2022 BPP Kit SBR

@
BPP
LEARNING
MEDIA
ACCA
Approved
Practice & Revision Kit
Strategic Business Reporting -
International & UK (SBR - I NT & UK)
For exams in September 2021,

December 2021, March 2022
and June 2022
Free access to eBook & additional digital content
Valid for both paper- and computer-based exams

ACCA
Strategic Business
Reporting (SBR)
Practice &
Revision Kit
• • • • •
For exams in September 2021,

December 2021 , March 2022 and
. . . . .
June 2022 . . . .
Third edition March 2021 A note about copyright
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ii
Contents
Page
Finding questions
Question index iv
Topic index vii
The exam ix
Helping you w ith your revision xvi
Essential skill areas xviii
Section 1: Preparation questions
Questions 3
Answers 89
Section 2: Exam-standard questions
Questions 17
Answers 108
Section 3: Mock exams
Mock exam 1
• Questions 277
• Answers 285
Mock exam 2 (ACCA Specimen exam 1, amended)
• Q uestions 303
• Answers 313
Mock exam 3 (March 2020 exam)
• Q uestions 327
• Answers 335
Mock exam 4 (September/December 2020 exam)
Questions 351
• Answers 359
Mathematical tables 373

Review form
Cont ents iii

Finding questions
Quest ion index
The q uestions in section 1 ore p reparation questions to help consolidate your knowledge before
you move onto the exam-standard questions in section 2. The questions in section 2 ore grouped
according to the structure of the exam. Section A of the exam will contain two questions, the first
on groups and the second on ethical a nd reporting issues. Section B of the exam wil l conta in two
25- mark questions which could cover a ny area of the syllabus. Here we hove general ly
cat egorised questions containing analysis/appraisal of information and current issues under
'Section B-type questions' however, these areas cou ld be examined in either section of the exam.
Questions which require consideration of an issue from the perspective of on investor o r other
stakeholder are marked below w ith an a sterisk*.
The IASB's Conceptual Framework for Financial Reporting was substantially revised and
reissued in March 2018. References to the Conceptual Framework or the revised Conceptual
Framework throughout this Kit refer to the March 2018 version unless otherwise stated.
Time
allocation Page number
Marks Mins Question Answer
Section 1: Preparation questions

1 Financial instruments 6 12 3 89
2 Leases 10 20 4 89
3 Defined benefit pion 10 20 4 90
4 Sundry standards 30 59 6 91
5 Control 12 23 7 94
6 Associate 20 39 8 96
7 Port disposal 25 49 9 98
8 Step acquisition 15 29 11 101
Foreign operation 25 49 11 103
• Consolidated statement of cash flows 20 39 13 106
Section 2: Exam- standard questions
11 Robby 30 59 17 108
12 Banana 30 59 19 112
13 Hill 30 59 21 115
14 Luploid 30 59 22 119
15 Angel 30 59 24 123
16 Moyes 30 59 27 127
17 Weston 30 59 29 130
18 Bubble 30 59 31 135
19 C orbise 30 59 32 139
iv Finding questions
Time

Ethical issues questions
20 Elevator* 20 39 34 143
21 Star 20 39 35 145
22 Farham 20 39 36 147
23 Gustoso* 20 39 37 149
24 Fiskerton 20 39 38 151
25 Hudson 20 39 39 153
26 Stent 20 39 40 156
Section-B-type questions
Current issues
27 Jenne* 25 49 41 159
28 SunChem 25 49 42 162
29 Egin group 25 49 43 166
30 Alexandra* 25 49 45 170
31 Yanong 25 49 46 173
32 Avco* 25 49 47 177
33 Calendar 25 49 48 180
34 Lupin 25 49 49 182
35 Lizzer* 25 49 50 186
36 Digiwire 25 49 51 190
Analysis
37 Moorland* 25 49 53 194
38 Toobasco 25 49 54 196
39 Tufnell* 25 49 55 199
40 Amster* 25 49 57 202
41 Havanna 25 49 58 205
42 C rypto 25 49 59 208
43 Operating segments* 25 49 60 211
44 Skizer* 25 49 61 214
45 Cloud 25 49 63 217
46 Allsop* 25 49 64 221
47 KiKi* 25 49 65 224
48 Hells* 25 49 66 227
49 Guidance* 25 49 67 230
Financial reporting issues
50 Pensions 25 49 68 233
51 Kayte 25 49 70 236
52 Fill 25 49 71 239
53 Zedtech 25 49 72 242
@BPP lE.\l'ING Finding questions V

IAfl'llA
Time

54 Emcee 25 49 73 244
55 Scramble 25 49 74 246
56 Estoil 25 49 75 249
57 Evolve 25 49 76 252
58 Gasnature 25 49 77 254
59 Complexity* 25 49 78 257
60 Carsoon 25 49 78 260
61 Leigh 25 49 79 262
62 Mehran 25 49 80 265
63 Canto 25 49 82 267
64 Ethan 25 49 83 270
65 Whitebirk 22 43 84 272
Mock exam 1
1 Joey
2 Ramsbury
3 Klancet*
4 Jayach
Mock exam 2 (ACCA Specimen exam 1, amended)
1 Kutchen Co
2 Abby Co
3 Africant Co*
4 Rationale Co
Mock exam 3 (March 2020 exam)
1 Hummings Co
2 8agshot Co
3 Leria Co
4 Ecoma Co
Mock exam L+ (September/December 2020 exam)
1 Sugar Co
2 Calibra Co
3 Corbel Co
4 Handfood Co
vi Finding questions
Topic index
Listed below are t he key SBR syllabus topics and t he numbers of the questions in this Kit covering
those topics. We have a lso included a reference to the releva nt Chapter of the BPP SBR
Workbook, the companion to the BPP SBR Practice and Revision Kit, in case you wish to revise the
information on the topic you have covered.
If you need to concentrate your practice and revision on certain topics or if you want to attempt
all available questions that refer to a particular subject, you will find this index useful.
Syllabus topic Question numbers Workbook

chapter
Accounting policies (IAS 8) 33,49 2
Mock exam 1: 0 4
Alternative performance mea sures 27,37,38, 39,42,49 18
(APMs) Mock exa m 2: 03
Business combinations (IFRS 3) 11 - 14, 28, 11-13
Mock exam 1: 01,
Mock exam 2: 0 1
Conceptual Framework 11 , 27, 32, 34, 36, 44, 45, 48,
51, 52, 53,
Mock exam 1: 0 4,
Mock exam 2: 04
Consolidated statement of cash flows 15, 16, 17 17
Deferred tax (IAS 12) 13, 25,34,39,48,57,64, 7
Mock exam 3: 02
Disposals of investments 12, 13, 19 13
Mock exam 2: 01
Ethics 20- 26, 2
Mock exa m 1: 0 2,
Mock exam 2: 02,
Mock exam 3: 02,
Mock exam 4: 02
Eve nts after the reporting period (IAS 10) 13,35,57,58 6
Fair value measurement (IFRS 13) 14, 27, 28, 31, 36, 54, 60, 62, 4
63, 64, Mock exam 1: 04,
Mock exam 2: 03
Financial instruments (IFRS 9) 12, 13, 17, 23, 26, 30, 32, 35, 8
36,40,42,45,55,57,58,
59, 60, 62, 64, Mock exam 1:
03, Mock exam 2: 0 1
Foreign t ransactions and entities (IAS 21) 18, 19 16
IFRS Practice Statement 1 Management 37, 48 18
Commentary
IFRS Practice Statement 2 Making 27,28,29,30,33,35 20
Materiality Judgments Mock exam 1: 03,
Mock exam 1: 0 4,
Mock exam 2: 04,
Impairment (IAS 36) 14,22,52, 55,56,63,64 4
Intangible assets (IAS 38) 28,33,39, 44,54, 55,63 4
Integrated reporting 29,44, 45, 46 18
Interim reporting (IAS 34) 51 18
Investment property (IAS 40) 24,27,57,63,64 4
@BPPLEAR\ING Topic index vii

fJlfOIA
Syllabus topic Question numbers Workbook
chapter
Joint arrangements (IFRS 11) 11, 42, 58 15
Leases (IFRS 16) 21, 24,33,34,36,41, 42,60 9
Measurement 27, Mock exam 1: 04,
Mock exam 2: 03
Non -current assets held for sale and 16, 22, 39, 41 , 51, 54, 57 14
discontinued operations (IFRS 5)
O perating segment s (IFRS 8) 37, 43 18
Pensions (IAS 19 Employee Benefits) 12, 25, 50, Mock exam 2: 01 5
Provisions 23,25,50 6
Related party transactions (IAS 24) 26, 28, 29, 30, 54, 2
Mock exam 2: 02
Revenue recognition (IFRS 15) 16, 20, 24, 30, 31, 33, 36, 41, 3
46, 47,53,60
Segment reporting (IFRS 8) 37, 43, Mock exam 1: 03, 18
Mock exam 2: 02
Share-based payment (IFRS 2) 14, 16, 34, 40, 61, Mock exam 10
1: 0 1
Step acquisitions (IFRS 10) 11 , Mock exam 1: 01, 12
Mock exam 2: 01
viii Topic index @BPPlEAR~lt C

t,1.fl'llA.
The Exam
Computer-based exams
Wit h effect from t he March 2020 sitting, ACCA have commenced the launch of computer-based
exams (CBEs) for this exam w ith the aim of roll ing out into all markets internationally over a short
period. BPP materials have been designed to support you, w hichever exam format you are
studying towards. For more information on these c hanges and when they will be implemented,
please visit the ACCA website.
ACCA CBE practice platform

ACCA has launched a free on-demand resource, the ACCA CBE practice plat form , designed to
mirror the live CBE experience. You can access the ACCA CBE practice platform via the Study
Support Resources section of the ACCA website: navigate to t he C BE question pract ice section
and log in with you r myACCA credentials.
If you are sitting SBR as a CBE, practising as many exam-st yle questions as possible in t he ACCA
CBE practice p latform will be key to passing the exam.
Important note for UK students who are sitting the UK variant of

Strategic Business Reporting
If you are sitting the UK va riant of the Strat egic Business Reporting exam you will be studying
under Internat ional standards, but between 15 and 20 marks w ill be available for comparisons
between International and UK GAAP.
This Pra ctice S Revision Kit is based on IFRS Standards only. An online supplement covering the
additional UK issues a nd providing additional illustrations and examples is available on the Exam
Success Site; for details of how to access t his, see the inside cover of this Kit.
Approach to examining the syllabus

The Strategic Business Reporting syllabus is assessed by a 3 hour and 15 minute exam. The pass
mark is 50%. All questions in the exam are compulsory .
At t he revision stage, we advise students to revisit t he following main syllabus requirements so
that you have a good understanding of t he overall objectives of this exam. Remember, ACCA's
examining team expect you to be able to:
• Demonstrate professional competences within the business reporting environment . You

will be examined on concept s, theories, and principles, a nd on your ability to question and
comment on proposed accounting treatments.
• Relate professional issues t o relevant concepts and practical situations. The evaluation of
alternative accounting practices and the identification and prioritisation of issues will
be a key element of the exam.
• Exercise professional and ethical j udgement, and integrate technica l knowledge when
addressing business reporting issues in a business context.
• Adopt either a stakeholder or an external focus in answering questions and demonstrate

personal skills such as problem solving, d ealing with information and decision making .
You will also have to demonstrate commu nication skills appropriate t o t he scenario .
The Exam ix
• Demonstrate specific p rofessional knowledge appropriate to the preparation and
presentation af consolidated and other financia l statements from account ing data, to
conform wit h relevant accounting standards. Here, you may be required to interpret
financial statements for different stakeholders and/or communicate the impact of changes
in accounting regulation on financial reporting.
The ACCA website conta ins a useful explanation of the verbs used in exam q uestions.
See: 'What is the examiner asking? 'available at www.accaglobal.com/u k/en/student/sa/study-
skills/questions. html
x The Exam
Format of the exam
Section A Two compulsory scenorio-based questions, tota lling 50 marks 50

Question 1 (30 marks): (incl. 2
• Based on the financial statements of group entities, or extracts professional
thereof (syllabus area D) marks)
• Also likely to require consideration of some financial reporting

issues (syllabus area C)
• Numerical aspects of g roup accounting will be a maximum of
25 marks
• Discussion and explanation of numerical aspects will be
required
Question 2 (20 marks):
• Consideration of the reporting implications and the ethical
implications of specific events in a contemporary scenario
Two p rofessional marks will be awarded to the ethical issues
question.
Section B Two compulsory 25-mark questions 50

Questions: (incl. 2
• May be scenario, case- study, or essay based professional
marks)
• Will contain both discursive and computational elements
• Could deal with any aspect of the syllabus
• Will a lways include either a full or part question that requires
the appraisal of financial and/or non-financial information
from either the preparer's or anoth er stakeholder's perspect ive
Two professional marks w ill be awarded to the question that requires
analysis.
Current issues
The current issues element of the syllabus (Syllabus area F) may be examined in Section A or B
but will not be a full question. It is more likely to form part of another quest ion.
The Exam xi
Analysis of past exams
The table below shows when each element of the syllabus has been exam ined a nd the section in
which the element was examined.
Mar/ I Sept/ I Sept/

Workbook Specimen Specimen Sept Dec Jun Dec Mar Dec
chapter exam 1 exam 2 I2018 I2018 I2019 2019 2020 2020
I
Fundamental
ethical and
professional
principles
2 Professio nal and A A A A A A A A

ethical behaviour in
corporate reporting
The financial
reporting
framework
The applicat ions, A, B A 8 A,B 8 A, B A

strengths and
weaknesses of an
accounting
framework
Reporting the
financial
performance of a
range of entities
3 Revenue 8 8 A 8 8 A
4 Non-current assets A, 8 A,B A,B 8 A,B
8 Financial A A 8 A,B A
instruments
9 Leases 8 A 8 8
5 Employee benefits A A 8 8 A,B
7 Income t axes A 8 A A
6 Provisions, A 8 A A
contingencies and
events after the
reporting period
10 Share-based A
payment
4,8 Fair value 8 A

measurement
19 Reporting 8
requirements of
small and medium-
sized entities (SMEs)
2, 4, Other reporting 8 8 A
9, 18 issues
xii The Exam 0 BPP

LEl\ltNINC
t.1r-nt,
Mar/ Sept/ Sept/
Workbook Specimen Specimen Sept Dec Jun Dec Mar Dec
chapter exam 1 exam 2 2018 2018 2019 2019 2020 2020
Financial
statements of
groups of entities
11, Group accounting A A A A A A,B A A

14-17 including
statements of
cash flows
11 , 15 Associates and A A B B
joint arrangements
12, 13 Changes in group A A A A A A A

structures
16 Foreign A A
transactions
and entities
Interpreting
financial
statements for
different
stakeholders
18 Analysis and A,B B B B B B B B

interpret ation of
financial
information and
measurement of
performance
The impact of
changes and
potential c hanges
in accounting
regulation
20 Discussion of A,B B A,B A,B B B B

solutions to current
issues in financia l
reporting
IMPORTANT!
The table above gives a brood idea of how frequently major topics in the syllabus ore examined.
It should not be used to question spot and predict, for example, that a certain topic will not be
examined because it has been examined in the last two sittings. The examiner's reports ind icate
that they are well aware that some students try to questio n spot. The examining team avoid
predictable pat terns and may, for example, examine the same topic two sittings in a row,
particularly if there has been a recent change in legislation. Equally, just because a topic has
not been examined for a long time, this does not necessarily mean it wi ll be examined in the
next exam!
Syllabus and Study Guide

The complete SBR syllabus and study guide can be found by visiting t he exam resource f inder on
the ACCA website.
@BPP LEIU\ING
11,fl}II\
The Exam xiii
Examinable documents
The following document s are examinable for sittings up from September 2021 to June 2022.
Knowledge of new examinable regulations issued bi:J 31 August will be required in examination
sessions being held in the following exam year. Documents may be examinable even if t he
effective date is in the future.
The syllabus and studi:J guide offers more detailed guidance on the depth and level at which the
examinable documents will be examined.
International Accounting Standards (IASs)/lnternational

Financial Reporting Standards (IFRSs)
IAS 1 Presentation of Financial Statements
IAS 2 Inventories
IAS 7 Statement of Cash Flows
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
IAS 10 Events After t he Reporting Period
IAS 12 Income Taxes
IAS 16 Property, Plant and Equi pment
IAS 19 Employee Benefits
IAS 20 Accounting for Government Grants and Disclosure of Government

Assistance
IAS 21 The Effects of Changes in Foreign Exchange Rates
IAS 23 Borrowing Costs
IAS 24 Related Party Disclosures
IAS 27 Separate Financial St atements
IAS 28 Investments in Associates and Joint Ventures
IAS 32 Financial Instruments: Presentation
IAS 33 Earnings per Shore
IAS 34 Interim Financial Reporting
IAS 36 Impairment of Assets
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
IAS 38 Intangible Asset s
IAS 40 Investment Properti:J
IAS 41 Agriculture
IFRS 1 First-time Adoption of International Financial Reporting Standards
IFRS 2 Share-based Payment
IFRS 3 Business Combination s
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
IFRS 7 Financial Instruments: Disclosures
xiv The Exam @BPP LEAR~IIIC

tilff}IA,
International Accounting Standards (IASs)/lnternational
Financial Reporting Standards (IFRSs)
IFRS 8 Operating Segments
IFRS9 Financial Instruments
IFRS 10 Consolidated Financial Statements
IFRS 11 Joint Arrangements
IFRS 12 Disclosure of Interests in other Entities
IFRS 13 Fair Value Measurement
IFRS 15 Revenue from Contracts with Customers
IFRS 16 Leases
IFRS for SMEs IFRS for Small and Medium-sized Entities
The International Integrated Reporting <IR> Framework
IFRS Practice Management Commentary

Statement 1
Making Materiality Judgements
EDs, Discussion Papers and Other Documents

I t • .... • • ... ... • • • • I
Important note
Many of these IFRS standards are also tested in Financial Reporting (FR). The technical
knowledge required for SBR is an extension of that required for FR. The SBR examining team
have commented that many student responses do not d emonstrat e a good technical FR
knowledge. However, a good understanding of FR is vital t o pass your SBR exom and you need to
be able to demonstrate it. Before you begin your studies for SBR, be sure that you have revised
all FR topics.
@BPP LEAR\ING
Mfl11A.
The Exam xv
Helping you with your revision
BPP Learning Media - ACCA Approved Content Provider
As an ACCA App roved Content Provider, BPP Learning Media gives you the op portunit y to use
revision materials reviewed by the ACCA examining team. By incorporating the ACCA examining
team's comments and suggestions regarding the depth and breadth of syllabus coverage, the
BPP Learning Media Practice & Revision Kit provides excellent, AC CA- opproved support for your
revision.
These materials ore reviewed by the ACCA examining team. The objective of the review is to
ensure that t he material properly covers the syllabus and study guide outcomes, used by the
examining team in setting t he exams, in t he appropriate breadth and depth. The review does not
ensure that every eventuality, combination or application of examinable topics is addressed by
the ACCA Approved Content. Nor does the review comprise a detailed technical check of the
content as the Approved Content Provider hos its own quality assurance processes in place in
this respect.
BPP Learning Media do everything possible to ensure the material is accurate and up to dote
whe n sending to print. In the event that any errors ore found ofter the print dote, they ore
uploaded to the following website: www.bpp.com/learningmedio/E rrat o.
The structure of this Practice & Revision Kit

This Practice & Revision Kit is divided into three sections. The questions in Section 1 ore
preparation questions to help develop your knowledge. Section 2 contains exam-standard
questions which ore of appropriate complexity and format to mimic the style of the final exam.
Section 3 contains four mock exams. You should attempt all four mock exams, preferably under
exam conditions, as this w ill provide excellent preparation before you t oke the real exam.
Question practice
Question practice is a core port of learning new topic a reas. When you practice questions, you
should focus on improving the Exam success skills - personal to your needs - by obtaining
feedback or through a process of self-assessment.
Sitting this exam as a computer-based exam and practising as many exam-style questions as
possible in the ACCA CBE practice platform will be the key to passing this exam. You should
attempt questions under timed conditions and ensure you produce full answers to the d iscussion
ports as well as doing the calculations. Also ensure that you attempt all mock exams under exam
conditions.
ACCA hove launched a free on-demand resource designed to m irror the live exam experience
helping you to become more familiar with the exam format. You con access the platform via the
Study Support Resources section of the ACCA website navigating to the CBE question practice
section and logging in with your myACCA credentials.
Selecting q uestions
To help you pion your revision, we hove provided a full topic index which mops the questions to
topics in the syllabus (see page vii).
Making the most of question practice
At BPP Learning Media we realise that you need more than just questions and model answers to
get t he most from your question practice.
• Our Top t ips, included for certain questions, provide essential advice on tackling
questions, presenting answers and the key points that answers need to include.
• We include m arking g uid es to show you what the examining team rewords.
• We include co mments fro m the examining t eam to show you where students struggled or
performed w ell in the actual exam
xvi Helping you with your revision

Atte mpti ng mock exams
This Kit hos four mock exams, including ACCA's Specimen exam 1, the Morch 2020 real exam
and the September/December 2020 hybrid exam, all of which have been updated for applicable
c hanges in examinable documents. We strongly recommend that you attempt the mock exams
under exam conditions.
Topics to revise
ACCA's examining team consistently warn very st rongly against question-spotting and trying to
predict the topics that will be included in the exam. Student s should not be surprised if the same
topic area is examined in two successive sittings. ACCA's examining team regards few areas as
off-limits for quest ions, and all of the syllabus can be tested.
That said, t he following areas of t he syllabus are very important, and your revision therefore
needs to cover them particularly well.
• Group a ccounts: Group accounts will always be examined as part of Section A but may
also feature in Section B. You will not be asked to prepare fu ll consolidated financial
statements in SBR but do need to be able to prepare extracts from them or key
calculations w ithin. You must also be able to explain the accounting treatment, as the
marks for numerical aspects w ill be limited. The group accounts q uestion could feature
conso lida t ed stat ements of cash flows, foreign subsidiaries or changes in group structure,
as wel l as t he underlying principles of group accounting, all of which are included i n the
SBR syllabus.
• Ethical issues: Ethical issues will feature in Section A of every exam. It is important that
you can analyse ethical issues with regards to the fundamental principles of ACCA's Code
of Ethics and Conduct.
• Analy sis and appraisal of informatio n will be tested in Section B. You should not focus
only on 'traditional' financia l analysis such as ratios. You will need to appraise companies
using a range of financial and non-financial information, and from the perspective of
different stakeholders.
• An in-depth knowled ge of the C onceptual Fra mew ork is required. You are expected to be
able discuss the consistency of each examinable IFRS with the Conceptual Framework.
• Develo pments in Financ ia l Reporting: You need to be able to d iscuss t he effect of a

change or proposed change in accounting standards and other developments, such as the
IFRS Practice Statement 2 Making Materiality Judgements, including t he effect it may
have on how stakeholders will analyse t he financial statements. You need to read widely to
develop your knowledge of cu rrent issues, including reading articles published on ACCA's
website a nd looking at real published annual reports.
• More complex IFRSs such as IFRS 15 Revenue from Contracts with Customers and IFRS 16
Leases, as there is significant scope for discussion and justification in more complex
standards.
The Exam xvii

Essential skill areas
There are three a reas you should develop in order to achieve exam success in Strategic Business
Reporting (SBR). These are:
(1) Knowledge applicatio n
(2) Specific St rategic Business Reporting skills
(3) Exam success skills
At t he revision a nd fi nal exam p reparation phases these sho uld be developed together a s port
of a comprehensive study pion of focused q uestion practice.
Take some time to revisit the Specific Strategic Business Reporting skills and Exa m suc cess
skil ls. These ore shown in t he diagram below and followed by tutoria l guidance of how to apply
them.
E1<om success skills
Sllecific SBR skills
Resolving Applying
financial good
reporting consolidation
Issues techniques
Interpreting
financial
statements
)
Creating
effective
discussion
Effective wr\t\n9
0 11d presentation
Specific SBR skills

These are the skills specific to SBR that we think you need to develop in order to pass the exam.
In the BPP Strategic Business Reporting Workbook, there are five Skills Checkpoints which define
each skill and show how it is applied in answering a question. A brief summary of each skill is
given below.
Skill 1: Approaching ethical issues

Question 2 in Section A of the exam will require you to consider the re porting implic at ions and
the ethi cal implications of specific events in a given scenario . The two Section B questions
xviii Essent ial skill areas @BPP lEAR~IIIC

tJlfOII\
could deal with any aspect of the syllabus. Therefore, ethics cou ld feature in th is part of the
exam too.
Given that ethics will f eature in every exam, it is essential that you master the appropriate
technique for approaching et hical issues in order to maximise your mark.
BPP recommends a step-by-step technique fo r approaching questions on ethical issues:
St ep 1 Work out how many minutes you have to answer the question.
St e p 2 Read the requirement and analyse it.
Ste p 3 Read the scenario, identify which IFRS Standard may be relevant, whether the
proposed accounting t reatment complies with that IFRS Standard. Identify which
fundamental principles from the ACCA Code of Ethics are relevant and whether
there are ony threats to these p rinciples.
St e p 4 Prepare on answer plan using key words from the requirements as headings.
Ensure your plan makes use of the information given in the scenario.
St e p 5 Complete your answer using key words from the requirements as headings.
Skills Checkpoint 1 in the BPP Workbook for Strategic Business Reporting covers this technique in
detail through application to on exam-standard question. Consider revisit ing Skills Checkpoint 1
and completing the scenario-based question to specifically improve this skill.
Skill 2: Resolving financial reporting issues

Financial reporting issues ore highly likely to be tested in both sections of your Strategic Business
Reporting exam, so it is essential that you master the skill for resolving financial reporting issues
in order to maximise your chance of passing the exam.
The basic approach BPP recommends for resolving financial reporting issues is very similar to the
one for ethical issues. This consistency is important because in Question 2 of the exam, both will
be tested together.
Ste p 1 Work out how many minutes you hove to answer the question.
Step 2 Read the requirement and analyse it, identifying sub-requirements.
Step 3 Read the scenario , identifying relevant IFRS Standards and their application to
the scenario.
Step 4 Prepare on answer plan ensuring that you cover each of the issues raised in the
scenario.
Step 5 Complete your answer, using separate headings for each item in the scenario.
detail through application to on exam-standard question. Consider revisiting Skills Checkpoint 2
and completing the scenario based question to specifically improve this skill.
Skill 3: Applying good consolidation techniques

Question 1 of Section A of the exam will be based on the financial statements of group entities, or
extracts thereof. Section B of the exam could deal with any aspect of the syllabus so it is also
possible that g roups feature in Question 3 or 4 .
Good consolidation techniques ore therefore essential when answering both narrative and
numerical aspects of group questions.
Essential skill areas xix

Skills Checkpoint 3 focuses on the more chollenging technique for correcting errors in group
financial statements that hove a lready been p repared.
A step-by-step technique for applying good consolidotion techniques is outlined below.
St e p 1 Wo rk out how mony minutes you hove to answer the question.
Step 2 Read the requirement for each port of the question and onolyse it, identifying
sub-requirements.
Ste p 3 Read the scenario, identify exactly what information hos been provided a nd what
you need to do with this information. Identif y which consolidation
workings/adjustments may be required and w hich IFRS Standards or ports of the
Conceptual Framework you may need to explain.
St e p 4 Drow up o group structure. Make notes in the margins of the question os to which
consolidation working, adjustment or correction to error is required. Do not perform
any detailed calculations ot this stage.
Ste p 5 Complete your answer using key words from the requ irements os headings.
Perform calculations first, then explain.
detail through application to on exom-stondord question. Consider revisiting Skills Checkpoint 3
Skill It: Interpreting financial statements

Section B of the SBR exam will contain two questions, which may be scenario or case-study or
essay based and will contain both discursive and computationa l elements. Section B could deal
with any aspect of the syllabus but will always include either o full question, or port of o question
that requires opproisol of financia l or non-financial information from either the preporer's and/or
another stokeholder's perspective. Two professional marks will be awarded to the question in
Section B that requires analysis.
Given that opproisol of financial and/or non-financial information will feature in Section B of
every exam, it is essential that you hove mastered the appropriate technique in order to maximise
your chance of passing the SBR exam.
A step-by-step technique for interpreting financial statements is outlined below.
Step 1 Work out how many minutes you hove to answer the question
Step 2 Read and analyse the requirement
Step 3 Read and analyse the scenario
Step 4 Prepare on answer pion
St ep 5 Complete your answer
detail through application to on exom -stondord question. Consider revisiting Skills Checkpoint 4
xx Essential skill areas

Skill 5: Creating effective discussion
Significantly more marks in t he Strategic Business Reporting exam will relate to narrative answers
than numerical answers. It is very tempting to only practise numerical questions as they are easy
to mark because the answer is right or wrong, whereas narrative questions are more subjective
and a range of different answers will be given credit. Even when attempting narrative questions,
it is tempting to write a brief answer plan and then look at the answer rather than writing a full
answer to p lan . Unless you practise narrative questions in full to time, you will never acquire the
necessary skills to tackle discussion questions.
The basic five steps adopted in Skills Checkpoint 4 should also be used in discussion questions.
Steps 2 and 4 are particularly important for discussion questions. You will definitely need to
spend a third of your time reading and planning. Generating ideas at the planning stage to
c reate a comprehensive answer plan will be the key to success in this style of question.
Consideration of the Conceptual Framework, ethical principles and the perspective of
stakeholders will often help with discursive questions in SBR.
Remember that very few marks are available for just stating knowledge. You must make sure
your answers are applied to the scenario given. At the end of each detailed marking guide, ACCA
says:
'Some marks in each question are allocated for RELEVANT knowledge. Marks will not be awarded
for the reproduction of irrelevant knowledge or irrelevant parts of IFRS Standards. Full marks
cannot be gained unless relevant knowledge has been applied. Candidates may also discuss
issues which do not appear in the suggested solution. Providing that the a rguments made are
logical and the conclusions derived are substantiated, then marks will be awarded accordingly.'
(ACCA, 2019)
detail through application to an exam -standard question. Consider revisiting Skills Checkpoint 5
Exam success skills

Passing the SBR exam requires more than applying syllabus knowledge and demonstrating the
Specific SBR skills; it also requires the development of excellent exam technique th rough question
practice.
We consider the following six skills, or exam techniques, to be vital for exam success. These skills
were introduced in the BPP Workbook and you can revisit the five Skills Checkpoint s in the BPP
Workbook for tutorial guidance of how to apply each of the six Exam success skills in your
question practice and in the exam.
Aim to consider your performance in all six Exam success skills during your revision stage
question practice and reflect on your particular strengths and weaker areas wh ich you can t hen
work on.
Exam success skill 1
Managing Information
Queltlona In the exam wlll praaent you with a lot of Information. The alcll la how you handle thla
Information to make the beat UN of your time The key la determining how you wlll approach the
exam and then actMlly reading the quastlona.
@BPP LCMNINC
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Essential skill areas xxi
Advice on developing this skill
Approach
The exam is 3 hours 15 minutes long. There is no designated 'reading' time at the start of the
exam, however, one approach that can work wel l is t o start the exam by spending 10 - 15 minutes
reading through all of the questions to familiarise yourself w ith the exam contents.
Once you feel familiar with the exam contents, consider the order in which you w ill attempt t he
questions; a lways attempt them in your order of preference - far example, you may want to
leave to last the question you consider to be the most difficu lt.
If you do take this approach, remember to adjust the time available for each question
app ropriately - see Exam success skill 6: Good time management.
If you find that t his approach doesn't work for you, don't worry - you can develop your own
technique.
Active reading
To avoid being overwhelmed by the quantity of information p rovided , you must take an active
app roach to reading each question
Act ive reading means focussing on the question's requirement first, highlighting key verbs such
as ' prepa re', 'comment', 'explain', 'discuss', to ensure you answer the question properly. Then
read the rest of the q uestion, and as you now have an understanding of what the question
requires you to do, you can highlight important a nd relevant information, and use t he
scratchpad with the exam software to make notes of a n y relevant technical information you think
you wi ll need.
Computer-based exam
In a computer-based exam (CBE) the highlighter tool provided in the toolbar at t he top of the
screen offers a range of colours:
T Highlight + Slrlk@lhrough
□ Remowi H,ghr.ght
This a llows you to choose different c olours t o a nswer different a spect s to a question . For
example, if a question asked you to discuss the pros and cons of an issue then you could choose
a different colour for highlighti ng pros and cons w ithin the relevant section of a question.
The striket hrough function allows you to d elete a reas of a question that you have dealt with -
this can be useful in managing information if you are dealing w ith numerical questions because it
can allow you to ensure that a ll numerical areas have been accounted for in your answer.
The CBE also a llows you to r esize windows b y clicking and dragging on the bottom right- hand
corner of the w indow.
This functionality a llows you to d ispla y a number of window s at the same time, so this could
allow you review :
• the quest ion requirements and the exhibit relating to that requirement, at the same time, or
• the window containing your answer (whether a word processing or spreadsheet document)
and the exhibit relating to that requirement , at the same time.
xxii Essential skill areas

Correct Interpretation of the requirements

The active Y8l'b used often dictates the approach that written answers should take (eg 'explain',
'dllcusa', 'evaluate'). It la Important you Identify and ..-e the Y8l'b to define your approach. The
Correct Interpretation of the requlrwMnta slclU Is correctly producing only what Is being asked
for by a requirement. Anything not required will not earn marks.

This skill can be developed by analysing question requirements and applying this process:
Ste p 1 Read the requi rement
Firstly, read the requirement a couple of times slowly and carefu lly and hig hlight
t he active verbs. Use t he active verbs to define what you plan to do. Make sure
you identify any sub-requirements.
In SBR, t he detailed a spects o f a requirement are often embedded in the

scenario. For example, in t he scenario, the directors may ask you explain
something, and then the requirement w ill ask you to respond to the director's
instruction. Therefore, t he initial requirement by itself may not provide a complete
understanding of a question's requirement , a lthoug h it is a useful starting point.
In a CBE, you may find it useful to begin by copying the requirements into your
chosen response opt ion (eg word processor), in order to form the basis of your
answer plan. See Exam success skill 3: Answer planning below.
Ste p 2 Read t he rest of the question

By reading the requirement first, you w ill have an idea of what you are looking out
for as you read through the scenario and exhibits. This is a great time saver and
means you don't end up having to read the whole question in full twice. You
should do t his in an active way - see Exam success skill 1: Managing information.
St e p 3 Rea d the requireme nt again

Read the requirements again to remind yourself of the exact wording before
starting your written answer. This will captu re any misinterpretation of the
requirements or any requirements missed entirely .
It is particularly important to pay attention to any dates you are given in requirements. This is
especially t he c ase w hen, for example, discussing an accounting treatment up to a particular
date. No marks will be awarded for discussing the treatment at a different date than that asked
for in the requirement.
An... planning: PrlorltlN. structul'9 and logic

Thia lklll requlrea the plannlng of the key aapacta of an anawer which accurately and completely
reaponda to the requirement.

Everyone will have a preferred style for an answer plan. For example, it may be a mind map,
bullet-pointed lists or simply annotating the question. Choose the approach t hat you feel most
comfortable with or if you are not sure, try out different approaches for different questions until
you have found your preferred style.
Essential skill areas xxiii

CBE
In a CBE environment, a time-saving approach is to plan your answer directly in your chosen
response option (eg word processor) and then fill out the detail of the plan with your answer. This
wil l save you time spent on creating a separate plan, say in the scratchpad, and then typing up
your answer separotely - t hough you could copy and paste between the scratchpad and
response option if you wanted to do so.
The easiest way to start your answer plan is to copy the question requirements to your chosen
response option (eg word processor). This will allow you to ensure that your answer plan
addresses all parts of the question requirements. Then, as you read through the exhibits, you
can copy and paste any relevant information into your chosen response option under the
relevant requirement. This approach also has the advantage of making sure your answer is
applied to the scenario given, which is crucial in the SBR exam.
Copying and pasting simply involves selecting the relevant information and either right clicking
to access the copy and paste functions, or alternatively using Ctrl-C to copy and Ctrl-V to paste.
Exam success skill'+
Efficient numerlcal anali,ell

Thia elcUI alma to maximise the marlca awarded by making clear to the marker the procesa of
arriving at your anawar. This Is achieved by laying out an anawar such that. 8ll8fl If you make a
few errors. you can still BCOr8 subsequent marks for follow-on calculations. It Is vital that you do
not l01e marks puraly because the marker cannot follow what you hava done

This skill can be developed by applying the following process:
Step 1 Use a standard proforma working where relevant
If answers can be laid out in a standard proforma then always plan to do so. This
will help the marker to understand your working and allocate the marks easily. It will
also help you to work through the figures in a methodical and time-efficient way.
Step 2 Show your workings
Keep you r workings as clear and simple as possible and ensure they are cross-
referenced to the main part of your answer. Where it helps, provide brief narrative
explanations to help the marker understand the steps in the calculation. This means
that if a mistake is made then you do not lose any subsequent marks for follow-on
calculations.
Step 3 Keep moving!

