is probable (‘more likely than not’), and
•
the amount can be estimated reliably.
An obligating event is an event that creates a legal or constructive obligation and,
therefore, results in an entity having no realistic alternative but to settle the obligation.
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Rubul Co should therefore record a sales tax liability on this basis, for the full amount
that it is legally obligated to remit to the taxation authorities. The sale of goods creates
the obligation to make the sales tax payments. In measuring its liability, Rubul Co
should not consider the fact that the risk of detection by the taxation authorities is
very low. Rubul Co should assume that the authorities have all the relevant facts.
Interest and penalties should also be included in the estimate of the liability.
Although it is ‘widely understood’ that the taxation authority would look back no more
than seven years to determine the taxation liability, Rubul Co must use judgement to
determine what constitutes ‘widely understood’.
The taxation authorities can reclaim any sales tax liability from prior years. Therefore,
Rubul Co should evaluate whether the taxation authorities will assess the liability back
to the first year of taxable sales, which is ten years. Rubul Co should take into account
its previous dealings with the taxation authority. An assessment of what Rubul Co
believes it could negotiate as a settlement would not represent what is ‘widely
understood’. As the obligating event is the sale of goods, Rubul Co should not record
a sales tax liability for future sales until those sales actually occur. The obligation for
the previous years would be treated as a prior period error in accordance with IAS 8
Basis of Preparation of Financial Statements.
Tutorial note
Remember if the criteria for a provision are not met, you should still consider whether
there is a possible outflow and therefore the need to disclose a contingent liability.
As regards the income tax proceedings, the taxable profits were earned in the past and
therefore it is a past event, so if the income tax had not been paid, Rubul Co would
have a present obligation. However, it is uncertain whether the entity has any
obligation and therefore whether a liability exists. This conclusion is consistent with
IAS 37, which identifies a disputed court case as an example of existence uncertainty.
It may be unclear whether a past event causing an obligation has occurred. The
taxation authorities have claimed that Rubul Co has committed an offence and, for
that, the taxation authorities should be compensated. It is uncertain whether Rubul Co
has committed the offence. In this case, the uncertainty about the existence of an
obligation, combined with a low probability of outflows of economic benefits and a
high level of measurement uncertainty, may mean that there would be no recognition
of a provision, but consideration should be made of disclosing a contingent liability.
(c)
Exchange rates
Tutorial note
This part is worth 8 marks and there are three separate bullet points to cover in your
answer. Make sure you cover all elements in order to maximise the marks you can
score.
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When analysing a company’s financial trends over multiple periods, significant shifts
in currency exchange rates can have a dramatic effect on the company’s revenue and
profit trends. The changes in foreign currency exchange rates can mask both
concerning and encouraging trends in foreign subsidiaries. Therefore, understanding
the overall trends of a company’s foreign operations through a constant currency
analysis will portray a different picture than financial statements prepared under IFRS
Accounting Standards. It enables a reader to evaluate the actual change in earnings
without the effect of foreign currency gains and losses.
Using a single historic exchange rate would eliminate the effects of exchange rate
fluctuations due to Rubul Co’s international operations in the determination of
financial performance.
Tutorial note
When addressing the second bullet point, as part of your explanation, set out the rules
that should be applied under IAS 21 when translating a subsidiary. This should lead to
a conclusion that applying a single historic fixed exchange rate is not acceptable.
However, constant currency amounts are non-IFRS Accounting Standard measures,
and therefore, Rubul Co cannot use this approach in its financial statements. The
principal issues are which exchange rate(s) to use and how to report the effects of
changes in exchange rates in the financial statements. IAS 21 The Effects of Changes in
Foreign Exchange Rates requires assets and liabilities for each of the international
subsidiaries’ statements of financial position to be translated at the closing rate at the
date of that statement. Income and expenses for each statement of profit or loss are
translated at exchange rates at the dates of the transactions and all resulting exchange
differences are recognised in other comprehensive income (OCI). IAS 21 allows the use
of a simplified approach in determining the foreign exchange rate used for translation,
for example using an average rate to translate income and expenses, provided that
exchange rates do not fluctuate significantly. However, a constant currency rate is not
allowed under that standard.
Tutorial note
The final bullet point refers to the usefulness of financial statements, so there is an
opportunity here to link the treatment of foreign exchange gains or losses to the
Conceptual Framework. This would score credit.
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Exchange differences arising when monetary items are settled, or when monetary
items are retranslated at rates different from those used upon initial recognition or in
previous financial statements, are reported in the profit or loss for the period. It is
useful to examine whether it is more appropriate to recognise a foreign exchange gain
or loss on Rubul Co’s deposits (a monetary item) in OCI instead of profit or loss in the
period. There will be cases where an exchange rate change is likely to be reversed, and
thus it may not be appropriate to recognise foreign exchange gains or losses of all
monetary items as realised gains or losses. Any potential fluctuation in the profit or
loss would be reduced by recognising in OCI those foreign exchange gains or losses on
monetary items with a high possibility of reversal. The question would arise as to
whether these items recognised in OCI could be reclassified.