It is important to remember that, in an exam situation, it is difficult to get every
number 100% correct. The key is therefore ensuring you do not spend too long on
any single calculation. If you are struggling with a solution then make a sensible
assumption, state it and move on.
In a CBE, you can use the spreadsheet to prepare calc ulations, if you wish. If you do so, you can
make use of formulas to help with calculations, instead of using a calculator. For example, the
'sum ' function: =SUM(A1:10) would add all the numbers in spreadsheet cells A1 to A10. You can use
the symbol" to ca lc ulate a number 'to the power of...', eg =1.10"2 calculat es 1.10 squared - this is
very useful if you need to perform a discounting calculation.
If you use the spreadsheet for calculations, make sure the spreadsheet cel l includes your formula
and not just the final answer, so that the marker can see what you have done and can award
follow-on marks even if you have made a mistake earlier in the ca lculation.
xxiv Essential skill areas

If you do decide to use a calculator instead, don't just put the final answer into a cell without
including your workings - make sure you type up your workings os well and cross refer to t hem
in your final onswer.
ur.otlvewrltlnganc:I p-...ntatlon
Written anawara 1hould be preaented 10 that the marker can clearly aee the point■ you are
making. preaented In the format apecfflecl In the quNtlon. The alcnl II to provide efficient written
anlWWI with aufflclent breadth of polntl that anawer the queatlon. In the right depth. In the time
available
Step 1 Use headings
Using the heodings ond sub-headings from your answer plan will g ive your
answer structure, order and logic. This will ensure your answer links back to the
requirement and is clearly signposted, making it easier for the marker to
u nd erstand the d ifferent points you are making. Underlining your headings will
also help the marker.
Step 2 W rite y o ur answer in short, but full, sentences
Use short, punchy sentences with the aim that every sentence should say
something different and generate marks. Write/type in full sentences, ensuring
y our style is professional.
Step 3 Do your calculations first, explanation second
Questions often ask for an explanation with suitable calculations, the best
approach is to prepare the calculation first but present it on the bottom half of
the page of /next page to your answer. Then add the explanation before the
calculation. Performing the calcu lation first should enable you to explain w hat
you have done.
In an CBE, this is easy to do - prepare your calculation, then type up your answer
above it. If you wish, you can use the word processor to type up narrative
discussion and the spreadsheet to prepare any calculations. If you do so, make
sure you clearly cross reference to your calcu lation so the marker can follow what
you have done. See Exam success skill 4 - efficient numerical analysis.
Good time manage,Mllt

tam
Thia 1ldll mean■ planning your time acrc111 all the requlrementl 10 that all have been
attempted at the end of the 3 houra 15 mlnutea available and actlvely checking on time during
your exam. Thia II 10 that you can flex your approach and prlorltlle requhmentl which. In your
Judgement. wlll generate the maximum marks In the available time remaining.
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Essentia l skill areas xxv
The exam is 3 hours 15 minutes long, which translates to 1.95 minutes per mark. Therefore a
10-mark requirement should be a llocated a maximum of 20 minutes to complete 1:iour answer
before 1:iou move on to t he next task. At the beginning of a question, work out the amount of time
1:iou should be spending on each requirement and write the finishing time next to each requirement
on your exam. In a CBE, 1:iou could put t he t ime a llocation next to the requirements in 1:iour answer
plan. If you take the approach of spending 10-15 minutes reading and planning at the start of
the exam, adjust the time allocated to each question accordingly, eg if 1:iou allocate 15 minutes to
reading, then you will have 3 hours remaining w hich is 1.8 minutes per mark.
Keep an eye on the clock

Aim to attempt all requirement s, b ut be read1:i t o be ruthless and move on if 1:iour answer is not
going as planned. The challenge for man1:i is sticking to planned timings. Be aware this is difficult
to achieve in t he early stages of 1:iour studies and be ready to let this skill develop over time.
If you find yourself running short on time and know that a full answer is not possible in t he time
1:iou have, consider recreat ing 1:iour plan in overview form a nd then add ke1:i terms and details as
time a llows. Remember, some marks ma1:i be available, for example, simpl!:j stating a conclusion
which you don't have time to justify in full.
xxvi Essential skill areas

Question Bank
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• • • • •
• • •
• • • • •
• • • • •
• • . •
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2 Strategic Business Reporting (SBR)
Section 1 - Preparation questions
Tuto rial note.
The Section 1 questions are designed to help you prepare for the SBR examination. They are not
of a ful l exam standard but are st ill very helpful in testing your understanding of key areas of the
syllabus. The number of marks and time allocated to each question in this section is for indicative
purposes only.
1 Financial instruments 12 mins

(a) Graben Co purchases a bond for S441,014 on 1 January 20X1. It wil l be redeemed on
31 December 20X4 for S600,000. The bond is held at amortised cost and carries no
coupon.
Required
Calculate the valuation of the bond for the statement of financial position as at
31 December 20X1 and the finance income for 20X1 shown in profit or loss. (3 marks)
Compound sum of S1: (1 + r) 0
Year 2% 4% 6% 8% 10% 12% 14%

1.0200 1.0 400 1.0600 1.0800 1.1000 1.1200 1.1 400
2 1.0404 1.0816 1.1236 1.1664 1.2100 1.2544 1.2996
3 1.0612 1.1249 1.1910 1.2597 1.3310 1.4049 1.4 815

4 1.0824 1.1699 1.2625 1.3605 1.4641 1.5735 1.6890
5 1.1 041 1.2167 1.3382 1.4693 1.6105 1.7623 1.9254
(b) Baldie Co issues 4,000 convertible bonds on 1 J anuary 20X2 at par. The bonds are
redeemable three years later at a par value of $500 per bond, which is the nominal value.
The bonds pay interest annually in arrears at an interest rate (based on nominal value) of
5%. Each bond can be converted at t he maturity date into 30 $1 shares.
The prevailing market interest rate for t h ree yea r bonds that have no right of conversion is
9%.
Required
Show how the convertible bond would be presented in the statement of financial position a t
1 January 20X2. (3 marks)
Cumulative three year annuity factors:
5% 2.723
9% 2 .531
(Total = 6 marks)
Q uestions 3
2 Leases 20 mins
Sugar Co leased a machine from Spice Co. The terms of the lease are as follows:
Inception of lease 1 January 20X1

Lease term 4 years at $78,864 per annum payable in arrears
Present value of future lease payments $250,000
Useful life of asset 4 years
Required
(a) Calculate the interest rate implicit in the lease, using the table below. (3 marks)
This table shows the cumulative present value of $1 per annum, receivable or payable at
the end of each year for n years.
Years Interest rates

(n) 6% 8% 10%
0.943 0.926 0.909
2 1.833 1.783 1.736
3 2.673 2.577 2.487
4 3.465 3.312 3.170
5 4 .212 3.993 3.791
(b) Explain, w ith suitable workings and extracts from the financial statements, how Sugar Co
should account for the lease for the year ended 31 December 20X1. Notes to t he accounts
are not required. (7 marks)
(Tot al = 10 marks)
3 Defined benefit plan 20 mins
BPP not e. In this question, proforma a re g iven to you to help you get used to setting out your
answer. You may wish to transfer them to a separate sheet, or alternatively to use a separate
sheet for your workings.
Brutus operates a defined benefit pension plan for its employees. The present value of the future
benefit obligations and t he fair value of its plan assets on 1 January 20X1 were $110 million and
$150 million respectively.
The pension plan received contributions of $7 million and paid pensions to former employees of
$10 million during the yea r.
Extracts from the most recent actuarial report shows the following:
Present value of pension plan obligation at 31 December 20X1 $116m

Fair value of plan assets at 31 December 20X1 $140m
Present cost of pensions earned in the period $11m
Yield on high quality corporate bonds a t 1 January 20X1 10%
On 1 January 20X1, the rules of the pension plan were changed to improve benefits for plan
members. The actuary has advised that this will cost $10 million.
Req uired
Prepare extracts from the notes to Brutus' financial statements for the year ended 31 December
20X1 which show how the pension plan should be accounted for. (10 marks)
Not e. Assume contributions and benefits were paid on 31 December.
It Strategic Business Reporting (SBR) @ BPP

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NOTES TO THE STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
Defined benefit expense recognised in profit or loss
Sm
Current service cost
Past service cost

Net interest on the net defined benefit asset
Other comprehensive income (items that will not be reclassified to profit or loss)
Remeasurement of defined benefit plans
Sm
Remeasurement gain on defined benefit obligation
Remeasurement loss on plan assets
NOTES TO THE STATEMENT OF FINANCIAL POSITION
Net defined benefit asset recognised in the statement af financial position
3 1 December 31 December
20X1 20X0
Sm Sm
Present value of pension obligation
Fair value of plan assets
Net asset
Changes in the present value of the defined benefit obligation
Sm
Opening defined benefit obligation
Interest on obligation
Current service cost
Past service cost
Benefits paid
Gain on remeasurement of obligation (balancing figure)
Closing defined benefit obligation
Changes in the fair value of plan assets
Sm
Opening fair value of plan assets
Interest on plan assets

Contributions
Benefits paid
Loss on remeasurement of assets (balancing figure)
Closing fair value of plan assets
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Q uestions 5
It Sundry standards 59 mins
(a) Penn has a defined benefit pension plan.
Required
Using the information below, prepare extracts from the statement of financial position
and the statement of profit or loss and other comprehensive income for the year ended
31 January 20X8. Ignore taxation. (10 marks)
(i) The opening plan assets were $3.6 million on 1 February 20X7 and plan liabilities at
this date were $4.3 million.
(ii) Company contributions to the plan during the year amounted to $550,000. The
contributions were paid at the start of the year.
(iii) Pensions paid to former employees amounted to $330,000. These were paid at the
start of the year.
(iv) The yield on high quality corporate bonds was 8% at 1 February 20X7.
(v) On 31 January 20X8, five staff were made redundant, and an extra $58,000 in total
was added to the value of their pensions.
(vi) Current service costs as provided by the actuary are $275,000.
(vii) At 31 January 20X8, the actuary valued the plan liabilities at $4.64 million and the
plan assets at $4. 215 million.
(b) Sion operates a defined benefit pension plan for its employees. Sion has a 31 December
year end. The following details relate to the plan.
$'000
Present value of obligation at 1 January 20X8 40,000
Market value of plan assets at 1 January 20X8 40,000
20X8 20X9
$'000 $'000
Current service cost 2,500 2,860
Benefits paid out 1,974 2,200
Contributions paid by entity 2,000 2,200
Present value of obligation at end of the year 46,000 40,800
Market value of plan assets at end of the year 43,000 35,680
Yield on corporate bonds at start of the year 8% 9%
During 20X8, the benefits available under the plan were improved. The resulting increase in
the present va lue of the defined benefit obligation was $2 million as at 31 December 20X8.
Contributions were paid into the plan and benefits were paid out of the plan on the final
day of each accounting period.
On 31 December 20X9, Sion divested of part of its business, and as part of the sale
agreement, transferred the relevant part of its pension fund to the buyer. The present value
of the defined benefit obligation transferred was $11.4 million and the fair value of plan
assets transferred was $10.8 million. Sion also made a cash payment of $400,000 to the
buyer in respect of the plan.
6 Strategic Business Reporting (SBR) @BPP LEAR\,NC:

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Required
(i) Calculate the net defined benefit liability as at the start and end of 20X8 and 20X9
showing clearly any remeasurement gain or loss on the plan each year.
(ii) Show amounts to be recognised in the financial statements in each of the years
20X8 and 20X9 in respect of the plan. (15 marks)
(c) Bed Investment Co entered into a contract on 1 July 20X7 with Em Bank. The contract
consisted of a deposit of a principal amount of $10 million, carrying an interest rate of 2.5%
per annum and with a maturity date of 30 June 20X9. Interest will be receivable at
maturity together with the principal. In addition, a further 3% int erest per annum will be
payable by Em Bank if the exchange rate of the dollar against the Ruritanian kroner (RKR)
exceeds or is equal to $1.15 to RKR 1.
Bed's functional currency is the dollar.
Required
Explain how Bed should account for the above investment in the financial statements for
the year ended 31 December 20X7 (no calculations are required). ( 5 marks)
(Total= 30 marks)
5 Control 23 mins
(a) IFRS 10 Consolidated Financial Statements focuses on control as the key concept
underlying the parent/subsidiary relationship.
Required
Explain the circumstances in which an investor controls an investee according to IFRS 10.
(3 marks)
(b) Twist holds 40% of the voting rights of Oliver and 12 other investors each hold 5% of the
voting rights of Oliver. A shareholder agreement grants Twist t he right to appoint, remove
and set the remuneration of management responsible for directing the relevant activit ies.
To change the agreement, a t wo- thirds majority vote of the shareholders is required . To
date, Twist has not exercised its rights with regard to the management or activities of
Oliver.
Required
Explain whether Twist should consolidate Oliver in accordance with IFRS 10. (3 marks)
(c) Copperfield holds 45% of the voting rights of Spenlow. Murdstone and Steerforth each hold
26% of the voting rights of Spenlow. The remaining voting rights are held by three other
shareholders, each holding 1%. There are no other arrangements that affect decision-
making.
Required
Explain whether Copperfield should consolidate Spenlow in accordance with IFRS 10.
(3 marks)
(d) Scrooge holds 70% of the voting rights of Cratchett. Marley has 30% of the voting rights
of Cratchett. Marley also has an option to acquire ha lf of Scrooge's voting rights, which is
exercisable for the next two years, but at a fixed price that is deeply out of the money
(and is expected to remain so for that two- year period).
Required
Explain whether either of Scrooge or Marley should consolidate Cratchett in accordance

with IFRS 10. (3 marks)
(Total = 12 marks)
0 BPP
LE/Pl 11,u
1r111
Questions 7
6 Associate 39 mins
The statements of financial position of J Co and its investee companies, P Co and S Co, at
31 December 20X5 are shown below.
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20X5
JCo PCo SCo

$'000 $'000 $'000
Assets
Non-current assets
Freehold property 1,950 1,250 500
Plant and equipment 795 375 285
Investments 1,500
4,245 1,625 785
Current assets
Inventories 575 300 265
Trade receivables 330 290 370
Cash 50 120 20
955 710 655
5,200 2,335 1,440
Equity and liabilities
Equity
Share capital ($1 ordinary shares) 2,000 1,000 750
Retained earnings 1,460 885 390
3,460 1,885 1,140
Non-current liabilities
12% debentures 500 100
Current liabilities
Bank overdraft 560
Trade payables 680 350 300
1,240 350 300
5,200 ~ 1,440
Additional information
(a) J Co acquired 600,000 ordinary shares in P Co on 1 January 20X0 for $1,000,000 when
the accumulated retained earnings of P Co were $200,000.
(b) At the date of acquisition of P Co, the fair value of its freehold property was considered t o
be $400,000 greater than its value in P Co's statement of financial position. P Co had
acquired the property ten years earlier and the buildings element (comprising 50% of the
total value) is depreciated on cost over 50 years.
(c) J Co acquired 225,000 ordinary shares in S Co on 1 January 20X4 for $500,000 when the
retained profits of S Co were $150,000.
(d) P Co sells goods to J Co at cost plus 25%. J Co held $100,000 of t hese goods in inventories
at 31 December 20X5.
(e) It is the policy of J Co to review goodwill for impairment annually. The goodwill in P Co was
written off in full some years ago. An impairment test conducted at the year end revealed
impairment losses on the investment in S Co of $92,000.
(f) It is the group's policy to value the non-controlling interest at acquisition at fair value. The
market price of the shares of the non-controlling shareholders just before t he acquisition
was $1.65.
Required
Prepare, in a format suitable for inclusion in the annual report of the J Group, the consolidated
statement of financia l position at 31 December 20X5. (20 marks)
8 Strat egic Business Reporting (SBR) @BPP Lt:ARMN(j

I/ toll\
7 Part disposal '+9 mins
P note. In this question, proforma a re g iven to you to help you get used to setting out your
swer. You may wish to transfer them to a separate sheet or to use a separate sheet for your
rkings.
Angel Co bought 70% of t he share capital of Shane Co for $120,000 on 1 January 20X6. At that
date Shane Co's retained earnings stood at $10,000.
The statements of financial posit ion at 31 December 20X8, summarised statements of profit or
loss and other comprehensive income to that date and movement on retained earnings are given
below.
Ange/ Co Shane Co
$'000 $'000
STATEMENTS OF FINANCIAL POSITION
Non-current assets
Property , plant and equipment 200 80
Investment in Shane Co 120
320 80
Current assets 890 140
1,210 220
Equity
Share capital - $1 ordinary shares 500 100
Retained reserves 400 90
900 190
Current liabilities 310 30
1,210 220
SUMMARISED STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
$'000 $'000
Profit before interest and tax 100 20
Income tax expense ( 40) _@)
Profit for the year 60 12
Other comprehensive income (not reclassified to P/L), net of tax 10 6
Total comprehensive income for the year 70 18
MOVEMENT IN RETAINED RESERVES

Balance at 31 December 20X7 330 72
Total comprehensive income for the year 70 18
Balance at 31 December 20X8 400 90
Angel Co sells one half of its holding in Shane Co for $120,000 on 30 June 20X8. At that date, the
fair value of the 35% holding in Shane was slightly more at $130,000 due to a share price rise. The
remaining holding is to be dealt with as an associate. This does not represent a discontinued
operation.
No entries have been made in the accounts for the above transaction.
Assume that profits accrue evenly throughout the year.
It is the group's polic y to va lue the non- contro lling interest at acquisition fa ir value. The fa ir value
of the non-controlling interest on 1 January 20X6 was $51.4 million.
Q uestions 9
Required
(a) Prepare the consolidated statement of financial position, statement of profit or loss and
other comprehensive income and a reconciliation of movement in retained reserves for the
year ended 31 December 20X8.
(20 marks)
Ignore income taxes on the disposal. No impairment losses have been necessary to date.
PART DISPOSAL PROFORMA
ANGEL GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20X8 $'000
Non-current assets
Property, plant and equipment
Investment in Shane
Current assets
Equity attributable to owners of the parent

Share capital
Retained earnings
Current liabilities
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AN D OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20X8
$'000
Profit before interest and tax
Profit on disposal of shares in subsidiary
Share of profit of associate
Profit before tax
Income tax expense
Profit for the year
Other comprehensive income (not reclassified to P/L) net of tax:
Share of other comprehensive income of associate
O t her comprehensive income for the year
Tota l comprehensive income for the year
Profit attributable to:
Owners of the parent
Non-controlling interests
Total comprehensive income attributable to:

Owners of the parent
Non-controlling interests
CONSOLIDATED RECONCILIATION OF MOVEMENT IN RETAINED RESERVES
$'000
Balance at 31 December 20X7
Total comprehensive income for the year
Balance at 31 December 20X8
(b) Explain t he accounting treatment that would be required if Angel had disposed of 10% of its
holding in Shane. (5 marks)
(Tot al= 25 marks)
10 Strategic Business Reporting (SBR) @BPP LEAR\IMG

IAEDIA
8 Step acquisition 29 mins
SD acquired 60% of the 1 million $1 ordinary shares of KL on 1 July 20XO for $3,250,000 when
KL's retained earnings were $2,760,000. The group policy is to measure non-controlling interests
at fair value at the dot e of acquisition. The fair value of non-cont rolling interests at 1 July 20XO
was $1,960,000. There hos been no impairment of goodwill since the dote of acquisition.
SD acquired a further 20% of KL's shore capitol on 1 Morch 20X1 for $1,000,000.
The retained earnings reported in the financial statements of SD and KL as at 30 June 20X1 ore
$9,400,000 and $3,400,000 respectively.
KL sold goods for reso le to SD with a soles va lue of $750,000 during the period from 1 Morch 20X1
t o 30 June 20X1. 40% of these goods remain in SD's inventories at the year-end. KL applies a
mark-up of 25% on all goods sold .
Profits of both entities con be assumed t o accrue evenly throughout the year.
Required
(a) Explain the impact of the additional 20% purchase of KL's ordinary shore capital by SD on
the consolidated financial statements of the SD Group for the year ended 30 June 20X1.
(5 marks)
(b) Calculate the amounts that will appear in the consolidated statement of financial position
of the SD Group as at 30 June 20X1 for:
(i) Goodwill;
(ii) Consolidat ed retained earnings; and
(iii) Non-controlling interests. (10 marks)
(Total= 15 marks)
9 Foreign operation lt9 mins
pp note. In this question, proformas for the translation workings ore given to assist you with the
approach. You will need to also need to draw up proformas for the consolidated financial
tatements and the remaining group workings. _J
~
Standard acquired 80% of Odense SA for $520,000 on 1 January 20X5 when the retained
reserves of Odense were 2,500,000 Danish krone.
The financia l statements of Standard and Odense for the year ended 31 December 20X6 o re as
follows:
STATEMENTS OF FINANCIAL POSITION AT 31 DECEMBER 20X6
Standard Odense
$'000 Kr'000
Property, plant and equipment 1,285 4,400
Investment in Odense 520
1,805 4,400
Current assets 410 2,000
2,215 6,400
Shore capitol 500 1,000
Retained earnings 1,115 4,300
1,61 5 5,300
Loons 200 300
Current liabilities 400 800
600 1,100
2,215 6,400
Questions 11
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR YEAR ENDED 31 DECEMBER 20X6
Standard Odense
$'000 Kr'OOO
Revenue 1,1 25 5,200
Cost of sales (410) (2,300)
Gross profit 715 2,900
Other expenses (180) (910)
Dividend from Odense 40
Profit before tax 575 1,990
Income tax expense (180) (640)
Profit/Total comprehensive income for the year 395 ~
STATEMENTS OF C HANG ES IN EQUITY FOR THE YEAR 31 DEC EMBER 20X6 (EXTRACT FOR
RETAINED EARNINGS)
Standard Odense
$'000 Kr'OOO
Balance at 1 January 20X6 915 3,355
Dividends paid on 31 December 20X6 (195) (405)
Total comprehensive income for the year 395 1,350
Balance at 31 December 20X6 1,11 5 __L+,300
In the yea r ended 31 December 20X5, Odense's total comprehensive income was 1,200,000
Danish krone. On 31 December 20X5, Odense paid dividends of 345,000 Danish krone.
An impairment test conducted at 31 December 20X6 revealed impairment losses of 148,000
Danish krone relating to Odense's goodwill. No impairment losses had previously been
recognised. It is group policy to translate impairment losses at the closing rote.
At the date of acquisition, Standard chose to measure the non-controlling interest in Odense at
the proportionate sho re of the fair value of net assets.
Exchange rotes were as follows:
Kr to $1
1 January 20X5 9. 4
31 December 20X5 8.8
Average 20X5 9. 1
31 December 20X6 8.1
Average 20X6 8. 4
Required
Prepare the consolidated statement of financial position and consolidated statement of profit or
loss and other comprehensive income of the Standard Group for the year ended 31 December 20X6
(round your answer to t he nearest $'000). (25 marks)
12 Strategic Business Reporting (SBR) @BPP LEA~~IMG

ME.CIA
TRANSLATION OF ODENSE - STATEMENT OF FINANCIAL POSITION
Kr'000 Rate $'000

Property, plant and equipment X6CR
Current assets X6CR
Share capital HR
Pre-acquisition retained earnings HR
Post-acquisition retained earnings:
20X5 profit X5AR
20X5 dividend X5 Actual
20X6 profit X6AR
20X6 dividend X6 Actual
Exchange difference on net assets Bal. fig.
Loans X6CR
Current liabilities X6CR
TRANSLATION OF ODENSE - STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE

INCOME
Odense Rate Odense
Kr'000 (AR) $'000
Revenue
Cost of sales
Gross profit
Other expenses
Profit before tax
Income tox expense
Profit/Total comprehensive income for the yea r
10 Consolidated statement of cash flows 39 mins
BPP note. In this question, proformas are given to you to help you get used to setting out you r
answer. You may wish to transfer them to a separate sheet, or alternatively to use a separate
sheet for your workings.
On 1 September 20X5 Swing Co acquired 70% of Slide Co for $5,000,000 comprising $1,000,000
cash and 1,500,000 $1 shares.
The statement of financial position of Slide Co at acquisition was as follows:
$'000
Property , plant and equipment 2,700
Inventories 1,600
Trade receivables 600
Cash 400
Trade payables (300)
Income tax payable _@Q)
4 ,800
Questions 13
The consolidated statement of finonciol position of Swing Coos ot 31 December 20X5 was
as follows:
20X5 20X4
Non-current assets $'000 $'000
Property, plant and equipment 35,500 25,000
Goodwill 1,400
36,900 25,000
Current assets
Inventories 16,000 10,000
Trade receivab les 9,800 7,500
Cash 2,400 1,500
28,200 19,000
65,100 4-4,000
Share capital 12,300 10,000
Share premium 5,800 2,000
Reva luation surplus 350
Retained earnings 32,100 21,900
50,550 33,900
Non-controlling interest 1,750
52,300 33,900
Current liabilities
Trade payables 7,600 6,100
Income t ax payable 5,200 4,000
12,800 10 ,100
~ ~
The consolidated statement of profit or loss and other comprehensive income of Swing Co for the
year ended 31 December 20X5 was as follows:
20X5
$'000
Profit before tax 16,500
Income tax expense (5,200)
Profit for the year 11,300
Other comprehensive income (not reclassified to P/L)
Revaluation surplus 500
Total comprehensive income for the year :!!.&22
Owners of the parent 11,100
Non-controlling interest 200
.lldQ2
Total comprehensive income for the year attributable to:
Owners of the parent 11 ,450
Non-controlling interest 200 + (500 x 30%) 350
11,800
Not es
Depreciation cha rged for the year was $5,800,000. The group made no disposals of
property, plant and equipment.
2 Dividends paid by Swing Co amounted to $900,000.
It is the group's policy to value the non-controlling interest at its proportionate share of the
fair value of the subsid iary's identifiable net assets.
11t Strategic Business Reporting (SBR) @BPP LEARMMG

fAEDIA
Required
Prepare the consolidated statement of cash flows of Swing Co for the yea r ended 31 December
20X5. No notes are required. (20 marks)
CONSOLIDATED STATEMENT OF CASH FLOWS PROFORMA

STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 20X5
$'000 $'000
Cash flows from operating activities
Profit before tax
Adjustments for:
Depreciation
Impairment losses
Increase in trade receivables (:-N4)
Increase in inventories (:-N4)
Increase in trade payables (W4)
Cash generated from operations
Income taxes paid (:,N3)
Net cash from operating activities
Cash flows from investing activities
Acquisition of subsidiary, net of cash acquired (:-N5)
Purchase of property, plant & equipment (:-N1)
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issue of share capital
Dividends paid
Dividends paid to non-controlling interest 0N2)
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period
Workings
Assets
Propert y,
plant and
equipment Goodwill
$'000 $'000
b/d
OCI (revaluation)
Depreciation/Impairment
Acquisition of sub/associat e
Cash paid/(rec'd) ~
c/d
2 Equity
Non-
Share Share Retained controlling
capital premium earnings interest
$'000 $'000 $'000 $'000
b/d
P/ L
Acquisition of subsidiary
Cash (paid)/rec'd ~ *
c/d
* Dividend paid is given in question but working shown for clarity.
0 BPP
LE/Pl 11,u
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Q uestions 15
3 Liabilities
Tax
payable
$'000
b/d
P/L
Cash (paid)/rec'd II
c/d
4 Working capita/ changes
Inventories Receivables Payables

$'000 $'000 $'000
Balance b/d
lncrease/(decrease) (balancing figure)

Balance c/d
5 Purchase of subsidiary
$'000
Cash received on acquisition of subsidiary
Less cash consideration
Cash outflow
Not e. Only the cash consideration is included in the figure reported in the st atement of
cash flows. The shares issued as part of the consideration are reflected in the share capital
working (:,N2) above.
Goodwill on acquisition (to show no impairment):
$'000
Consideration
Non-controlling interest
Net assets acquired
Goodwill
16 Strategic Business Reporting (SBR) @BPP LEJ\R\IMG

1/ f.OIA
Section 2 - Exam-standard questions
11 Robby 59 mins
Adapted from P2 June 2012
You work in the f inance department of Robby, an entity which hos two subsidiories, Hail and Zinc.
Robby has recently appointed two new directors, with limited finance experience, to its board.
You have received the following email from the finance director.
To: An accountant
From: Finance director
Subject: New directors - help required
Hi, our two new directors are keen to understand the g roup financial st atements. In particular,
they want t o understand the effect of acquisitions and joint operations on the consolidated
accounts.
I am putting together a briefing document for them and would like you t o prepare section s for
inclusion in the document on goodwill and on joint operations. Please use the acquisitions of Hail
and Zinc (Attachment 1) to expla in the how the goodwill on acquisition of subsidiaries is
accounted for in the group f inancial statements at 31 May 20X3. Use t he gas station joint
operation (Atta c hment 2) to explain what a joint operation is and how we account for it in the
g roup financial statements. Make sure you explain t he financia l reporting principles that underlie
both of these.
Attachment 1 - d etails of acquisitions of Hail and Zinc
Accounting policy: measure non-controlling interests at acquisition at fair value.
(1) Hail a cquisit ion. On 1 June 20X2, acquisition of 80% of the equity interests of Hail. The
purchase consideration comprised cash of $50 m illion payable on 1 June 20X2 and
$24.2 million payable on 31 May 20X4. A further amount is payable on 31 August 20X6 if
the cumulat ive profits of Hail for the fou r-year period from 1 June 20X2 to 31 May 20X6
exceed $150 million. On 1 June 20X2, the fair value of the contingent consideration was
measured at $40 million. On 31 May 20X3, this fa ir value was remeasured at $42 million.
On t he acquisition date, the fair value of the identifiable net asset s of Hail was $130 million.
The notes to t he financial stat ements of Hail at acquisition disclosed a contingent liability.
On 1 June 20X2, t he fair val ue of this contingent liability was reliably measured at $2
million. The non-control ling interest at fair value was $30 million on 1 June 20X2. An
appropriat e discount rate t o use is 10% per annum.
(2) Zinc a cq uisition. On 1 J une 20X0, acquisition of 5% of the ordinary shares of Zinc. Robby
had treated this investment at fair va lue through profit or loss.
On 1 December 20X2, a cquisition of a f u rther 55% of the ordinary shares of Zinc, obtaining
control.
Consideration:
Share holding Consideration

% Sm
1 June 20X0 5 2
1 December 20X2 55 16
60 18
At 1 December 20X2, the fair value of the equity interest in Zinc before the business
combination was $5 million.
The non-controlling interest at fair value was $9 million on 1 December 20X2.
Questions 17
The fair value af t he identifiable net assets at 1 December 20X2 af Zinc was $26 million,
and the reta ined earnings were $15 million. The excess of t he fair value of the net assets
was due to a n increase in t he value of property, plant and eq uipment (PPE), which was
provisiona l pending receipt of the final valuations. These valuations were received on
1 March 20X3 and resulted in an additional increase of $3 million in the fair value of PPE at
the date of acquisition. This increase does not affect the fair value of the non-controlling
interest at acquisition.
At 31 May 20X2 the carrying amount of the investment in Zinc in Robby's separate f inancial
statements was $3 million.
Attachment 2 - details of j oint op eration
Joint operation - 40% share of a natural gas station. No separate entity was set up under the
joint operation. Assets, liabilities, revenue and costs are apportioned on the basis of shareholding.
(i) The natural gas station cost $15 million to construct , was completed on 1 June 20X2 and is
to be dismantled at the end of its life of ten years. The present va lue of this dismantling
cost to the joint operation at 1 June 20X2, using a discount rate of 5%, was $2 million.
(ii) In the year, gas with a direct cost of $16 million was sold for $20 million. Additionally, t he
joint operation incurred operating costs of $0.5 million during the year.
The revenue and costs are receiva ble and payable by the other joint operator who settles
amou nts outstanding wit h Robby after the year end.
Required
(a) Prepare for inclusion in the briefing note to t he new directors:
(i) An explanat ion, w ith suitable ca lculations, of how t he goodwill on acquisition of

Hail and Zinc should be accounted for in the consolidated financial statements at
31 May 20X3. (16 marks)
(ii) An explanation as to the nature of a joint operation and, showing suitable

ca lc ulations, of how t he joint operation should be accounted for in Robby's separate
and consolidated statements of financial position at 31 May 20X3. (Ignore retained
earnings in your answer.) (7 marks)
Note. Marks will be allocated in (a) for a suitable discussion of the principles involved as
well as the accounting treatment.
(b) Robby held a portfolio of trade receivables with a carrying amount of $4 million at 31 May
20X3. At that date, the entity entered into a factoring agreement with a bank, whereby it
transferred the receivables in exchange for $3.6 million in cash. Robby has agreed to
reimburse the bank for any shortfall between the amount collected and $3.6 million. Once
the receivables have been collected, any amounts above $3.6 million, less interest an t his
amount, will be repaid to Robby. The d irectors of Robby believe t hat these trade
receivables should be derecognised.
Required
Explain t he appropriate accounting treatment of t his transaction in the financial
statements for the year ended 31 May 20X3, and evaluate this treatment in t he context of
the Conceptual Framework for Financial Reporting. (7 marks)
(Total = 30 marks)
18 Strategic Business Reporting (SBR) @BPP lE~NINC

Mrrn~
12 Banana 59 mins
SBR September 2018 (am ended)
Background
Banana is the parent of a listed group of compan ies which have a year end of 30 June 20X7.
Banana has made a number of acquisitions and disposals of investments during t he current
financial year and the directors require advice as to t he correct accounting treatment of these
acquisitions and disposals.
The acquisition of Grape
On 1 January 20X7, Banana acquired an 80% equity interest in Grape. The following is a
summary of Grape's equity at the acquisition date.
Sm
Equity share capit al ($1 each) 20
Retained earnings 42
Other components of equity 8
Total 70
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 1 January 20X9 if the net profit after tax of Grape grew by 5% in each of t he two years
following acquisition. The present value of t he total contingent consideration at 1 January 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 1 January 20X7.
Goodwill for the consolidated financial statements has been incorrectly calculated as follows:
Sm
Share consideration 68
Add NCI at acquisition (20% x $70 million) 14
Less net assets at acquisition J?!2)
Goodwill at acquisition 12
The financia l d irector did not take into accoun t the contingent cash since it was not probable that
it would be paid. Additionally, he measured the non-controlling interest using the proportional
method of net assets despite the group having a published policy to measure non-controlling
interest at fair value. The share price of Grape at acquisition was $4.25 and should be used to
value the non-controlling interest.
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 t he 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 equity accounted for in the consolidated financial statements of Banana. Banana
disposed of 75% of its 40% investment on 1 October 20X6 for $19 million when t he fa ir 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 but only $4 million at 30 June 20X7. Banana has recorded a loss in reserves of $14 million
ca lculated as the difference between the price paid of $18 million and the fair value of $4 million at
the reporting dat e. Banana has stated that they have no intention to sell their remaining shares in
Strawberry and wish to classify t he remaining 10% interest as fair value through other
comprehensive income in accordance w ith IFRS 9 Financial Instruments.
0 BPP
LE/Pl 11,u
1r111
Questions 19
The acquisition of Melon
On 30 June 20X7, Banana acquired a ll of the shares of Melon, an entity which operat es in the
biotechnology indust ry. Melon was only recently formed and its only asset consists of a licence to
carry out resea rch activities. Melon has no employees as research activities were outsourced to
other companies. The activities are still at a very early stage and it is not clear that any definit ive
product would result from t he activities. A management company provides personnel for Melon to
supply supervisory activities and a d minist rative functions. Banana believes that Melon does not
constitute a business in accordance with IFRS 3 Business Combinations since it does not have
employees nor carries out any of its own processes. Banana intends to employ its own staff to
operate Melon rather than t o continue to use the services of the management company. The
directors of Banana therefore believe that Melon should be treated as an asset acquisition.
The acquisition of bonds
On 1 July 20X5, Banana acquired $10 million 5% bonds at par w ith interest being due at 30 June
each year. The bonds are repayable at a substantial premium so t hat 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.
On 1 July 20X6, Banana sold the bonds to a third party for $8 million. The fair value of t he bonds
was $10.5 million at that date. Banana has the right to repurchase t he bonds on 1 July 20X8 for
$8.8 million and it is likely that this option wil l be exercised. The third party is obliged to return the
coupon interest t o Banana and to pay additional cash to Banana should bond values rise.
Banana w ill also compensate the third part y for any devaluation of t he bonds.
Pension advice
Banana intends to divest of part of its business in the next reporting period. If the divestment goes
ahead, Bonano w ill also transfer the relevant part of it s defined benefit pension fund to the buyer.
Banana is unsure how the transfer of part of t he pension pion should be accounted for a nd has
asked fo r your advice. To facilitate their understand ing of the accounting treatment, Banana has
provided the following estimated figures:
Defined benefit obligation transferred $5.7 million

Fair value of plan assets transferred $5.4 million
Cash payment to buyer in respect of the plan $200,000
Banana is aware that IAS 19 Employee Benefits was amended in 2018 and that the amendments
related to plan amendments, curtailments and settlements but is unsure how these amendments
would impact their financia l statements.
Required
(a) Draft an explanatory note to the directors of Banana, discussing the following:
(i) How goodwill should have been calculated on the acquisition of Grape and show the
accounting ent ry which is required to amend the financial d irector's error (8 marks)
(ii) Why equity accounting was t he appropriate treatment for Strawberry in the
consolidated financial statements up to the date of its disposal showing the carrying
amount of the investment in Strawberry just prior to disposal (4 marks)
(iii) How the gain or loss on disposal of Strawberry should have been recorded in the
consolidated financial statements and how the investment in Strawberry should be
accounted for after the part disposal ( 4 marks)
(iv) The impact on the financial statements of t he potential transfer of part of the
pension plan (using the estimated figures t o illustrate your explanation) a nd advise
Banana of any impact of the 2018 amendments t o IAS 19 regarding plan
amendments, cu rtailments a nd settlements (3 marks)
Note. Any workings ca n either be shown in the main body of the explana tory note or in an
appendix to the explanatory note.

IMlllA
(b) Discuss whether the directors are correct to treat Melon as a financial asset acquisition.
(4 marks)
(c) Discuss how the derecognition requirements of IFRS 9 Financial Instruments should be
applied to the sale of the bond including calculat ions to show the impact on the
conso lidated financial statements for the year ended 30 June 20X7. (7 marks)
(Total= 30 marks)
13 Hill 59 mins
SBR Specimen exam 2
Background
Hill Co is a public limited company which has investments in two other entities, Chondler Co and
Doyle Co. Al l three entities prepare their financial statements in accordance with International
Finan cial Reporting Standards.
Exhibit 1 - Financial statement extracts
Extracts from the draft individual stat ements of profit or loss for Hill Co, C handler Co and Doyle
Co for the year ended 30 September 20X6 are presented below.
Hill Co Chandler Co Doyle Co

Sm Sm Sm
Profit/(loss) before taxation (45) 67 154
Taxation 9 .@ ..Q!)
Profit/(loss) for the period (36) 52 123
Exhibit 2 - Acquisition of 80% of Chandler Co

Hill Co purchased 80% of the ordinary shares of Chandler Co on 1 October 20X5. Cash
consideration of $150 million has been included when ca lculating goodwill in the consolidated
f inancial statements. The purchase agreement specified that a further cash payment of $32 million
becomes payable on 1 October 20X7 but no entries have been posted in the consolidated financial
statements in respect of this. A discount rate of 5% should be used.
In the goodwill calculation, the fair value of Chandler Co's identifiable net assets was deemed to
be $170 million. Of this, $30 million related to Chandler's non-depreciable land. However, on
31 December 20X5, a survey was received which revealed that the fair value of this land was
actually only $20 million as at the acquisition date. No adjustments have been made to the
goodwill calculation in respect of t he results of the survey. The non-controlling interest at
acquisition was measured using the proportionate method as $34 million ($170m x 20%).
As at 30 September 20X6, t he recoverable amount of Chandler Co was calculated as $250 million.
No impairment has been calculated or accounted for in the consolidated financial statements.
Exhibit 3 - Disposal of 20% holding in Doyle Co
On 1 October 20X4, Hill Co purchased 60% of the ordinary shares of Doyle Co. At this date, t he
fair value of Doyle Co's identifiable net assets was $510 million. The non-controlling interest at
acquisition was measured at its fair value of $215 million. Goodwill arising on the acquisition of
Doyle Co was $50 million and had not been impaired prior to t he disposal date. On 1 April 20X6,
Hill disposed of a 20% holding in the shares of Doyle Co for cash consideration of $140 million. At
this date, the net assets of Doyle Co, excluding goodwill, were carried in the consolidated
financial statements at $590 million.
From 1 April 20X6, Hill Co has the ability to appoint two of the six members of Doyle Co's board of
directors. The fair value of Hill Co's 40% shareholding was $300 million at that date.
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Questions 21
Exhibit 4 - Issue of c onvertible bo nd
On 1 October 20X5, Hill Co issued a convertible bond at par value of $20 million and has
recorded it as a non-current liabilit y. The bond is redeemable for cash on 30 September 20X7 at
pa r. Bondholders can instead opt for conversion in the form of a fixed number of shares. Interest
on the bond is payable at a rate of 4% a year in arrears. The int erest paid in t he year has been
present ed in finance costs. The interest rate on similar debt without a conversion option is 10%.
Discount factors:
Year Discount rat e 5% Discount rate 10%

0.952 0.909
2 0.907 0.826
Exhibit 5 - Deferred tax asset
Hill Co has made a loss in the year ended 30 September 20X6, as well as in the previous t wo
financial years. In t he consolidated statement of financial position it has recognised a material
deferred tax asset in respect of the carry-forward of unused tax losses. These losses cannot be
surrendered to other group companies. On 30 September 20X6, Hill Co breached a covenant
attached to a bank loan which is due for repayment in 20X9. The loan is p resented in non -current
liabilities on the statement of financial posit ion. The loan agreement terms state that a breach in
loan covenants entit les the bank to demand immediat e repayment of t he loan. Hill Co and its
subsidiaries do not have sufficient liquid assets to repay t he loan in fu ll. However, on 1 November
20X6 the bank confirmed that repayment of the loan would not be required until the o riginal due
date. Hill Co has p roduced a business p lan which forecast s significant improvement in its
f inancial situation over the next t hree years as a result of the launch of new products which are
currently being developed.
Required
Dra ft an explanatory not e to t he directors of Hill Co addressing the following:
(a) how goodwill should have been calculated in respect of the investment in Chandler Co.
Your answer should include suitable calculations and show the adjustments which need to
be made to the consolidated financial statements for this as well as any implications of the
recoverable amount calculated at 30 September 20X6. (13 marks)
(b) a calculation of the profit or loss arising from the disposal of the investment in Doy le Co for
inclusion in the consolidated financial statements for the year ended 30 September 20X6.
( 4 marks)
(c) how the convertible bond should be accounted for, with suitable calculations, in the
conso lidated financial statements for the year ended 30 September 20X6. ( 5 marks)
(d) discuss t he proposed treatment of Hill's deferred tax asset and the financial reporting
issues raised by its loan covenant breach . ( 8 marks)
(Total= 3 0 m arks)
1'+ Luploid 59 mins

SBR Septe mber/ December 2019
Backgro und
Luploid Co is the parent company of a g roup 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.
Exhibit 1 - Acq uisit ion af Calyson Co

Luploid Co acquired 80% of t he five million equity shares ($1 each) of Colyson Co on 1 July 20X4 for
cash of $90 million. The fa ir value of the non-controlling interest (NCI) at acquisition was $22 million.
The fair value of the identifiable net asset s at ac quisition was $65 million, excluding the following
asset. Colyson Co purchased a factory site several years prior to the date of acquisition. Land and
22 Strat egic Business Reporting (SBR) @BPP LEAR\,NC:

IMlllA
property prices in the orea 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 t ha t , 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
plonning 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.
Exhibit 2 - Impairment of C o lyson C o
Colyson Co incurred losses during the year ended 30 June 20X8 and an impairment review was
performed. The recoverable amount of Colyson Co's assets was estimoted t o be $100 million.
Included in this assessment was the only building owned by Colyson Co which had been
damaged in a storm and impaired to the extent of $4 million. 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:
Sm
Land and buildings 60
Other plant and machinery 15
Intangibles other thon goodwill 9
Current assets (recoverable amount) 22
Total 106
None of the assets of Colyson Co including goodwill have been impaired previously. Colyson Co
does not have a policy of revaluing its assets.
Exhibit 3 - Acquisition of Hammond C o
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
wil l be issued on 1 J uly 20X8. The fa ir value of a Luploid Co share was $30 at 1 July 20X7.
Hammond Co had previously granted a share-based payment to its employees wit h a three-year
vesting period. At 1 J uly 20X7, the employees had completed their service period but had not yet
exercised their options. The fair value of t he 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 w ith a scheme of its own which has t he following details:
Luploid Co issued 100 options to each of Hammond Co's 10,000 employees on 1 July 20X7. The
shares are conditional on the employees completing a further two years of service. Additionall y,
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 t he directors of Luploid Co, addressing t he following:

(a) (i) How the fai r value of the factory site should be determined at 1 July 20X4 and why
the deprec iated replacement cost of $17.4 million is unlikely to be a reasonable
estimate of fair va lue. (7 ma rks)
(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 m arks)
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Questions 23
(b) Discuss the calculation and allocation of Colyson Co's impairment loss ot 30 June 20X8
and why the impairment loss of Colyson Co would d iffer 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 calculation of the consideration and a
discussion of why on ly 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 the share-based payment scheme should be recognised
in the consolidated profit or loss of Luploid Co for the year ended 30 June 20X8.
Your answer should include a brief discussion of how the vesting conditions impact
u pon 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 not e.
(Total = 30 marks)
15 Angel 59 mins
Adapted from P2 December 2013
The following draft consolidated financial statement s relate to Angel, a public limited company.
Angel is a furniture manufacturer which sells its mass- produced goods wholesale to a number of
large building contractors with whom it has well established relat ionships.
Angel 's new finance director has explained that he is used to preparing cash flow statements
using t he direct method and requires some advice on the indirect method as used by his
predecessor for the Angel Group.
ANGEL GROUP: EXTRACTS FROM STATEMENT OF FINANCIAL POSITION

AS AT 30 NOVEMBER 20X3
30 Nov 30 Nov
20X3 20X2
Sm Sm
Assets
Non-current assets
Property , plant and equipment 475 465
Investment in associate 80
Financial assets 215 180
Current assets
Invento ries 155 190
Trade receivables 125 180
Cash and cash equivalents 465 355
745 725
C urrent liabilities:
Trade payables 155 361
Current tax payable 49 138
Tota/ current liabilities 204 499
21+ Strat egic Business Reporting (SBR) @BPPLEAR\ll•C

1Cll1A
ANGEL GROUP: EXTRACT FROM STATEMENT OF PROFIT OR LOSS AND OTHER COMPRE HENSIVE
INCOME FOR THE YEAR ENDED 30 NOVEMBER 20X3
$m
Revenue 1,238
Cost of sales (986)
Gross profit 252
Other income 30
Administrative expenses (45)
Other expenses (54)
Operoting profit 183
Finance costs (11)
Share of profit of associates 12
Profit before tax 184
The following information relates to the financia l statements of t he Angel G roup:

(i) Angel decided to renovate a building wh ich had a ca rrying a mount of $nil at 1 December
20X2. As a result , $3 million was spent during the year on its renovation. On 30 November
20X3, Angel received a cash grant of $2 million from the government to cover some of t he
renovation cost and the creat ion of new jobs w hich had resulted from the use of t he
building. The grant related equa lly to both job creation a nd renovation . The only elements
recorded in t he financial statements were a charge to revenue for the renovation of the
building and t he receipt of the cash grant, which has been credited to additions of
property , plant and equipment (PPE).
Angel t reats g rant income on capital-based projects as deferred income.
(ii) On 1 December 20X2, Angel acquired all of the share capital of Sweety, a manufacturer
of bespoke furniture, for cash of $30 million. The fair va lues of t he identifiable assets and
liabilities of Sweety at the date of acquisition a re set out below. There were no other
acquisitions in the period. The fair values in the table below have been reflected in the year
end balances of the Angel G roup.
Fair va/ues
$m
Property, p lant and equipment 14
Inventories 6
Trade receivables 3
Cash and cash equivalents 2
Total assets 25
Trade payables J2)
Net assets at acquisition 20
(iii) Angel's propert1:1, plant and equipment (PPE) comprises t he following.
$m
Carrying amount at 1 December 20X2 465
Additions at cost including assets acquired on the purchase of
subsidiary 80
Gains on property revaluation 8
Disposals (49)
Depreciation (29)
Carrying amount at 30 November 20X3 475
Angel has constructed a machine which is a qualifying asset under IAS 23 Borrowing Costs
and has paid construction costs of $4 million, w hich has been charged to other expenses.
Angel G roup paid $11 million in interest in the year, recorded as a finance cost, which
includes $1 million of interest which Angel wishes to capitalise under IAS 23. There was no
deferred tax implication regarding this transaction.
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Questions 25
The proceeds on disposal of PPE were $63 million. The gain on disposal is included in
administrative expenses.
Note. Ignore t he effects of any depreciation required on the construction cost s.
(iv) Angel purchased a 30% interest in an associate, Digitool, for cash on 1 December 20X2. The
associate reported a profit for the year of $40 million and paid a dividend of $10 million out
of these profits in the year ended 30 November 20X3.
(v) An impairment t est carried out at 30 November 20X3 showed that goodwill and other
intangible assets were impaired by $26.5 million and $90 million, respectively. The
impairment of goodwill relates to 100% owned subsidiaries.
(vi) The finance costs were all paid in cash in the period.
Required
(a) (i) Explain to the finance director why the building renovation has been incorrectly
recorded, setting out the correcting entries. ( 4 marks)
(ii) Explain, showing supporting calculations, the adjustments that need to be made to
ca lculate the correct profit before tax figure for inclusion in a consolidated statement
of cash flows for the Angel Group for the year ended 30 November 20X3, prepared
using the indirect method. ( 4 marks)
(iii) Prepare the cash generated from operations figure for inclusion in a consolidated
statement of cash flows for the Angel Group for the year ended 30 November 20X3,
using the indirect method, in accordance w ith the requirements of IAS 7 Statement of
Cash Flows. For each line item, explain to the finance director of Angel Group the
reason for its inclusion in the reconciliation. (14 marks)
(b) The financial statements of Digitool, the associate (note (iv)) that Angel invested in during the
year, were presented to the direct ors at a recent board meeting, along with nan-financial
disclosures.
Digitool is a data mining and analysis company that earns revenues by providing business
insights such as emerging trends and forecasts to other companies. It has a large number
of contracts with new customers that it is building relationships with, and it operates from a
single data centre employing 100 high-performing people.
Included within Digitool's annual report is information relating to relationships with
customers, emissions levels and the company's investment in human capital. Angel does
not make similar d isclosures. The directors of Angel have asked its finance director to help
them manage their expectations in terms of the financia l statements of Digitool and to
understand why the
non- financial disclosures provided might be important to a d igital company. As a wholesale
manufacturing company, the directors of Angel review its gross profit margin, return on
capital employed, inventory holding period and receivables collection period.
Required
(i) Identify t he key differences that might be expected between the financial statements
of Angel and Digitool with references to the key ratios noted by the directors. Yau do
not need to calculate any ratios. (5 marks)
(ii) Discuss why the non-financial disclosures made by Digitool might be important to a
digital company. (3 marks)
(Total= 30 ma rks)

IMlllA
16 Moyes 59 mins
Part (a) adapted from SBR December 2018, part (b) adapted from P2 2015
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
Sm
Revenue 612
Cost of sales (347)
Gross profit 265
Operating expenses (123)
Share of profit of associate 67
G ROUP STATEMENT OF FINANCIAL POSITION
30 Septembe r 20X8 30 Septembe r 20X7

Sm Sm
Inventories 126 165
Trade receivables 156 149
Trade pa yables 215 19 7
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 w it hin operating expenses. The remeasurement component for t he year was a gain of
$3 m illion. Benefits paid out of t he 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 c urrent year.
Property, plant and equipment
Property, plant and equipment (PPE) at 30 September 20X8 included cash additions of $134 million.
Depreciation charged during the year wos $99 million and an impairment loss of $43 million was
recognised. Prior to the impairment, the g roup had a balance on the revaluation surplus of
$50 millio n of w hich $20 million related to PPE impaired in the current year.
Inventory
Goods were purchased for Dinar 80 million cosh when the exchange rate was $1:Dinar 5. Moyes
had not managed to sell the good s ot 30 September 20X8 and the net realisable value at t hot
dote wos estimated to be Dinar 60 million. The exchange rate ot this date wos $1:Dinar 6. The
inventory has been correctly valued at 30 September 20X8 with the loss resulting from both the
exchange difference and impairment correctly included within cost of sales.
Changes to group structure
During the yea r ended 30 September 20X8, Moyes acquired a 60% subsidiary, Davenport, and
a lso sold a ll of its equity interests in Barham for cash. The consideration for Davenport consist ed
of a share for share exchange together with some cash payable in two yeors. 80% of the equity
shores 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 on interim dividend on 30 September 20X8.
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Questions 27
Discontinued operations
The directors of Moyes wish for advice as to whether the disposal of Barham should be treated as
a discontinued operation and separately disclosed wit hin the consolidated statement of p rofit or
loss. There are several other subsidiaries which all produce similar products to Barham a nd
operate in a similar geographical area. Additionally, Moyes holds a 52% equity interest in
Watson. Watson has previousl y issued share options to other entities which are exercisable in the
year ending 30 September 20X9. It is highly likely that these options wou ld be exercised which
would reduce Moyes' interest to 35%. The directors of Moyes require advice as to whether th is loss
of control would require Watson to be classified as held for sale and reclassified as discontinued.
Required
(a) (i) Draft an explanatory note t o the directors of Moyes which should include:
• A ca lc ulation of cash generat ed from operations using the indirect method;

and
• An explanation of the specific adjustments required to the group profit before

tax t o ca lcu late the cash generated from operations.
Note. Any workings can either be shown in the main body of the explana t ory note or in an
appendix to the explanatory note. (12 marks)
(ii) Explain how the changes to the group structure and dividend would impact upon the
consolidated statement of cash flows at 30 September 20X8 for t he Moyes group.
You should not attempt to a lter your answer to Part (a). (6 marks)
(iii) Advise the direct ors 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)
(b) Moyes has an equity investment in an entity called Yanong. The directors of Yanong are
inexperienced and wou ld like to confirm how some share appreciation rights (SARs) should
have been accounted for. The details of the SARs are as follows:
On 1 October 20X5, Yanong granted 500 share appreciation rights to its 300
managers. All of the rights vested on 30 September 20X7 but they can be exercised
from 1 October 20X7 up to 30 September 20X9. At the grant date, the value of each
SAR was $10 and it was estimated that 5% of the managers would leave during t he
vesting period. At 30 September 20X6, the estimate of how many managers would
leave during the vesting period remained at 5%. The fair value of the SARs was as
follows:
Fair value of SAR
$
30 September 20X6 9
30 September 20X7 11
30 September 20X8 12
All of the managers who were expected to leave employment did leave the company
as expected before 30 September 20X7. On 30 September 20X8, 60 managers
exercised their options, when the intrinsic va lue of the right was $10.50, and were
paid in cash.
The directors of Yanong would like to confirm how the SARs should have been accounted
for from the grant date to 30 September 20X8 and w hether IFRS 13 Fair Value
Measurement or IFRS 2 Share- based Payment applies.
Required
Prepare a briefing note for t he directors of Yanong which answers their queries relating to
the SARs. (6 marks)
(Total= 30 marks)

IMlllA
17 Weston 59 mins
Part (a) adapted fro m P2 Mar/ Jun 20 16 , part (b) adapted from P2 Mar/ J u n 2017
Weston is a public limited company with several subsidiaries. The following information relates to
the financial statements of the Weston Group.
WESTON GROUP
EXTRACT FROM STATE MENT OF FINANCIAL POSITION AS AT 31 JANUARY
20X6 20X5
Sm Sm
Assets
Non-current assets
Other non-current assets 393 432
Investment in associate 102
Tota/ non-current assets 495 432
Total current assets 253 312
Tota/ assets 748 744
Total equity 565 476
Total non-current liabilities 100 135
Total current liabilities 83 133
Total liabilities 183 268
Tota/ equity and liabilities 748 744
WESTON GROUP
EXTRACT FROM STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 JANUARY 20X6
Sm
Operating profit 190
Finance costs (23)
Share of profit of associate 16
Income tax expense M)
Profit for the year from continuing operations 143
Discontinued operations
Loss for the year from discontinued operations (Note (i)) ..@
Profit for the year 118
The following information relates to t he financia l statements of Weston:

(i) On 31 July 20X5, Weston disposed of its entire 80% equity holding in Nort hern fo r cash.
The shares hod been acquired on 31 July 20X1 for a consideration of $132 million when
the fair value of the net assets was $124 million. This included an increase of $16 million
in the fair value of land which had a remaining useful life of eight years. Deferred tax at
25% on the fair value adjustment was also correctly provided for in the consolidated
accounts and is included w it hin the fa ir value of net assets. Weston hod elected to
measure the non-controlling interest at acquisition at its fair value of $28 million.
Goodwill was impaired by 75% at 31 January 20X5. There has been no further
impairment of Northern in the current year.
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Questions 29
The carrying amounts of assets and liabilities in the individual accounts of Northern at
disposal ore listed below.
Carry ing amount

$m
Property, plant and equipment 80
Inventory 38
Trade receivables 23
Trade and other payables (10)
Deferred tax liability (6)
Bonk overdraft (2)
(ii) The loss for the period from discontinued operations in t he consolidated statement of profit
or loss and other comprehensive income relates to Northern and con be analysed as
follows:
Sm
Profit before tax 6
Income tax expense (2)
Loss on disposal (29)
fil)
The directors hove stated that they expect the loss on d isposal to be disclosed in the
statement of cash flows as a non-cash adjustment to cash generated from operations.
They ore optimistic that this will display the results of the continuing group in a more
positive light, increasing the cash generated from operations.
(iii) Weston purchased a 40% interest in an associate, Southland, for cash on 1 February 20X5.
Southland paid a dividend of $10 million in the year ended 31 January 20X6. Weston does
not have an interest in any other associates.
(iv) Weston Group prepares its statement of cash flows using the indirect method.
Required
(a) (i) Explain to the d irectors the effect of t he disposal of Northern on the consolidated
statement of cash flows for the Weston Group for the year ended 31 January 20X6.
You should p repare the relevant extracts and workings to support your explanation.
(15 marks)
(ii) Explain to the d irectors the effect of the acquisition of Southland on the consolidated
statement of cash flows for the Weston Group for the yea r ended 31 January 20X6.
You should p repare the relevant extracts and workings to support your explanation.
(6 marks)
Not e. Marks will be allocated in (a) for a suitable discussion of the principles involved as
well as the accounting treatment.
(b) Weston is looking at ways to improve its liquidity. One option is to sell some of its trade
receivables to a debt factor. The directors are considering two possible alternative
agreements as described below:
(i) Weston could sell $40 million receivables t o a factor w ith the factor advancing 80% of
the funds in full and final settlement. The factoring is non-recourse except that Weston
would guarantee that it will pay the factor a further9% of each receivable which is not
recovered within six months. Weston believes that its customers represent a low credit
risk and so the probability of default is very low. The fair value of the guarantee is
estimated t o be $50,000.
(ii) Alternatively, the factor would advance 20% of the $40 million receivables sold.
Further amounts w ill become payable to Weston as the receivables are collected, but
a re subject to an imputed interest charge so that Weston receives progressively less
of the remaining bala nee t he longer it takesthefactorto recover thefunds. The factor has
full recourse to Weston fora six- month period afterwhich Weston hos no further
obligations and hos no rights to receive any further payments from the factor.
3 0 St rategic Business Reporting (SBR) @BPPLEAR\IMG

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Required
Explain the financial reporting principles involved in debt factoring and advise how each of
the above arrangements would impact upon the financial statements of future years.
(9 marks)
(Total= 30 marks)
18 Bubble 59 mins
Adapted from P2 Sep/Dec 2015
The following draft financial statements relate to Bubble Group, a public limited company and
two other companies in which it owns investments.
DRAFT STATEMENTS OF FINANCIAL POSITION AS AT 31 OCTOBER 20X5
Bubble Salt Tyslar

Sm Sm Dinars m
Assets
Non-current assets:
Property, plant and equipment 280 105 390
Investment in Salt 110
Investment in Tyslar 46
Financial assets 12 9 98
448 114 488
Current assets
Inventories 20 12 16
Trade and other receivables 30 25 36
Cash and cash equivalents 14 11 90
64 48 142
Tota/ assets 512 162 630
Equity
Ordinary share capital 80 50 210
Retained earnings 230 74 292
Other component s of equity 40 12
Toto/ equity 350 136 502
Non-current liabilities 95 7 110
Current liabilities 67 19 18
162 26 128
Toto/ equity and liabilities 512 162 630
The following information is relevant to the Bubble Group.

(a) Bubble acquired 80% of the equity shores of Salt on 1 November 20X3 when Salt's retained
earnings were $56 million and other components of equity were $8 million. The fair value of
the net assets of Solt were $120 million at the date of acquisition. This does not include a
contingent liability which was disclosed in Salt's financial statements as a possible
obligation of $5 million. The fair value of the obligation was assessed as $1 million at the
date of acquisition and remained unset tled as at 31 October 20X5. Any remaining
difference in the fair value of the net assets at acquisition relates to non-depreciable land.
The fair value of the non-controlling interest at acquisition was estimated as $25 million.
Bubble always elect s to measure non-controlling interests at acquisition at fair value under
IFRS 3 Business Combinations.
(b) Bubble owns 60% of the equity shares of Tyslar, a company located overseas.which uses
the dinar as its functional currency . The shares in Tyslar were acquired on 1 November
20X4 at a cost of 368 million dinars. At the date of acquisition, retained earnings w ere 258
million d inars and Tyslar had no other components of equity. No fair value adjustments
were deemed necessary in relation to the acquisition of Tyslar. The fair value of the non-
controlling interest was estimated as 220 million dinars at acquisition. No dividend was
paid by Tyslar in the year ended 31 October 20X5.
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Q uestions 31
(c) An impairment review of goodwill was undertaken as at 31 October 20X5. No impairment
was necessary in relation to Salt, but the goodwill of Tyslar is to be impaired by 20%.
Neither Bubble, Salt nor Tyslar has issued any equity shares since acquisition.
(d) On 1 February 20X5, Bubble gave an interest-free loan to Tyslar for $10 million. Tyslar
recorded this correctly in it s financial statements using the spot rate of exchange. Tyslar
repaid $5 million on 1 July 20X5 when the spot exchange rate was $1 to 10 dinars. Tyslar
therefore reduced its non-current liabilities by 50 million d inars. No further entries were
made in Tyslar's financia l statements. The out standing balance remains within the f inancial
assets of Bubble and the non-current liabilities of Tyslar.
(e) The following exchange rates are relevant to the preparation of the g roup financial
statements:
Dinars to$
1 November 20X4 8.0
1 February 20X5 9 .0
31 October 20X5 9.5
Average for year to 31 October 20X5 8 .5
Required
(a) (i) Explain, with supporting calculations, t he entries Tyslar needs to make in its
individual financial statements as at 31 October 20X5 in order to correctly reflect the
loan from Bubble. (5 marks)
(ii) Translate Tyslar's stat ement of financial position at 31 October 20X5 into dollars for
inclusion in the consolidated statement of financial position and explain your
ca lc ulations to the directors, including how to incorporate t he t ranslated figures into
Bubble's consolidated financia l statements. (8 marks)
(iii) Explain, including suitable calculations, and reference to the principles of relevant
IFRSs how goodwill should have been calculated on the acquisitions of Salt and
Tyslar and subsequently recorded in the consolidated financial statements of Bubble
as at 31 October 20X5. (8 marks)
(b) The directors of Bubble a re not fully aware of the requirements of IAS 21 The Effects of
Changes in Foreign Exchange Rates in relation to exchange rate differences. They would
like advice on how exchange differences should be recorded on both monetary and non-
monetary assets in the individual financ ial statements and how these differ from the
requirements for the translation of an overseas entity. The direct ors also wish to be advised
on what would happen to t he exchange differences if Bubble were to sell all of its equity
shares in Tyslar, and any practical issues which would arise on monitoring exchange
differences if the remaining balance on the loan from Bubble to Tyslar was not intended to
be repaid.
Required
Provide a brief memo for the directors of Bubble which identifies the correct accounting
treatment for the various issues raised. (9 marks)
(Total = 30 marks)
19 Carbise 59 mins
SBR March/ June 2019
Background
Carbise is t he parent company of an international group wh ich has a presentation and f unctional
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 d isposed of all of it s holding in Bikelite. The
current year end is 31 December 20X6.

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Bikelite trading information
Bikelite is based overseas where the domestic currency is the dinar. Staff costs and overhead
expenses are a ll paid in dinars. However, Bikel ite a lso has a ra nge 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 dolla rs of which approximately ha lf were purchases of material
from Carbise. This ratio continued even after Carbise d isposed 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 a ll three currencies. No dividends have been paid by Bikelite for
several years. At the start of 20X6 Bikelite sought additional deb t finance. As Carbise was a lready
looking to divest, funds we re 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 capita l 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 build ing w hich had a fair value of d inar
20 m illion above its carrying amount and a remaining usefu l life of 20 years at the acquisition
date. Carbise measures non-controlling interests (NCI) at fair value for a ll acquisitions, and the
fair value of t he 20% interest was estimated to be d inar 22 million at acquisition. Due to the
relatively poor performance of Bikelite, it was decided t o impair goodwill by dinar 6 million d uring
the year ending 31 December 20X5.
Rates of exchange between the$ and dinar are g iven as follows:
1 January 20X2: $1:0.5 dinar

Average rate for year ended 31 December 20X5 $1:0.4 dinar
31 December 20X5: $1:0.38 dinar
30 September 20X6: $1:0.35 dinar
Average rate for the nine-month period ended 30 September 20X6 $1:0.37 dinar
Disposal of Bikelite
Carbise sold its ent ire equity sha reholding in Bikelite on 30 September 20X6 for $150 million .
Further details relating to the disposal a re a s follows:
Carrying amount of Bikelite's net asset s at 1 J anuary 20X6 dinar 48 million

Bikelite loss for the year ended 31 December 20X6 dinar 8 million
Cumula tive exchange gains on Bikelite at 1 Ja nuary 20X6 $74.1 m illion
Non-controlling interest in Bikelite a t 1 January 20X6 $47.8 million
Required
(a) Prepare a n explanator y note for the directors of Carbise which addresses the following
issues:
(i) What is meant by an entity's presentation and functional currency. Explain your
answer with reference t o how the presentation and functional currency of Bikelite
should be determined. (7 marks)
(ii) A calculation of the goodwill on t he 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 d ifference on goodwill for the
period from 1 J anuary 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 stat ements. You do not need to
discuss how the disposal will affect the exchange differences. ( 4 marks)
Not e: An y workings can either be shown in the main body of the explanatory note or in an
appendix to the explanatory note.
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Questions 33
(b) Explain why exchange differences will arise an the net assets and profit ar lass af Bikelite
each year and haw they would be presented w ithin the cansolidoted financial statements.
Your answer should include a ca lculation of the exchange differences w hich would arise on
the translation of Bikelite (excluding goodwill) in the year ended 31 December 20X6.
(7 marks)
(c) (i) Calculate t he g roup profit or loss on the disposal of Bikelite. (3 marks)
(ii) Briefly explain how Bikelite should be treated and presented in the consolidated
financia l st atements of Carbise for the yea r ended 31 December 20X6. (4 marks)
(Total= 30 marks)
20 Elevator 39 mins
(a) The d irectors of Elevator, o public limited company, which opera tes in the UK technology
sector, are paid a bonus based on the profit that they achieve in a year. Employees have
historically been paid a discretionary bonus based o n their individual performance in the
year. Elevat or's year to date results indicate that it may not achieve the required level of
profit to secure a bonus for the directors. Elevator's Chief Executive Officer (CEO) has
suggest ed that one way of managing this is not to pay the employees a bonus in the
current year which w ill keep the wages and salaries expense at a minimum. Elevator
reports employee satisfaction scores, staff turnover, gender equality and employee
absentee rates as non-financial performance measures in its annual report. The C EO has
told the directors in an email that 'no one ever reads the non-financial information anyway'
and is therefore not concerned about the impact of his suggestion.
Required
(i) Comment on the ethical consequences of the proposals made by the CEO and the
potential implications for the information given in t he annual report. (7 marks)
(ii) Explain, from the perspective of investors and potentia l investors, the benefits and
potential drawbacks of reporting non-financial performance measures. ( 4 marks)
(b) Immediately prior to the 31 May 20X3 year end, Elevator sold land located adjacent to its
UK head offices to a third party at a price of $16 million with an option to purchase t he land
bac k on 1 July 20X3 for $16 million plus a premium of 3%. On 31 May 20X3 the market
value of the land was $25 million and t he carrying amount was $12 million. The cash
received from th is transaction eliminated Elevator's bank overd raft a t 31 May 20X3. As
instruct ed by the CEO of Elevator, the finance director has accounted for the transaction
as a sale, and has included a profit on d isposal in the statement of profit or loss for the
year ended 31 May 20X3.
Required
Discuss the financial reporting and ethical implications of the above scenario. (7 marks)
Professional marks will be awarded for t he application of ethical p rinciples. (2 marks)
(Total = 20 marks)
31+ Strat egic Business Reporting (SBR) @BPP LEAR\,NC:

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21 Star 39 mins
Part (a) a dapted from P2 Ma r/ J u n 2017
(a) Star, a public limited company supplying oil products globally, has debt covenants
attached to some of the loan balances included w ithin liabilities on its statement of
financial position. The covenants create a legal obligation to repay the debt in full if Star
fails to maintain a liquidity ratio and operating profit margin above a specified m inimum.
The directors are considering entering into a new five-yea r leasing arrangement but are
concerned about the negative impact which any potential lease obligations may have on
these covenants. If they proceed, t hey are proposing to construct the lease agreement in
such a way t hat it is a series of six ten-month leases rather than a single five-year lease in
order to utilise the short-term term lease exemption under IFRS 16 Leases. It would then
account for the leases in accordance wi t h their legal form. The directors believe that this
will meet the requirements of the debt covenant, though they are aware that the proposed
treatment may be contrary to accounting standards.
Required
Discuss the ethical issues which arise from t he proposal by Star. (6 marks)
(b) Star is currently suffering a degree of stagnation in it s business development. Its domestic
and international markets a re being maintained but it is not attracting new customers. Its
share price has not increased whilst that of its competitors has seen a rise of between 10%
and 20%. Additionally, it has recently received a significant amount of adverse publicity
because of its poor environmental record a nd is to be investigated by regulators in several
countries. Although Star is a leading supplier of oil products, it has never f elt the need to
promote socially responsible policies and practices or make posit ive contributions to
society because it has always maintained its market share. It is renowned for poor
customer support, bearing little regard for the customs and cu ltures in the communities
where it does business. It had recently made a decision not to pay t he amounts owing to
certain small and medium entities (SMEs) as the directors feel that SMEs do not have
sufficient resources to challenge the non- payment in a court of law. The management of
the company is quite authoritarian and tends not to value employees' ideas and
contributions.
Required
Discuss the ethical and social responsibilities of Star and whether a change in the ethical
and social attitudes of the management could improve business performance. (9 marks)
(c) In many organisations, bonus payments related to annual profits form a significant part of
the total remuneration of all senior managers, not just the top few managers. The directors
of Star feel that the chief internal a uditor makes a significant contribution to the
company's profitability, and should therefore receive a bonus based on profit.
Required
Advise St ar's directors as to whether this is appropriate. (3 marks)
Professional marks will be awarded in this question for the application of ethical principles.
(2 m arks)
(Total= 20 marks)
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Questions 35
22 Farham 39 mins
SBR September 20 18
Background
Farham manufactures white goods such as washing machines, tumble dryers and dishwashers.
The industr y is highly competitive with a large number of products on t he market. Brand loyalty is
consequently an important feature in the industry. Farham operates a profit- related bonus
scheme for it s managers based upon the consolidated financial statements but recent results
have been poor and bonus target s 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 J une 20X8.
Fact ory subsidenc e
Farham has a production facility which started to show signs of subsidence since January 20X8.
It is probable that Farham w ill 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
c hief operating officer (COO) refuses to disclose the issue at 30 June 20X8 since no repa ir costs
have yet been undertaken although she is aware that t his 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 t he repair to the factory should be made because there is no legal or
constructive obligation to repair the fact ory.
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 tha t this
surplus can be used for any futu re loss arising from the subsidence of t he 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 t hat Oldcastle, an entity which
currently owns the other 20% of Newall, w ill acquire the 80% equity interest. The sale is expected
t o be complete by December 20X8. Newall is expected to have substantial trading losses in t he
period up to the sale. The accountant of Farham wishes to show Newall as held for sale in the
consolidated financial stat ements a nd to create a restruct uring 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 t his may affect
the sales price a nd wou ld 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 fina ncial statements. The expected cost s from the sa le are as follows:
Future trading losses $30 million
Various legal costs of sale $2 million
Redundancy costs for Newall employees $5 million
Impairment losses on owned assets $8 million
Included within the future trading losses is an early payment penalty of $6 million for a leased
asset which is deemed surplus to requirements. (6 ma rks)
Required
(a) Discuss the accounting t reatment 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 this question for the quality of the discussion. (2 marks)
(Tot a l = 20 m arks)
36 Strategic Business Report ing (SBR) @BPP LEAR\,NC:

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23 Gustoso 39 mins
SBR Specimen exam 2
Gustoso Co is a public limited company which produces a range of luxury food products. It
prepares its financial statements in accordance wit h International Financia l Reporting Standards.
The directors of Gustoso Co receive a cash bonus each year if reported profits for the period
exceed a pre-determined target. Gustoso Co has performed in excess of ta rgets in the year
ended 31 December 20X7 but financial forecasts for 20X8 ore pessimistic.
Exhibit 1 - Provisions
A new accountant hos recently started work at Gustoso Co. She noticed that the provisions
balance as at 31 December 20X7 is significantly higher than in t he prior year. She mode enquiries
of the finance d irector, who explained that the increase was due to substantial changes in food
safety and hygiene lows which become effective during 20X8. As o result, Gustoso Co must retrain
o large proportion of it s workforce. This retraining hos yet to occur, so o provision hos been
recognised for the estimated cost of S2 million. The finance director then told the accountant that
such enquiries were o waste of time and would not be looked at favourably when deciding on her
f uture pay rises and bonuses.
Addit ionally in November 20X7, the board of directors discussed o potential restructure of
Gustoso Co. The restructuring plans included an analysis of long t erm cost savings but, should
the restructure toke place, there will be significant short term costs which wou ld be necessary.
These include professional fees, penalties for cancelling leases and also redundancy costs for o
number of employees. Even if the restructure did not toke place exactly as planned, alternative
plans w ill need to be explored to ensure Gustoso Co remains o going concern. The finance
director hos therefore included o restructuring provision, arguing that this is prudent. A final
decision and announcements to staff and lessors ore likely to be mode prior to the authorisation
of t he financial statements which is expected in April 20X8.
Exhibit 2 - Wheat contrac t
Gustoso Co purchases significant quantities of w heat on which Gust oso Co records significant
profit margins. The price of wheat is volatile and so, on 1 November 20X7, Gustoso Co entered
into o contract with o supplier to purchase 500,000 bushels of wheat in June 20X8 for $5 o
bushel. The contract c o n be settled net in cash. Gustoso Co hos entered into similar contracts in
the post and hos always token delivery of the wheat. By 31 December 20X7 the price of wheat
hod fallen. The fi nance director recorded o derivative liability of $0.5 million on t he statement of
financia l position and o loss of $0.5 million in the statement of profit or loss. Wheat prices may
rise again before June 20X8. The accountant is unsure if the current accounting treatment is
correct but f eels uncomfortable approaching the finance director again.
Required
Discuss t he ethical and accounting implications of t he above situations from the perspective of
the accountant. (18 marks)
(2 marks)
(Total= 20 marks)
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Quest ions 37
21.t Fiskerton 39 mins
SBR December 2018
The following is an extract from the statement of financial position of Fiskerton, a public limited
entit y as at 30 September 20X8.
$'000
Non-current assets 160,901
Current assets 110,318
Equity share capital ($1 each) 10,000
Other components of equity 20,151
Retained earnings 70,253
Non-current liabilities (bank loan) 50,000
Current liabilities 120,815
The bank loan has a covenant attached whereby it will become immediately repayable should the
gearing ratio (long-term debt to equit y) of Fiskerton exceed 50%. Fiskerton has a negative cash
balance as at 30 September 20X8.
Holom property
Included within the non-current asset s of Fiskerton is a property in Holom 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
adopt ed the fair value model.
The property was initially reva lued to $22 million on 31 March 20X8. Interim financial statements
had indicat ed that gearing was 51% prior to this reva luat ion. The managing director was made
aware of this breach of covenant and so instructed that the property should be revalued. The
propert y is now carried at a value of $28 million w hich 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 hig her grade of material. An independent professional valuer has estimated
the value to be no more than $22 million. The managing director has argued t hat fa ir values
should be ref erenced to an active market and is refusing to adjust the financial statemen t s, 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
whe reby t he customer pays an initial d eposit. The deposit is refundable only if Fiskerton fails to
complete the construction of t he 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 direct or 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 t he Holom property should have been accounted for and explain the
implications for the financial statement s and the debt covenant of Fiskerton. (7 marks)
(b) In accordance with IFRS 15 Revenue from Contracts with Customers, d iscuss whether
revenue arising from the sales contract should be recognised on a st age of completion
basis. ( 4 marks)
(c) Explain any ethical issues wh ich may arise for the managing director and the accountant
from each of the scenarios. (7 m a rks)
Professional marks will be awarded in (c) for the quality of the discussion. (2 marks)
(Tot al = 20 marks)

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25 Hudson 39 mins
SBR March/June 2019
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 w ith International
Financial Reporting Standards (IFRS 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 f inal expected closure in
early 20X3. As a consequence, Hudson offered its staff two settlement packages in relation to t he
curtailment of the defined benefit scheme. A basic settlement was offered for all staff who leave
before the final closure of d ivision Wye. An additional pension contribution 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 t he
remeasurement component of the defined benefit scheme. They do not wish to provide for any
other settlement contributions until employment is finally terminated, arguing that an obligation
would only arise once t he staff were made redundant. On final termination, the directors intend
to include the remaining basic settlement and the additional pension contribution w ithin the
remeasurement component. The directors and accountant are aware that the proposed
treatment does not conform to IFRS Standards. The d irectors believe t hat the proposed treatment
is justified as it will help Hudson maintain its debt covenant obligations and will therefore be in the
best int erests of their shareholders who are the primary stakeholder. The directors have indicated
that, should the accountant not agree with their accounting treatment, t hen he w ill 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 g row by 20% each year for the next four years. The market is cu rrently
depressed and sales orders are at a lower level for t he 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 settlement and
additional pension contributions as part of the remeasurement component, including an
explanation of the correct t reatment for each of these items. Also explain how any other
restructuring costs should be accounted for. (8 marks)
(b) Explain whether a d eferred t ax asset can be recognised in the financial statements of
Hudson in t he year ended 31 December 20X2. (5 marks)
(c) Identify any ethical issues which arise from the directors' proposed accounting treatments
and behaviour. Your answ er should also consider the im plicat ions for the accountant
arising from the directors' behaviour. (5 marks)
Professional marks will be awarded in (c) for the quality of the d iscussion. (2 marks)
(Total= 20 marks)
0 BPP
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Questions 39
26 Stent 39 mins
September/ December 2019
Backg round
Stent Co is a consumer electronics company which has faced a challenging yea r due to
increased competition. Stent Co has a year end of 30 September 20X9 and the unaudited draf t
financial statements report an operating loss. In addition to this, debt covenant limit s based on
gearing are close to being b reac hed and the company is approaching its overdraft limit.
Cash adva nce 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 t he $3 million w ill be repaid to Budster Co in four months'
time. The finance director a rg ues 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 Bu dster Co to place
orders with Stent Co. ( 4 marks)
Preference shares
On 1 October 20X8, the C EO 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 ord inary shares in two years'
t ime, or redeemed at par on the same dat e, 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 va lue 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 t he current and the previous two years. The fina nce director has asked the accountant
to inc lude the deferred tax asset in full. He has suggested t his on the basis that Stent Co w ill
return to profitability once its funding issues a re resolved. (3 marks)
Required
(a) Discuss appropriate accounting t reatments wh ich Stent Co should adopt for all issues
identified above and their impact upon gearing.
Note: The mark allocation is shown against each issue above.