ACCA Marking scheme
Marks
(a)
(b)
1 mark per discussion point of key principles in IFRS 15 and application to
the scenario including:
–
Control discussion
–
Recognition discussion
–
Principal discussion
1 mark per discussion point of key principles in IAS 37 and application to
the scenario including:
–
Provision requirements
–
Sales tax
–
Income tax
Maximum
(c)
1 mark per discussion point of key principles in IAS 21 and application to
the scenario, including:
–
Advantages and acceptability of fixed exchange rate
–
IAS 21 principles
–
Overseas deposits
Maximum
Total
3
3
1
–––
7
–––
1
6
4
–––
11
–––
10
–––
3
4
3
–––
10
–––
8
–––
25
–––
Examiner’s comments
Part (a) required candidates to explain how a consignment arrangement would be accounted
for according to IFRS 15. A further requirement is to then explain why the proposed
treatment is not suitable – missing this from your answer would reduce opportunities for
some relatively straightforward marks. This part of the question was generally well answered
with most candidates providing a good rationale for their conclusions. Since 7 marks are
available, candidates should plan their answer such that they have presented at least seven
clear points to maximise the potential for marks.
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Whilst knowledge of the standard is vital, this needs to be combined with application. Merely
listing out the standard’s five steps will not earn marks, because the issue of this scenario
relates specifically to the final step of recognition, in which the issue of control of the
furniture (the performance of an obligation) is paramount. A good answer would begin with
a discussion on when revenue is recognised under IFRS 15 (‘knowledge’ marks), and then
apply this to the scenario (‘application’ marks). Weaker answers may jump to a conclusion
without first providing any rationale and lose out on available knowledge marks.
In an explanation-style answer it is often useful to use the scenario to guide your answer.
Using phrases from the scenario, ‘legal title’ is retained by Rubul Co until the garden centre
sells the furniture and the garden centre ‘has no obligation to pay’ until they sell the furniture
themselves. Better answers would then discuss how physical possession is not the same as
control because, as well as maintaining legal title, Rubul Co has the right to request return or
transfer the furniture to a different location. Each issue mentioned can be related back to
IFRS 15 to explain how control has not been passed and therefore no sale has arisen.
Discussion can also be made over the way that Rubul Co is paid once the furniture is sold by
the garden centre: ‘sales proceeds net of their agent’s commission’ gives a strong hint that
this is a principal/agent relationship, which better answers would identify and explain.
b) Weaker answers tended to copy and paste a lot of the information from the exhibit
without adding to it – which will earn no marks. Marks accumulate from adding to the exhibit
information: for example, the exhibit relating to sales tax states ‘the tax law stated that
companies were subject to sales tax if they had a physical or economic presence.’ Applying
IAS 37, as soon as a sale is made, an economic presence exists, as does a legal obligation for
a sales tax liability. The exhibit mentions that Rubul Co has realised that a liability existed,
but candidates that explained why would earn a mark through applying the standard to the
scenario.
Having identified a legal obligation, the next step would be to measure the amount (which
should be estimated reliably under IAS 37). The final two paragraphs from the sales tax
section of the exhibit provide information for candidates to use in assessing a reliable
estimate of the provision. In considering the amount, a good answer would apply all the
information provided in the exhibit – for example, whether the liability should:
•
be set at zero, given ‘the risk of detection by the tax authorities is very low’
•
be based on amounts payable from the total sales (ten years), when it is ‘widely
understood’ that tax authorities go back only seven years, and
•
include interest and penalties.
The exhibit provides this information so that the candidate can assess each fact against the
requirements of IAS 37 and conclude. The application of knowledge to each fact will earn a
mark, so ignoring information will limit the candidate’s potential for marks. The final
sentence from this section about sales tax should be a useful signpost to candidates: ‘tax
authorities can reclaim any sales tax liability from prior years.’
Weaker answers strayed away from the information in the scenario and wasted time
describing accounting for tax rather than accounting for provisions, despite a clear
requirement that the focus is on IAS 37.
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AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
The income tax liability, the second section, provides candidates with an opportunity to
describe the circumstances in which a contingent liability may require disclosure. A signpost
to this is the phrase ‘legal proceedings’ which many candidates picked up on, and is further
reinforced with the fact that Rubul Co disputes any liability. It’s made clear that this is not
related to the previous issue on sales tax, so should be considered on its own. Candidates
should apply their knowledge of IAS 37 to the facts that Rubul Co considers there is ‘little
chance of the case succeeding’, and it ‘cannot measure any potential income tax liability.’
The case is in dispute, with uncertainty over any obligation and amount. Answers that
described how such a situation may be dealt with under IAS 37 did well in this section.
(c) Strong answers to the first issue of using a single fixed historic rate to translate into the
presentation currency would consider how this would be beneficial for the users and allow a
better analysis of trends in the statement of profit or loss, revealing underlying performance
which is not distorted by exchange rate fluctuations. Good answers would then discuss the
second bullet point, whether this was acceptable practice under IFRS Accounting Standards,
beginning with the reporting requirements for IAS 21. Some relatively straightforward
knowledge marks are available here, provided candidates describe the required translation
process and relate this back to the first bullet point.
The remaining part of the requirement, on recognising foreign exchange gains or losses on
overseas deposits in other comprehensive income, was generally less well answered. Weaker
answers described the accounting treatment required by IAS 21 in the translation of a
monetary item, rather than providing thoughts on the proposed treatment. Better answers
considered how reporting the gains or losses in profit or loss may lead to distortions between
reporting periods if the exchange rate change subsequently reverses. Strong answers also
considered the Conceptual Framework’s qualitative characteristics to enhance their
discussion.
43
JUAN (SEP/DEC 2022)
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Key answer tips
Part (a) links together the topics of management commentary and materiality.