(b) The accountant has been in her position for only a few months and the finance d irector has
recently commented that 'all these accounting treatment s m ust be made exactly as I have
suggest ed to ensure the growth of the business and the security of all our jobs'. Both
finance director and accountant are ACCA q ualified accountants.
Required
Discuss the ethical issues arising from the scenario, includ ing any actions which t he
accountant should take to resolve the issues. (7 m arks)
(2 marks)
(Total = 20 marks)
ltO Strategic Business Reporting (SBR) @BPP LEAR\,NC:

IMlllA
27 Janne '+9 mins
Part (a) a dapted from P2 June 2013
Janne is a listed rea l estate company which specialises mainly in industrial property. Invest ment
properties constitute more than 60% of its total assets.
(a) Janne measures its industrial investmen t property using the fair value model, and fair value
is measured using 'new-build va lue less obsolescence'. Valuations are conducted by a
member of the board of directors. In order to determine the obsolescence, the board
member takes account of the age of the property and t he nature of its use. According to
the board, this method of calculation is complex but gives a very precise resu lt, which is
accepted by the industry. There are sales values for similar properties in similar locations
available as well as market rent data per square metre for similar industrial buildings.
Required
(i) Discuss whether the above valuation technique is appropriat e, making reference to
the principles of relevant IFRSs. (5 marks)
(ii) Discuss Janne's selection of fair value as a measurement basis with reference to the
Conceptual Framework for Financial Reporting. ( 4 marks)
(b) Janne has received criticism that its annual report is too detailed, and therefore it is
difficult t o understand and analyse. In response to the criticism, the managing director
has proposed a reduction in disclosures provided in the annual report. Th is includes, but
is not limited to, reducing the accounting policies note, and removing the related party
transactions note, which he does not consider important as a ll transactions a re at arm's
length. The managing direct or has recommended that all disclosures that appear irrelevant
should be removed.
The finance director has vigorously defended t he annual report, stating that a ll disclosures
made are required by IFRSs, even if some of them appear irrelevant. He has confirmed this
by using a 'disclosure checklist' provided by a reputable accountancy firm. He is extremely
nervous t hat t he changes proposed risk non-compliance with standards and would not
improve the relevance or usefulness of the report for investors.
Required
Discuss the implications of t he above in relation to Janne's annual report and it s usefulness
to investors, w ith reference to IFRS Practice Statement 2 Making Materiality Judgements.
(8 marks)
(c) The managing director has also proposed to report a new performance measure 'adjusted
net asset value per share', which is defined as net assets calculated in accordance with
IFRS, adjusted for various items and then d ivided by the total number of shares. This would
be present ed instead of earnings per share as the managing director believes it is more
relevant to investors. This performance measure is disclosed by several companies in the
same industry as Janne.
Required
Discuss the benefit s and drawbacks to investors of Janne's plan to disclose 'adjusted net
asset value per share' instead of earnings per share. (8 m arks)
(Total = 25 m arks)
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28 SunChem '+9 mins
P2 Septe mber/ Decembe r 2015 (a mended )
(a) SunChem trades in the chemical industry. The entity operates one large development and
production facility . It has entered into an agreement with a separate entity, Jomaster,
under which SunChem will acquire a licence to use Jomast er's technology to manufacture
a chem ica l compound, Volut. The technology has a fair va lue of $4 million. SunChem
connot use the technology for manufacturing any other compound than Volut. SunChem
has not concluded the amount of economic benefits that are likely to flow from Volut, but
will use Jomaster's t echnology for a period of t hree years. SunChem will have to keep
updating the technology in accordance with Jomaster's requirements. The agreement
stipulates that SunChem will make a non-refundable payment of $4 million to Jomaster
to acquire the licence to use Jomaster's technology.
SunChem is also interested in another compound, Yacton, which is being developed by

Jomaster. The compound is in the second phase of development. The intellectual property
of compound Yacton has been transferred to a newly formed shell company, Conew,
which has no employees. The compound is t he only asset of Conew. SunChem is intending
to acquire a 65% interest in Conew, which w ill give it control over the entity and the
compound. SunChem will provide the necessary resources to develop Yacton.
Required
Discuss how the above should be dealt with in the financial statements of SunChem under
IFRS Standards. (10 marks)
(b) At 30 November 20X6, three people own the shares of SunChem. The finance director owns
60%, and the operations director owns 30%. The third owner is a passive investor who does
not help manage the entity. All ordinary shares carry equal voting rights. The husband of
the finance director is t he sales director of SunChem. Their son is currently undertaking an
internship with SunChem and receives a salary of $30,000 per annum, wh ich is normal
compensation for the role. Recentl y, SunChem sold an almost fully depreciated laptop
computer to t he finance director's son at the going market rate for a laptop of similar make
and age.
The finance director and sales d irector have together set up an investment company,
Baleel. They jointly own Baleel and their shares in Baleel w ill event ually be transferred to
their son when he has finished his internship with SunChem.
In addition, on 1 June 20X6 SunChem entered into a five- year maintenance contract with
Ocean. Ocean is a new company which is owned and managed by the w ife of the
operations director. Although the cont ract w ith Ocean was more expensive t han similar
contracts, the board considered that Ocean would provide better service than other
companies.
The finance director is of t he opinion t hat none of the above should be d isclosed in the
financial statements. She believes that it is not relevant to the passive investor, and as she
and the operations director are the other two shareholders, they a lready have all the
information they need.
The finance director has heard that that the IASB has issued a new practice statement on
materiality. She has not read the practice statement as she doesn't understand what va lue
it can add g iven that materiality is not a new issue in financial reporting. However, she is
concerned that she has missed something mandatory in the practice statement.
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Required
(i) Explain ta t he finance director the reason the IASB has issued IFRS Practice
Stat ement 2 Making Materiality Judgements, a brief summary of the key points
contained within it and whether it will give rise to any mandat ory requirements.
( 4 marks)
(ii) Advise the finance d irector on the identification of relat ed parties for the year ending
30 November 20X6. You should refer to IFRS Standards where relevant. ( 5 marks)
(iii) Explain to the finance director why the company's passive investor may be
interested in related party disclosures and comment on the finance d irector's opinion
that the information should not be d isclosed. You should refer t o IFRS Practice
Stat ement 2 Making Mat erialit y Judgements where relevant. ( 6 marks)
(Total= 25 marks)
29 Egin group lt9 mins

Part (b) adapted from ACR June 200 6
The International Accounting Stand ard s Board (IASB) hos been undertaking number of project s to
explore how disclosures in IFRS financial reporting can be improved. In 2017, the IASB issued IFRS
Practice Statement 2: Making Materiality Judgements to provide guidance on the application of
materiality to financial st atements and in 2018 the IASB amended the definition of materiality to
refer to the obscuring of information and change the threshold for mat eriality influencing users.
Materiality is a matter which has been debated extensively in t he context of many forms of
reporting, including t he International Integrated Reporting Framework. There are difficulties in
app lying t he concept of materiality in p ractice when p reparing t he financial statements a nd it is
t hought that these d ifficu lties contribute t o a disclosure problem, namely, that there is too much
irre levant information in financial statements w hich often makes it difficult to focus on the
relevant information.
Required
(a) (i) Discuss the definition of materiality, how the application of t he concep t of
materiality hos led to concerns regarding the clarity and understandability of
financia l st atements a nd briefly discuss t he guidance issued in IFRS Practice
Statement 2: Making Materiality Judgements t o address these issues. (6 marks)
(ii) Discuss how t he concept of materiality would be used in applying the Int ernational
Int egrated Reporting Framework. ( 4 marks)
(b) On 1 June 20X5, Egin, a public limited company, was formed out of the reorganisation of
a g roup of compan ies which undertake transactions with each other at normal market
prices. Egin's directors are reluctant to disclose related party information as they feel tha t
such transactions are a normal feature of b usiness and need not be disclosed.
Under the new group structure, Egin owns 80% of Briers, 60% of Daye, and 30% of Eye.
Egin hos control over Briers and Daye and exercises significant influence over Eye. The
directors of Egin ore a lso directors of Briers and Daye but only one director of Egin sits on
the management board of Eye. The management board of Eye comprises six directors.
Originally t he group comprised five companies but the fifth company, Tong, which was a
70% subsidiar y of Egin, was sold on 31 January 20X6. There were no transactions between
Tang and the Egin Group during t he year to 31 Moy 20X6. 30% of the shares of Egin are
owned by another company, Atomic, which exerts significant influence over Egin. The
remaining 40% of t he shares of Daye ore owned by Spade, which exerts significant
influence over Daye.
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Questions lt3
Atomic
- - - - - 30%
Eg in ...--------
80% 60% 30%

Briars Doye Eye
Spade
40%
During the current financial year to 31 May 20X6, Doye has sold a significant amount of
plant a nd equipment to Spade at the normal selling price for such items. The directors of
Egin have proposed that where related party relationships are determined and sales are at
normal selling price, any disclosures will state that prices charged to related parties a re
made on an arm's length basis.
One of the d irectors of Bria rs, who is not on the management board of Egin, owns the
whole of the shar e capital of a company, Blue, that sells goods at market price to Briars.
The direct or is in charge of the production a t Briars and also act s as a consult ant to the
management board of the group.
Required
(i) Discuss why it is important to d isclose related party transactions, making reference
to the principles in IFRS Practice Statement 2 Making Materiality Judgements in your
answer. (6 marks)
(ii) Describe the nature of any related party relationships and transactions which exist
for t he Egin Group , commenting on whether transactions should be described as
being at 'arm's length '. (9 marks)
(Tota l = 25 marks)
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30 Alexandra '+9 mins
Parts (a) and (c) adapted from P2 June 20 12, par t (b) a dapted from P2 December 2 011
Alexand ra is a listed group which designs and manages business solutions and infrastructures.
(a) In November 20X0, Alexandra defaulted on an interest payment on an issued bond loan of
$100 million repayable in 20X5. The loan agreement stipulates that such default leads t o
an obligation to repay t he whole of the loan immediately, including accrued interest and
expenses. The bondholders, however, issued a waiver postponing the interest payment until
31 May 20X1. On 17 May 20X1, Alexandra requested a meeting of the bondholders and
agreed a further waiver of the interest payment to 5 July 20X1, when Alexandra was
confident it could make t he payments. Alexandra classified the loan as long-term debt in
its statement of financial position at 30 April 20X1 on the basis that the loan was not in
default ot the end of t he reporting period as the bondholders had issued waivers and hod
not sought redemption.
Required
(i) Explain, with reference to the principles of relevant IFRSs, the appropriate
accounting treatment for the above issue in Alexandra's financia l statements for the
year ended 30 April 20X1. (6 marks)
(ii) Discuss, in respect of the above issue, any potent ial impact on the analysis of
Alexandra's financial statements by its investors. (3 marks)
(b) Included in the financial assets of Alexandra is a ten- year 7% loan provided to a company
external to the group. Alexandra's business model is to collect the contractual cash flows
associated t he loan. Alexandra has adopted IFRS 9 Financial Instrument s and the loan
asset is currently held at an amortised cost of $31 million. This is net of an allowance at
30 April 20X0 for 12 mont hs' expected credit losses of $2 million. At 30 April 20X1, the
borrower was in financial difficulties and its credit rating had been downgraded. Alexandra
has assessed that t here is now a significant increase in credit risk since init ial recognition,
however, the asset is not considered to be credit - impaired . Lifetime expected credi t losses
are $9.9 million. Rather than recognise lifetime expected credit losses, Alexandra now
wishes to measure the loan a t fair value using current market int erest rates. Current market
interest rates are 8%.
Required
Explain, w ith suitable workings, how the loan should be accounted for in Alexandra's
financial statements for t he year ended 30 April 20X1. ( 5 marks)
(c) Alexandra has a two-tier board structure consisting of a management and a supervisory
board. Alexandra remunerates its board members as follows:
• Annual base salary

• Variable annual compensation (bonus)
• Share options
In the consolidated financial statements, w ithin the related parties note under IAS 24
Related Party Disclosures, Alexandra disclosed the total remuneration paid to directors and
a total for each of these boards. No further breakdown of the remuneration was provided.
The management board comprises both t he executive and non-executive d irectors. The
remuneration of the non-executive directors, however, was not included in the key
management disclosures as the board believed t he amounts involved to be immaterial.
Some members of t he supervisor y and management boards are of a particular nationality.
Alexandra was of the opinion that in that jurisdiction, it is not acceptable to provide
information about remuneration that could be t raced back to individuals. Consequently,
the finance director of Alexandra explained that the board had instructed her to provide
the related party information in the annual report in a n ambiguou s way to prevent users of
the financial statements from tracing remuneration information back to specific
individuals.
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Required
Explain how the transactions above should be dealt w ith in Alexandra's financial
statements, discussing the application of IFRS Practice Statement 2 Making Materiality
Judgements and the reasons why this treatment is important to investors. (11 marks)
(Total= 25 marks)
31 Yanong lt9 mins

Part (a) adapted from P2 June 2015
The directors of Yanong, a public limited company, would like advice, w ith reference to IFRS 13
Fair Value Measurement, on the transactions detailed in Exhibits 1 to 3 below. The directors would
also like advice regarding the exposure draft detailed in Exhibit 4 below.
Exhibit 1 - Agricu ltural vehicles
Yanong owns several farms and also owns a division which sells agricultural vehicles. It is
considering selling this agricultural reta il division and wishes to measure the fair value of the
inventory of vehicles for the purpose of the sale. Three markets currently exist for the vehicles.
Yanong has transacted regularly in all three markets. At 30 April 20X5, Yanong 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:
Historical Total volume Transport

Sales price volume - of vehicles Transaction costs to the
- per vehicles sold sold in costs - per market -
Market vehicle by Yanong market vehicle per vehicle
s s s
Europe 40,000 6,000 150,000 500 400
Asia 38,000 2,500 750,000 400 700
Africa 34,000 1,500 100,000 300 600
The directors of Yanong w ish 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 Yanong 's product.
Exhibit 2 - Biological asset
The company uses quarterly reporting for its farms as they grow short- lived crops such as maize.
Yanong planted the maize fields during the quarter to 31 October 20X4 at an operat ing cost of
$10 million. The fields originally cost $20 million. There is no active market for partly grown fields
of maize and therefore the directors of Yanong propose to use a d iscoun ted cash flow method to
value the maize fields. As at 31 October 20X4, the following were the cash flow projections
relating to the maize fields:
3 months to 3 months to
31 January 30 April
20X5 20X5 Total
Sm Sm Sm
Cash inflows 80 80
Cash outflows (8) (19) (27)
Notional rental charge for land usage _J!) _Q) _g)
Net cash flows J2) 60 51
In the three months to 31 January 20X5, the actual operating costs amounted to $8 million and
at that date Yanong revised its futu re projections for the cash inflows to $76 million for the three
months to April 20X5. At the point of harvest at 31 March 20X5, the maize was worth $82 million
and it was sold for $84 million (net of costs to sell) on 15 April 20X5. In t he measurement of fair
value of the maize, Yanong includes a notional cash flow expense for the 'rent' of t he land where
it is self-owned.
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Exhibit 3 - Farmland
Yonong uses the revaluation model for its non- current assets. Yonong hos several plots of
farmland which ore unproductive. The company feels that the land would hove more value if it
were used for residential purposes. There ore severa l potential purchasers for the land but
planning permission hos 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 hos recently indicated that more
agricultura l land should be used for residential purposes.
The directors of Yonong hove also been approached to sell the land for commercial development
at a higher price than that for residential purposes.
Exhibit 4 - IASB Exposure draft
The finance d irector at Yanong is aware that the International Accounting Standards Board (IASB)
hos issued on exposure draft which includes proposals relating to presentation of the statement
of profit or loss. She hasn't yet looked at the details of the exposure draft but hos heard that all
companies will now hove to change their presentation of this statement. The finance director is
unsure what benefits this would provide.
Required
(a) (i) Advise the directors of Yanong as to whet her their proposed valuation for the
agricultural vehicles would be acceptable under IFRS 13 Fair Value Measurement.
(6 marks)
(ii) Advise the direct ors of Yanong as to how they should have accounted for the
biological asset at 31 October 20X4, 31 January 20X5, 31 Morch 20X5 and when
the produce was sold. (7 marks)
Note. Assume a discount rote of 2% per quarter as follows:
Factor
Period 1 0.980
Period 2 0.961
(iii) Advise the directors of Yanong as to how to measure the fair value of the farmland in
its financial statements. (5 marks)
Note. Ignore any deferred tax implications of the transactions in Exhibits 1 - 3.

(b) Respond to the finance director by explaining the proposals relating specificall y to the
presentation of the statement of profit or loss in ED 2019/7 Genera/ Presentation and
Disclosures and the reasons the IASB felt these proposals were necessary. (7 marks)
(Total = 25 marks)
32Avco '+9 mins

Port (a) adopted from P2 June 2014
(a) The directors of Avco, a public limited companl:J, ore reviewing the financial statement s of
two entities which are acquisition targets, Cavor ond Lidan. They have asked for
cla rification on the treatment of the following financial instruments with in the financial
statements of the entities.
Covar hos two classes of shores: A and B shores. A shares ore Cover's ordinary shores and
are correctly classed as equity. 8 shares are not mandatorily redeemable shares but contain
a call option allowing Cavor to repurchase them. Dividends ore payable on the B shares if,
and only if, dividends hove been paid on the A ordinary shores. The t erms of the B shores
ore such t hat dividends ore payable at a rote equal to that of the A ordinary shares.
Lidan has in issue two classes of shares: A shares and B shares. A shares are correctly
classified as equity. Two million B shares of nominal value of $1 each ore in issue. The
B shores ore redeemable in two years' time. Lidon has a choice as to the method of
redemption of the B shares. It may either redeem the B shares for cash at their nominal
value or it may issue one million A shares in settlement. A shores are cu rrently valued at $10
per shore. The lowest price for Lidan's A shares since its formation has been $5 per shore.
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Required
Discuss whether the above arrangements regard ing the B shares of each of Cavor and
Lidan should be treated as liabilities or equity in the financial statements of the respective
issuing compan ies. Your a nswer should refer to relevant IFRS Standards. (B marks)
(b) At it s recent general meeting, a shareholder asked the board to explain how it decides
whether certain financial instruments are classified as equity when other seemingly similar
financial instrument s are classified as debt. The shareholder suggested t hat the dir ectors
do not underst and the impact of t he classification on investors and their analysis of the
financial statements.
Required
(i) Explain the key classification dif ferences between debt and equity under IFRS
Standards. (8 marks)
(ii) Explain why it is important for entities to understand the impact of the classification
of a financial instrument as debt o r equity in the fina ncial statements. ( 4 marks)
(c) The finance director of Avco has suggested that it invests in cryptocurrencies as part of its
investment strat egy. The board understands w hat cryptocurrencies are, but has asked the
finance director to explain how they would be presented in the financial statements. The
finance director has stated that they should be accounted for as financial assets but is
unsure if this is consistent with IFRS Standards and the Conceptual Framework.
Required
Explain to the directors w hether the cryptocurrencies should be accounted for as fina ncial
assets with reference to relevant IFRS Sta ndards and the Conceptual Framework.
(5 marks)
(Total = 2 5 m arks)
33 Calendar Co '+9 mins

SBR Specimen exam 2
Calendar Co has a reporting date of 31 December 20X7. It prepares its financial statement s in
accordance wit h International Financial Reporting Standards. Calendar Co develops biotech
products for pharmaceutical companies. These pharmaceutical companies then manufacture
and sell the p roducts. Calendar Co receives stage payments during product development and a
share of royalties when the final product is sold to consumers. A new accountant has recently
joined Calendar Co's finance department and has raised a number of queries.
The following exhibits provide information that is relevant to the question.
Exhibit 1 - Develo p ment p roj ect
During 20X6 Calendar Co acquired a development project through a business combination a nd

recognised it as an intangible asset. The commercia l director decided that the return made from
the completion of this specific development project would be sub-optimal. As such, in October
20X7, the project was sold to a competitor. The gain arising on derecognition of the intang ible
asset was p resented as revenue in the financial statements for the year ended 31 December 20X7
on the grounds that development of new products is one of Calendar Co's ordinary activities.
Calendar Co has made two similar sales of development projects in the past, but none since
20X0.
Exhibit 2 - Air craft Contract
While searching for some invoices, the accountant found a contract which Calendar Co had
entered into on 1 January 20X7 with Diary Co, another entity. The contract allows Calendar Co
t o use a specific aircraft owned by Diary Co for a period of three years. Calendar Co is required
to make annual payments.
lt8 Strat egic Business Reporting (SBR) @BPP LEAR\,NC:

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On 1 January 20X7, costs were incurred negotiating the contract . The first annual payment was
mode on 31 December 20X7. Both of these amounts hove been expensed to the statement of
profit or loss.
There ore contractual restrictions concerning where the aircraft con fly. Subject to those
restrictions, Calendar Co determines where and when the aircraft will fly, and the cargo and
passengers which will be transported.
Diary Co is permitted to substitute the aircraft at a ny t ime during the three-year period for on
alternative model and must replace the aircraft if it is not working. Any substitut e aircraft must
meet strict interior and exterior specifications outlined in the contract. There ore significant costs
involved in outfitting an aircraft to meet Calendar Co's specifications.
Exhibit 3 - Accountant's recommendations
The new accountant hos been reviewing Calendar Co's financial reporting processes. She hos
recommended t he following:
• All purchases of property, plant and equipment below $500 should be w ritten off to profit
or loss. The accountant believes that this will significantly reduce the time and cost involved
in maintaining detailed financial records and producing the annua l financial statements.
• A checklist should be used when finalising the annual financial stat ements to ensure that all
disclosure notes required by specific IFRS Standards ore included.
Required
(a) The accountant requires advice about whet her the accounting treatment of the sale of the
development project is correct. (6 marks)
(b) The accou ntant requires advice as to the correct accounting treatment of t he aircraft
contract. (9 marks)
(c) W ith reference to the concept of materiality, discuss t he acceptability of the accountant's
recommendations.
Note. Your answer should refer t o IFRS Practice Statement 2: Making Materiality
Judgements. (10 marks)
(Total = 25 marks)
3lt Lupin lt9 mins

Part (a) adapted from ACR December 2005
(a) The directors of Lupin, a public limited company, want advice on how the provision for
deferred taxation should be calculated for t he year end ed 31 October 20X5 in the following
situations under IAS 12 Income Taxes:
(i) On 1 November 20X3, the company had granted ten million shore options worth
$40 million subject to a two-year vesting period. Local tax law a llows a tax deduction
at the exercise date of the intrinsic value of the options. The intrinsic value of the ten
m illion share options at 31 Oct ober 20X4 was $16 million and at 31 October 20X5 was
$46 million. The increase in the shore price in the year to 31 October 20X5 could not
be foreseen at 31 October 20X4. The options were exercised at 31 October 20X5. The
directors are unsure how t o account for deferred taxation on th is transaction for the
years ended 31 October 20X4 and 31 October 20X5.
(ii) Lupin is leasing plant over a five-year period. A right-of-use asset was recorded at
the present value of future lease payments of $12 million at the commencement of
the lease w hich was 1 November 20X4. The right - of- use asset is depreciated on a
straight-line basis over t he five years. The annual lease payments are $3 million
payable in arrears on 31 October and the effective interest rate is 8% per annum.
The directors have not leased an asset before and are unsure as to the treatment of
leases for deferred taxation. The company can claim a tax deduction for the annual
lease payments. (You should assume that the IAS 12 recognition exemption for assets
and liabilities does not apply in t h is situation.)
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(iii) A wholly owned overseas subsidiary, Dahlia, a limited liability company, sold goods
costing $7 million to Lupin on 1 September 20X5, and these goods had not been
sold by Lupin before the year end. Lupin had paid $9 million for these goods. The
directors do not understand how this transaction should be dealt with in the financial
statements of the subsidiary and the group for t axation purposes. Dahlia pays tax
locally at 30%.
Assume a tax rate of 30%.

Required
Discuss, with suitable computations, how the situations (i) to (iii) above will impact on the
accounting for deferred tax under IAS 12 in the consolidated financial statements of Lupin.
Note. The situations in (i) to (iii) above carry equal marks. (12 m arks)
(b) At the last annual meeting, one of Lupin's shareholders raised a question regarding
deferred tax to the company's executives. The shareholder stated that he did not
understand the concept of deferred tax and did not understand why the accounting
standards make adjustments for tax that do not reflect the actual amount of tax paid. He
questioned the benefit of the tax reconciliation that is included within the disclosure note as
it is too complicated to understand.
The finance director has since suggested that the tax reconciliation could be removed on
the grounds that it is difficult to prepare and does not serve its purpose if the users cannot
understand it anyway.
Required
(i) In response to the shareholder's statement regarding the concept of deferred tax,
discuss the conceptual basis for the recognition of deferred taxation using the
temporary difference approach to deferred taxation. (5 m a rks)
(ii) Discuss the view of the finance director and the shareholder that the tax
reconciliation is difficult to understand and comment on the finance director's
suggestion that it should not be disclosed. You should refer t o the requirements of
IFRS Standards, the Conceptual Framework and IFRS Practice Statement 2, Making
Materiality Judgements where relevant. ( 4 marks)
(c) Lupin has recently incurred a large item of expenditure which is not expected to recur
next year. The finance director plans to present th is as a separate line item after profit
after tax from ordinary activities in the statement of profit of loss, with the heading
'unusual expenditure'. The finance director believes th is will provide useful information for
Lupin's investors and that it is acceptable given the IASB's recent proposals to replace IAS 1
Presentation of Financial Statements.
Required
Discuss whether the finance director's planned presentation of this expenditure is permitted
under IFRS Standards, and briefly explain the proposals relating to unusual expenditure in
ED 2019/7 General Presentation and Disclosures. (4 ma rks)
(Total= 25 m arks)
35 Lizzer '+9 mins

Adapted from P2 June 2013
(a) The directors of Lizzer have decided not to disclose any information concerning the two
matters below.
(i) Lizzer is a debt issuer whose business is the securitisation of a portfolio of underlying
investments and financing their purchase through the issuing of listed , limited
recourse debt. The repayment of the debt is dependent upon the performance of the
underlying investments. Debt-holders bear the ultimate risks and rewards of
ownership of the underlying investments. Given the d ebt specific nature of the
underlying investments, the risk profile of individual d ebt may differ.

IMlllA
Lizzer does not consider its debt-holders os being amongst the primar!:J users of its
financial statements and, accordingl!:J, does not w ish to disclose the debt-holders'
exposure to risks in the financial statement s (as d istinct from the risks faced b!:J
the compan!:J'S shareholders) in accordance w ith IFRS 7 Financial Instruments:
Disclosures.
Required
Discuss the reasons wh!:J the debt-holders of Lizzer ma!:J be interested in its financial
statements and advise the directors whether their decision not to disclose t he
debt- holders' exposure to risks is consistent w ith the principles of IFRS 7. (6 ma rks)
(ii) At t he date of the financial statements, 31 Januar!:J 20X3, Lizzer's liquidit!:J position
was quite poor, such that the d irectors described it as 'unsatisfactor!:J' in the
management report. During the first quarter of 20X3, the situation worsened w it h
the result that Lizzer was in breach of certain loan covenants at 31 March 20X3. The
financia l st atements were authorised for issue at the end of April 20X3. The directors'
and audit or's reports both emphasised the considerable risk of not being able to
continue as a going concern.
The notes to the financial statements indicated that there was 'ample' comp liance
with all loan covenants as at t he date of t he financial statements. No additional
information about the loan covenants was included in the financia l statements.
Lizzer had been close to breaching the loan covenants in respect of free cash flows
and equit!:J ratio requirements at 31 Januar!:J 20X3.
The directors of Lizzer felt that, given the existing information in the financial
statements, an!:J further d isclosure would be excessive and confusing to users.
Required
Discuss, from the perspective of the investors and potential investors of Lizzer, the
decision of the directors not to include further disclosure about the breach of loan
covenants. (6 ma rks)
(b) The directors of Lizzer have read various reports about excessive disclosure in annua l
reports. Same reports suggested t hat excessive disclosure is burdensome and can
overwhelm users. However, other reports argued that there is no such thing as t oo much
'useful' information for users.
Required
(i) Discuss wh!:J it is important to ensure t he optimal level of disclosure in annua l reports,
describing the reasons wh!:J users of annual reports ma!:J have found disclosure to be
excessive in recent !:Jears and the actions taken b!:J the International Accounting
Standard's Board to address this issue. (9 marks)
(ii) Describe the barriers which ma!:J exist to reducing excessive disclosure in annual
reports. (4 ma rks)
(Tot al= 25 m arks)
36 Digiwire 1+9 mins
SBR September/December 2019
Backgro und
Digiw ire Co has developed a new business model whereb!:J it sells music licences to other
companies which then deliver digital music to consumers.
Revenue: sale of three-!:J ea r licence

Digiwire Co has agreed to sell Clamusic Co, an unlisted technolog!:J start-up compan!:J, a three-
!:Jear licence to sell Dig iwire Co's catalogue of classical music to the public. This cata logue
contains a large selection of classical music which Digiwire Co will regularl!:J update over th e
three-!:Jear period.
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Questions 51
As revenue for the three-year licence, Clamusic Co has issued shares t o Digiwire Co equivalent to
a 7% shareholding. Voting rights are attached t o 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 revenue sales of Clamusic Co as 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 o market- based opprooch. The voluotion wos based on t he share price of o controlling
interest in a comparable list ed 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 valuat ion report had been produced b y 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 w ith TechGame Co to develop a new music platform. On
31 December 20X6, t he 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, c ryptocurrency with a ca rrying amount of $3 m illion (fair value of $4 m illion)
and an office building w ith a carrying amount of $6 million (fair value of $10 million). The
c ryptocurrency has been recorded at cost in Digiwire Co's financia l statements. TechGame Co
has contributed the t echnology and marketing expertise. The board of FourDee Co w ill comprise
directors appointed equally by Digiwire Co and TechGame Co. Decisions are made by a
unanimous vote.
Pension plan
Digiwire Co provides a pension pla n for its employees. From 1 September 20X6, Digiwire Co
decided to c urtail the plan a nd to limit the number of participants. The employees were paid
compensation from the plan assets a nd some received termination benefits due to redundancy.
Due to the curtailment, the current monthly service cost changed from $9 million to $6 million.
The relevant financial information relating to the p ion is as follows:
Dote Net defined liability Discount rote

Sm %
1 January 20X6 30 3
1 September 20X6 36 3.5
31 December 20X6 39 3.7
Required
(a) 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 yea r ended
31 December 20X6; and
(ii) royalties which Clo music Co has agreed t o pay as revenue for the sole of the three-
y ear licence in the financial statements for the yea r ended 31 December 20X6. Your
a nswer to (a)(ii) should d emonstrate how it is supported by the revised Conceptual
Framework for Financial Reporting (2018). (9 marks)
(b) Based on International Fina ncial Reporting Standards (IFRS), advise the d irectors on the
following:
(i) the c lassification of the investmen t which Digiwire Co has in FourDee Co;
(ii) t he derecognition of the assets exchanged for the investment in FourDee Co and any
resu lting gain/ loss on disposal in the financial statements of Digiwire Co at
31 December 20X6; a nd

IMlllA
(iii) whether t he cryptocurrency should be classified as a financial asset or an in tangible
asset. Your answer should a lso briefly consider whether fair va lue movements on the
cryptocurrency should be recorded in profit or loss. (9 marks)
(c) (i) Explain the reasons behind t he issue of the a mendment to IAS 19 Plan Amendment,
Curtailment or Settlement and d iscuss w h y t he changes to t he calculation of net
int erest and current service cost were considered necessary. (3 marks)
(ii) Advise the directors of Digiwire Co on the impact of the amendment to IAS 19 on the
calculation of net interest a nd current service cost for t he year ended
31 December 20X6. (4 marks)
(Total = 25 marks)
37 Moorland 1+9 mins

(a) Management commentary is a narrative report that relates to financial statemen t s and is
published voluntarily by companies in their annual report.
Required
Describe the principles and o bjectives of mana gement commentary with reference to IFRS
Practice Statement 1 Management Commentary and discuss whether the commentary
should be made mandatory or whether directors should be free to use their judgement as
to what should be included in such a commentary. (11 marks)
(b) Moorland is a listed entity with several subsidia ries. Tybull is Moorland's only overseas
subsidiar!:I and Moorland has always d isclosed Tybull as an operating segment within t he
conso lidated financial statements. The directors of Moorland are considering how the
company identifies its operating segments a nd the rationale for disclosing segmental
information. In particular, they are int erested in whether it is possible to reclassif y their
operating segments and whether this may impact on t he usefulness of segmental reporting
for t he business. There have been no internal organisational changes at Moorland for the
past five years.
The C EO of Moorland has proposed to r eport 'underlying earnings per share' in its a nnual
report, calculated by adjusting earnings for various items that are considered t o be
non- recurring, divided by the weight ed average number of ordinary shares outstanding
during t he period. A similar performance measure is disclosed by several companies in the
same industry as Moorland. The C EO believes that presenting underlying earnings per
share will aid investors in their analysis of Moorland's performance, and t herefore it should
be presented prominently. In calculating underlying earnings per share, one item the CEO
wishes to exclude from earnings is a large impairment loss relating to the goodwill of a
subsidiar!:I. He believes that this cost can be excluded as it is unlikely to reoccur.
Required
(i) Advise the directors as to how operating segments are identified and whether they
can be reclassified. Include in your discussion whether Tybull should be treated as a
separate segment and how it ma!:I impact on the usefulness of the information if its
results were not separately disclosed in accordance with IFRS 8 Operating
Segments. (8 ma rks)
(ii) Discuss the usefulness to investors of Moorland's plan to report underlying earnings
per share, and suggest ways in which the directors could improve its usefulness to
investors. (6 marks)
(Total = 2 5 marks)
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Questions 53
38Toobasco '+9 mins
SBR September 2018
(a) Toobasco is 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 IFRS. 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, and is based on operating profit before the impact of
extraordinary items. Extraord inary 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 generated from operations 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 hove given no detail of its
ca lculation. They hove 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 in to 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 t he financia l year end, the directors disclosed t hat 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 information under IFRS
and there was no reconciliation to any measure under IFRSs. 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 in calculating the
remaining APMs.
Required
Advise the directors whether the above APMs would achieve fair presentation in the
financial stat ements. (10 marks)
(b) Daveed is a car retailer who leases vehicles to customers under operating leases and often
sells the cars to third parties w hen the lease ends.
Net cash generated from operating activities for the year ended 31 August 20X8 fo r the
Daveed Group is as follows:
Year ended 31 August 20X8 Sm

Cash generated from operating activities 345
Income taxes paid (21)
Pension deficit payments (33)
Interest paid (25)
Associate share of profits 12
Net cash generated from operating activities 278
Net cash flows generated from investing activities included interest received of $10 million
and net capital expenditure of $46 million excluding the business acquisition at (iii) below.
There were also some errors in the presentation of the statement of cash flows which could
have an impact on t he calculation of net cash generated from operating activities.
51+ Strat egic Business Reporting (SBR) @BPP LEARhlNG

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The directors have provided the following information as regards any potential errors:
(i) Cars a re t reated as property, plant and equipment w hen held under operating leases
and when t hey become available for sale, they are transferred to inventory at their
carrying amount. In its statement of cash flows for the y ear ended 31 August 20X8,
cash flows from investing activities included cash inflows relating to the d isposal of
ca rs ($30 million).
(ii) On 1 September 20X7, Daveed purchased a 25% interest in an associate for cash.
The associate reported a profit after t ax of $16 million and paid a d ividend of
$4 million out of t hese profits in the y ear ended 31 August 20X8. The d irectors had
incorrectly included a figure of $12 million in cash generated from operating
activities as the cash generated from t he investment in the associat e. The associate
was correctly recorded a t $23 million in the statement of financial position at
31 August 20X8 a nd profit for the year of $4 million was included in the statement
of profit or loss.
(iii) Daveed also acquired a digital mapping business during the year ended 31 August 20X8.
The statement of cash flows showed a loss of $28 million in net cash inflow
generated from operating activities as the effect of changes in foreign exchange
rates arising on the retranslation of this overseas subsidiary. The assets and liabilit ies
of t he acquired subsidiary had been correctly included in t he calculation of the cash
movement during t he !:Jear.
(iv) During the year to 31 August 20X8, Daveed made exceptional contributions to the
pension plan assets of $33 million but the statement of cash flows had not recorded
the cash tax benefit of $6 m illion .
(v) Additionally, Daveed had capitalised the int erest paid of $25 million into property,
plant and equipment ($18 million) and inventory ($7 million).
(vi) Daveed has defined operating free cash flow as net cash generated by operating
activities as adjusted for net capital expenditure, purchase of associate and
dividends received, interest received and paid. Any exceptional items should also be
excluded from the ca lculation of free cash flow.
Required
Prepare:
(i) An adjusted statement of net cash generated from operating activities to correct any
errors above; (4 marks)
(ii) A reconciliation from net cash generated by operating activit ies to operating free
cash flow (as described in note (vi) above); and (4 marks)
(iii) An explanation of the adjustments made in parts (i) and (ii) above. (5 ma rks)
Professional marks will be awarded in Part (b) for clarity and qualit y of discussion.
(2 marks)
(Total= 25 m arks)
39 Tufnell 1+9 mins