Part (b) tests the application of a number of core standards in the context of the
contemporary issue of climate change, a very topical issue which candidates should be well
prepared for.
There should be plenty of achievable marks to pick up in this question, including the two
professional marks. An important part of your exam technique is time management. This is
Q4 of the exam, so if you don’t allow enough time to properly attempt this question you run
the risk of missing out on some relatively straightforward marks. Stick to your timings!
KA PL AN P U BLI SH IN G
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(a)
Tutorial note
This part of the question can be answered without referring to the exhibits, so don’t
waste time reading them when attempting this part.
You will likely find that your answer looks quite different to the model solution, that is
okay! There are lots of valid points that would score credit and the model solution is
not an exhaustive list of such points.
Climate-related risks are predominantly discussed within the management commentary
which is outside the financial statements. However, given the importance of climaterelated risks to investor decision making, the implication of the materiality definition
is that companies may need to consider such risks in the context of their financial
statements, rather than solely as a matter of corporate social responsibility reporting.
Investors need companies to make materiality judgements when they prepare their
financial statements and investors have specifically identified climate-related risks as
being used in their decision making. Thus, if the information is material, companies
should disclose how climate-related risks have affected judgements made in relation
to the recognition and measurement of items in the financial statements.
According to IFRS Accounting Standards, information is material if omitting, misstating
or obscuring it could reasonably be expected to influence decisions which the primary
users of general purpose financial statements make on the basis of the financial
statements. This definition may lead to the disclosure of information which is not
specifically required by IFRS Accounting Standards but is required by investors to
understand the effect of transactions and events on the company’s financial position,
performance and cash flows. Companies will therefore need to consider whether to
provide additional disclosures when compliance with the specific requirements in IFRS
Accounting Standards is insufficient to enable investors to understand the impact of
climate-related matters on the company’s financial position and financial performance.
Companies may need to disclose to investors the significant estimates or judgements
they have made about climate-related risks. These disclosures are necessary even if
the companies are not required by IFRS 18 Presentation and Disclosure in Financial
Statements to make such disclosures e.g. if the company currently faces no financial
impact or significant risk of materially adjusting the carrying amounts of assets and
liabilities in the next financial year.
Given the importance of climate-related matters to investors, companies should also
consider whether additional sustainability related disclosures should be prepared in
line with the voluntary IFRS Sustainability Disclosure Standards (Sustainability
Standards). These disclosures are provided as part of their general purpose financial
reports. The Sustainability Standards require companies to disclose material
sustainability related risks and opportunities, so the concept of materiality would apply
to such disclosures.
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KA PL AN P U BLI SH IN G
AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
(b)
(i)
IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets
Tutorial note
Structure your answer with headings for each of the three sub-requirements in
part (b). You should aim to spend the same amount of time on each one given
the mark allocation is the same.
Before writing up an answer, spend some time reading the exhibit and noting
down your key points. There are plenty of hints to pick up from the scenario. Take
each factor and note down how it might relate to one (or more) of the standards.
As your write up your answer, make sure you are discussing points in the context
or climate-related issues in order to pick up the two professional marks.
Juan Co is committed to changing and adapting its business activities and
operations, including research and development. It will incur increased costs in
improving the energy efficiency of its existing buildings. IAS 16 specifies
requirements for the recognition of these costs as assets. There may be, in
addition, an increase in research and development expenditure. IAS 38 also
requires disclosure of the amounts of research and development expenditure
recognised as an expense and capitalised during the reporting period.
Climate change may affect the estimated residual values and expected useful
lives of assets because of obsolescence or compliance with changes in the law.
Many of its subsidiaries sit in the regions of the world that are subject to weather
extremes, which may cause additional wear and tear on the assets. IAS 16 and
IAS 38 require companies to review residual values and useful lives at least
annually, and to reflect the changes in the depreciation and amortisation
charges.
(ii)
IAS 36 Impairment of Assets
Tutorial note
Think firstly about the key principles of IAS 36 – identifying indicators of
impairment, how to perform an impairment review and providing information in
the financial statements about impairments that have been recognised
(disclosure). Then tie these in to the scenario, for example by identifying the
specific indicators of impairment referred to that are relevant to Juan Co.
A company is required to assess whether there is any indication of impairment
at the end of each reporting period. IAS 36 sets out the way in which companies
should estimate recoverable amounts in order to assess any impairment of
goodwill and non-current assets. Climate-related matters may give rise to
indications that an asset (or a group of assets) is impaired. There has been a
decline in demand for the energy produced by the coal-fired power plants which
emit greenhouse gases. This would seem to indicate that the plant may be
impaired. In addition, there has been significant changes in the company’s
KA PL AN P U BLI SH IN G
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operating environment. For example, changes in climate change regulations.
Also, Juan Co’s supply chains are becoming more complex and globally spread
with many points of possible failure. Many of its subsidiaries sit in the regions of
the world which are subject to weather extremes. Also, Juan Co anticipates
some physical harm to its corporate assets with risks rising as the world warms.
All of these factors will have an adverse effect on the company and are
indications of impairment.
Tutorial note
The scenario refers to revised assumptions and cash flows, a hint that you need
to consider value in use.