Tufnel l, a public limited company, operates in t he fashion sector and has undertaken a group
re-organisation during the current financial yea r to 30 September 20X7. As a resu lt, the following
events occurred.
(a) (i) Tufnell identified two manufacturing units, North and South, which it had decided to
dispose of in a single t ransact ion. These units comprised non-current assets only.
One of the unit s, North, had been impaired prior t o 30 September 20X7 and it had
been written down to its recoverable amount of $35 million. The c riteria in IFRS 5
Non-current Assets Held fo r Sole and Discontinued Operations, for classification as
held for sale had been met for North a nd South at 30 September 20X7. The following
information related to the assets of the cash-generating units at 30 September
20X7:
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Questions 55
Fair value less
costs of disposal
Depreciated and recoverable Carrying amount
historical cost amount under IFRS 5
Sm Sm Sm
North 50 35 35
South 70 90 70
120 125 105
The foir value less costs of disposal had risen at the year end to $40 million for North
and $95 million for South. The increase in the foir value less costs of disposal had not
been taken into account by Tuf nell. (7 marks)
(ii) As a consequence of the re-organisation, and a change in government legislation,

the tax aut horities have a llowed a revaluation of the non-current assets of the
holding company for tax purposes to market value at 30 September 20X7. There has
been no change in the carrying amounts of the non-current assets in the financial
statements. The tax base and the carrying amounts after the revaluation are as
fol lows:
Tax base at Tax base at

Carrying 30 September 30 September
amount at 20X7 20X7
30 September after before
20X7 r evaluat ion revalu ation
Sm Sm Sm
Property 50 65 48
Vehicles 30 35 28
O ther taxable temporary d ifferences amounted to $5 million at 30 September 20X7.
Assume income tax is paid at 30%. The deferred tax provision at 30 September 20X7
had been calculated using the tax values before revaluation. (6 ma rks)
(iii) A subsidiary company had purchased computerised equipment for $4 million on

30 September 20X6 to improve t h e manufoct uring process. Whilst re-organising the
group, Tufnell had discovered that the manufocturer of the comput erised equipment
was now selling the same system for $2.5 million. The projected cash flows from the
equipment are:
Cash flows
s
Year ended 30 September 20X8 1.3
20X9 2.2
20YO 2.3
The residual value of the equipment is assumed to be zero. The company uses a
discount rate of 10%. The d irectors think that the foir value less costs of disposal
of the equipment is $2 million. The directors of Tufnell propose t o write down the
non-current asset to the new selling price of $2.5 million. The company 's policy is to
depreciate its computer equipment by 25% per annum on the straight line basis.
(5 marks)
(iv) The directors are worried about th e impa ct that the above changes will have o n the
value of its non- current assets and it s key performance indicator which is 'Return on
Capital Employed' (ROCE). ROCE is defined as net profit before interest a nd tax
divided by share ca pital, other reserves and retained earnings. The directors have
ca lc ulated ROCE as $30 million divided by $220 million, ie 13.6% before any
adjustments required by the above. (2 marks)
56 Strategic Business Reporting (SBR) @BPP LEAl~,NC

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Required
Discuss the accounting treatment of t he above t ransactions and the impact that the
resulting adjustments to the financial statements would have on ROCE.
Note. Your answer should include appropriate ca lculations where necessary and a
discussion of the accounting principles involved.
(b) The directors are considering a lternative methods for measuring the performance of it s
subsidiaries, including residual income.
Required
Explain what is meant by alternative performance measures and how residual income
could be used to measure the relative performance of each subsid iary from the point of
view of t he shareholders. (3 marks)
Professional marks will be awarded in this question for clarity and quality of t he discussion.
(2 marks)
(Total = 25 m arks)
l+O Amster 1+9 mins

P2 December 2017 (amended)
When an entity issues a fina ncial instrument, it has to determin e it s classification either as debt
or as equity. The result of the classification can have a significant effect on the entity's reported
results and financial position. An understanding of what an entity views as capital and its
strategy for capital management is important to all companies and not just banks and insurance
companies. There is diversity in practice as to what different companies see as capital and how it
is managed.
Required
(a) (i) Discuss why t he information about the capital of a company is important to
investors, setting out the nature of the published information available to investors
about a company 's capital.
Note. You r answer should briefly set out the nature of financial capital in integrated
reports. (8 marks)
(ii) Discuss the importance of the classification of equity and liabilities under IFRS
Standards, with reference to t he Conceptual Framework, and how this classification
has an impact on the information disclosed to users in the statement of profit or loss
and other comprehensive income and the st atement of financial position.
(6 marks)
(b) Amster has issued two classes of preference shares. The first class was issued at o fair
value of $50 million on 30 November 20X7. These shares give the holder the rig ht to a fixed
cumulative cash dividend of 8% per annu m of the issue price of each preferred share. The
company may pay a ll, part or none of the dividend in respect of each preference share. If
the company does not pay the dividend after six months from the due date, then the
unpaid amount carries interest at twice t he prescribed rate subject to approval of t he
management committee. The preference shares can be redeemed but only on the approval
of the management committee.
The second class of preference shares was issued at o fair value of $25 million and is a
non- redeemable preference share. The share has a discretionary annual d ividend which is
capped at a maximum amount. If the dividend is not paid, t hen no dividend is payable to
the ordinary shareholders. Amster is currently showing both classes of preference shares as
liabilities.
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Questions 57
On 1 December 20X6, Amster granted 250 cash-settled share awards ta each af its
1,500 employees on the condition that the employees remain in it s employment for the
next t hree years. Cash is payable at t he end of three years based on the share price of
the entity's shares on that date. During the year to 30 November 20X7, 65 employees left
and, at thot date, Amster estimates that an additionol 115 employees will leave during the
following two years. The share price ot 30 November 20X7 is $35 per share ond it is
anticipat ed that it will rise to $46 per share by 30 November 20X9. Amster has cha rged the
expense to profit or loss and credited equity wit h the same amount.
The capitalisation table of Amster is set out below:

Amster Group - capitalisatio n table
30 November 20X7
Sm
Long-term liabilities 81
Pension plan deficit 30
Cumulative preference shares 75
Total long-t erm liabilities 186
Shareholders' equity 150
Total group equity 160
Total capitalisation 346
Required
Discuss whether the accounting t reatment of t he above transactions is acceptable under
International Financial Reporting Standards including any adj ustment which is required to
the capitalisat ion table and the effect o n t he gearing and the return on capital employed
ratios. (9 marks)
Professional marks will be awarded in this question for clarity and quality of presentation .
(2 marks)
(Total= 2 5 marks)
1+1 Havanna 1+9 mins

Adapted fro m P2 December 2013
Havanna is seeking advice on transactions it has entered into in the year ended 30 November 20X3.
(a) Havanna owns a chain of health clubs and has entered into binding contracts with sports
organisations, wh ich earn income over given periods. The services rendered in return for
such income include access to Havanna's database of members and admission to health
clubs, including the provision of coaching and other benefits. These contracts are for
periods of between 9 and 18 months. Havanna's accounting policy for revenue recognition
is to recognise the contract income in full at the date when the contract is signed. The
rationale is that the contracts are binding and at the point of signing the cont ract, the
customer gains access to Havanna's services. The directors are reluctant to change their
accounting policy.
Required
Advise the directors, with reference to the underlying principles of IFRS 15 Revenue from
Contracts with Customers, how the revenue in relation to the contracts should be
recognised. (5 m a rks)
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(b) In May 20X3, Havanna decided to sell one of its regional business divisions through o
mixed asset and share deal. The decision to sell the division at o price of $40 million
was made public in November 20X3 and gained shareholder approval in December 20X3.
It was decided t hat the payment of an8 agreed sale price could be deferred until
30 November 20X5. It is estimated that the cost of allowing the deferred payment is
$0.5 million and that legal and other professional fees associated with the disposal will be
around $1 million. The business division was identified correctly as 'held for sale' and was
presented as a disposal group in the statement of financial position as at 30 November
20X3. At the initial classification of the division as held for sale, its net ca rry ing amount was
$90 million. In writing down the d isposal group's carrying amount, Havanna accounted for
an impairment loss of $30 million which represented the difference between t he carrying
amount and value of t he assets measured in accordance with applicable IFRS .
Required
Advise the directors how t o account for the disposal group in the financial statements for
the year ended 30 November 20X3. (5 marks)
(c) Havanna has decided to sell its main office building to a third party for $5 million and lease
it back on a ten-year lease. The current fair value of the property is $5 million and t he
carrying amount of t he asset is $4.2 million. The present va lue of t he lease payments has
been ca lculated as $3.85 million. The remaining useful life of t he building is 15 years. The
transaction constitutes a sale in accordance with IFRS 15 Revenue from Contracts with
Customers.
Havanna's CEO believes this represents a very good deal for Havanna and has told you
that the profit on d isposal of $0.8 million w ill help to ensure that the company meets the
covenants imposed by the bank in respect of Havanna's interest cover ratio.
Havanna's board of directors would like information about the effect of the introduction of
IFRS 16 l eases, particularly for its own b ank covenants, but also for investors more
generally. They have been told that IFRS 16 should be helpful for investors in their analysis
of financ ial statements but are unsure as to why this is the case.
Required
Prepare a briefing note for t he d irectors which:
(i) Discusses the key changes to financial statements which investors will see w hen
companies apply the lessee accounting requirements in IFRS 16 leases. (6 marks)
(ii) Explains to the directors how to account for the sa le of the main office building at the
start of the lease, including any gain on t he sale. (5 marks)
(iii) Comments on the effect of this transaction Havanna's interest cover ratio. (2 marks)
Professional marks will be awarded in part (c) of this question for clarity and quality of
presentation . (2 marks)
(Total= 25 marks)
'+2 Crypto '+9 mins

SBR March/ June 2019
(a) (i) C rypto 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 rema ining four board
members are nominated by each of the other investo rs. Any major decisions require
all board members to vote and for there t o be a clear majority. Thus, C rypto has
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Questions 59
effectivel!:J the power of veto on on!:J mojor 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 Cri:jpto believe that Cri:jpto has joint control
over Kurran because it is the major shareholder and holds the power of veto over
major decisions.
The directors of Cr!:Jpto would like advice as to whether or not the!:J should account
for Kurran under IFRS 11 Joint Arrangements. (6 marks)
(ii) On 1 April 20X7, C r!:Jpto, which has a functional currenc!:J of the dollar, entered into
a contract to purchase a fixed quantit!:J of electricit!:J a t 31 December 20X8 for
20 million euros. At that date, the spot rate was 1.25 dollars to the euro. The
electricit!:J wi ll be used in Cr!:Jpto's production processes.
Cr!:Jpto has separated out the foreign currenc!:J embedded derivative from the
electricit!:J contract and measured it at fair value through other comprehensive
income (FVTOCI). However, on 31 December 20X7, there was a contractual
modification, such that the contract is now an executor!:J contract denominated in
dollars. At this date, Cri:jpto calculated that the embedded derivative had a negative
fair va lue of 2 million euros.
The directors of Cr!:Jpto would like advice as to whether the!:J should have separated
out the foreign currenc!:J derivative and measured it at FVTOCI, and how to treat the
modification in the contract. ( 5 marks)
Required
Advise the directors of Cr!:Jpto as to how the above issues should be accounted for with
reference to relevant IFRS St andards.
Not e: The split of the mark a llocation is shown against each of the two issues above.
(b) Previous leasing standards have been criticised about the lack of information the!:J required
to be disclosed on leasing transactions. These concerns were usuall!:J expressed bi:j
investors and so IFRS 16 leases was issued in response to these criticisms.
Required
(i) Discuss some of t he ke!:J changes to financial statements which investors will see
when companies appl!:J the lessee accounting requirements in IFRS 16. ( 6 m arks)
(ii) For a compan!:J with significant off- balance sheet leases, discuss the likel!:J impact
that IFRS 16 will have generall!:J on accounting ratios and particularl!:J on:
• Earnings before interest and tax to interest expense (interest cover);
• Earnings before interest and tax to capital emplo!:Jed (return on capital
emplo!:Jed);
• Debt to earnings before interest, tax, depreciation and amortisation (EBITDA).
(6 marks)
Professional marks w ill be awarded in (b) for clarit!:J and qualit!:J of discussion. (2 m a rks)
(Tot al= 25 ma rks)
'+3 Operating segments '+9 mins

Parts (a ) and (b) a dapted from P2 December 2011, part (c) adapt ed from P2 June 2010
(a) Acce ll
Accell has three distinct business segments. Management has calculated t he net assets,
revenue and profit before common costs, which are to be a llocated t o these segments.
However, the!:J are unsure as to how they should a llocate certain common costs and
whether the!:J can exercise judgement in the allocation process. The!:J wish to allocate head
office management expenses; pension expense; the cost of managing properties and
interest and related interest- bearing assets. The!:J also are uncertain as t o whether the
allocation of costs has to conform to the accounting policies used in the financial
statements.
60 St rategic Business Reporting (SBR) @BPP LEAR\,NC:

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Required
Advise the management of Accell on the issues raised in the above paragraph. (7 marks)
(b) Veloc ity
For the year ended 31 Morch 20X3, the directors of Velocity, a public limited company
operat ing in the transport sector, identified the following operating segments.
(i) Segment 1 local train operations

(ii) Segment 2 inter-city tra in operations
(iii) Segment 3 railway constructions
The finance director hos determined that segments 1 and 2 should be aggregat ed into a
single reportable operating segment on the basis of their similar business characteri stics,
and the natu re of their p roducts and services.
The c haract eristics of each market ore as follows:
• Local t rain market: the local t ransport authority awards t he cont ract a nd pays
Velocity for its services; contracts o re awarded following a competit ive tender
process; t he ticket prices paid by passengers ore set by and paid to the t ransport
a ut hority.
• Int er-city train market: t icket p rices ore set by Velocity and the passengers pay
Velocity for the service provid ed.
The managing director is pleased about this as segment 1 hos seen a sharp decline in
profits d uring t he year, whereas segment 2 hos shown improved margins. The managing
d irector doesn't believe t hat segment information is relevant to investors, he believes that
investors simply provide funds and aren 't interest ed in how management derives a return
from them.
Required
(i) Discuss whether it is approp riat e to aggregate segments 1 and 2 with reference to
IFRS 8 Oper ating Segments. ( 4 marks)
(ii) Discuss, w ith reference to Velocit y, whether t he disclosure of segment information is

relevant to on investor's appraisal of the financial statements a nd comment on the
managing director's opinion that investors ore not interested in how management
derives a return from their investment. ( 4 marks)
(c)
Required
Explain t he factors which encourage companies to d isclose social and environmental
information in their financial statements, briefly discussing whether t he content of such
disclosure should be at the company's disc retion. (8 marks)
Professional marks will be awarded in this question. (2 marks)
(Total= 2 5 marks)
I.tit Skizer Lt9 mins

SBR Septe mber 2018 (amended)
(a) Skizer is a pharmaceutical company which develops new products with other
pharmaceutica l companies that hove the appropriate production facilities.
Stokes in d evelopment project s
When Skizer acquires a stoke in a development project, it makes on initial payment to the
other pharmaceutical company. It then makes a series of further stage payments until the
product development is complete and it hos been approved by the authorities. In t he
financial statements for t he year ended 31 August 20X7, Skizer hos treated the different
stokes in the development projects as separate intangible assets because of the anticipated
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Questions 61
future economic benefits related to Skizer's ownership of t he product rights. However, in the
year to 31 August 20X8, the d irectors 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 hove been initiolli:J recognised as intangible assets. This w rite off was to
be treated as o change in on accounting estimate.
Sole of deve lopment proj ect
On 1 September 20X6, Skizer acquired o development project as port of o business

combination and correctly recognised the project as on intangible asset. However, in
the financial stat ements to 31 August 20X7, Skizer recognised on impairment loss for
the ful l amount of t he intangible asset because of the uncertainties surrounding the
completion of the project. During the 1:Jeor ended 31 August 20X8, the directors of Skizer
judged that it could not complete the p roject on its own and cou ld not find o 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 hod o nil
carrying value, it treated t he sole 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 o point in time. The directors
of Skizer argued that t he sole of the right s was port of their business model and that
control of t he p roject hod passed to t he purchaser.
Required
(i) Explain the c riteria in the Conceptual Framework for Financial Reporting for the
recog nition of on asset and discuss whether there ore inconsistencies wit h the
criteria in IAS 38 Intangible Assets. (6 marks)
(ii) Discuss the implications for Skizer's financia l statements for both the years ended
31 August 20X7 and 20X8 if the recognition criteria in IAS 38 for on intangible asset
were met as regards the stokes in the development projects above. Your answer
should also briefly consider the implications if the recognition criteria were not met.
( 5 ma rks)
(iii) Discuss whether the proceeds of the so le of the development project above should be
treated as revenue in the financial statements for t he year ended 31 August 20X8.
( 4 marks)
(b) External disclosure of information on intangibles is useful only insofar as it is under stood
and is relevant to investors. It appears that investors ore increasingly interested in and
understand disclosures relating to intangibles. A concern is that, due to the nature of
disclosure requirements of IFRSs, invest ors moi:J feel that t he information disclosed hos
limited usefulness, thereby making comparisons between companies difficult. Many
companies spend o huge amount of capitol on intangible investment, which is mainly
developed within the company and thus may not be reported. Often, it is not obvious that
intangibles con be valued or even separately identified for accounting purposes.
The Integrated Reporting Framework may be one way to solve t his problem.
Required
(i) Discuss the potential issues which investors may hove with:
• Accounting for the different types of intangible asset acquired in o business

combination;
• The choice of accounting poliCi:J of cost or revaluation models, a llowed under
IAS 38 Intangible Assets for intangible assets; and
• The capitalisation of development expenditure . (7 marks)

(ii) Discuss whether integrated reporting con enhance the current reporting
requirement s for intangible assets. (3 ma rks)
(Total = 25 marks)
62 Strategic Business Report ing (SBR) @BPP LEAR\,NC:

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'+5 Cloud '+9 mins
P2 December 2015 (a mended)
(a) IAS 1 Presentation of Financiol Statements defines profit or loss and other comprehensive
income. The purpose of the statement of profit or loss and other comprehensive income
(OCI) is to show an entity's financial performance in a way which is useful to a wide range
of users so that they may attempt to assess t he future net cash inflows of an entity. The
statement should be classified and aggregated in a manner which makes it understandable
and comparable. However, the International Integrated Reporting Council (IIRC) is calling
for a shift in thinking more to t he long term, to think beyond what can be measured in
quantitative terms and to think about how the entity creates value for its owners. Historical
financial statements are essential in corporate reporting, particularly for compliance
purposes, but it can be a rgued that they do not p rovide meaningful information. Preparers
of financ ial statements seem to be unclear about the interaction between profit or loss and
OCI especially regarding the notion of reclassification, but are equally uncertain about
whether the IIRC's International Integrated Reporting Framework (<IR> Framework)
constitutes suitable criteria for report preparation.
Required
(i) Describe the current presentation requirements relating to the statement of profit or
loss and OCI and d iscuss the issues surrounding the conceptua l basis for the
distinction between profit and loss and OCI. Your answer should refer to t he
requirements of IAS 1 and to the Conceptual Framework. (6 marks)
(ii) Discuss, with examples, the nature of a reclassification adjustment, any issues
surround ing the conceptual basis for reclassification and t he a rguments for a nd
against a llowing reclassification of items from OCI to profit or loss. Your answer
should refer to the Conceptual Framework. ( 5 marks)
(iii) Discuss the principles and key components of the IIRC's International Integrated
Reporting Framework, and any concerns which could question the <IR> Framework's
suitability for assessing t he prospects of an entity. ( 8 marks)
(b) C loud, a p ublic limited company, regularly purchases steel from a foreign supplier and
designates a future purchase of steel as a hedged item in a cash flow hedge. The steel was
purchased on 1 May 20X4 and at that dat e, a cumulative gain on the hedging instrument
of $3 million had been credited to other comprehensive income. At t he year end of 30 April
20X5, the carrying amount of the steel was $8 million and its net realisable value was
$6 million. The steel was final ly sold on 3 June 20X5 for $6.2 million. On a separate issue,
C loud purcha sed an item of property, plant and equipment for $10 million on 1 May 20X3.
The asset is depreciated over five years on t he straight- line basis wit h no residual value. At
30 April 20X4, the asset was revalued to $12 million. At 30 April 20X5, t he asset's value has
fallen to $4 million. The entity makes a transfer from revaluation surplus to retained
earnings for excess depreciation, as the asset is used.
Required
Show how the above transactions would be dealt with in the financial statements of C loud
from the date of t he purchase of the assets.
Not e. Ignore any deferred taxation effects. (6 m arks)
(Tot al= 25 m arks)
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Questions 63
'+6 Allsop '+9 mins
Part (a) adapted from P2 June 2014 and P2 Sep/ Dec 2015, Part (b) adapted from P2
Mar/ Jun 2016
Allsop, a public limited company which reports under IFRS, has some overseas operations. Allsop's
f unctionol currency is the dollar and it has an accounting year end of 30 November 20X5.
Exhibit 1 - Foreign branch
Allsop has a foreign branch which a lso has the dollar as its functional currency. The foreign
branch's taxable profits a re determined in dinars. On 1 December 20X4, the foreign branch
acquired a property far 6 million d inars. The property had an expected useful life of 12 years w ith
zero residual val ue. The asset is written off far tax purposes over eight years. The tax rate in
Allsop's jurisdiction is 30% and in the foreign branch's jurisdiction is 20%. The foreign branch uses
the cost model far measuring its property and determines its tax base using the exchange rate at
the reporting date.
EXCHANGE RATES
$1 = dinars
1 December 20X4 5.0
30 November 20X5 6.0
Average exchange rate far year ended 30 November 20X5 5.6
Exhibit 2 - Contract
Allsop entered into a contract on 1 December 20X4 to construct a machine on a customer's

premises far a promised consideration of $1,500,000 with a bonus of $100,000 if t he
construction is completed within 24 months of the contract commencement. At the inception
of t he contract, Allsop correctly accounted for the promised bundle of goods and services as
a single performance obligation in accordance w ith IFRS 15. At that date, Allsop expected to
incur cost s associated with the contract of $800,000 and concluded that it was unlikely to
complete construction within 24 months of contract commencement. Completion of the
machine was highly susceptible to factors outside of Allsop's influence, mainly issues with the
supply of components.
At 30 November 20X5, Allsop had satisfied 65% of its performance obligation on the basis of
costs incurred to date and concluded that the variable consideration was still constra ined in
accordance wit h IFRS 15. However, on 4 December 20X5, the contract was modified with the
result that the fixed consideration and expected costs increased by $110,000 and $60,000
respectively. The time allowed far achieving the bonus was extended by six months. As a result,
Allsop concluded it was highly probable t he bonus would be achieved. The contract remained a
single performance obligation after the modification.
Exhibit 3 - Integrated reporting
The directors of Allsop have been reviewing the Int ernational Integrated Reporting Council's
Framework for Integrated Reporting. The directors believe that IFRS Standards are already
extensive and provide stakeholders with a comprehensive understanding of an entity's financial
position and performance far the year. In particular, statements of cash flows enable
stakeholders to assess the liquidit y, solvency and financial adaptability of a business. They are
concerned that any additional disclosures could be excessive and obscure the most useful
inform ation w ithin the financial statements. They are therefore unsure as to the rationale far the
implementation of a separate, or combined, integrated report.
61+ Strategic Business Reporting (SBR) @BPP

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Required
(a) Explain to t he directors of Allsop:
(i) Wh!:J a deferred tax charge relating to the foreign branch's prapert!:J arises in the
group financial statements for the !:lear ended 30 November 20X5 and the impact on
the financial statements if the tax base had been translated at the historical rate.
Your explanation should include ca lculations. (8 ma rks)
(ii) Haw the contract for the construction of the machine should be accounted for. Your
advice should include the accounting treatment up to 4 December 20X5. (7 marks)
(b) Discuss the extent to which statements of cash flows provide stakeholders with usef ul
information about an entit!:J and whether this information would be improved b!:J the entit!:J
introducing an Integrated Report. ( 8 marks)
Professional marks will be awarded in part (b) for the qualit!:J of the discussion. (2 m arks)
(Total = 25 m arks)
1+7 Kiki Co 1+9 mins

SBR Specimen exam 2
Kiki Co is a public limited entity. It designs and manufactures children's toys. It has a reporting
date of 31 December 20X7 and prepares its financia l statements in accordance with International
Financial Reporting Standards.
Exhibit 1 - G ift card s
Kiki Co sells $50 gift cards. These can be used when purchasing any of Kiki Co's products
th rough its website.
The gift cards expire after 12 months. Based on significant past experience, Kiki Co estimates that
its customers w ill redeem 70% of the value of the gift card and that 30% of the value will expire
unused. Kiki Co has no requirement to remit any unused funds to the customer when the gift card
expires unused.
Exhibit 2 - Roya lty fee
Kiki Co's best-selling range of toys is called Scarimon. In 20X6 Colour Co, another list ed
compan!:J, entered into a contract wit h Kiki Co for the rights to use Scarimon characters and
imager!:J in a monthl!:J comic book. The contract terms state that Colour must pa!:J Kiki Co a
ro!:Jalt!:J fee for ever!:J issue of the comic book which is sold. Before signing the contract, Kiki Co
determined that Colour Co had a strong credit rating. Throughout 20X6, Colour Co provided Kiki
Co w ith monthly sales figures and paid all amounts due in the agreed-upon period. At the
beginning of 20X7, Colour Co experienced cash flow problems. These were expected to be short
term. Colour Co made nominal payments to Kiki Co in relation to comic sales for the first half of
the !:Je0r. At the beginning of Jul!:J 20X7, Colour Co lost access t o credit facilities and several
major customers. Colour Co continued to sell Scarimon comics online and through specialist
retailers but made no further payments to Kiki Co.
Exhibit 3 - Propert!:J
As a result of rising propert!:J prices, Kiki Co purchased five buildings during the current period in
order to benefit from further capital appreciation. Kiki Co has never owned an investment
property before. In accordance with IAS 40 Investment Property, the directors are aware that
they can measure the buildings using either the fair value model or the cost model. However, they
are concerned about the impact that this choice will have on the analysis of Kiki Co's financial
performance, position and cash flows by current and potential investors.
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Required
(a) The directors require advice about how revenue from the following sources should be
accounted for in the financia l statements for the year ended 31 December 20X7:
(i) gift cards (6 marks)

(ii) royalty (6 marks)
(b) Discuss the potential impact that the property accounting policy may have on investors'
analysis of Kiki Co's financial statements for the year ended 31 December 20X7. Your
answer should refer to key financial performance ratios. (11 marks)
Professional marks will be awarded in Part (b) for clarity and quality of presentation.
(2 marks)
(Total= 25 marks)
1+8 Holls 1+9 mins

SBR December 2018
(a) IFRS Practice Statement 1 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 IFRSs. 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
(i) Discuss briefly the arguments for and against issuing IFRS Practice Statement 1
Management Commentary as a non-binding framework or as an IFRS. ( 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)
(b) Hells Group is preparing its financial statements for the year ended 30 November 20X7.
The directors of Hells have been asked by an investor to explain the accounting for taxation
in the financial statements.
The Group operates in several tax j urisdictions and is subject to annual tax audits which
ca n result in amendments to the amount of tax to be paid.
The profit from continuing operations was $300 million in t he year to 30 November 20X7
and the reported tax charge was $87 million. The investor was conf used as to why the tax
charge was not the tax rate multiplied by the profit from continuing operations. The
directors have prepared a reconcil iation of the notional tax charge on profits as compared
with the actual tax charge for the period.
Sm
Profit from continui ng operations before taxation 300
Notional cha rge at local corporation tax rate of 22% 66
Differences in overseas tax rates 10
Tax relating to non-taxable gains on disposals of businesses (12)
Tax relating to the impairment of brands 9
Other tax adjustments 14
Tax charge for the year 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 financia l
statements.
66 Strategic Business Reporting (SBR) @BPP E,OhlNC

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The tax rate applicable to Hells 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 Hells 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%. Halls does
not currently disclose its opinion of how the tax rate may alter in the future but the
government is likely to change w ith the result that a new government will almost certainly
increase the corporate tax rate.
At 30 November 20X7, Hells has deductible temporary differences of $4.5 million which
are expected to reverse in t he next year. In addition, Hells also has taxable temporary
differences of $5 m illion which relate to the same taxable company and the tax authority.
Hells expects $3 million of those taxable temporary differences t o reverse in 20X8 and the
remaining $2 million t o reverse in 20X9. Prior to the current year, Hells 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 w ith relevant IFRSs. (14 marks)
Professional marks will be awarded in part (b) for clarity and quality of discussion.
(2 marks)
(Total= 25 m arks)
'+9 Guidance '+9 mins

SBR December 2018
Backg round
Guidance Co is considering the financial results for the year end ed 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 generat e 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 calculat ed as:
Net profit before tax Sales Assets

Return on equity = --------x--- x---
Sales Assets Equity
Guidance Co uses year-end equity and assets to calcu late ROE.
The following information in table 1 relates t o Guidance Co for the last two years:
20X5 20X6
$m $m
Net profit before tax 30 38
Sales 200 220
Assets 250 210
Equity at 31 December 175 100
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 t o the SPE at its carrying amount of
$50 million, but had incorrectly charged revaluation reserves with this amount rather than showing
the t ransfer as an investment in the SPE. The p roperty was the SPE's only asset. However,
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Quest ions 67
Guidance Ca still managed the property, and any profit or loss relating to the asset s of the entity
was remitted d irectly 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 also raised loan capital for the first time during the year ended 31 December 20X6
of $20 million in o rder to help with the buy-back of the company's shares.
Guidance Co had purchased a 25% interest in an associate company on 1 July 20X6 for cash .
The investment had cost $15 million and the a ssociate had made profit s of $32 million in the year
to 31 December 20X6. Guidance Co accounted for the purchase of the associate correctly.
All of these miscellaneous transactions have been accounted for in the financial information for
the year ended 31 December 20X6 in table 1.
(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 compa n y. This lack of comparability may
be due to different accounting policy choices or deliberate manipulation.
Required
Discuss the reasons why an entity may c hoose a particular accounting policy where an
International Financial Reporting 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 m iscellaneous 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 (b)(i) for clarity and quality of discussion.
(2 marks)
(Total= 25 marks)
50 Pensions '+9 mins

Part (a) adapt ed fro m P2 December 2007, Part (b) adapted from P2 June 2012
(a) Joydan
Joydan, a public limited company, is a leading support services company which focuses on
the building industry. The company would like advice on how to treat certain items under
IAS 19 Employee Benefits. The company operates the Joydan Pension Plan B which
commenced on 1 November 20X6 and the Joydan Pension Plan A, which was closed to new
entrants from 31 October 20X6, but which was open to future seNice accrual for the
employees already in t he scheme. The assets of the schemes are held separately from
those of the company in fu nds under the control of trustees. The following information
relates to the two schemes.
68 Strategic Business Reporting (SBR) @BPPLEAR\,NC:

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Joydan Pension Plan A
The terms of the plan are as follows.
(i) Employees contribute 6% of their salaries to the plan.
(ii) J oydan contributes, currently, the same amount to the plan for the ben efit of the
employees.
(iii) On retirement, employees are guaranteed a pension which is based upon the
number of years' service w ith t he company and their fina l salary.
The following d etails relate to the plan in the year to 31 October 20X7:
Sm
Present value of obligation at 1 November 20X6 200
Present value of obligation at 31 October 20X7 240
Fa ir value of plan assets at 1 November 20X6 190
Fa ir value of plan assets at 31 Oct ober 20X7 225
Current service cost 20
Pension benefits paid 19
Total contributions paid to the scheme for year to 31 October 20X7 17
Remeasurement gains a nd losses are recognised in accordance with IAS 19.

Assume that cont ributions are poid into the plan and pension benefits o re withdrawn from
the plan on 31 October 20X7.
Joydan Pensio n Plan B
Under the terms of the plan, Joyd an does not guarantee any return on the contributions
paid into the fund . The com pany's legal and constructive obligation is limited to t he
amount that is contributed to the fund. The following details relate to this scheme:
Sm
Fa ir value of plan assets at 31 October 20X7 21
Contributions paid by company for year t o 31 Oct ober 20X7 10
Contributions paid by employees for yea r to 31 October 20X7 10
The interest rate on high quality corporate bonds for the two plans are:
1 November 20X6 31 October 20X7

5% 6%
The company would like advice on how to treat t he two pension plans, for the year ended
31 Oct ober 20X7, together with an explanation of the differences between a defined
contribution plan and a defined benefit p lan.
Required
Prepare a briefing note for t he directors of Joydan which includes:
(i) An explanation of the nature of and differences between a defined contribution plan
and a defined benefit plan with specific reference to the company's two schemes.
(B marks)
(ii) The accounting treatment for the two Joydan pension plans for the year ended
31 October 20X7 under IAS 19 Employee Benefits. (9 marks)
(b) William
William operates a defined benefit pension plan for its employees. Shortly before t he year
end of 31 May 20X3, William decided to relocate a division from one country to another,
where labour and raw material costs are cheaper. The re location is due to take place in
Dece mber 20X3. On 13 May 20X3, a det ailed formal plan was approved by the board of
directors. Half of the affected division's employees will be made redundant in July 20X3,
and will accrue no f urther benefits under William's defined benefit pension plan. The
affected employees were informed of this decision on 14 May 20X3. The result ing reduction
in the net pension liability due the relocation is estimated to have a present val ue of $15
million as at 31 May 20X3. Total relocation costs (excluding the impact on the pension plan)
are estimated at $50 million.
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Questions 69
Required
Advise the director s of Williom on how to account for the relocation cost s and the reduct ion in t he
net pension liability for the yea r ended 31 Moy 20X3. (8 marks)
(Total= 25 marks)
51 Kayte lt9 mins

Port (a) SBR December 2018 (amended), Port (b) adopted from P2 December 2014
(a) The 2010 Conceptual Framework for Financial Reporting included a probability criterion
which specified that in order for on asset or liability to qualify for recognition, it must be
probable that any future economic benefit associated with on asset or liability will flow to
or from on entity.
Some current accounting standards, which were developed under the 2010 Conceptual
Framework, hove been criticised for not necessarily applying t he probability criterion
relating to future economic benefits on a consistent basis.
The IASB issued a significantly revised Conceptual Framework in 201 8. The recognition
c riteria in the 20 18 Conceptual Framework no longer include a probability crit erion.
Required
Expla in how the probability criterion in the 2010 Conceptual Framework has not been
applied consistently across accounting st andards, illustrating your answer w ith reference
t o a ny inconsist encies w ith the measurement of assets held for sole, provisions and
contingent consideration, and discuss how the revised 2018 Conceptual Framework may
address t his issue. (6 marks)
(b) (i) Kayte has a year end of 31 May. It operates in the shipping industry and owns
vessels for transportation. Koyte's vessels constitut e a material port of its total
asset s. The economic life of the vessels is estimated t o be 30 years, but the useful life
of some of the vessels is only 10 years because Koyt e's policy is to sell these vessels
when they ore 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. Koyte argued that the estimates of residual value used were
conservative in view of on immature market w ith a high degree of uncertainty and
presented documentation which indicated some vessels were being sold for a price
considerably a bove carr ying amount. Broker valuations of t he residual va lue were
considerably higher than those used by Koyte. Kayte a rgued against broker
valuations on the grounds that it wou ld result in greater volatility in reporting.
Koyte keeps some of the vessels for the whole 30 years and these vessels ore
required t o undergo an engine overhaul in dry d ock every 10 years to restore their
service potential, hence the reason why some of t he vessels ore sold. The residual
value of the vessels kept for 30 years is based upon the steel va lue of the vessel at
the end of its economic life. At the time of purchase, the service potential wh ich will
be required to be restored by the engine overhaul is measured based on the cost as
if it hod been performed at the t ime of the purchase of the vessel. Normally, eng ines
lost for the 30- year total life if overhauled every 10 years. Additionally, one type of
vessel was having its funnels replaced after 15 yea rs, but the funnels had not been
depreciated separately. (12 marks)

IMlllA
(ii) On 1 June 20X1, Kayte acquired a property for $5 million and annual depreciation
af $500,000 is charged an the straight-line basis with no residual value. At
31 May 20X3, when accumulated depreciation was $1 million, an impairment loss
of $350,000 was recognised, wh ich resulted in the property being valued at its
estimated va lue in use. On 1 October 20X3, as a consequence of a proposed move
to new premises, the property was classified as held for sale. At the time of
classification as held for sale, the fair value less costs to sell was $3.4 million. At
the date of the published interim financial st atements, 30 November 20X3, the
property market had improved and the fair value less costs to sell was reassessed
at $3.52 m illion and at the year end on 31 May 20X4 it had improved even further,
so that the fa ir value less costs ta sell was $3.95 million. The property was sold on
5 June 20X4 for $4 million. (7 m a rks)
Required
Discuss the accounting t reatment of the above t ransactions in the financial st atements of
Kayte.
Not e. The mark allocation is shown against each of the issues above.
(Total = 25 marks)
52 Fill 1+9 mins

SBR Decem ber 2018
(a) Fill is a coal mining company that sells its coal on the spot and futures market s. 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 int o different grades of
coal. One of the categories included in inventories at 30 November 20X6 is coal with a low
carbon content that is of a low quality. Fill will not process this low quality coal until a ll 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 t hat the three- year forecast price of coa l
will be 20% lower than the current spot price.
The directors of Fill would like advice on two matters:
(i) Whether the Conceptual Framework affects the valuation of inventories
(ii) How to calculate the net realisable value of the coa l inventory, including the low
quality coal (7 ma rks)
(b) At 30 November 20X6, the directors of Fill estimate that a piece of mining equipment
needs to be recond itioned every two years. They estimate that th ese 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, a long wit h 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 ta treat the reconditioning costs and whether the
decline in the price of coal is an impairment indicator. (8 m arks)
(c) Fill also jointly controls coal mines with other entities. The Theta mine is owned by four
participants. Fill owns 28%, and the other three participants each own 24% of the m ine.
The operating agreement requires any major decisions to be approved by parties
representing 72% of the interest in the mine. Fill is considering purchasing one of the
participant's interests of 24%.
The directors of Fill w ish advice on whether the revised Conceptual Framework will affect
the decision as to whet her Fill controls the mine.
The directors are also wondering whether the acquisition of t he interest would be
considered a business combination under IFRSs. (10 marks)
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Questions 71
Required
Advise the d irector s of Fill on how the above transactions should be dealt w ith in its financial
statements with reference to relevant IFRSs and the Conceptual Framework where indicated.
Note. The split of the mark allocation is shown against each of the three issues above.
(Total= 25 marks)
53 Zedtech 1+9 mins

SBR Mar/ Jun 2019 (amended)
(a) In the revised 20 18 Conceptual Framework for Financial Reporting (the Conceptual
Framework), t he accounting model is built on the definit ions and principles for the
recognition of assets and liabilities.
The 2010 Conceptual Framework specified t hree recognition criteria w hic h apply to all
asset s and liabilities:
(a) the item meets the definition of an asset or a liability;
(b) it is probable that any future economic benefit associated with the asset or liability
will flow to or from the entity; and
(c) the asset or liability has a cost or value which can be measured reliably .
However, these definitions were not always consistently applied by the standard setters.
The result is that many existing IFRS are inconsistent w ith the 2010 Conceptual Framework.
Required
(i) Discuss and contrast the criteria for t he recognition of assets and liabilities as set out
in the 2018 Conceptual Framework and its predecessor, the 2010 Conceptual
Framework (given above). (7 marks)
(ii) Discuss how the recognition of assets and liabilities under IAS 12 Income Taxes and
IAS 37 Provisions, Contingent Liabilities and Contingent Assets are both inconsistent
with t he definitions in the 2010 Conceptual Framework and how certain items
recognised in a business combination may not be recognised in the individual
financia l statements of the group companies. (6 marks)
(b) Zedtech is a software development company which provides data hosting and other
professional services. As part of these services, Zedtech also securely hosts a range of
inventory management software online w hich 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, g ives
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.
W ith the second package, lnventoryX, 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 t hat 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 ful l amount from the customer and
estimates that it may collect 80% of the consideration.

IMlllA
Required
(i) Discuss the principles in IFRS 15 Revenue from Contracts with Customers which
should be used by Zedtech to determine the recognition of t he a bove contracts.
(5 marks)
(ii) Discuss how the above contracts should be recognised in the financial statements of
Zedtech under IFRS 15. (7 marks)
(Total= 25 marks)
51+ Emcee lt9 mins

P2 Mar/Jun 2016 (amended)
Emcee, a public limited company, is a sports o rganisation w hich owns several football a nd
basketball teams. It has a financial year end of 31 May 20X6.
(a) Emcee needs a new stadium to host sporting events which w ill be included as part of
Emcee's property , plant and equipment. Emcee commenced construction of a new stad ium
on 1 February 20X6, and this continued until its completion which was after the year end of
31 May 20X6. The direct costs were $20 million in February 20X6 and then $50 m illion in
each month until the year end. Emcee has not taken out any specific borrowings to finance
the construction of the stadium, but it has incurred finance costs on its general borrowings
during t he period, which could have been avoided if the stadium had not been constructed .
Emcee has calc ulated that the weighted average cost of borrowings for the period 1
February t o 31 May 20X6 on an annualised ba sis amounted t o 9% per annum. Emcee
needs advice on how to treat the borrowing costs in its financial statements for the year
ended 31 May 20X6. (6 marks)
(b) Emcee purchases and sells players' registrations on a regular basis. Emcee must purchase
registrations for that player t o play for t he club. Player registrations a re contractua l
obligations between the player and Emcee. The costs of acquiring pla yer registrations
include transfer fees, league levy fees, and p layer agents' fees incurred by the club. Often
players' former clubs are paid amounts w hich are contingent upon the performance of the
player w hilst they play for Emcee. For example, if a cont racted basketball player scores an
average of more than 20 points per game in a season, t hen an additional $5 million ma y
become payable to his former club. Also, players' contrac t s ca n be extended and this
incurs additional costs for Emcee.
At the end of every season, w hich also is the financial year end of Emcee, the club
reviews it s p laying staff and makes decisions as t o w hether they wish to sell any players'
registrations. These registrations are actively marketed by circulating oth er clubs with a
list of players' reg istrations and t heir estimated selling price. Players' registrations a re also
sold during the season, often with performance conditions attached. Occasionally, it
becomes clear t hat a p layer will not play for the c lub again because of , for example, a
player sustaining a ca reer 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 tota l proceeds, net of associated costs, of $25 million. These
registrations had a net book value of $7 million.
Emcee would like to know t he financial r eporting t reatment of the acquisition, extension,
review and sale of players' registrations in the circumstances out lined above. (11 marks)
(c) Emcee uses the revaluation model to measure its stadiums. The d irectors have been offered
$100 million from a n a irline for t he property naming rights of all t he stadiums for three
years. There a re two directors who are on t he management boards of Emcee and the
airline. Additionally, there are regulations in place by both the football and basketball
leagues which regulate t he financing of t he clubs. These regulations prevent capital
contributions from a related party which 'increases equity without repayment in return'.
The aim of these regulations is to promote sustai nable business models. Sanctions imposed
by the regulator include fines a nd withholding of prize monies. Emcee wishes to know how
to t ake account of the naming rights in the valuation of the stadium and the pot ential
implications of the financial r egulations imposed by t he leagues. ( 8 marks)
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Quest ions 73
Required
Discuss how the above events would be shown in the financial statements of Emcee under
International Financial Reporting Standards.
Note. The mark a llocation is shown against each of t he three issues above.
(Total= 25 marks)
55 Scramble 1+9 mins

Scramble, a public limited company, is a developer of online computer games.
(a) At 30 November 20X1, 65% of Scromble' s total assets were mainly represented by internally
developed intangible assets comprising the capitalised costs of the development and
production of online comput er games. These games generate all of Scromble's revenue.
The costs incurred in relation to maintaining the games at the some standard of
performance ore expensed to profit or loss for the year. The accounting policy note states
that intangible assets ore valued at historical cost. Scramble considers the games to hove
on indefinite useful life, which is reconsidered annually when the intangible assets ore
tested for impairment. Scramble determines value in use using t he estimated future cash
flows which include maintenance expenses, capitol expenses incurred in developing
different versions of the games and the expected increase in revenue resulting from the
cash outflows mentioned above. Scramble does not conduct on analysis or investigation of
differences between expected and actual cash flows. Tax effects were also token into
account. (7 marks)
(b) Scramble hos two cash-generating units (CGU) which hold 90% of the internally developed
intangible asset s. Scramble reported a consolidated net loss for the period and on
impairment charge in respect of the two CGUs representing 63% of t he consolidated profit
before tax and 29% of the total costs in the period. The recoverable amount of the CGUs is
defined, in this case, as value in use. Specific discount rotes ore not directly available from
the market, and Scramble estimates the discount rotes, using its weighted overage cost of
capitol. In calculating the cost of debt as on input to t he determination of the discount
rote, Scramble used the risk-free rote adjusted by the company specific overage c redit
spread of its outstanding debt, which hod been raised two years previously. As Scramble
did not hove any need for additional financing and did not need to repay a n y of the
existing loons before 20X4, Scramble did not see any reason for using a different discount
rote. Scramble did not disclose either the events or circumstances that led to the
recognition of the impairment loss or the amount of the loss recognised in respect of each
cash-generating unit. Scramble felt that the event s and circumstances that led to the
recognition of a loss in respect of the first CGU were common knowledge in the market and
the events and t he circumstances that led to the recognition loss of the second CGU were
not needed to be disclosed. (8 marks)
(c) Scramble wished to diversify its operations and purchased a professional football club,
Roshing. In Roshing's financial statements for t he year ended 30 November 20X1, it was
proposed to include significant intangible assets which relat ed to acquired players'
registration rights comprising registration and agents' fees. The agents' fees were paid by
the club to players' agents either when a player is transferred to the club or when the
contract of a player is extended. Scramble believes that the registration rights of the
players ore intangible assets but that t he agent's fees do not meet the criteria to be
recognised as intangible assets as they ore not directly attributable to the costs of players'
contracts. Additionally, Roshing hos purchased the rights to 25% of the revenue from ticket
soles generated by another football club, Sontosh, in a different league. Roshing does not
sell these tickets nor hos any discretion over the pricing of the tickets. Roshing wishes to
show these rights as intangible assets in its f inancial statements. (10 marks)
71t Strategic Business Reporting (SBR) @BPP LEAR\,NC:

IMlllA
Required
Discuss t he validity of the accounting treatments proposed by Scramble in its financial

statements for the yea r ended 30 November 20X1.
Not e. The mark a llocation is shown against each of t he three accounting t reatments above.
(Tota l = 25 m arks)
56 Estoil 1+9 mins

(a) An assessment of accounting practices for asset impairments is especially important in
the context of financial reporting quality in that it requires the exercise of considerable
management judgement and reporting discret ion. The importance of this issue is
heightened during periods of ongoing economic uncertainty as a result of the need for
companies to reflect the loss of economic value in a timely fashion through the mechanism
of asset write-downs. There are many factors which can affect the quality of impairment
accounting and d isclosures. These factors include changes in circumstance in the r eporting
period, the market capitalisation of t he entity, the allocation of goodwill to cash-
generating units, valuation issues and the nature of the disclosures.
Required
Discuss the importance and significance of t he above factors when conducting an
impairment test under IAS 36 Impairment of Assets. (15 marks)
(b) (i) Estoil is an international company providing parts for the automotive industry. It
operates in many different jurisdictions with different currencies. During 20X4, Estoil
experienced financial difficulties marked by a decline in revenue, a reorganisation
and rest ructuring of the business and it reported a loss for t he year. An impairment
test of goodwill was performed but no impairment was recognised. Estoil applied one
discount rate to all cash flows for all cash-generating units (CGUs), irrespective of
the currency in w hich the cash flows would be generated. The discount rate used
was the weighted average cost of capital 0/VACC) and Estoil used the ten-year
government bond rate for its jurisdiction as the risk- free rate in t his calculation.
Additionally, Estoil built its model using a forecast denominated in the functiona l
currency of the parent company. Estoil felt that any other approach would require a
level of detail which was unrealistic and impracticable. Estoil argued that the
different CGUs represented d ifferent risk profiles in the short term, but over a longer
business cycle, there wa s no basis for claiming that their risk profiles were different.
(ii) Fariole specialises in the communications sector with three main CGUs. Goodwill
was a significant component of total assets. Fariole performed an impairment test
of t he CGUs. The cash flow projections were based on the most recent financial
budgets approved by management. The realised cash flows for the CGUs were
negative in 20X4 and far below budgeted cash flows for that period. The directors
had significantly raised cash flow forecasts for 20X5 with little justification. The
projected cash flows were calculated by adding back depreciation charges to the
budgeted result for the period with expected c hanges in working capital and capital
expenditure not taken into account.
Req uired
Discuss the acceptability of the above acco unting practices under IAS 36 Impairment of
Assets. (10 m arks)
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Questions 75
57 Evolve '+9 mins
P2 Sep/Dec 2016 (amended)
(a) Evolve is a real estate company, which is listed on the stock exchange a nd has a year end
of 31 August. On 21 August 20X6, Evolve u ndertook a scrip (bonus) issue where the
shareholders of Evolve received certain rights. The shareholders a re able to choose
between:
(i) Receiving newly issued shares of Evolve, which could be traded on 30 September
20X6; or
(ii) Transferring their rights back to Evolve by 10 September 20X6 for a fixed cash price
which would be paid on 20 September 20X6.
In the financial statements at 31 August 20X6, Evolve believed that the criteria for the
recognition of a financial liability as regards the second option were not met at 31 August
20X6 because it was impossible to reliably determine t he full amount to be paid, until
10 September 20X6. Evolve felt that the t ransferri ng of the rights back to Evolve was a put
option on its own equity, which would lead to recording changes in fair value in profit or
loss in the next financial year. Evolve disclosed the t ransaction as a non-adjusting event
after the reporting period. (9 marks)
(b) At 31 August 20X6, Evolve controlled a wholly owned subsidiary, Resource, w hose only
asset s were land and buildings, which were all measured in accordance with Internationa l
Financial Reporting Standards. On 1 August 20X6, Evolve published a stat ement stating
that a binding offer for the sale of Resource had been made and accepted and, at that
date, the sale was expected to be completed by 31 August 20X6. The non-current a ssets
of Resource were measured at the lower of t heir carrying amount or fair value less costs
to sell at 31 August 20X6, based on the selling price in the binding offer. This measurement
was in accordance with IFRS 5 Non-Current Assets Held for Sale and Discontinued
Operations. However, Evolve did not classify the non-current assets of Resource as held
for sale in the financia l statements at 31 August 20X6 because there were uncertainties
regarding t he negotiations with the buyer and a risk t hat the agreement would not be
finalised. There was no disclosure of these uncertainties and the original agreement was
finalised on 20 September 20X6. (10 marks)
(c) Evolve operates in a jurisdict ion with a specific tax regime for listed real estate companies.
Upon adoption of t his tax regime, the entity has to pay a single tax payment based on t he
unrealised gains of its investment properties. Evolve purchased Monk whose only asset was
an investment property for $10 million. The purchase price of Monk was below the market
value of the investment property, which was $14 million, and Evolve chose to account for
the investment property under the cost model. However, Evolve considered that the
transaction constituted a 'ba rgain purchase' under IFRS 3 Business Combinations. As a
result, Evolve accounted for the potential gain of $4 million in profit or loss and increased
the 'cost' of the investment property to S14 million. At the same time, Evolve opt ed for the
specific t ax regime for the newly acquired investment property and agreed to pay the
corresponding tax of $1 million. Evolve considered that the tax payment qualifies as an
expenditure necessary to bring t he property to the cond ition necessary for it s operations,
and therefore was directly a ttributable to the acquisition of the property. Hence, t he
tax payment was capitalised and the value of the investment property was stated at
$15 million. (6 marks)
Required
Advise Evolve on how the above transactions should be correctly dealt with in its financia l
statements with reference to relevant International Financial Reporting Standards.
Note. The mark allocation is shown against each of t he three issues above.
(Total= 25 marks)

IMlllA
58 Gasnature '+9 mins
P2 Sep/Dec 2015 (amended)
(a) Gasnature is a publicly traded entity involved in the production and trading of natural
gas and oil. Gasnature jointly owns an underground storage facilit!:I with onother 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
Gogos owns 45%. They hove ogreed to shore services and costs accordingly, with
decisions regarding the storage facilit!:I requiring unanimous agreement of the parties. The
underground facility is pressurised so that the gas is pushed out when extract ed. When the
gas pressure is reduced to a certain level, the remaining gas is irrecoverable and remains in
the underground storage facility until it is decommissioned. Local legislation requires the
decommissioning of the storage facilit y at the end of its useful life. Gasnature wishes to
know how to treat the agreement w ith Gogas including any obligation or possible
obligation arising on the underground storage facility and the accounting for the
irrecoverable gas. (9 marks)
(b) Gasnature has entered into a ten-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 ten years which has been calculated using t he forecasted
price of gas. The advance carries interest of 6% per annum, which is settled by wa!:I of
the supply of extra gas. Fixed quantities of gas have to be supplied each month and there
is a p rice adjustment mechanism in t he 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)
(c) Additionally, Gasnature is finalising its financial statements for the year ended 31 August
20X5 and has the following issues.
(i) Gasnature purchased a major refinery on 1 January 20X5 and the directors estimate
that a major overhaul is required every two yea rs. The costs of the overhaul are
approximately $5 million which comprises $3 million for parts and equipment and
$2 million for labour. The directors proposed to accrue the cost of the overhaul over
the two years of operations up to that date and create a provision for the
expenditure. (5 marks)
(ii) From Oct ober 20X4, Gasnature had undertaken exploratory d rilling to find gas and
up to 31 August 20X5 cost s of $5 million had been incurred. At 31 August 20X5, the
results to date indicated that it was probable that there were sufficient economic
benefits to carry on drilling and there were no indicators of impairment. During
September 20X5, additional drilling costs of $2 million were incurred and there was
sig nificant evidence that no commercial deposit s existed and the drilling was
abandoned. (5 marks)
Required
Discuss, with reference to International Financial Reporting Standards, how Gasnature should
account for the above agreement and contract, and the issues raised by the directors
Note. The mark allocation is shown against each of the items above.
(Total = 25 marks)
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Questions 77
59 Complexity '+9 mins
Part (a) adapted from P2 December 2009
(a) Complexity borrowed $47 million on 1 December 20X4 when the market and effective
interest rate was 5%. On 30 November 20X5, the company borrowed an additiona l
$45 million when t he current market and effective interest rate was 7.4%. Both financia l
liabilities are repayable on 30 November 20X9 and are single payment notes, whereby
interest and capital are repaid on that date.
Complexity's creditworthiness has been worsening. It has entered into an interest ra t e
swap agreement which acts as a hedge against a $2 million 2% bond issue which matures
on 31 May 20X6. The directors of Complexity wish to know in which circumst ances it can
use hedge accounting. In particular, they need advice on hedge effectiveness and whether
this can be calculated.
Required
(i) Discuss the accounting for the financial liabilities under IFRS 9 under the amortised
cost method, and addit ionally using fair value method as at 30 November 20X5.
(6 marks)
(ii) Advise Complexity's directors as to the circumstances in w hich it can use hedge
accounting a nd whether it can calcu late hedge effectiveness. (9 marks)
(b) The type and value of financial instruments that Complexity holds has increased in recent
years which has resulted in increased disclosures regarding financial instruments in the
financial statements. Complexity's reporting accountant is concerned that the users of the
financial statements find financial instruments complicated and has argued that there is no
point in providing detailed information in this area as the users will not understand the
disclosures.
Required
(i) Discuss, from the perspective of the users of financial statements, how the
measurement of financia l instruments under IFRSs can create confusion. ( 6 marks)
(ii) Discuss the reporting accountant's view that detailed disclosures in respect of
financia l instruments do not provide useful information to the users of financial
statements.
( 4 marks)
(Total= 25 marks)
60 Carsoon '+9 mins

P2 Mar/ Jun 2017 (amended)
Car soon Co is a company which manufactures and retails motor vehicles. It also constru cts
premises for third parties. It has a year end of 28 February 20X7.
(a) The entity enter s into lease agreements with the public for it s motor vehicles. The
agreements are normally far a three- year period. The customer decides how to use the
vehicle within certain contractual limitations. The maximum mileage per annum is specified
at 10,000 miles without penalty. Carsoon is responsible for the maintenance of the vehicle
and insists that the vehicle cannot be modified in any way. At the end of the three-year
contract, the customer can purchase the vehicle at a price wh ich w ill be above the market
value, or alternatively hand it back to Carsoon. If the vehicle is returned, Carsoon will then
sell the vehic le on t o the public t hrough one of its retail outlets. These sales of vehicles are
treated as investing activities in the statement of cash flows.
The directors of Carsoon wish to know how the leased vehicles should be accounted for,
from the commencement of the lease to the final sale of the vehicle, in the financial
statements including the statement of cash flows. (9 marks)

IMlllA
(b) On 1 March 20X6, C arsoon invested in a debt instrument with a fair value of $6 million and
has assessed that the fina ncial asset is a ligned with the fair value through other
comprehensive income business model. The instrument has a n interest rate of 4% over a
period of six tiears. The effective interest rate is also 4%. On 1 March 20X6, the debt
instrument is not impaired in anti watJ. During the tiear to 28 Februorti 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 t he 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 on amount equal to 12-month expected credit losses of
$400,000. Corsoon sold the debt instrument on 1 March 20X7 for $5.3 million.
The directors of Corsoon wish to know how to account for the debt instrument unti l its sale
on 1 March 20X7. (8 marks)
(c) Corsoon const ructs retail vehicle outlets and enters int o contracts wit h customers to
construct buildings on their land. The contracts have standard terms, w hich include
penalties patiable bti Carsoon if the contract is delatied, or patiable bti the customer, if
Carsoon cannot gain access to the construction site.
Due to poor weather, one of the projects was delatied. As a resu lt, Carsoon faced
additional cost s and contractual penalties. As Carsoon could not gain access to t he
construction site, the directors decided to make a counter-claim against the customer for
the penalties and additional costs which Carsoon faced. Carsoon felt that because a
counter claim had been made against the customer, the additional costs and penalties
should not be included in contract costs but shown as a contingent liabilittJ. Carsoon has
assessed the legal basis of the claim and feels it has enforceable rights.
In the tiear ended 28 Februarti 20X7, Corsoon incurred general and administrative costs of
$10 million, and costs relating to wasted materials of $5 million.
Additionallti, during the tiear, Car soon agreed to construct a st orage facilitti on the same
customer's land for $7 million at a cost of $5 million. The parties agreed to modifti the
contract to include the construction of the storage facilitti, which was completed during the
current financial tiear. All of the additional costs relating to the above were capita lised as
assets in the financial statements.
The directors of C arsoon wish to know how to account for the penalties, counter claim and
additional costs in accordance with IFRS 15 Revenue from Contracts with Customers.
(8marks)
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 mork ollocation is shown against each of the three issues above.
(Total= 25marks)
61 Leigh '+9 mins

ACR June 2007 (amended)
(a) Leig h, a public limited companti, purchased t he whole of the share capita l of Hash, a
limited companti, on 1 June 20X6. The whole of the shore capital of Hash was formerlti
owned bti the five directors of Hash and under the t erms of the purchase agreement, the
five directors were to receive a total of three million ordinarti shares of $1 of Leigh on 1 June
20X6 (market value $6 million) and o further 5,000 shares per director on 31 Mati 20X7, if
the ti were st ill employed by Leigh on that date. All of the directors were still employed by Leigh
at 31 May 20X7.
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Questions 79
Leigh granted and issued ful ly paid shares ta its own employees on 31 May 20X7. Normall y
share options issued to employees would vest over a three-year period, but these shares
were given as a bonus because of the company 's exceptional performance over the period.
The shares in Leigh had a market value of $3 million (one m illion ordinary shares of $1 at $3
per share) on 31 May 20X7 and an average fair value of $2.5 million (one million ordina ry
shares of $1 at $2.50 per share) for the year ended 31 May 20X7. It is expected that Leigh's
share price will rise to $6 per share over the next three years. (10 marks)
(b) On 31 May 20X7, Leigh purchased property, plant and equipment for $4 million. The
supplier has agreed to accept payment for t he p roperty, plant and equipment either in
cash or in sha res. The supplier can either choose 1.5 million shares of Leigh to be issued in
six months' t ime or to receive a cash payment in three months' time equivalent to the
market val ue of 1.3 million shares. It is estimated that the share price will be $3.50 in three
months' time and $4 in six months' time.
Additionally, at 31 May 20X7, one of the directors recently appointed to the board has
been granted t he right to choose either 50,000 shares of Leigh or receive a cash payment
equal to the current value of 40,000 shares at t he settlement date. This right has been
granted because of the performance of the director during the year and is unconditional
at 31 May 20X7. The settlement date is 1 July 20X8 and the company estimates the fair
value of the share alternative is $2.50 per share at 31 May 20X7. The share price of Leigh
at 31 May 20X7 is $3 per share, and if the director chooses the share alternative, they must
be kept for a period of four years. (9 marks)
(c) Leigh acquired 30% of the o rdinary share capital of Handy, a public limited company, on
1 April 20X6. The purchase consideration was one million ordinary shares of Leigh which
had a market value of $2.50 per share at that date and t he fa ir value of the net assets of
Handy was $9 million. The retained earnings of Handy were $4 million and other reserves
of Handy we re $3 million at that date. Leigh appointed two directors to the Board of
Handy, and it intends to hold t he investment for a significant period of t ime. Leigh exerts
significant influence over Handy. The summarised statement of financial position of Handy
at 31 May 20X7 is as fo llows.
Sm
Share capital of $1 2
Other reserves 3
Retained earnings 5
10
Net assets 10
There had been no new issues of shares by Handy since the acquisition b y Leigh and t he
estimated recoverable amount of the net assets of Handy at 31 May 20X7 was $11 million.
(6 marks)
Required
Discuss with suitable computations how t he above share-based transactions should be

accounted for in the financial statements of Leigh for the yea r ended 31 May 20X7.
(Total = 25 marks)
62 Mehran '+9 mins

The directors of Mehran, a public limited compa ny, have seen many d ifferent ways of dealing
with t he measurement and d isclosure of the fair value of assets, liabilities and equity instruments.
They f eel that this reduces comparability among different entities' financial statements. They
would like advice on how IFRS 13 Fair Value Measurement should be applied to several
transactions.

MEDIA
(a) Mehran has j ust acquired a company, which comprises a farming and mining business.
Mehran wishes advice on how to place a fair value on 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 forming is $5 million. If the land is used for fa rming purposes, a tax credit
arises annually, wh ich is based upon the lower of 15% of the fair market va lue of land or
$500,000 at the cu rrent tax rate. The current tax rate in the jurisdiction is 20%.
Mehran has determined that market participants would consider t hat the land cou ld have
an alternative use for residential purposes. The fair value of the land for residential
purposes before associated cost s is thought to be $7.4 million. In order to transform the
land from farm ing 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 lega l
authority and because of this, market participants have indicated that the fair value of t he
land, after the above costs, would be discount ed by 20% because of the risk of not
obtaining planning permission.
In addition, Mehran has acquired t he brand name associated with the produce from the
farm. Mehran has d ecided to discontinue the brand on the assumption that it will gain
increased revenues from its own brands. Mehran has determined that if it ceases to use the
brand, then t he indirect benefits will be $20 million. If it continues to use the brand, then
the direct benefit w ill be $17 million. (7 marks)
(b) Mehran wishes to place a fair value on the inventory of the entity acquired. There are three
different markets for the produce, which a re mainly vegetables. The first is t he local
domestic market where Mehran can sell direct to retailers of the produce. The second
domestic market is one where Mehran sells directly to manufacturers of canned vegetables.
There ore no restrictions on the sale of produce in either of the domestic markets other than
the demand of the reta ilers and manufacturers. The final market is the export market but
the government limits the amount of produce which can be exported. Mehran needs a
licence from t he government to export its produce. Farmers tend to sell all of the produce
that they con in the export market and, when they do not have any further authorisation to
export, they sell the remaining produce in t he two domestic markets.
It is difficult to obtain information on the volume of trade in the domestic market where the
produce is sold locally direct to retailers but Mehran feels that t he market is at least as
large as the domestic market - direct to manufact urers. The volumes of sales quoted below
have been taken from trade journals.
Domestic Domestic
market market
- direct t o - direct to
retailers manufacturers Export market
Volume - annual Unknown 20,000 tonnes 10,000 tonnes
Volume - sales per month 10 tonnes 4 tonnes 60 tonnes
Price per tonne $1,000 $800 $1,200
Transport cost s per tonne $50 $70 $100
Selling agents' fees per tonne $4 $6
(10 marks)
(c) Mehran owns a non-controlling equity interest in Erham, a private company, and wishes to
measure the interest at its fair value at its financial year end of 31 March 20X6. Me hran
acquired the ordinary sha re interest in Erham on 1 April 20X4. During the current financial
year, Erham has issued further equity capital through the issue of preferred shores to a
venture capital fund .
As a result of the preferred shore issue, the venture capital fund now holds a control ling
interest in Erham. The terms of the preferred shores, including the voting rights, ore 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 shores rank a head of the
ordinary shores upon the liquidation of Erham. The transaction price for the preferred
shares was $15 per share.
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Questions 81
Mehran w ishes to know the factors which should be taken into account in measuring the
fa ir value of their holding in the ordinary shares of Erham a t 31 March 20X6 using a
market-based approach. ( 8 marks)
Required
Discuss the way in w hich Mehran should measure the fair value the above assets wit h reference
t o the principles of IFRS 13 Fair Value Measurement.
Note. The mark a llocation is shown against each of t he three issues above.
(Total = 25 marks)
63 Canto '+9 mins

Canto Co is a company which manufactures industrial machinery and has a year end of
28 February 20X7. The d irectors of Canto require advice on t he following issues:
(a) On 1 March 20X4, Canto acquired a property for $15 million, which was used as an office
building. Canto measured the property on the cost basis in property, plant and equipment.
The useful life of the building was estimated at 30 years from 1 March 20X4 with no
residual value. Depreciation is charged on the straight-line basis over its useful life. At
acquisition, the value of t he land content of the property was thought to be immaterial.
During the financia l year to 28 February 20X7, the planning authorities approved the land
to build industrial units and reta il outlets on the site. During 20X7, Canto ceased using the
property as an office and converted the property to an industrial unit. Canto also built
retail units on t he land during the year to 28 February 20X7. At 28 February 20X7, Canto
wishes to transfer the property at fair value t o investment property at $20 million. This
valuation was based upon other similar properties owned by Canto. However, if the whole
site were sold including the retail outlets, it is estimated t hat the value of the industrial units
would be $25 million because of synergies and complementary cash flows.
The directors of Canto wish to know whether t he fair valuation of the investment property is
in line w ith International Financial Reporting Standards and how to account for the change
in use of the property in the financial statements at 28 February 20X7. (9 marks)
(b) On 28 February 20X7, Canto acquired all of the share capit al of Binlory, a company which
manufactures and supplies industrial vehicles. At the acquisition dat e, Binlory has an order
backlog, which relates to a contract between itself and a customer for ten indust rial
vehicles to be delivered in the next two years.
In addition, Binlory requires the extensive use of water in the manufactu ring process and
can take a pre-determined quantity of water from a water source for industrial use. Binlory
cannot manufacture vehicles without t he use of t he water rights. Binlory was the first entity
to use water from t his source and acquired t his legal right at no cost several years ago.
Binlory has the right t o continue to use the quantity of water for manufacturing purposes
but any unused water cannot be sold separately. These rights can be lost over time if non-
use of the water source is demonstrated or if the water has not been used for a certain
number of years. Binlory feels that the valuation of these rights is quite subjective and
difficult to achieve.
The directors of Canto wish to know how to a ccount for t he above intangible assets on the
acquisition of Binlory. (8 marks)
(c) Canto a cqui red a cash-gene rating unit (CGU) several years ago but, at 28 February 20X7,
the directors of Canto were concerned that the value of the CGU had declined because of
a reduction in sales due to new com petitors entering the market. At 28 February 20X7, the
carr ying amounts of the assets in the CGU before any impairment testing were:
Sm
Goodwill 3
Property, plant and equipment 10
Other assets 19
Total 32
82 Strat egic Business Reporting (SBR) @BPP LEAR\ING

MEDIA
The fair values af the property, plant and equipment and the other assets at 28 February
20X7 were $10 million and $17 million respectively and their costs to sell were $ 100,000
and $300,000 respectively.
The CGU's cash flow forecasts for the next five years are as follows:
Date year ended Pre-tax cash flow Post-tax cash flow

$m $m
28 February 20X8 8 5
28 February 20X9 7 5
28 February 20Y0 5 3
28 February 20Y1 3 1.5
28 February 20Y2 13 10
The pre-tax discount rate for the CGU is 8% and the post-tax discount rate is 6%. Canto
has no plans to expand the capacity of the CGU and believes that a reorganisation would
bring cost savings but, as yet, no plan has been approved.
The directors of Canto need advice as to whether the CGU's va lue is impaired. The
following extract from a table of present value factors has been provided.
Year Discount rate 6% Discount ra te 8%

1 0.9434 0.9259
2 0.8900 0.8573
3 0.8396 0.7938
4 0.7921 0.7350
5 0.7473 0 .6806
(8 marks)
Required
Advise the directors of Canto on how the above transactions should be dealt with in its financial
statements with reference to relevant International Financial Reporting Standards.
Note. The mark a llocation is shown against each of the three issues above.
(Total= 25 marks)
61.t Ethan lt9 mins

Ethan, a public limited company, develops, operates and sells investment properties.
(a) Ethan focuses mainly on acquiring properties where it foresees growth potential, through
rental income as well as value appreciation. The acquisition of an investment property is
usually realised through the acquisition of the entity, which holds the property.
In Ethan's consolidated financial statements, investment properties acquired th rough
business combinations are recognised at fair value, using a d iscounted cash flow model as
approximation to fair value. There is currently an active market for this type of property.
The difference between the fair va lue of the investment property as determined under the
accounting policy, and the val ue of the investment property for tax purposes results in a
deferred tax liabilit y.
Goodwill arising on business combinations is determined using the measurement p rinciples
for the investment properties as outlined above. Goodwill is only considered impaired if and
when the deferred tax liability is reduced below the amount at which it was first recognised.
This reduction can be caused both by a reduction in the value of the real estate or a
change in local tax regulations. As long as the deferred tax liability is equal to, or larger
than, the prior year, no impairment is charged to goodwill. Ethan explained its accounting
treatment by confirming that almost all of its goodwill is due to the deferred tax liability
and that it is normal in the industry t o account for goodwill in this way.
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Questions 83
Since 20X0, Ethan has incurred substantial annual losses except for the year ended
31 May 20X3, when it made a small profit before tax. In year ended 31 May 20X3, most
of the profit consisted of income recognised on revaluation of investment properties.
Ethan had announced early in its financial year ended 31 May 20X4 that it a ntic ipated
substantial growth and profit. Later in the year, however, Etha n announced that the
expect ed profit would not be achieved a nd that, instead, a substantial loss would be
incurred. Ethan had a history of reporting considerable negative variances from its
budgeted results. Ethan's recognised deferred tax asset s have been increasing year-on-
year despite the deferred tax liabilities recognised on business combi nations. Ethan's
deferred tax a ssets consist primarily of unused tax losses that ca n be carried forward
which a re unlikely to be offset against anticipated future taxable profits. (13 marks)
(b) Ethan wishes to apply the fair value option rules of IFRS 9 Financial Instruments to debt
issued to finance its investment properties. Ethan 's argument for applying the fair value
option is based upon the fact that the recog nition of gains and losses on its investment
properties and the related debt would otherwise be inconsist ent. Ethan argued that there
is a specific financial correlation between the fact ors, such as interest rates, that form the
basis for determining the fair value of bath Et han's investment properties and the related
debt. (7 marks)
(c) Ethan has an o perating subsidiary, which has in issue A and B shares, both of wh ic h
have voting rights. Ethan holds 70% of the A and B shares and the remainder are held by
shareholders external t o the group. The subsidiary is obliged to pay an annual dividend of
5% on the B shares. The dividend payment is cumulative even if the subsidiary does not
have sufficient legally d istributable profit at the time the payment is due.
In Ethan's consolidated st atement of financial position, the B shares of the subsidiary were
acc ounted for in the same way as equity instruments would be, w ith the B shares owned by
external parties reported as a non-controlling interest. (5 marks)
Required
Discuss how the above transactions and events sho uld be recorded in the consolidated financia l
statement s of Ethan.
Note. The mark allocation is shown against each of t he three t ransactions above.
(Total = 25 marks)
65 Whitebirk '+3 mins

(a) The main argument for separate accounting standards for small a nd medium-sized entities
is the undue cost burden of reporting, which is proportionately heavier for smaller firms.
Required
Discuss the main differences and modifications to IFRS which the IASB made when it
published the IFRS for Small and Medium-Sized Ent ities (IFRS for SMEs), giving specific
examples where possible and include in your d iscussion how the Board has dealt with t he
problem of defining an SME. (11 marks)
(b) Whitebirk has met the def inition of a SME in its jurisd iction and w ishes to comply w ith
the IFRS for SMEs. The entity wishes t o seek advice on how it will deal w ith t he following
accounting issues in its fina ncial statements for the year ended 30 November 20X2. The
entity a lready prepares its financia l statements under fu ll lFRS Standards.
(i) Whitebirk purchased 90% of Close, an SME, on 1 December 20X1. The purchase
consideration was $5.7 million a nd the value of C lose's identifiable asset s was
$6 million. Whitebirk has elected to measure the non-controlling interest at
acquisition at its fa ir value of $0.7 million. The life of the goodwill ca nnot be
estimated with any accuracy. Whitebirk wishes to know how t o account fo r
goodwill under the IFRS for SMEs .
Sit Strat egic Business Reporting (SBR) @BPP LEAR\,NC:

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(ii) Whitebirk has incurred $1 million of research expenditure to develop a new product
in the year to 30 November 20X2. Additionally, it incurred $500,000 of development
expenditure to bring another product to a stage where it is ready to be marketed
and sold.
(iii) Wh itebirk purchased some properties for $1.7 million on 1 December 20X1 and
designated t hem as investment properties under t he cost model. No depreciation
was charged as a real estate agent valued the properties at $1.9 million at the
year end.
(iv) Wh itebirk has an intangible asset valued at $1 million on 1 December 20X1. The asset
has an indefinite useful life, and in previous years had been reviewed for impairment.
As at 30 November 20X2, t here are no indications that the asset is impaired.
Required
Discuss how t he above transactions shou ld be dealt with in the financial stat ements of
Whitebirk, w ith reference to t he IFRS for SMEs. (11 marks)
(Total= 22 marks)
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Questions 85
AnsYler Bank
• • • • •
• • •
• . . • • • •
• • • • •
• • •
• • • • •
• • • • •
• • . •
. . • . • •
Section 1 - Preparation questions
1 Financial instruments
(a) STATEMENT O F PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
$
Finance income
(441,014 X 0/v1) 8%) 35,281
STATEMENT OF FINANCIAL POSITION

Non-current assets
Financial asset (441 ,01 4 + 35,281) 476,295
Working: Effective interest rate
6
00,000 = 1.3605 :. from tables interest rate is 8%
441,014
(b) Compound instrument
$
Presentation
Financial liability component of convertible bond 0/vorking) 1,797,467
Equity
Equity component of convertible bond (2,000,000 - 0/vorking) 1,797,467) 202,533
Working : Fair value of equivalent non-convertible debt
$
Present value of principal payable at end of 3 years 1,544,367
1
(4,000 x S500=S2m x - -)
(1.09)3
Present value of interest annuity pa ya b le a nnually in arrears

for 3 years ((5% x $2m) x 2 .531] 253,100
1,797,467
2 Leases
(a) Interest rate implic it in the lea se
PV = annuity x cumulative d iscount factor (CDF)
250,000 = 78,864 x CDF
250,000
:. CDF
78,864
= 3.170
:. Interest rate is 10%

(b) At the inception of the lease, Sugar Co recognises a rig ht-of-use asset and a lease liability.
The right-of- use asset is measured at the amount of the lease liabilit y, which is the p resent
value of the future lease payments discounted at the rate of interest implicit in the lease,
here $250,000. At 31 December, the right-of- use asset is measured at cost less
accumulated depreciation: $250,000 - $(250,000/4) = $187,500. The lease liability is
measured by increasing the carrying a m ount to refl ect interest on the lease liability and
reducing the ca rrying amount to reflect the lease payments made.
Answers 89
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X1 (EXTRACT)
Property, plant and equipment s
Right-of-use asset 187,500
Lease liabilities 0N) 136,886
Current liabilities
Lease liabilities 0N) (196,136 - 136,886) 59,250
FOR THE YEAR ENDED 31 DECEMBER 20X1 (EXTRACT) (PROFIT OR LOSS SECTION)
Depreciation on right-of-use asset 62,500

Finance charges 25,000
Working: lease liability
s
Year ended 31 December 20X1:
1.1.X1 Liability b/d 250,000
1.1.X1 - 31.12.X1 Interest at 10% 25,000
31.12.X1 Instalment in arrears (78,864)
31.12.X1 Liability c/d 196,136
Year ended 31 December 20X2:

1.1.X2 - 31.12.X2 Interest at 10% 19,614
31.12.X2 Instalment in arrears (78,864)
31.12.X2 Liability c/d ~
3 Defined benefit plan
NOTES TO THE STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
Sm
Past service cost 10
Net interest on the net defined benefit asset (10% x (110 + 10)) - (10% x 150) _@)
18
Other comprehensive income (items that will not be rec/ossified to profit or loss)
Sm
Remeasurement gain on defined benefit obligation 17
Remeasurement loss on plan assets (22)
_@
Net defined benefit asset recognised in the statement of financial position
3 1 December 3 1 December
20X1 20XO
Sm Sm
Present value of pension obligation 116 110
Fair value of plan assets (140) (150)
Net a sset (24) (40)
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Changes in t he present value of the defined benefit obligation
Sm
O pening defined benefit obligation 110
Interest on obligation (10% x (110 + 10)) 12
Post service cost 10
Benefits paid (10)
Goin on remeasurement through OCI (balancing figure) J0
Closing defined benefit obligation 116
Sm
Opening fair value of pion asset s 150
Interest on pion assets (10% x 150) 15
Cont ributions 7
Benefits paid (10)
Loss on remeasurement through OCI (balancing figure) (22)
Closing fair value of pion assets 140
Tuto rial note.