When determining the recoverable amount and calculating the value in use,
Juan Co will need to estimate the future cash flows. The company has already
revised its future cash flow projections because of expectations about cutting
its emissions. However, Juan Co should consider whether climate-related
matters have further affected the assumptions used in the projections as they
have not provided for any impairment. The assumptions used should be
reasonable and supportable and based upon the current situation. Based upon
all of the above factors, it would appear likely that Juan Co’s non-current assets
would be impaired.
IAS 36 requires disclosure of circumstances and assumptions which led to the
recognition of an impairment loss which would include the expansion of
emission reduction legislation.
(iii)
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
Tutorial note
There are lots of factors from the scenario that can be discussed here, so it should
be a source of some relatively easy marks.
Climate-related matters may affect the recognition, measurement and
disclosure of liabilities in the financial statements when applying IAS 37. Climaterelated risks and uncertainties may also affect the best estimate of a provision.
Juan Co may have to make a provision for potential fines imposed by
governments for failure to meet climate-related targets. There will also be
regulatory requirements to remediate environmental damage. Juan Co
anticipates some physical harm to its property, plant and equipment with risks
rising as the world warms, which could lead to environmental damage.
There will also be costs involved in the restructurings required to redesign
products or services to achieve climate-related targets. These costs will be
provided for only when a detailed formal plan is in place and Juan Co has started
to implement the plan or has announced its main features to those affected.
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AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
Tutorial note
This standard is not just about provisions, so make sure you are also considering
contingent liabilities and disclosure requirements in your answer.
As there is a likelihood that some of the power plants will require
decommissioning sooner than expected, an increase in the provisions
recognised for decommissioning is necessary. Also, the restoration of the land
damaged by these plants may not be possible at the level required by regulation.
Therefore, again, consideration should be given to creating a provision or a
contingent liability for the costs of restoration and the potential litigation and
fines which may be imposed by government. Juan Co will be required to disclose
a brief description of the nature of any contingent liability and, where
practicable, an estimate of its financial effect including an indication of any
uncertainties. IAS 37 requires these disclosures unless, in extremely rare cases,
disclosure of the information can be expected to prejudice seriously the
company’s position in a dispute with other parties.
ACCA Marking scheme
Marks
(a)
1 mark per discussion point and application to the scenario, including:
–
Status of management commentary
–
Materiality
–
Relationship with IFRS Accounting Standard requirements
Maximum
(b)
(i)
(ii)
1 mark per discussion point of key principles in IAS 16 and IAS 38,
and application to the scenario including:
–
Capitalisation of costs
–
Depreciation/amortisation
1 mark per discussion point of key principles in IAS 36 and
application to the scenario including:
–
Impairment review procedure
–
Indications of impairment
–
Value in use considerations
–
Disclosure
Maximum
KA PL AN P U BLI SH IN G
1
3
3
–––
7
–––
5
–––
3
3
–––
6
–––
2
3
2
1
–––
8
–––
6
–––
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SB R: S T RA TE GI C B US IN E SS RE P O RT IN G
(iii)
1 mark per discussion point of key principles in IAS 37 and
application to the scenario including:
–
Provision/contingency requirements
–
Measurement
–
Decommissioning and restoration
Maximum
Professional marks – for overall understanding of climate-related issues
in corporate reporting
Total
2
4
2
–––
8
–––
6
–––
2
–––
25
–––
Examiner’s comments
Part (a) was only 5 marks and could be answered without referring to the exhibit. Candidates
should scan the requirement to identify what is needed: a discussion of the validity of the
views relating to materiality. A quick summary of the views given in the opening paragraph
would help guide a plan to answering:
•
Does the management commentary provide enough disclosure of climate related
matters?
•
What about climate changes with no impact on financial statements (e.g. non-financial
impact)?
•
Does a materiality decision extend to climate change (if no IFRS Accounting Standard
exists)?
The marking scheme for this was open to any valid comment by candidates, and a good
answer should be able to present at least five valid comments in their discussion. A good
answer would most likely begin with the definition of materiality, and then apply this to the
discussion. A material item influences the user’s decision making. If a user considers that
climate risk information would influence their decisions, the information is material.
Information can therefore be material without being required for disclosure by IFRS
Accounting Standards, or inclusion in the financial statements. Most candidates presented a
good answer to this section, recognising that compliance with IFRS Accounting Standards
may be insufficient for users.
(b) Better answers applied the information provided to each of the three issues (non-current
assets, impairment, and provisions and contingent liabilities). It’s advisable to follow the
layout of the requirement and answer this part under three separate headings. In doing so,
the candidate can monitor the balance of each requirement, both in terms of time spent and
the extent of each answer.
The challenge with part (b) is that the single exhibit presents a mix of issues, so candidates
were required to read through and pick out issues that would impact each of the three
accounting standards. To maximise opportunities for marks in their discussion of each issue
candidates should attempt to present at least six points for each part. These should combine
points of knowledge of the standard in each requirement with application of each standard
to the exhibit information.
For (b)(i), a good answer applied the recognition criteria for improvements to buildings, and
most candidates described how residual values and expected lives may be impacted by the
weather extremes described in the exhibit, with further impacts on depreciation and
amortisation. Valid comments on intangible assets (development costs relating to eco-design
of its products and services) were also made.
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For b(ii), weaker answers discussed the impairment process but failed to link this to the
scenario. Better answers applied knowledge of the standard to the scenario, for example, the
changes in regulation and legislation, the decline in demand, and evidence of early
decommissioning.
For b(iii), a good answer would describe and apply IAS 37 to the potential fines (government
targets), the issue of carbon taxes on future (not current) profits, the need to decommission
and restore land damage earlier than expected, and comments on restructuring.
As candidates progress through their answer, it may help to pause and quickly review it to
ensure they are meeting the requirement to ‘discuss the potential effects of climate-related
matters’ in applying the standards. This extends beyond a mere description of the accounting
treatment.
44
BOHAI (MAR/JUN 2022)
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Key answer tips
This question tested knowledge of a number of key areas of SBR – impairment, deferred tax,
leases and revenue. There were no numbers to deal with here, so it is a good test of a
candidate’s ability to explain the accounting treatment in the context of a scenario, without
the security of the calculations. There were a reasonable amount of marks available for
knowledge of the standards, so it is important to state the relevant rules first, rather than
going straight into the application. When reviewing your answer, if you find you have missed
out some of the points in the model solution, revisit the scenario to see which clues you may
have missed. There were some headroom marks though, so don’t worry if you haven’t
covered every single point, you certainly don’t need to in order to pass!
(a)
Impairment test
Tutorial note
This requirement asks for a discussion on whether the directors were correct in not
performing an impairment review. Start off by setting out the rules surrounding
impairment reviews under the relevant standard. There were some relatively easy
marks available for doing this.
Then try to take a methodical approach. Take each bullet point in exhibit 1, link it to
other relevant information in the exhibit and then tie it in to the impairment rules. For
example is the factor an indicator of impairment, does it affect the value in use
calculation used when assessing the recoverable amount etc.
KA PL AN P U BLI SH IN G
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IAS 36 Impairment of Assets requires Bohai Co to assess at 31 December 20X8 whether
there is any indication that an asset may be impaired. If any such indication exists, it
should estimate the recoverable amount (higher of fair value less costs of disposal and
value in use (VIU)) of the asset. It appears that there were impairment indicators (both
internal and external) at this date.
The carrying amount of the net assets is significantly higher than the company’s market
capitalisation because the price‑to‑book ratio is 0.3. This ratio is one of the impairment
indicators mentioned in IAS 36. The directors of Bohai Co argued that this ratio was
similar to other companies in the industry. However, several companies in this industry
had actually written down the value of their ships during 20X8 and Bohai Co had not
taken this into account in its comparison. Also, any comparison needs to consider
factors such as the ships’ type and age.
Bohai Co stated that there had been no losses from the sale of ships that were material
to the financial statements for the year ended 20X8. However, although the disposal
losses were immaterial compared to the year-end results, there were several cases
where the loss per ship was 40% of the carrying amount of the ship. Thus, in these
cases, the loss per ship was material in relation to its carrying amount.
Bohai Co mentioned that there had only been an estimated 2% drop in the market
value of the fleet in December 20X8. The lack of change in market value is not an
indicator that there should not be an impairment review. Further, there is little
relevance in looking at estimates unless they are based on actual market transactions
or a valuation by experts and neither of these events had occurred.
Bohai Co pointed out that fuel prices were falling and there was an increased demand
for cruising after a significant reduction due to a recession. However, the price of a
cruise had not increased in two years. As a result, conservative income estimates had
been applied in budgets because of an anticipated delay in the recovery of the cruise
market with ships still lying idle. These estimates would be used for VIU calculations
which would almost certainly result in VIU calculations being below the carrying
amount of the ships.
IAS 36 requires an entity to assess at the end of each reporting period whether there
is any indication that an asset may be impaired. There are several potential indications
of impairment of the ships existing as of 31 December 20X8 and thus an impairment
test should be carried out and recoverable amounts for the ships estimated.
Considering information available on the market, it seems that Bohai Co faces
challenging market conditions with overcapacity and cruise ships lying idle. This has
led to liquidity problems and negotiations with its creditors on deferral of payments to
20X9. This is not a justifiable argument to fail to perform an impairment review.
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AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
(b)
Deferred tax
Tutorial note
Make sure you answer both parts of the requirement – using sub-headings can help
with this. Also, try to avoid writing down everything you can remember about deferred
tax unless it is relevant! Focus on the specifics of the question and try to identify the
relevant rules, then apply them to the scenario.
IAS 12 Income Taxes sets out the principle that accounting for the deferred tax effects
of an event should be consistent with the accounting for the event itself. IAS 12 also
states that at the end of each reporting period, an entity should reassess unrecognised
deferred tax assets.
IAS 12 requires deferred tax which relates to items which are recognised
–
in profit or loss, to be recognised in profit or loss
–
in other comprehensive income, to be recognised in other comprehensive
income and
–
directly in equity, to be recognised directly in equity.
IAS 12 explains that IFRS Accounting Standards require (or permit) particular items to
be credited (or charged) directly to equity, such as an adjustment to the opening
balance of retained earnings resulting from a change in accounting policy which is
applied retrospectively.
However, such accounting treatment does not necessarily extend to the subsequent
adjustments to the deferred taxes of $5 million in December 20X8, originally
recognised on 1 January 20X8. Also, where the IFRS 9 Financial Instruments expected
credit loss model is applied, all impairment charges are recognised in profit or loss.
Therefore, it is acceptable to recognise the additional deferred tax assets in profit or
loss.
Tutorial note
You may jump fairly quickly to a conclusion for this part – that the deferred tax asset
and liability should not be offset. However, to maximise the marks you score, you need
to show how you have arrived at that conclusion, i.e. what are the relevant rules around
offsetting.
Deferred tax assets and liabilities are required to be offset only in certain restricted
scenarios. Deferred tax assets and liabilities must be recognised gross unless the entity
has a legally enforceable right to set off current tax assets against current tax liabilities
and the deferred tax assets and the deferred tax liabilities relate to the same taxation
authority. This is only the case where the right to set off relates to the same taxable
entity or different taxable entities which intend either to settle taxation on a net basis,
or to realise the assets and settle the liabilities simultaneously.
KA PL AN P U BLI SH IN G
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As the deferred tax asset and liability of Bohai Co and Yuyan Co do not relate to the
same taxable entity, the directors of Bohai Co must consider whether these entities
either intend to settle current tax liabilities and assets on a net basis or to realise the
assets and settle the liabilities simultaneously. Net settlement will generally not be the
case, unless Bohai Co and Yuyan Co are part of a tax group and where the local tax
jurisdiction allows a group of companies to file tax returns on a consolidated basis.
Therefore, Bohai Co should not set off the Yuyan Co deferred tax liability in the
consolidated financial statements.
(c)
Lease and non-lease components
Tutorial note
It’s worth spending some of your time reading the exhibit carefully. Identify each
element that needs to be covered in your answer so you don’t miss part of the
requirement. In this case you need to cover both the lease and non-lease elements, and
also whether Bohai is correct in its conclusion that it is acting as a principal.
IFRS 16 Leases states that for a contract which contains a lease, an entity should
account for each lease component within the contract as a lease separately from nonlease components. In this case, IFRS 16 is applicable because the lessee has the right
to use the cruise ship for a specified period (five years) in exchange for a rental fee.
Bohai Co should reflect the underlying asset (the cruise ships) subject to the lease
arrangement on the statement of financial position.
Bohai Co has to assess whether the operating services for the cruise ship are non-lease
components. This in turn leads to an assessment as to whether IFRS 15 Revenue from
Contracts with Customers is applicable to these services or whether amounts payable
do not give rise to a separate component from the lease. If the services are not
separate from the lease, they are part of the consideration which is allocated to the
separately identified components of the lease contract. In this case, both IFRS 15 and
16 can be applicable, depending on the identified components. Bohai Co should
allocate consideration between individual lease and non-lease components of the
contract in line with IFRS 15’s guidance on allocating the transaction price to
performance obligations, i.e. based on stand-alone selling prices or estimation thereof.
Therefore, the operating costs are deemed to be separate non-lease components.
When more than one party is involved in providing goods or services to a customer,
IFRS 15 requires an entity to determine whether it is a principal or an agent in these
transactions by evaluating the nature of its promise to the customer. An entity is a
principal and, therefore, records revenue on a gross basis, if it controls a promised
good or service before transferring that good or service to the customer. An entity is
an agent if its role is to arrange for another entity to provide the goods or services and,
therefore, records as revenue the net amount which it retains for its agency services.
The operating costs of the cruise ship such as engine maintenance and cleaning of the
cruise ship are carried out by Bohai Co and are billed at a price agreed on the signing
of the lease. Therefore, Bohai Co is acting as a principal and therefore the recording of
the operating costs at the gross amount is correct.
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AN S WE R S T O P RA C TI CE QUE S TI ON S : SE C T ION 2
The direct purchase agreements with third parties at each port are billed to Bohai Co
and the entity adds a management fee and bills the total to the lessee. In this case,
Bohai Co is acting as an agent for arranging the supply of fuel and food supplies. The
fact that Bohai Co acts as an agent is only relevant for the presentation of the
consideration and not for identification of separate components in a lease contract.
Bohai Co should recognise revenue only in the amount of the management fee to
which it expects to be entitled in exchange for arranging for the specified goods or
services to be provided by the third party. The relevant criterion is whether Bohai Co
obtains control of the services before they get passed to the lessee. In this case,
Bohai Co cannot control the fuel and food supplies before they are transferred to the
lessee.
Bohai Co has no consumption or inventory risk, is not able to set its own prices and
does not earn any margin on the supply of goods. The fact that Bohai Co arranges the
port facility does not give the entity control over the fuel and food supplies.
ACCA Marking scheme
(a)
(b)
1 mark per discussion point of key principles in IAS 36 including knowledge of
indicators, principles and relevant definitions
1 mark for each relevant point discussed with application to the scenario
Conclusion
1 mark per discussion point of key principles in IAS 12 and application to the
scenario including:
–
Recognition of movement in deferred tax asset in PL v OCI
–
Offsetting deferred tax assets and liabilities
Maximum
(c)
1 mark per discussion point of key principles in IFRS 16 and IFRS 15 and
application to the scenario including:
IFRS 16
–
principle of separating lease and non-lease components
–
applies here as RoU (5 years) for rent
–
separate accounting each lease and non-lease component
–
operational services: assess if non-lease component
IFRS 15
–
allocate consideration between components
–
base on stand-alone prices/estimates
–
allocate transaction price to performance obligations
Principal v agent:
–
assess principal/agent based on nature of performance obligations
–
principal: controls goods/service before transfer
–
principal: records revenue on gross basis
–
agent: arranges for 3rd party to transfer good/service
–
agent: records revenue net
–
accounting if principal/agent applied to scenario
Maximum
Total
KA PL AN P U BLI SH IN G
Marks
4
4
1
–––
9
–––
4
5
–––
9
–––
7
–––
4
3
5
–––
12
–––
9
–––
25
–––
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Examiner’s comments
Part (a) for 9 marks, required a discussion on whether the directors were correct in not
conducting an impairment test at the end of the financial year.
A good answer should always start with a demonstration of your knowledge relating to the
issue. Relatively easy marks are often available for describing relevant accounting standards
relating to the requirement: ‘Discuss whether the directors of Bohai Co were correct in not
conducting an impairment test at 31 December 20X8.’ The key verb is to discuss, so begin
with what IAS 36 Impairment of Assets requires for an impairment test to be undertaken: are
there impairment indicators (internal or external)? You could begin by outlining the more
obvious indicators: such as negotiations with creditors to defer payments and challenging
market conditions (overcapacity and idle cruise ships).
It may also help to outline the impairment review process, since information provided may
relate to the recoverable amount (value in use or fair value less costs of disposal). Good
answers discussed the five bullet points alongside the additional details, which may counter
the directors’ arguments.
Of the three parts to this question, this was the best answered. A good answer first briefly
described when IAS 36 Impairment of Assets requires an impairment review, and then
applied this knowledge using the information provided, making clear points in the discussion
leading to a justified conclusion. Weaker answers were too brief and covered general
knowledge on IAS 36 without specific application to the scenario.
For 7 marks, part (b) asked for a discussion on the acceptability of recognising a deferred tax
asset in profit or loss rather than in equity and offsetting a subsidiary’s deferred tax liability
against the holding company’s deferred tax asset. It is important to answer both bullet points
in the requirement to maximise opportunities for marks, and weaker answers lost focus,
particularly when answering the offsetting aspect.
Where knowledge of IAS 12 Income Taxes is explained, you need to make sure it is relevant
to the scenario: merely stating aspects of the standard without considering its relevance or
application to the scenario is unlikely to earn you marks. In this case both issues relate to
financial statement presentation, so candidates who considered the principle of consistency
would gain credit. In the case of the first bullet point, whether to recognise a deferred tax
asset in profit or loss or equity, the exhibit describes how the deferred tax asset rises due to
a change in the expected credit loss under IFRS 9 Financial Instruments. Knowledge of this
standard helps identify the treatment, since all impairment charges are recognised in profit
or loss and explaining this would be a good start to then considering how the related deferred
tax adjustment should be recognised. IAS 12 requires a consistent approach in that the
deferred tax is recognised in the same location as the item to which the deferred tax relates.
Since an impairment under IFRS 9 is recognised in profit or loss, this is where the deferred
tax movement can also be recognised. Some answers to this part of the question lost focus
on the requirement, particularly where candidates seemed to misread the exhibit and
suggested that no deferred tax asset should be recognised (despite the question saying it had
been correctly accounted for retrospectively).
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The second issue, relating to the offsetting of a subsidiary’s deferred tax liability against the
holding company’s deferred tax asset, was less well answered. Credit was awarded to
answers which considered the legal standpoint, where there is a legally enforceable right to
a net settlement, then offsetting is permissible. Applying this principle to the scenario, a
conclusion can be drawn that offsetting would not be allowed, unless both companies in the
group are under the same tax jurisdiction which allows the group to file returns on a
consolidated basis, which is rare. Whilst many candidates may have found this section of the
question challenging, answers which started with a broader theoretical positioning
(consistency in the first case, and the legal standpoint in the second) would form a solid
foundation for any further arguments.
(c) For 9 marks, part (c) asked for an explanation of how lease and non-lease components of
cruise ship agreements should be accounted for under IFRS 15 Revenue from Contracts with
Customers and IFRS 16 Leases. Most candidates were aware of the IFRS 15 recognition
requirements and made sensible comments regarding performance obligations and when
they could be recognised, for which credit was given. IFRS 16 was also well explained in most
cases, identifying a right-of-use asset from the lease (the cruise ship), although the treatment
of the operation’s management fees was more challenging. Fewer candidates identified that
Bohai Co was only acting as an agent relating to the fuel and food supplies and therefore
most missed the point regarding the ‘gross’ revenue recognition within the question
requirement. Where this was overlooked (despite the phrase “acts as a principal” being
included in the exhibit), candidates lost opportunities for marks from discussing the
differences between accounting for income under IFRS 15 when acting as principal or agent.
Bohai should be identified as the principal for providing maintenance and cleaning (by
controlling the service before transfer), although the fuel and food is not under their control
as the lessee can deal with third parties; so Bohai acts as an agent in the latter case. Weaker
answers failed to focus sufficiently on both accounting standards, and this would limit
opportunities for marks.
The marking team found that most candidates were wisely separating their points out and
therefore making it easy to award relevant marks. Using paragraphs and subsections is
recommended; as well as taking the first few minutes to draft a plan for your answer. It
should by now be common practice for candidates to copy and paste the requirements from
the question, using bold or a different font to identify this from their answer, and refer back
to this requirement to ensure that they are keeping on track.
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Walk in the footsteps of a top tutor
Key answer tips
This question tested knowledge of the going concern assumption and three main standards
– IAS 8 Basis of Preparation of Financial Statements, IAS 37 Provisions, Contingent Liabilities
and Contingent Assets and IFRS 13 Fair Value Measurement. This is another good example of
where it is important to start off with the rules per the Conceptual Framework or relevant
standard. There were marks available for knowledge, so don’t miss out!
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(a)
(i)
Going concern
Tutorial note
When discussing the going concern assumption, don’t restrict your answer to
simply the definition of the assumption, consider the requirements under IAS 8
Basis of Preparation of Financial Statements as well. The disclosure of
uncertainties around the going concern status is particularly relevant here.
The IFRS Conceptual Framework for Financial Reporting states that the going
concern assumption is an underlying assumption. Thus, the financial statements
presume that an entity will continue in operation indefinitely or, if that
presumption is not valid, relevant disclosures and a different basis of reporting
are required. IAS 8 Basis of Preparation of Financial Statements requires
management, when preparing financial statements, to make an assessment of
an entity’s ability to continue as a going concern, and whether the going concern
assumption is appropriate. Furthermore, disclosures are required when the
going concern basis is not used or when management is aware of material
uncertainties related to events or conditions which may cast significant doubt
upon the entity’s ability to continue as a going concern. In assessing whether
the going concern assumption is appropriate, the standard requires that all
available information about the future, which is at least 12 months from the end
of the reporting period, should be taken into account. This assessment needs to
be performed up to the date on which the financial statements are issued and
should take into account measures taken by the government and banks to
provide relief to affected companies. Wing Co has taken advantage of the
business reduction loan scheme and the national bank’s short-term debt
scheme but its operations have been suspended before and after the reporting
date. In addition, the company has several contracts which may turn out to be
loss making and its investment properties appear to have lost value due to the
pandemic.
The directors should take into consideration the existing and anticipated effects
of the pandemic on the entity’s activities. Wing Co has a history of profitable
operations and relies on external financing resources, but because of the
pandemic, it finds itself in difficulties. The directors have to consider the
expected impact on liquidity and profitability before they can satisfy themselves
that the going concern basis is appropriate. This consideration is particularly
relevant given that operations have been temporarily suspended.
Significant judgement and continual updates to the assessments up to the date
of issuance of the financial statements may be required given the evolving
nature of the pandemic and the related uncertainties.
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(ii)
Onerous contracts
Tutorial note
Consider that there may be more than one outcome here – the scenario describes
contracts where penalties are incurred and then also goes on to mention that
there are, on occasion, some contracts where there will be no penalty. Discuss
both in your answer.
An onerous contract is a contract in which the unavoidable costs of meeting the
obligations under the contract exceed the economic benefits expected to be
received under it. The unavoidable costs under a contract reflect the minimum
cost of exiting from the contract, which is the lower of the cost of fulfilling it and
any compensation arising from cancelling the contract. IAS 37 Provisions,
Contingent Liabilities and Contingent Assets requires the entity to recognise and
measure the present obligation under the contract as a provision. Before a
separate provision for an onerous contract is established, an entity recognises
any impairment loss which has occurred on assets dedicated to that contract.
One significant impact of the pandemic is the disruption to the global supply
chain. Wing Co has contracts to sell goods at a fixed price and, because of the
shutdown of its manufacturing facilities, which was required by the government,
it cannot deliver the goods itself without first buying them from a third party at
a significantly higher cost.
All contracts should be reviewed to determine if there are any special terms
which may relieve an entity of its obligations or any contracts which can be
cancelled without paying compensation. In this case, such contracts are not
deemed onerous as there is no obligation.
(iii)
Fair value measurement
Tutorial note
Use the clues in the scenario to help you apply the principles of IFRS 13 Fair Value
Measurement to the scenario. For example, the scenario describes transactions
that are ‘forced’ and that the directors ‘have indicated they would not sell their
properties’. IFRS 13 places an emphasis on orderly transactions, i.e. not forced,
and that the fair value is from the perspective of the market, not the entity.
IFRS 13 Fair Value Measurement says that the objective of fair value
measurement (FVM) is to estimate the price at which an orderly transaction to
sell an asset or to transfer a liability would take place between market
participants at the measurement date under current market conditions. Due to
the pandemic, valuations will be subject to significant measurement
uncertainty. As a result, there will be a wider range of possible estimates of FVM.
Wing Co is required to apply judgement to find the fair value which is most
representative in the circumstances.
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The definition of fair value requires an orderly transaction, that is not a forced
transaction. Evidence of an orderly transaction must be evaluated when
estimating FVM. If the observed price is based on a transaction which is
determined to be forced, little weight should be placed on it.
The fact that the directors have stated that they would not sell their own assets
at prices currently observed in the market does not mean these transactions
should be presumed to be forced. IFRS 13 makes clear that fair value is a marketbased measurement, not entity-specific and that an entity’s intention to hold an
asset in a market downturn is not relevant.
There has been a significant decrease in the volume of transactions in the
property market and, therefore, it could be argued that the market is not active.
An active market is one in which transactions for the asset or liability occur with
sufficient frequency and volume to provide pricing information on an ongoing
basis. Observable prices from inactive markets may not be representative of fair
value. However, such transactions should not be ignored and the relevance of
the transactions such as type, and location of the property should be taken into
account.
A significant decrease in the volume of transactions in a market can also
influence which valuation technique is used. The market approach can prove
challenging, and the use of additional valuation techniques may be needed. This
may need the use of unobservable inputs. However, a significant decrease in the
volume of transactions does not automatically mean that a market is no longer
active as transactions may still occur with sufficient frequency and volume to
provide pricing information. Also, several properties similar to those held by
Wing Co have been sold in December, therefore data from these sales could be
used to measure the fair value of their properties. Relevant prices observed
from orderly transactions in these markets must still be cons