The interest on the defined benefit obligation is calculated on the balance at the start of the year
($110 million) plus the increase in obligation of $10 million due to post service costs. Interest is
charged on the increase in obligation due to past service costs because the $10 million given in
the question is the present value at the start of the year (if it were the present value at the end of
the year, no interest would be required).
Lt Sundry standards
~ rkboo k reference. Employee benefits ore covered in Chapter 5 of the SBR Workbook,
l:_:bedded derivatives in covered in Chapter 8.
(a) NOTES TO THE STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
7
s·ooo
Net interest on the net defined benefit liability (318 - 306) 12
Curtailment cost 58
345
Other comprehensive income (items that w ill not be rec/ossified to profit or loss)
s·ooo
Remeasurement loss on defined benefit obligation (19)
Remeasurement gain on pion assets 89
70
Answers 91
Net defined benefit liability recognised in the statemen t of financial position
31 January 31 January
20X8 20X7
Sm $'000
Present value of pension obligation 4,640 4,300
Fair va lue of pion assets (4,215) (3,600)
Net liability 425 700
$'000
Opening defined benefit obligation 4,300
Benefits paid (330)
Interest on obligation (4,300 - 330) x 8% 318
Curtailment 58
Loss on remeasurement through OCI (balancing figure) 19
Closing defined benefit obligation 4,640
Changes in the fair value of pion assets
$'000
Opening fair value of plan assets 3,600
Contributions 550
Benefits paid (330)
Interest on pion assets ((3,600 + 550 - 330) x 8%) 306
Goin on remeasurement through OCI (balancing figure) 89
Closing fair value of pion assets 4,215
(b) Settlemen t
(i) Calculation of net defined benefit liability

20X8
$'000
Opening defined benefit obligation (1.1.X8) 40,000
Interest on obligation (40,000 x 8%) 3,200
Current service cost 2,500
Post service cost 2,000
Benefits paid (1,974)
45,726
Loss on remeasurement through OCI (bol. fig .) 274
Closing defined benefit obligation (31 .12.X8) 46,000
20X9
$'000
Opening defined benefit obligation (1.1.X9) 46,000
Interest on obligation (46,000 x 9%) 4,140
Current service cost 2,860
Settlement (11 ,400)
39,400
Loss on remeasurement through OCI (bol. fig.) 1,400
Closing defined benefit obligation (31.12.X9) 40,800
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20X8
$'000
Opening fa ir value of plan assets (1.1.XB) 40,000
Interest on plan assets (40,000 x 8%) 3,200
Contributions paid 2,000
43,226
Loss on remeasu rement through OCI (bal. fig.) ~
Closing fair value of plan assets (31.12.XB) 43,000
$'000
Opening fair value of plant assets (1.1.X9) 43,000
Interest on plan assets (43,000 x 9%) 3,870
Settlement (10,800)
Contributions paid in 2,200
36,070
Loss on remeasurement through OCI (bal. fig.) (390)
Closing fair value of plan assets (31.12.X9) 35,680
• During 20X8, there is an improvement in the future benefits available under

the plan and as a result there is a past service cost of $2 million, being the
increase in the present value of the obligation as a result of the change.
• During 20X9, Sion sells part of its operations and transfers the relevant part of
the pension plan to the purchaser. This is a settlement. The overall gain on
settlement is calculated as:
$'000
Present value of obligation settled 11,400
Fair value of plan assets transferred on settlement (10,800)
Cash transferred on sett lement (400)
Gain 200
(ii) Financial statements extracts
STATEMENT OF FINANCIAL POSITION
20X8 20X9
$'000 $'000
Net defined benefit liability:
(46,000 - 43,000)/(40,800 - 35,680) 3,000 5,120
20X8 20X9
$'000 $'000
Profit or loss
C urrent service cost 2,500 2,860
Past service cost 2,000
Gain on settlement (200)
Net interest: (3,200 - 3,200)/(4,140 - 3,870) 270
Other comprehensive income

Remeasurement loss on defined benefit pension plan:
(274 + 226)/(1,400 + 390) 500 1,790
O
BPP
LU.Ir! N
11.-111. Answers 93
(c) Classification of financial assets
Bed's deposit is a financial asset. Accor ding to IFRS 9 Financial Instruments, fina ncia l
assets a re classified as measured at either amortised cost or fair value.
A fina ncia l asset is measured at amortised cost where:

(i) The asset is held w ith in a business model w here the objective is to hold financial
assets in order to collect contrac tual cash flows; and
(ii) The contractual terms of the financia l asset g ive rise on specified dates to c a sh
flows that are solely payments of principal and interest on the principal amount
outstand ing.
All other financial asset s ore measured at fair va lue.

Deposit with Em Bank
At first g lance, it appears that th is deposit may meet the criteria to be measured at
amortised cost beca use Bed will receive cash flows comprising t he principa l amoun t
($10 million) and interest (2.5%). However, IFRS 9 requires the cash flows to be consistent
with a basic lending arrangement, where the time value of money and credit risk are
t ypically the most significa nt elements of interest. Contractual terms that introduce
exposure to risk or volatility in the contractual cash flows tha t is unrelated to a basic
lending arrangement, such as exposure to changes in exchange rates, do not give rise to
contractual cash flows that are solely payments of principal and interest.
The additional 3% interest Bed will receive if the exchange rate target is reached, exposes
Bed t o risk in cash flows that are unrelated to a basic lending arrangement (movement
in excha nge rates). Therefore, the contract w ith Em Bank does not give rise to cont ractual
cash flows that are purely pa yments of principal a nd interest and as a result, it should not
be measured at amortised cost . This type of cont ract is referred to a s a ' hybrid contract'.
This additional 3% dependent on exchange rates is a n embedded derivative. Derivatives

embedded wit hin a host which is a financial asset w ithin the scope of IFRS 9 are not
separated out for accounting purposes. Instead the usual IFRS 9 measure ment
requirements should be applied to the entire hyb rid cont ract.
Since the contrac t with Em Bank does n ot meet the criteria to be measured at amortised
cost , the entire c ontract (includ ing the t erm entit ling Bed to an ad ditional 3% if the
exchange rate target is met) should be measured at fair value through profit o r loss.
5 Control
(a) IFRS 10 states t hat an investor controls an investee if and only if it has all of the following.
(1) Power over the investee;
(2) Exposure, or rights, to varia ble returns from its involvement with the investee; and
(3) The ability to use its power over the investee to affect the amount of the investor's
returns.
Power is defined as existing rights that give the current ability to direc t the relevant
a c tivities of the investee. There is no requirement for that power to have been exercised.
Relevant activities may include:
• Selling and purchasing goods or services

• Managing financial assets
• Selecting, acquiring a nd disposing of a ssets
• Researching and developing new products a nd processes
• Determining a funding structure or obtaining fund ing
In some cases assessing power is straightforward, for example, where power is obtained
directly and solely from having the majority of voting rights or potential voting righ ts, and
as a result the ability to direct relevant activities.
91+ Strategic Business Reporting (SBR) @BPP LEAR\,NC:

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(b)
,, , - Twist
,, ,, 12 others x 5% = 60%
/
Shareholder %
40
agreement
'
' - Oliver
The absolute size of Twist's holding and the relative size of the other shareholdings alone
are not conclusive in determining whether the investor has rights sufficient to give it power.
However, t he fact that Twist has a contractual right to appoint, remove and set the
remuneration of management is sufficient to conclude that it has power over Oliver.
The fact that Twist has not exercised this right is not a determining factor when assessing
whether Twist has power. In conclusion, Twist does control Oliver, and should consolidate it.
(c)
Copperfield Murdstone Steerforth 3 others x 1 %
=3%
Spenlow
In this case, the size of Copperfield's voting interest and its size relative to the other
shareholdings are sufficient to conclude that Copperfield does not have power. Only two
other investors, Murdst one and Steerforth, would need t o co-operate to be able to prevent
Copperfield from directing the relevant activities of Spenlow.
(d)
Scrooge Morley
35%+ 35%1---➔ ??
= 70%
I
Option
Cratchett
Scrooge holds a majority of the cu rrent voting rights of Cratchett, so is likely to meet
the power criterion because it appears to have the current ability t o direct the relevant
activities. Although Marley has currently exercisable options to purchase additional voting
rights (that, if exercised, would give it a majority of the voting rights in Cratchett), the
terms and conditions associated with those options ore such that the options ore not
considered substantive.
Thus voting rights, even combined with potential voting rights, may not be the decid ing
factor. Scrooge should consolidate Cratchett.
O BPP
LEIP' II G
,rn1A Answers 95
6 Associate
J GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X5
Assets $'000
Non-current assets
Freehold property (1,950 + 1,250 + 370 0N7)) 3,570
Plant and equipment (795 + 375) 1,170
Investment in associate 0N3) 480
5,220
Current assets
Inventories (575 + 300 - 20 0/v6)) 855
Trade receivables (330 + 290)) 620
Cash at bank and in hand (50 + 120) 170
1,645
6,865
Issued share capital 2,000
3,785
Non-controlling interests 0N5) 890
Total equity 4,675
12% debentures (500 + 100) 600
Current liabilities
Bank overdraft 560
Trade payables (680 + 350) 1,030
1,590
Total liabilities 2,190
6,865
Workings
Group structure
J
600/100 225/ 750
p s
Pre-acquisition
profits $200k $150k

2 Goodwill
$'000 $'000
Consideration transferred 1,000
NCI (at 'full' FV: 400 x $1.65) 660
Net assets acquired:

Share capita l 1,000
Retained earnings at acquisition 200
Fa ir value adjustment (W7) 400
(1,600)
60
Impairments to date _@)
Year-end va lue
3 Investment in associate
$'000
Cost of associate 500.0
Share of post-acquisition retained reserves 0/1/4) 72.0
Less impairment of investment in a ssociate (92.0)
480.0
4 Retained earnings
JCo PCo SCo

$'000 $'000 $'000
Retained earnings per question 1,460 885 390
Unrealised profit 0/1/6) (20)
Fair va lue adjustment
movement 0/1/6) (30)
Retained earnings at a cquisition (200) (150)
635 240
P Co: share of post-acquisition retained
earnings
60% X 635 381
S Co: share of post-acquisition retained
earnings
30% X 240 72
Goodwill impairments to date
P Co: 60 0/1/2) x 60% (36)
SCo __jzg)
1,785
5 Non-controlling interests
$'000
NC I at acquisition 0/1/2) 660
NC I share of post-acquisition retained earnings (0/1/4) 635 x 40%) 254
NC I share of impa irment losses (0/1/2) 60 x 40%) ~
890
6 Unrealised profit on inventories
P Co JCo $100k x 25/ 125 = $20,000
O BPP
LE/111 11(,
,,.-11\, Answers 97
7 Fair value adjustment table
At reporting
At acquisition Movement date
$'000 $'000 $'000
Land 200 200
Buildings 200 170 (200 X 34/40)
400 370
7 Part disposal
(a) ANGEL GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X8
$'000
Non-current assets
Property, plant and equipment 200.00
Investment in Shone 0/1/3) 133.15
333.15
Current assets (890 + 120 (cash on sole)) 1,010.00
1,343.15

Shore capitol 500.00
Retained reserves 0/1/4) 533.15
1,033.15
Current liabilities 310 .00
1,343.15
ANGEL GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X8
$'000
Profit before interest and tax [100 + (20 x 6/12)] 110.00
Profit on disposal of shores in subsidiary 0/1/6) 80.30
Shore of profit of associate (12 x 35% x 6/12) 2.10
Profit before tax 192.40
Income tax expense [40 + (8 x 6/12)] (44.00)
Profit for the year 148.40
Other comprehensive income (not reclassified to P/L) net of tax [10 + (6 x 6/12)] 13.00
Shore of other comprehensive income of associate (6 x 35% x 6/12) 1.05
Other comprehensive income for the year 14.05
Total comprehensive income for the year 162.45

Owners of the parent 146.60
Non-controlling interests (12 x 6/12 x 30%) 1.80
148.40
Owners of the parents 159.75
Non-controlling interests (18 x 6/12 x 30%) 2.70
162.45
98 Strategic Business Reporting (SBR) @BPP LE.ARM NC

MHllA
ANGEL GROUP
CONSOLIDATED RECONCILIATION OF MOVEMENT IN RETAINED RESERVES
$'000
Balance at 31 December 20X7 0/1/5) 373.40
Total comprehensive income for the year 159.75
Balance at 31 December 20X8 0/1/4) 533.15
Workings
Timeline
1.1.fOXA
SOCI
Subsidiary - 6/12 Associate - 6/12

0
Group gain on Equity account in
disposal SOFP
2 Goodwill - Shane
$'000 $'000
Consideration transferred 120.0
Non-controlling interests (FV) 51.4
Less:
Share capita l 100
Retained reserves 10
{110.0)
61.4
3 Investment in associate
$'000
Fair value at date control lost 130.00
Share of post 'acquisition ' retained reserves 0/1/4) 3.15
133.15
4 Group retained reserves

Ange/ Shane Shane
$'000 $'000 $'000
70% 35% retained
Per question/date of disposal
(90 - (18 X 6/12)) 400.00 81 90
Group profit on disposal 0/1/4) 80.30
Less retained reserves at
acquisition/date of disposal (10) .@!)
71 9
Shane: 70% x 71 49.70
Shane: 35% x 9 3.15
533.15
Answers 99
5 Retained reserves blf
Ange/ Shane
$'000 $'000
Per question 330.0 72
Less pre-acquisition retained reserves (10)
330.0 62
Shane - Shore af past-acquisition ret'd reserves (62 x 70%) 43.4
373.4
6 G roup profit on disposal of Shone

$'000 $'000
Fair value af consideration received 120.0
Fair value of 35% investment retained 130.0
Less shore of carr ying amount when control lost
Net assets 190 - (18 x 6/12) 181.0
Goodwill 0/V2) 61.4
Less non-controlling interests 0N7) (72.7)
(169.7)
80.3
7 Non-controlling interests at dote of disposal

$'000
Non-controlling interest at acquisition (FV) 51.4
NCI shore of post- acq'n retained earnings (30% x 710/V4)) 21.3
72.7
(b) Angel disposes of 10% of its holding

If Angel disposes of 10% of its holding in Shane, Shone goes from being o 70% subsidiary to
o 60% subsidiary. In other words control is retained. No accounting boundary has been
crossed, and the event is treated as a transaction between owners.
The accounting treatment is as follows:

Statement of profit or loss and other comprehensive income
(i) The subsidiary is consolidated in full for t he whole period.
(ii) The non-controlling interest in the statement of profit or loss and other
comprehensive income will be based on percentage before and after disposal,
ie time apportion.
(iii) There is na profit or loss on d isposal.
Statement of financial position

(i) The change (increase) in non-controlling interests is shown as on adjustment to
the parent's equity.
(ii) Goodwill on acquisition is unchanged in the consolidated statement of financial
position.
In the case of Angel and Shane you would time apportion the non-controlling interest in the
statement of profit or loss and other comprehensive income, giving 30% for the first half the
year and 40% for the second half. You would also calcu late the adjustment to the parent's
equity as follows:
$'000
Fair va lue of consideration received X
Increase in NCI in net assets and goodwill at disposal (X)
Adjustment to parent's equit y X
100 Strategic Business Reporting (SBR) @BPP

LEAR\IMG
MEDIA
8 Step acquisition
(a) Prior to the acquisition of 20% on 1 March 20X1, SD already cont rols KL with its 60%
investment, so KL is already a subsidiary and would be fu lly consol idated . In substance,
this is not an acquisition. Instead, it is t reated in t he group accounts as a transaction
between the group shareholders ie the parent has purchased a 20% shareholding from
the non-controlling interests (NCI). No goodwill is calculated on the additional investment.
The value of the NCI needs to be worked out at the date of the addit ional investment
(1 March 20X1), a nd t he proportion purchased by the parent needs to be removed
from NCI. The difference between the consideration transferred and the amount of the
reduction in the NCI is included as an adjustment to equity.
KL must be consolidated in the group statement of profit or loss and other
comprehensive income for the full year but NCI wil l be pro-rated with 40% for t he first
eight months and 20% for the following four months. In the consolidated statement of
financial p ositio n , KL will be consolidated with a 20% NCI.
(b) (i) Goodwill $1,450,000 (YV2)
(ii) Group retained earnings $9,843,999 0/'13)
(iii) Non-controlling interests $1,096,001 (YV4)
Workings
Group structure
SD
1.7.X0 60%
1.3.X1 20%
80%
KL Pre-acquisition retained earnings $2,760,000
Timeline
1.7.X0 1.3.X1 30.6.X1
SPLOCI Consolidate for full year
NC I 40% x 8/12 ~ NC I 20% x 4/12
Acquired 60% Acquired 20% Consol in

subsidiary 60%+ 20% SOFP with
= 80% Subsidiary 20%NCI
2 Goodwill (calculated at date when control was originally obtained)

$ $
Considerat ion transferred 3,250,000
NCI at fair value 1,960,000
Less net assets at acquisition:
Share capital 1,000,000
Pre-acquisition retained earnings 0/'11) 2,760,000
(3,760,000)
Goodwill 1,450,000
Answers 101
3 Consolidated reta ined earnings
SD KL KL
60% 80%
$ $ $
At year end/step acquisition 9, 400,000 3,186,667 3,400,000
Unrealised profit 0/115) (60,000)
At acquisition/step acquisition (2,760,000) (3,186,667)
426,667 153,333
Group share (60% x 426,667) 256,000
(80% X 153,333) 122,666
Adjustment to parent's equity W6) 65,333
9,843,999
KL' s retained earnings for t he year to 30 June 20X1 (3,400,000 - 2,760,000) = $640,000
KL' s retained earnings for t he 8 months to 28 February 20X1 (640,000 x 8/12) = $426,667
KL's retained earnings as at 28 February 20X1 (2,760,000 + 426,667) = $3,186,667
4 Non-controlling interest
$
NCI at acquisition 1,960,000
NCI share of post-acquisition retained earnings to 28.2.X1
(40% X 426,667 0/113)) 170,667
2,130,667
Decrease in NCI on further acquisition (20%/40% x 2,130,667) (1,065,333)
NCI share of post-acquisition retained earnings to 30.6.X1
(20% X 153,333 0/113)) 30,667
1,096,001
5 Provision for unrealised p rofit

lntragroup sales by KL $750,000
25
Mark- up ($750,000 x ) x 40% = $60,000
125
(adj ust in KL's retained earnings for t he period after 1 March 20X1)
6 Adjustment to equity on acquisition of further 20% of KL
$
Fair val ue of consideration paid (1,000,000)
Decrease in NC I 0/114) 1,065,333
Adjustment to equity 65,333
Adjustment would be:
$ $
Debit (.J,) Non-controlling interest 1,065,333
C redit (t) G roup equity 65,333
Credit (.J,) Cash (consideration) 1,000,000
102 Strategic Business Reporting (SBR) @BPP EAR, t<C

U.£111 1\
9 Foreign operation
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
$'000
Property , plant and equip ment (1,285 + 543 0N2)) 1,828
Goodwill 0N4) 2 40
2,068
Current assets (410 + 247 0N2)) 657

2,725
Share capital 500

Retained earnings 0N5) 1,260
Other components of equity - t ranslat ion reserve 0N8) -----2.8.
1,858
Non-controlling interest 0N6) -131
1,989
Loans (200 + 37 0N2)) 237
Current liabilit ies (400 + 99 0N2)) 499
736
2,725
CONSOLIDATED STATEMENT O F PROFIT OR LOSS AND OTHER COM PREHENSIVE INCOM E
$'000
Revenue (1,125 + 619 0N3)) 1,744
Cost of sales (410 + 274 0N3)) (684)
Grass profit 1,060
Other expenses (180 + 108 0N3)) (288)
Goodwill impairment loss 0N4) ~)
Income t ax expense (180 + 76 0N3)) (256)
Profit for the year 498
Other comprehensive income
Items that may subsequently be reclassified to profit or loss
Exc hange d ifference on t ranslat ing foreign operat ions 0N9) 69
Total comprehensive income for the year 567
Owners of t he parent (balancing figure) 466
Non-controlling interests 0N7) ~
498
Owners of t he parent 525
Non-controlling interests 0N7) 42
567
Workings
Group structure
St andard
1.1.20X5 80%
Odense Pre- acquisition reta ined earnings= 2,500,000 krone
O BPP
LEJ.mNG
r,,-n. Answers 103
2 Translation of Odense - Statement of financial position
Kr'000 Rate $'000
Property, plant and equipment 4,400 8.1 543
Current assets 2,000 8.1 247
6,400 790
Shore capitol 1,000 9.4 106

Pre-acquisition retained earnings 2,500 9.4 266
Post-acquisition retained earnings:
• 20X5 profit 1,200 9.1 132
• 20X5 dividend (345) 8.8 (39)
470
• 20X6 profit 1,350 8.4 161
• 20X6 dividend (405) 8.1 (50)
Exchange difference on net assets Bal fig ...za
5,300 654
Loons 300 8.1 37
Current liabilities 800 8.1 99
1,100 136
6,400 790
3 Translation of Odense - statement of profit or loss and other comprehensive income

Odense Rate Odense
Kr'000 $'000
Revenue 5,200 8.4 619
Cost of soles (2,300) 8.4 (274)
Gross profit 2,900 345
Other expenses (910) 8.4 (108)
Profit before tax 1,990 237
Income tax expense (640) 8.4 (76)
Profit/Total comprehensive income for the year 1,350 161
4 Goodwill
Kr'000 Kr'000 Rate $'000
Consideration transferred (520 x 9.4)
Non-controlling interests (3,500 x 20%)
4,888}
700
520
74
Shore capitol 1,000 9.4
(3,500) (372)
2,088 222
Exchange differences 20X5 ~ 15
At 31.12.X5 2,088 8.8 237
Impairment losses 20X6 (148) 8.1 (18)
Exc hange differences 20X6 ~ 21
At 31.12.X6 1,940 8.1 240
5 Consolidated retained earnings

Standard Odense
$'000 $'000
At year end 1,115 470
At acquisition (266)
204
Group shore of post-acquisition retained earnings (204 x 80%) 163
Less: impairment losses to dote 0/1/4) _@
1,260
101t Strategic Business Reporting (SBR) (Z) BPP

LEAR~IMG
1/ !0IA
6 Non-controlling interests (sta tement of financial position)
$'000
NCI at acquisition 0N4) 74
NCI shore of post-acquisition retained earnings of Odense (204 0N5) x 20%) 41
NCI shore of exchange differences on net assets (78 0N2) x 20%) 16
131
7 Non-controlling interests (sta tement of profit or loss and other comprehensive income)
PFY TC/
$'000 $'000
Profit/Totol comprehensive income for the year 0N3) 161 161
Other comprehensive income: exchange differences on net
assets 0N9) 48
161 209
NCI shore X 20% X 20%
= 32 = 42
8 Consolidated translation reserve
$'000
Exchange differences on net assets (78 0N2) x 80%) 62
Exchange differences on goodwill (15 + 21 0/v4)) 36
98
9 Exchange differences
$'000
On translation of net assets:
C losing NA @ CR 0/v2) 654
Opening NA @ OR (1,000 + 3,355 = 4,355*@ 8.8) (495)
Less retained profit as t ranslated (PFY - dividends)(161 0N3) - 405 @ 8.1) @)
48
On goodwill 0/v4) 21
69
* The opening net assets hove been calcu lated as shore capitol (from Odense's statement of
financial position) plus opening retained earnings (from Odense's statement of changes in equity
extract). Alt ernatively, they could hove been calculated as closing net assets less total
comprehensive income for the year plus dividends: Kr(5,300,000 - 1,350,000 + 405,000).
~
Tuto rial note.
As Standard chose to measure the non-controlling interest in Odense at the proportionate shore
of net assets at acquisition, only group goodwill is recognised in the consolidated statement of
financial position and therefore, no goodwill is recognised for the non-cont rolling interests (NCI).
Therefore, there ore no exchange differences on goodwill relating to NCI. This is why only t he
exchange differences on net assets (and not the exchange differences on goodwill) are included
in t he NCI workings (0N6) and 0N7)). Since all the recognised goodwill relates to the group, in the
consolidated translation reserve working 0N8), the exchange differences on goodwill ore not
multiplied by the group share.
If Standard had measured NCI at fair value at acquisition, both group goodwill and goodwill
relating to the NCI would have been recognised. Therefore, in the NCI workings, t he exchange
differences on goodwill would be included. In the consolidated translation reserve working, the
exchange differences on goodwill would be multiplied by the group share (in the same way as the
exchange differences on net assets have been t reated).
Answers 105
It m ight help if you think about the treatment of exchonge differences on goodwill as being
the same as the treatment for impairment losses on goodwill. So when NCI is measured at the
proportionate share of net assets at acquisition, as a ll of the recognised goodwill relates to the
group, a ll of the impairment losses and exchange differences on goodwill belong to the group
so they should be recognised in full in the consolidated ret ained earnings and translation reserve
workings respectively and neither would be included in NCI workings. Whereas for the ful l
goodwill method, impairment losses and exchange differences on goodwill are apport ioned
between the group (in the retained earnings and tra nslat ion reserve workings) and t he NCI
(in the NCI workings).
10 Consolidated statement of cash flows

STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 20X5
$'000 $'000
Cash f lows from operating activities
Profit before tax 16,500
Adjustments for:
Depreciation 5,800
Impairment losses (W1) 240
22,540
Increase in trade receivables (W4) (1,700)
Increase in inventories (W4) (4,400)
Increase in trade payables (W4) 1,200
Cash generated from operations 17,640
Income t axes paid (W3) (4,200)
Net cash from operating activities 13,440
Cash f lows from investing activities
Acquisition of subsidiary net of cash acquired (600)
Purchase of property, plant and equipment (W1) (13,100)
Net cash used in investing activities (13,700)
Cash f lows from financing activities
Proceeds from issue of share capital (W2) 2,100
Dividends paid (W2) (900)
Dividends paid to non- controlling interest (W2) ~ )
Net cash from financing act ivities 1,160
Net increase in cash and cash equivalents 900
Cash and cash equivalents at the beginning of the period 1,500
Cash and cash equivalents at the end of the period 2,400
Workings
Assets
Property, plant
and equipment Goodwill
$'000 $'000
b/d 25,000
OCI (revaluation) 500
Depreciation/ Impairment (5,800) (240) ll
Acquisition of sub/associate 2,700 1,640 (W5)
Cash paid/(rec'd) jl 13,100
c/d 35,500
106 Strategic Business Reporting (SBR) @BPP LIAAN1NC,

~r-,,"
2 Equity
Non-
Sha re Share Retained controlling
capital premium earnings interest
$'000 $'000 $'000 $'000
b/d 10,000 2,000 21,900
SPLOCI 11 ,100 350
Acquisition of subsidiary 1,500 2,500 1,440 0N5)
Cash (paid)/rec'd ~ 800 1,300 (900)* (40)
c/d 12,300 5,800 32,100 1,750
*Dividend paid is given in question but working shown for clarit y.

3 Liabilities
Tax payable
$'000
b/d 4,000
P/L 5,200
Acquisition of subsidiary 200
Cash (paid)/rec'd (4,200) ~
c/d 5,200
4 Working capita/ changes
Inventories Receivables Payables

$'000 $'000 $'000
Balance b/d 10,000 7,500 6,100
Acquisition of subsidiary 1,600 600 300
11 ,600 8,100 6,400
lncrease/(decrease) (balancing figure) 4,400 1,700 1,200
Balance c/d 16,000 9,800 7,600
5 Purchase of subsidiary
$'000
Cash received on acquisition of subsidiary 400
Less cash consideration (1,000)
Cash outflow (600)
Not e. Only the ca sh consideration is included in the figu re reported in the statement of
cash flows. The sha res issued as part of the consideration are reflected in the share capital
working 0N2) above.
Goodwill on acquisition (before impairment):
$'000
Consideration: 55 + 695 0N3) + 120 0N2) + 216 5,000
Non-cont rolling interest: 4,800 x 30% 1,440
Net assets acquired (4,800)
Goodwill 1,640
O BPP
LEJ.11111(,
11.·ll\,
Answers 107
Section 2 - Exam-standard questions
11 Robby
Workbook referenc es. The underlying principles of IFRS 3 are covered in Chapter 11 . Business
combinations achieved in stages are covered in Chapter 12. Joint operations are covered in
Chapter 15 and financial instruments in Chapter 8. The Conceptual Framework is covered in
Chapter 1.
To p tips. You must make sure that you explain the principles underlying the accounting for
goodwill as the marks available for ca lculations are limited. The examining team is looking for an
understanding of the accounting involved and not rote learning of consolidation workings.
In Part (b), you need to evaluate whether the requirements of IFRS 9 relating to the factoring
arrangement are in agreement with the Conceptual Framework. This kind of evaluation in light of
the Conceptual Framework is likely to be a feature of questions in the SBR examination, so you
need to make sure you are familiar enough w ith the Conceptual Framework to be able to answer
questions in this way.
Marks
(a) (i) Goodwill

Explanation of IFRS 3 principles 10
Hail - calculation 3
Zinc - calculation 3
16
(ii) Joint operation
SOFP 3
Explanation - 1 mark per point up to a maximum 4
7
(b) Discussion - 1 mark per point up to a maximum 7

30
(a) Sectio ns for inc lusio n in t he finance director's report

(i) Goodwill
IFRS 3 Business Combinations requires goodwill to be recognised in a business
combination. A business combination takes place when one entity, the acquirer,
obtains control of another entity, the acquiree. IFRS 3 requires goodwill to be
ca lc ulated and recorded as a non-current asset at the acquisition date.
Goodw ill is calculated at the acquisition date as the fair value of the consideration
transferred by t he acquirer plus the amount of any non-controlling interest less the
fair va lue of the net assets of the acquiree. When the business combination is
achieved in stages, as is the case for Zinc, the consideration transferred by the
acquirer will include any previously held interest in the new subsidiary which must
be remeasured to its fair value at the date control is obtained.

Goodwill is not amortised, but instead is t ested for impairment at each year end.
Applying t hese principles, t he goodwill on the acquisition of Hail and Zinc for
inclusion in the consolidated financial st atements a t 31 May 20X3 is calculated as
follows.
Goodwill related to the ac quisition of Hail
Goodwill at acquisition: Sm Sm
Consideration transferred for 80% interest
Cash payable on 1 June 20X1 50
Deferred cash considerat ion ($24.2 million/(1.10)2) 20
Contingent consideration 40
Fair value of non-controlling interest 30
140
Fair value of identifiable net assets acquired 130
Contingent lia bility _Jg)
(128)
12
The immediate, deferred and contingent consideration transferred should be

measured at their fair values at th e acquisition date.
Deferred consideration
The foir value of the deferred consideration is t he amount payable on 31 May 20X4
discounted t o its present value at the acquisition date. The requirement to discount
to present value is consistent with other standards. The p resent value should be
u nwound in the period to 31 May 20X3 which w ill increase the ca rrying amount of
the obligation a nd result in a finance cost in profit or loss. The unwinding of the
discount does not affect the goodwill calculation as it is based on t he amount
payable at the date of acquisition.
Contingent consideration
The fair value of t he contingent consideration payable should take into account the
various milest ones set under the acquisition agreement. At the acquisition date the
fair va lue of the contingent consideration is $40 million.
As the contingent consideration will be paid in cash, the amount payable should be
remeasured at 31 May 20X3 to its fair value of $42 million. This remeasurement does
not affect t he goodwill ca lculation, but the increase in the fair value of the obligation
of $2 million should be taken to p rofit or loss. If the contingent consideration was to
be settled in equity, no remeasurement would be required.
Contingent liability
The contingent liability disclosed in Hail's financial statements is recognised as a

liability on acquisition in accordance with IFRS 3, provided that its fair value can be
reliably measured and it is a present obligation. This is contrary to the normal rules
in IAS 37 Provisions, Contingent Liabilities and Contingent Assets where contingent
liabilities are not recognised but only disclosed.
Conclusion
There is no indication that the goodwill balance is impaired at 31 May 20X3. Thus
goodwill of $12 million on acquisition of Hail should be included in the group financia l
statements at 31 May 20X3.
Answers 109
Goodwill reloted to the acquisition of Zinc
Substonce over form drives the occounting treatment for a subsidiary acquired in
stages. The legal form is t hat shares have been acquired, however, in substance:
(1) The 5% investment has been 'sold'. Per IFRS 3, the investment previously held
is remeasured to fair value at the date cont rol is obtained and a gain or loss
reported in profit or loss:
Sm
Fair value of 5% at date control achieved (1 December 20X2) 5
Fair value of carry ing amount of 5% per SOFP at 31 May 20X2 (3)
Remeasurement gain (1 June 20X2 to 1 December 20X2) 2
(2) A subsidiary has been ' purchased'. The previously held 5% investment is
effectively re-acquired at fair value, and so goodwill is calculated including
t he fair value of the previously held 5% investment.
Goodwill Sm Sm
Consideration transferred - for 55% 16
Fair value of previously held interest (for 5% at 5
1 December 20X2)
30
Fair value of identifiable net asset s at acquisition:
Provisional measurement 26
Adjustment to fair va lue of PPE (within measurement
period) 3
(29)
Fair value of PPE
The fair value of PPE was provisional at the date of acquisition, with an increase of
$3 million subsequent ly identified when the figures were finalised in March 20X3.
IFRS 3 permits adjustments to goodwill for adjustments to the fair value of assets and
liabilities acquired, provided this adjustment is made within one year of t he date of
acquisition (the measurement period).
Conclusion
There is no indication that the goodwill balance is impaired at 31 May 20X3. Thus
goodwill related to the acquisition of Zinc to be included in the group financial
statements at 31 May 20X3 is $1 m illion.
(ii) Joint operation
Robby has a joint arrangement w ith another party in respect of the natural gas
station. Under IFRS 11 Joint Arrangements, a joint a rrangement is one in which two or
more parties are bound by a contractual arrangement which gives them joint control
over the arrangement.
Joint arrangements can either be joint ventures or joint operations. The classification
as a joint venture or joint operation depends on the rights and obligations of the
parties to the arrangement. It is important to correctly classify t he a rrangement as
the accounting requirements for joint ventu res are different to those for joint
operatio ns.
IFRS 11 states that a joint arrangement that is not structured through a sepa rate
vehicle is a joint operation. In Robby's case, no separate entity has been set up for
the joint arrangement , therefore it is a joint operation. Robby has joint right s to the
assets and revenue, and joint obligations for the liabilities and costs of the joint
arrangement.
Therefore, Robby, in it s capacit y as a joint operator, must recognise on a line- by-line

basis it s own assets, liabilities, revenues and expenses plus its share (40%) of the

MEDIA
joint assets, liabilities, revenue end expenses of the joint operat ion as prescribed by
IFRS 11. This treatment is applicable to both the consolidated and separate financial
statements of Robby.
The figu res are calculated as follows:
Sm
Property, plant and equipment:
1 June 20X2 cost: gos station (15 x 40%) 6.00
d ismantling provision (2 x 40%) 0.80
6.80
Accum ulated depreciat ion: 6.8/10 years (0.68)
31 May 20X3 carrying amount 6.12
Trade receivables (from other joint operator): 20 (revenue) x 40% 8.00
Trade payables (to other joint operator): (16 + 0 .5) (costs) x 40% 6.60
Dismantling provision:
At 1 June 20X2 0.80
Finance cost (unwinding of d iscount): 0.8 x 5% 0 .04
At 31 May 20X3 0 .84
(b) Accounting t r eatment

Trade receivables are financial assets and therefore t he requirements of IFRS 9 Financial
Instruments need to be applied. The main question here is whether the factoring
arrangement means that Robby should derecognise t he t rade receivables from t he
Per IFRS 9, an entity should derecognise a financial a sset when:
(1) The c ontrac tual right s to the cash flows from the financial asset expire; or
(2) The entity transfers the financial a sset o r substantially a ll t he risks and rewords
of ownership of the financial asset to another party.
In the case of Rob by, the contractual rights to the cash flows have not expired as t he
receivables balances are still out stand ing and expected to be collected.
In respect of the risks and rewards of ownership, t he substance of the factoring

arrangement needs to be considered rather than its legal form. Robby has t ransferred
the receivables to the bank in exchange for $3.6 million cash, but remains liable for any
shortfall between $3.6 million and the amount collected. In principle, Robby is liable for the
whole $3.6 million, although it is unlikely that the default would be as much as this. Ro bby
th erefore retains the c red it risk.
In addition, Robby is entitled to receive t he benefit (less interest) of repayments in excess of

$3.6 million once the $3.6 million ha s been collected and therefore retains t he potential
reword s of f ull settlement .
Substantia lly a ll the risks a nd rew o rds of the financial asset therefore remain w ith
Ro bby, and the receivables should continue t o be recognised . In addition, a fina n cial
liab ility should be recognised in respect of the consideration received from the bank.
Conceptual Framework
According to the Conceptual Framework derecognition normally occurs when cont ro l of o il
or port of an asset is lost.
The requirements for derecognition should aim to faithf ull y rep resent both:
(a) Any assets and liabilities retained after derecognition; and

(b) The change in the entity's assets and liabilities as a resu lt of derecognition.
O BPP
LU,IIINC.
,,,-11\,
Answers 111
Meeting both of these aims becomes d ifficult if the entity disposes of only part of an asset
or retains some exposure t o that asset . It can be difficult to faithf ully represent the legal
form (which in t his case is the decrease in assets under the factoring arrangement) with the
substance of retaining the corresponding risks and rewards.
Because of the d ifficulties in practice in meeting these two a ims, the Conceptual
Framework does not advocate using a cont rol approach or the risks-and-rewards
approach to derecognition in every circumstance. Instead, it d escribes the options
available and discusses what factors the IASB would need to consider when developing
Standards.
As such, there appears ta be no conflict in principles between the Conceptual Framework
and the requirements of IFRS 9 for derecognition.
12 Banana
Marks
(a) (i) Application of the following discussion to the scenario:

Goodwill and contingent consideration 3
Why the existing goodwill valuation is incorrect 4
Correcting entry
8
(ii) Application of the following discussion to t he scenario:
Nature of significant influence 2
The equity method of accounting for an associate
Calculation of the carrying amount of t he investment
4
(iii) Calculation of the gain on disposal of Strawberry 2
Application of the following discussion to t he scenario:
Rationale for the calcu lation of gain on d isposal
Correct treatment of Strawberry after disposal
4
(iv) Explanation of treatment of settlement 2
Explanation of 2018 amendments to IAS 19
3
(b) Application of the following discussion to t he scenario:

Rationale for inclusion as business combination 4
(c) Application of the following discussion to the scenario:

Consideration of IFRS 9 principles 4
Transfer of right s/conclusion 1
Carry ing amount of bonds 2
7
30
(a) Explanatory note to: Directors of Banana

Subject: Consolidation of Grape a nd Strawberry
(i) Goodwill should be calculated by comparing the fair value of the consideration with
the fair value of the identifiable net assets at acquisition. The shares have been

correctly volued using the morket price of Banana at acquisition. Contingent
consideration should be included at it s fair value w hich should be assessed taking
into account t he probability of the target s 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 x 25%). A corresponding liability should be included within
the consolidated financial statement s with subsequent remeasurement. This would
be adjusted prospectively t o profit or loss rather than adjusting the consideration
and goodwill.
The finance director has erroneously measured non-controlling interest using the
proportional method rather than at fa ir value. Although either method is permitted
o n an acquisition by acquisition basis, the accounting policy of the Banana g roup is
to mea sure non-controlling interest at fair value. The fair value of the non-controlling
interest at acquisition is (20% x $20 million x $4.25) = $17 million.
Net assets at acquisition were incorrectly included at t heir carrying amount of

$70 million. This should be adjusted to fair va lue of $75 million with a corresponding
$5 million inc rease to land in the consolidated st atement af financia l position.
Goodwill should have been calculated as follows:
Sm
Fair value of share exchange 68
Contingent consideration 4
Non-controlling interest at acquisition 17
Fair value of identifiable net assets acquired (75)
Goodwill 14
The correcting entry required to the consolidated financia l statements is:
Debit Goodwill $2 million

Debit Land $5 million
Credit Non-controlling interest $3 m illion
C redit Liabilities $4 million
(ii) If an entit y holds 20% or more of the voting power of the investee, it is presumed that
the entity has significant influence unless it can be clearly demonstrated that this is
not the case. The existence of significant influence by an entity is usually evidenced
by representation o n the board of directors or participation in key policy making
processes. Banana has 40% of the equity of Strawberry and can appoint one
director t o the board. It would appear that Banana has significant influence but not
cont rol. Strawberry should be classified a s an associate and be equity accounted for
within the consolidated fina ncial stat ement s.
The equity method is a method of a ccounting w hereby the investment is initia lly
recognised at cost and adjusted thereafter for the post - acquisition change in the
investor's share of the investee's net a ssets. The investor' s profit o r loss includes its
share of the investee's profit or loss and the investor's other comprehensive income
includes its share of t he investee's other comprehensive income. At 1 Oct ober 20X7,
Strawberry should have been included in the consolidated financial statements at a
value of $20.4 million ($18 million + 40% x $50 million - $44 million).
(iii) On disposal of 75% of the shares, Banana no longer exercises significant influence
over Strawberry and a profit on d isposal of $3.1 million should have been calcu lated.
Sm
Proceeds 19.0
Fair value of retained int erest 4.5
Carrying amount of investment in associate (see part (ii)) (20.4)
Gain on disposal 3.1
Banana is incorrect to have recorded a loss in reserves of $14 million and this should
be reversed. Instead, a gain of $3.1 million should have been included w ithin the
Answers 113
consolidated statement of profit or loss. The investment is initially restated to fair
value of $4.5 million. Bonano does not intend to sell their remaining interest and
providing that they make on irrecoverable election, they can treat the remaining
int erest at fair value t hrough other comprehensive income. The investment will be
restated to $4 million at the reporting date w ith a corresponding loss of $0.5 million
reported in other comprehensive income.
(iv) The potential transfer of part of Banana's defined benefit pension plan is a
settlement under IAS 19. A gain or loss on a settlement is recognised in profit or loss
when the settlement occurs. At the date of sett lement , the fair value of the p lan
assets and the present value of the obligation should be remeasured . Using the
estimated figures for illustration purposes, a gain of $100,000 should be recognised:
Sm
Present value of obligation settled 5.7
Fair value of plan assets transferred on settlement (5.4)
Cash transferred on settlement (0.2)
Gain 0.1
The accounting entries t hat would be required are:
Debit (decrease) Obligation $5.7 million

Credit (decrease) Plan assets $5.4 million
Credit (decrease) Cash $0.2 million
Credit (increase) Profit or loss $0.1 m illion
The 2018 amendments t o IAS 19 require that, when a plan amendment, curtailment
or set tlement takes place, the updated actuarial assumptions used to remeasu re the
net defined benefit/asset should also be used to determine current service cost and
net interest for the remainder of the reporting period. Prior to the amendments, the
current service cost and net interest would have been calculated using the
assumptions in place at the beginning of the reporting period.
(b) Melon should only be t reated as an asset acquisition where the acquisition fails the
definition of a business combination. In accordance w ith IFRS 3 Business Combinations, an
entity should determine whether a transaction is a business combination by applying the
definition of a business in IFRS 3. A business is an integrated set of activities and assets
which are capable of being conducted and managed for the purpose of providing a return
in the form of dividends, lower costs or other economic benefits directly to investors or
other owners, members or participants. A business will typically have inputs and processes
applied to the ability to create outputs. Outputs are the result of inputs and processes and
are usually present within a business but are not a necessary requirement for a set of
integrated activities and assets to be defined as a business at acquisit ion.
It is clear that Melon has both inputs and processes. The licence is an input as it is an
economic resource within the control of Melon which is capable of providing outputs once
one or more processes are applied to it. Additionally, the seller does not have to be
operating the activities as a business for the acquisition to be c lassified as a business. It is
not relevant therefore that Melon does not have staff and outsources its activities. The
definition of a business requires just that the activities could have been operated as a
business. Processes are in place through the researc h activities, integration with the
management company and supervisory and administrative functions performed. The
research activities are still at an early stage, so no output is yet obtainable but, as
identified, this is not a necessary prerequisite for the acquisition to be trea t ed as a
business. It can be concluded that Melon is a business and it is incorrect to treat Melon as
an asset acquisition.
(c) IFRS 9 Financial Instruments requires that a financial asset only qualifies for derecognition
once the entity has transferred the contractua l rights to receive the cash flows from the
asset o r where t he entity has retained the contractua l 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 t o be assessed by a consideration of t he risks and rewards of ownership.
11'+ Strategic Business Reporting (SBR) @BPP LEARMMG

fAEDIA
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 t he fair values of the bonds increase. Consequently, Banana still has the
rights associat ed 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.
It would be expected that, if the sale were a genuine transfer of risks and rewards of
ownership, then the sales price would be approximate to the fair value of the bonds. It
would only be in unusual circumstances such as a forced sale of Banana 's assets arising
from severe financial difficulties t hat this would not be the case. The sales price of
$8 million is well below the current fair value of the bonds of $10 .5 million. 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 be derecognised. To measure the asset a t amortised cost, t he entit y must have
a business model where they intend t o collect the contractual cash flows over the life of
the asset. Banana maintains these rights and therefore the sale does not contradict their
business model. The bonds should continue to be measured at amortised cost in the
conso lidated financial statements of Banana. The va lue of the bonds at 30 June 20X6
would have been $10 .2 million ($10 million+ 7% x $10 m illion - 5% x $10 million). Amortised
cost prohibits a restatement to fair value. The value of the bonds at 30 June 20X7 should
be $10.414 million ($10.2 million + 7% x $10.2 m illion - 5% x $10 million). The proceeds of
$8 million should be treated as a financial liability and would also be measured at
amortised cost. An interest charge of $0.8 million would accrue between 1 July 20X6 and
1 July 20X8, being the difference between t he sale and repurchase price of t he bonds.
13 Hill
U@il:\·Hi:11::i&
Marks
(a) Application of the following discussion to t he scenario:

• Deferred consideration 2
• Property, plant and equipment 2
• NCI 1
• Goodwill impairment 3
Goodwill calculations and corrections requ ired 5
13
(b) Calculations of:
• Profit on disposal 3
• Treatment as associate
4
(c) Application of the following discussion to t he scenario:
• Compound instrument treatment 3
• Calculation of liability and adjustments 2
5
(d) Application of the following discussion to t he scenario:
• Treatment of deferred tax asset 4
• Implications of loan covenant breach 4
8
30
Answers 115
(a) Deferred considerat io n
When ca lculating goodwill, IFRS 3 Business Combinations states that purchase
consideration should be measured at fair value. For deferred cash consideration, this will
be the present value of the cash flows. This amounts to $29 million ($32m x 1/(1.052) or
$32m x 0.907). Goodwill arising on acquisition should be increased by $29 million and a
corresponding liability should be recognised:
C redit Liability $29 million
Interest of $1.5 million ($29m x 5%) should be recorded. This is charged to the statement of
profit or loss and increases the carrying amount of the liability:
Debit Finance costs $1.5 million
Credit Liability $ 1. 5 million
Property, plant a nd equi pm ent (PPE)
During the measurement period IFRS 3 states that adjustments should be made
retrospectively if new information is determined about the value of consideration
transferred, the subsidiary's identifiable net assets, or the non-controlling interest. The
measurement period ends no later than 12 months after the acquisition date.
The survey detailed t hat Chandler's PPE was overvalued by $10 million as at the acquisition
date. It was received four months after the acquisition date and so this revised valuation
was received during the measurement period. As such, goodwill at acquisition should be
reca lcu lated. As at the acquisition date, the carrying amount of PPE should be reduced by
$10 million and the carrying amount of goodwill increased by $10 million:
Credit PPE $10 million
NCI
The NCI at acquisition was valued at $34 million but it should have been valued at
$32 million (($170m - $10m PPE adj ustment) x 20%). Both NCI at acquisition and goodwill
at acquisition should be reduced by $2 million:
Debit NCI $2 million
Credit Goodwill $2 million
Goodw i ll
Goodwill arising on the acquisition of Chandler should have been calculated as fol lows:
Sm
Fair value of consideration ($150m + $29m) 179
NCI a t acquisition 32
Fair value of identifiable net assets acquired (160)
Goodwill i mpairment
According to IAS 36 Impairment of Assets, a cash- generating unit to which goodwill is

allocated should be tested for impairment annually by comparing its carrying amount to its
recoverable amount. As goodwill has been calculated using the proportionate method, then
this must be grossed up to include the goodwill attributable to the NCI.
Sm Sm
Goodwill 51.0
Notional NCI ($51m x 20/80) 12.8
Total notional goodwill 63.8

LEAR\INC
f"1111A
Sm Sm
Net assets at reporting date:
Fa ir value at start of period 160.0
Profit for period 52.0
212.0
Total carrying amount of assets 275.8
Recoverable amount (250.0)
Impairment 25.8
The impairment is allocated against the total notional goodwill. The NCI share of the
goodwill has not been recognised in the consolidated financial statements and so the NCI
share of the impairment is also not recognised. The impairment charged to profit or loss is
therefore $20.6 m illion ($25.8m x 80%) a nd t his expense is all attributable to the equity
holders of the parent company.
Debit Operating expenses $20.6 m illion

C redit Goodwill $20.6 million
The carrying amount of t he goodwill relating to Chandler at the reporting date w ill be
$30.4 million ($51m acquisition - $20.6m impairment).
(b) Doyle Co
Until 1 April 20X6, Doyle Co is a subsidiary of Hill Co and so should be consolidated u ntil that
date. The sale of the shares on 1 April 20X6, results in Hill Co losing control over Doyle Co.
The goodwill, net assets and NCI of Doyle Co must be derecognised from the consolidated
statement of financial position. The d ifference between the proceeds from the disposal
(including t he fair volue of t he shares retained) ond these amounts will give rise t o a
$47 million profit on d isposal. This is calculated as follows:
Sm Sm
Proceeds 140
Fa ir value of remaining interest 300
440
Goodwill at disposal (50)
Net assets at d isposal (590)
NC I:
At acquisition 215
NCI % of post acquisition profit (40% x ($590m - $510m)) 32
NCI a t disposal 247
Profit on disposal 47
After the share sale, Hill Co owns 40% of Doyle Co's shares and has the ability to appoint
two of t he six members of Doyle Co's board of d irectors. IAS 28 Investments in Associates
and Joint Ventures states t hat an associate is an entity over which an investor has
significant influence. Significant influence is presumed when the investor has a
shareholding of between 20 and 50%. Representation on the board of directors provides
further evidence that significant influence exists.
Therefore, the remaining 40% shareholding in Doyle Co should be accounted for as an

associate. It w ill be initially recognised at its fair value of $300 million and accounted for
using the equity method. This means t hat t he group recognises it s share of the associate's
profit after tax, w hich equat es to $24.6 million ($123m x 6/12 x 40%). As at t he reporting
date, t he associate will be ca rried at $324.6 million ($300m + $24.6m) in the consolidated
statement of financial position.
(c) Convertible bond

Hill Co has issued a compound instrument because the bond has characteristics of both a
financial liability (an obligation to repay cash) and equity (an obligation to issue a fixed
BPP
O Lll.l"ING
,cn1A Answers 117
number of Hill's own shores). IAS 32 Financial Instruments: Presentation specifies that
compound instruments must be split into:
• A liability component (the obligation to repay cash); and
• An equity component (the obligation to issue a fixed number of shares).
The split of the liability component and the equity component at the issue date is
calculated as follows:
• The liability component is the present va lue of the cash repayments, discounted
using the market rate on non-convertible bonds;
• The equity component is the difference between the cash received and the liability
component at the issue date.
The initial carrying amount of the liability should have been measured at $17.9 million,
calculated as follows:
Date Cash flow Discount rate Present value
Sm Sm
30 September 20X6 0.8 0.909 0.73
30 September 20X7 20.8 0.826 17.18
17.91
The equity component should hove been initially measured at $2.1 million ($20m - $17.9m).
The adjustment required is:
Debit Non-current liabilities $2.1m
Credit Equity $2.1m
The equity component remains unchanged. After initial recognition, the liability is
measured at amortised cost, as follows:
Finance cha rge 30 September
1 October 20X5 (10%) Cash paid 20X6
Sm Sm Sm Sm
17.9 1.8 (0.8) 18.9
The finance cost recorded for the year was $0.8 million and so must be increased by $1.0
million ($1.Bm - SO.Sm).
Debit Finance costs $1.0m
C redit Non-current liabilities $1.0m
The liability has a carrying amount of $18.9 million a s at the reporting date.
(d) Def erred tax
According to IAS 12 Income Taxes, an entity should recognise a deferred tax asset in
respect of the c a rry- forward of unused tax losses to the extent that it is probable that
future taxable profit will be available against which the losses can be utilised. IAS 12
stresses that the existence of unused losses is strong evidence that future taxable profit
may not be available. For this reason, convincing evidence is required about the existence
of future taxable profits.
IAS 12 says that entities should consider whether the tax losses result from identifiable causes
which are unlikely to recur. Hill has now made losses in three consecutive financial years, and
therefore significant doubt exists about the likelihood of future profit s being generated.
Although Hill Co is forecasting an improvement in its trading performance, this is a result of
new products which are currently under development. It will be difficult t o reliably forecast
the performance of these products. More emphasis should be placed on the performance
of existing products and existing customers when assessing the likelihood of future trading
profits.
Finally , Hill Co breached a bank loan covenant and some uncertainty exists about its
ability to continue as a going concern. This, again, places doubts on the likelihood of future
profits and suggests that recognition of a deferred tax asset for unused tax losses would be
inappropriate.
118 Strategic Business Reporting (SBR) @BPPLEAR\IMG

MEDIA
Based on t he above, it would seem that Hill Co is incorrect to recognise a deferred tax asset
in respect of its unused tax losses.
C ovenant breac h
Hill Co is currently presenting the loan as a non-current liability. IAS 1 Presentation of
Financial Statements states that a liability should be presented as current if the entity:
• Settles it as part of its operating cycle;
• Holds the liability primarily for the purpose of trad ing;
• Is due to settle the liability within 12 mont hs of the reporting date; or
• Does not have the right at the end of the reporting period to defer settlement for at
least 12 months after the reporting date.
Hill Co breached t he loan covenants before t he report ing date but only received
confirmation after the reporting date that the loan was not immediately repayable. As per
IAS 10 Events after the Reporting Period, the bank confirmation is a non-adjusting event
because, as at the reporting date, Hill did not have the right to defer settlement of the loan
for at least 12 months. IAS 1 is clear that this rig ht only exists if t he entit y complies w ith any
required conditions at the reporting date, even if compliance is not t ested until later. In the
statement of financial position as at 30 September 20X6 the loan should be reclassified as
a current liability.
G o ing concern
Although posit ive forecasts of future performance exist, management must consider
whether the breach of the loan covenant and the recent trading losses place doubt on
Hill Co's ability to continue as a going concern. If material uncertainties exist, then
disclosu res should be made in accordance with IAS 1.
1'+ Luploid
W o rkboo k references. Fair value measurement under IFRS 13 and IAS 36 Impairment of Assets are
both covered in Chapter 4. The underlying principles of acquisition accounting given in IFRS 3
Business Combinations are covered in Chapter 11. Share-based payment is covered in Chapter 10.
To p tips. Quest ion 1 of the real exam will always test group accounting as well as other financia l
reporting issues. In this quest ion, part (a)(i) required an explanation of how the fair va lue of a
factor y site is determ ined a s part of the acquisition of a subsidiary. This required knowledge of
IFRS 13. Part (a)(ii) required the calcu lation of goodwill on acquisition measuring the non-
controlling interest (NCI) under both fair value and proportionat e share of net assets. The
examiner commented t hat no explanation was needed to support these goodwill calculations, but
that some candidates provided an explanation anyway. This explanation would have not gained
any marks as it was not required by the question - make sure you read the questions
requirements ca refull y and only provide explanations for calculations if specified.
Part (b) required a discussion and calculation of an impairment loss relating to a subsidiary,
inc luding an explanation of how the impairment w ould d iffer depending upon the measurement
of non-controlling int erest. The examiner commented that very few candidates explained the
need for grossing-up goodwill when NCI is measured at the proportionate share of net assets.
Make sure you review the suggested solution below carefully if you are unsure of the need to
gross up goodwill in this way.
Part (c)(i) regarding the share-based payment was t ric ky - but you should have been able to pick
up some marks in this part of the question for discussing the share exchange. With questions like
this, if you a re unsure, you should have a go a t this part of the question, but make sure you don't
spend more than t he a llocated time of 1.95 minutes per mark.
Part (c)(ii) asked for the resulting share- based expense and a discussion of the vesting conditions.
The examiner commented that this was not well answered. If you are unsure about share-based
payments, go back to your Workbook, Chapter 10, to revise.
Answers 119
U@il:i·iH:h::i&
Marks
(a) (i) Application at the following discussion to the scenario:

How FV should be determined 5
Why depreciation replacement cost is unsuitable 2
7
(ii) Calculation marks for:
Correct FV of net assets 1
Correct NCI figures 2
3
(b) Discussion of what constitutes an impairment and CGUs 2
Correct calculation of impairment losses for both methods 2
Notional goodwill 1
Impairment a llocation 3
Discussion of how and why methods differ 3
11
(c) (i) Calculation FV of deferred shares
Calculation of FV of options
Discussion of the above calculations and Application to
the scenario 2
4
(ii) Calculation share expense
Application of the following discussion to the scenario:
Why expense required 2
Vesting cond itions 2
5
30
(a) (i) IFRS 13 Fair Value Measurement permits a range of valuation methods to estimat e
fair va lue including market based, income estimates and a cost- based approach.
However, the characteristics of each asset should be considered when determining
the most appropriate methodology.
Fair value is defined as the price w hich 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 to be market focused. The estimate consequently should consider what the
market would be prepared to pay for the asset.
The market would consider all a lternative uses for the assessment of the price
which they would be willing to pay. Fair va lue 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.
The highest and best use of the asset would appear 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 residentia l properties would be
likely. Since several nearby sites have been given such permission, this would appear
to be the case.
120 Strategic Business Reporting (SBR) @BPP LEAl~II C

tl.J'.l")IA.
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 va lue of $24 million. The fair value of the land and
buildings should be $23 million. The fair value of t he identifiable net assets at
acquisition are $88 million ($65m + $23m).
Depreciated replacement cost should only be considered as a possible method for

est imating the fair value of the asset when other more suitable methods are not
ovailoble. This may be the cose when the asset is highly specialised and mar ket dot a
is therefo re limited or unavailable. This is not the case with the factory site. In a n y
case, the rise in value of land and properties particularly for residential use would
mean that to use depreciated replacement cost would undervalue the asset. The exit
value for the asset, whether it was based on the principal or most advantageous
market, would need to be the same as the entry price. Depreciation may not also be
an accurate reflection of a ll forms of obsolescence including physical deteriorat ion.
The estimate would need to be adjusted for such factors even where industrial use
remained the best use of the asset.
(ii) Goodwill should be calculated as follows:
Fair value Proportional

method method
Sm Sm
Consideration 90 90
Non-controlling interest (NCI) at acquisition 22 17.6
Net assets at acquisition (88) (88)
Goodwill 24 19.6
NCI a t acquisit ion under proportional method is $17.6 million (20% x $88m).
The fair value of the net assets at acquisition is $88 million as per part a(i) ($65m + $23m).
Tuto ria l note: Goodwill under the proportional method could also be ca lculated as:
Consideration $90m
Less FV of net assets acquired (80% x $88m) ($70.4)m
Goodwill on acquisition $19.6m
(b) An impairment arises where the carrying amount of the net assets exceeds the recoverable
amount. Where t here is a clear indication of impairment, t his asset should be reduced to
the recoverable amount.
Where t he 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 w hich
independently generate cash flows. Impairments of cash generating units are allocated
first to goodwill and then pro rota on the other assets. It should be noted that no asset
should be reduced below its recoverable amount.
Fair value meth od
The overall impairment of Colyson Co is $30 million ($106m + goodwill $24m - $100m). The
damaged building should be impaired by $4 m illion w ith a corresponding charge to profit
or loss. Since $4 million has already been allocated to t he land and buildings, $26 million
remains. The goodwill should therefore be written off and expensed in the consolidated
statement of profit or loss.
Of the remaining $2 million, $1.25 million w ill be allocated to t he plant and machinery
(15/(15 + 9) x 2m) and $0.75 million w ill be allocated to the remaining intangibles (9/(9 + 15)
x 2m). As no assets have been previously revalued, all t he impairments are charged to
profit or loss. $24 million (80% x $30m) will be attributable to the owners of Luploid Co and
$6 million to the NCI in the consolidated statement of comprehensive income.
Answers 121
The allocation of the impairment is summarised in this table:
Original Impairment Revised CV

value
Sm Sm Sm
Land and buildings 60 4 56
Plant and machinery 15 1.25 13.75
Intangibles other than goodwill 9 0.75 8.25
Goodwill 24 24 0
Current assets (at recoverable amount) 22 0 22
Total 130 30 100
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. The problems arise
when performing the impairment review as a cash generating unit. When NCI is measured
using the proportional share of net assets, no goodwill is attributable to the NCI since
goodwill is not included within the individual net assets of the subsidiary. This means that
the goodwill needs to be grossed up when an impairment review is performed so that it is
comparable w ith the recoverable amount. Under the fair value method , the NCI ful ly
represents any premium the other shareholders would be prepared to pay for the net
assets and so goodwill does not need to be grossed up.
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 a lready been a llocated. Since the
remaining impairment of $26.5 million exceeds the value of goodwill, the goodwill 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. Only
$19.6 million is deducted in full from the owners of Luploid Co's share of profits since there is
no goodwill attributable to the non-controlling interest. The remaining $2 million impairment
is allocated between plant and machinery and intangibles (other than goodwill). NCI will be
allocated 20% of $6 million ($4m + $2m), ie $1.2 million. Consolidated retained earnings
will be charged with 80% of $6 million (ie $4.8 million) plus $19.6 million goodwill impairment
(ie $24.4m in total). The allocation of the impairment is summarised in this ta ble:
~ orie l not e: Notional goodwill and impairment of notional goodwill does not impact on the
l conso lidated financial statements.
Original Revised
carrying carrying
amount Impairment amount
Sm Sm Sm
Land and buildings 60 4 56
Plant and machinery 15 1.25 13.75
Intangibles other than goodwill 9 0.75 8.25
Goodwill 19.6 19.6 0
(Notional goodwill) 4.9 4.9 0
Current assets (at recoverable amount) 22 22
Total 130.5 30.5 100
122 Strategic Business Reporting ($BR) @BPP lfl\RNINC

~\fl}l~
(c) (i) IFRS 3 Business Combinations requires all consideration to be measured at fair value
on acquisition of a subsidiary . This w ill include t he deferred shares. 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. There is, however, a
post combination service period which means that the portion of the replacement
scheme attributable to pre-combination service is the market value of the acquiree
award multiplied by the ratio of the portion of the vesting period completed to the
greater of the t otal vesting period or t he orig inal vesting period of the acquire award.
The vesting period of the acquiree award had vested and was three years. As there is
a two-yea r post combination vesting period, the t otal vesting period is five years.
Therefore the amount attributable to the pre-combination period (and therefore
added to the cost of the investment) should be $15 million x 3/5 = $9 million.
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% x 10m x 2/5) shares as consideration. The market price at the date of
acquisition was $30, so the fair value is $72 million. The total consideration should be
valued as $81 million (72 + 9).
(ii) The fair value of the replacement scheme at the grant date is $18 million (100 x
10,000 x 90% x $20). Since $9 million has been allocated to the cost of the
investment, t he remaining $9 million should be treated as part of the post
combination remuneration package for the employees and measured in accordance
with IFRS 2 Share-based Payment. The fair va lue at the grant date of the share-
based scheme should be expensed to profit or loss over the two-year vesting period.
Subsequent changes to the fair value of the shares are ignored.
Luploid Co will need to consider the impact of market and non-market based vesting
conditions. 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 t he
grant date of t he option. An expense is therefore recorded in the consolidated profit
or loss of Luploid Co irrespective of whether the market based vesting condition is
met or not. A corresponding credit should be included within equity.
15 Angel
Workbook reference. Group statements of cash flow are covered in Chapter 17. Interpretation~
financial statements of different companies is included in Chapter 18.
Top tips. There are many straightforward, non-group aspects to this extracts from consolidated
statement of cash flows question, so make sure you don't get bogged down in the information
provided at the expense of these. We have set up workings for working capital reconciliations
even t hough the movements are straightforward.
Make sure you allocate enough time to Part (b) - it has eight marks available for fairly
straightforward knowledge that is not technically challenging.
Easy marks. These are available for the workings in Part (a)(iii) as well as explanations for the
adjustments in Part (a), all of which are straightforward, a long with valid points made in Part (b)
on the differences between manufacturing and digital companies. The key point with cash flows
is to ensure your understanding of the signage of each adjustment is clea r, this will be important
not only for you r work ings but also your explanation to the directors.
Answers 123
U@il:i·iH:h::i&
Marks
(a) (i) Build ing renovation 4

(ii) Profit before taxation 4
(iii) Cash generated from operations - up to 2 marks per item 14
(b) (i) Discussion 1 mark per point to a maximum 5

(ii) Discussion 1 mark per point for each non-financial disclosure to a
maximum 3
30
(a) (i) Building renovation
The building renovation has been incorrectly accounted for because Angel has
debited the cash spent to revenue and this needs to be corrected in order to
capitalise the correct amount for the enhancement of the asset. The correcting
entries are:
Debit Property, plant and equipment (PPE) $3m

Credit Revenue $3m
Being capitalisation of renovation of building and correction of charge to revenue
Angel treats grant income on capital-based projects as deferred income so it

should not have credited the cash received from the grant to PPE and it needs to
be reclassified to deferred income on the statement of financia l position. The grant
will then be released in line with future depreciation charges so as to recognise the
benefit over the same period as the related costs it is intended to compensate.
However, the grant of $2 million needs to be split equally between renovation
(capitol) and job creation (revenue). There do not appear to be any future
performance conditions relating to the job creation portion of the grant, so t hat port
may be released immediately to profit and loss at the time the cash has become
receivable. The correcting entries for th is are:
Debit Property, plant and equipment (PPE) $2m

Credit Retained earnings - profit or loss $ 1m
Credit Deferred income $ 1m
Being correction of treatment of grant income
(ii) Adjustments t o profit before tax
Profit before tax needs to be adjusted to toke account of:
(1) The correcting entries for the building refurbishment and grant in Part (a)(i).
(2) The $4 million construction costs for the machine hove been incorrectly
charged to other expenses and need to be capita lised as part of property,
plant and equipment (information point (iii)).
(3) The related interest of $1 million which is allowable as part of the cost of
the asset under IAS 23 Borrowing Costs needs to be capitalised (information
point (iii)):
Correcting entries for points (2) and (3) are:
Debit Property, plant and equipment $5m

Credit Profit or loss $5m
121+ Strategic Business Reporting (SBR) @BPP LEAl~II C

tl.J'.l")IA.
Being correction of construction costs chorged to operating expenses and
capitalisation of interest under IAS 23.
Therefore, profit before tax may be adjusted as follows to arrive at a correct figure
far inclusion in the cash flow statement:
Sm
Per question 184
Correction of renovation costs and grant (a)(i) 4
Correction of construction costs and interest (a)(ii) 5
193
(iii) ANGEL GROUP

EXTRACT FROM STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 30 NOVEMBER 20X3
Sm
Operating activities
Profit before tax (Part (a)(ii)) 193.0
Adjustments for:
Profit on sale of property, plant and equipment: (W1) (14.0)
Depreciation (per question/W2) 29.0
Impairment of goodwill and intangible assets (per question/W3):
$26.5m + $90m 116.5
Share of profit of associate (per question/W4) (12.0)
Interest expense: $11m per question less $1m capitalised ((a)(ii) (W5) 10.0
322.5
Decrease in trade receivables (W6) 58.0
Decrease in inventories (W6) 41.0
Decrease in trade payables (W6) (211.0)
Cash generated from operations 210.5
Workings
Profit on sale of property, plant and equipment (PPE)
Sm
Proceeds from sale of PPE 63
Less carrying amount of PPE disposed (49)
Profit on sale of property, plant and equipment 14
This amount needs to be deducted from profit before tax because t he profit of
$14 million is a non-cash credit currently included within profit before ta x. The
cash proceeds figure of $63 million will be included in the investing activities
section.
2 Depreciation
The d epreciation charge of $29 million which has been deducted in arriving at
the profit before tax figure. It is non-cash and must be added back.
3 Impairment of goodwill and intangible assets
The impairment charge of $116.5 million, which hos been deducted in arriving
at the profit before tax figure, is a non-cash movement and, as with
depreciation, it must be added bock.
4 Shore of profit of associate
The profit share of $12 million recorded in Angel's profit or loss is again a non-
cash figure and should therefore be deducted to arrive at a cash figure related
to operations. Any dividend received by Angel from its associate during the
year w ill be included as a cash receipt in the investing activities section of
Angel's cash flow statement.
O
BPP
LEI ,r, NG
r,,-n.
Answers 125
5 Interest expense
The interest charge of $10 m illion (being the $11m paid less the $1m
capita lised) is a cash payment. It is reclassified and shown in the cash flow
statement below cash generated from operations as a charge to this figu re,
along with tax, to arrive at a net cash from operating activities figure.
6 Working capitol changes

Trade Trade
Inventories receivables payables
Sm Sm $m
b /d 190 180 361
Acquisition of subsidiary 6 3 5
:. lncreose/(decreose) (41) ll (58) ll (211) ll
c/d 155 125 155
Movements in working capitol ore brought into the cash generated from
operations figure. If the inventories balance hos fallen, there is less cash tied
up in invent ory held and the cash position benefits. The key point here is that
Angel acquired a subsidiary, Sweety, during the financial year and gained
inventory and trade receivable and payable balances without a related
operational movement in cash. Therefore, these amounts must be adjusted
when calculating the correct cash flow. The cash payment to acquire Sweety
(net of the cash acquired) will be included in the investing activities section of
the cash flow statement.
(b) (i) Financial statement differences
Angel is a wholesale manufacturer and hos mode on investment gaining significant

influence in a d igital company. It is important that t he stakeholders of Angel, which
includes is d irectors, manage their expectations in terms of the information
presented in the financial statements of Digitool. At a high level, as a wholesa le
manufacturer, Angel will hove a significant level of property, plant and equipment
(a factory, a distribution warehouse and manufactu ring machinery) and it will hold
inventories either in the form of finished goods or work in progress. As a result of its
long established relationships with large customers, it would be expected to hove a
relatively high level of trade receivables. Contrast this with Digitool. Its non-current
asset s w ill comprise its data cent re and related equipment. Digital companies also
frequently invest in research and development relating t o new techniques and
processes and may therefore hove significant capitalised development costs. It
would not be expected to hove inventory, other than some work in progress relating
to any ongoing contracts,
In terms of the ratios commonly reviewed, it is important that ratios ore reviewed
in the cont ext of the specific entity. It is unlikely that t he directors will be able to
compare the ratios they regularly review for Angel with equivalent ratios for Digitool.
The gross profit margin will not be compa rable between the companies. The cost of
soles of Digitool will mainly comprise employee costs and therefore its gross profit
margin is likely to be higher than that for Angel. Digitool will, however, hove
additional operating costs relating to research, and advertising and promotion
expenditure incurred in generating new customers that Angel is unlikely to hove, thus
net profit margins may be more comparable. The return on capitol employed is likely
to be lower for Angel as it hos been established for a number of years, hos goodwill
from its investments in other entities and is heavily capitalised. The inventory holding
period is a ver y important ratio for a manufacturing company but is not relevant for
a digital company as it does not hold a physical inventories and any work in
progress would be expected to convert to revenue quickly. It is not c lear what the
credit terms offered to customers ore, but given Angel hos long-standing contracts
with regu lar customers, it is likely to hove a longer receivables collection period than
Digitool w hich hos a number of new contract s.

IAEDIA
(ii) Non-financial performance m easures
The non-financial performance measures reported by Digitool ore in keeping with
expectations for a digital company:
• Relationships with customers - it is essential for companies that do not sell a
physical product and instead sell 'business solutions' to t heir customers to
communicate well with their customers to understand their needs and be able
to tailor solutions to them. Digitool may report foctors such as customer
satisfaction scores, the number of individual engagements with their customers
in a period or the overage number of repeat customers. Although traditional
manufacturers must a lso hove a customer focus to keep their products relevant,
because Angel produces moss-produced furniture, it is less likely to interact with
the fin a I customer.
• Emissions levels - perhaps surprisingly, data centres produce large levels of
emissions and digital companies come under the some social and political
pressures to reduce emissions as heavy manufacturing companies.
• Investment in human capitol - digital compan ies rely on their staff to be at the
cutting edge of technological developments in order to keep t hem ahead of
competitors. Companies compete to attract the best talent and are renowned
for having creative working spaces, flexible working conditions and good
salaries to ensure they are seen as good places to work. Traditional companies
have requirements to pay staff fair rates and must comply with strict health
and safety req uirements, particularly when operating machinery, but will
generally hove a more traditional work environment.
16 Moyes
UMM:i-lH:M::i&
Marks
(a) (i) Calculation of cash flow generated from operations 6

Explanation of the adjustment s and use of the scenario 6
12
(ii) Application of the following discussion to the scenario:
• Purchase consideration (shores and deferred cash)
• Impact on consolidated statement of cash flows of:
Subsidiary acquisition (including dividend) 3
Subsidiary disposal 2
6
(iii) IFRS 5 definition of discontinued operation and a p plication
to the scenario 3
Consideration of held for sale and application to the
scenario
Consideration of loss of control and application to the
scenario 2
6
(b) Share- based payment 6

30
Answers 127
(a) (i) Explanatory note ta: The directors af Mayes
Subject: Cash generated from operations
$
Share of profit of associate (67)
Service cost component 24
Contributions into t he pension scheme (15)
Impairment of goodwill 10
Depreciation 99
Impairment of property, plant and equipment ($43m - $20m) 23
Movement on inventory ($165m - $126m - $6m) 33
Loss on inventory 6
Increase in receivables (7)
Increase in current liabilities 18
Cash generat ed from operat ions 333
Cash flows from operating activities a re principally derived from the key trading
activities of the entity. This would include cash receipts from the sa le of goods, ca sh
payments to suppliers and cash payments on behalf of employees. The indirect
method adjusts profit or loss for the effects of t ransactions of a non-cash nature,
any deferrals o r accruals from past or future operating cash receipts or payments
and any items of income or expense associated with investing or financi ng c ash
flows.
The share of profit of associate is a n item of income associat ed w ith investing
activities and so has been deducted. Likewise cash paid t o acquire property , p lant
and equipment is an investing cash flow rather than an operating one. Non- cash
flows which have reduced profit and must subsequently be added back inc lude the
service cost component, d epreciation, exchange losses and impairments. With t he
impairment of property, plant and equipment, the first $20 million of impairment w ill
be allocated to the revaluation surplus so only $23 million would have reduced
operating profits and should be added back. In relation to the pension scheme, the
remeasurement c omponent can be ignored as it is neither a cash flow nor an
expense to operating profits. Cash contributions should be deducted, though, as
t hese rep resent a n operating cash payment ultimately to be received by Moyes'
employees. Benefits paid a re a ca sh outflow for the pension scheme rather t han
Moyes and so should be ignored.
The movements on receivables, payables and invent ory are adjust ed so that the
timing differences between when cash is paid or received and when t he items are
accrued in t he fina ncial statement s are a ccounted 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). Of this, $2.7 million is an exchange loss
(Dinar 80 million/5 - Dinar 80 million/6) and $3.3 million is an impairment loss (Dinar
(80 - 60) million/6). Neither of these a re cash flows a nd would be add ed back to
profits in the reconciliation. However, t he loss of $6 million should also be adjusted in
t he movement of the inventory as a non- ca sh flow. The net effect on the statement
of ca sh flows wi ll be nil.
(ii) Wh en t he pa rent compa ny acquires or sells a subsidiary during the financia l year,
cash flows arising from the acquisition or disposal are presented w it hin investing
activities. In relation to Davenport, no cash consideration has been paid during the
current year since the consideration consist ed of a share for share exchange and
some d eferred cash. The deferred cash would be p resented as a negative cash flow
within investing activit ies but only w hen paid in t wo years' t ime.

MEDIA
This does not meon t hat 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 o r cash
equivalents at the dat e 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 t o be made to the opening balances of assets and liabilities by adding the
fair va lues of the identifiable net assets at acquisition to the respective balances.
This wou ld be necessary to ensure that only the cash flow effects are reported in the
consolidated statement of cash flows. Fair value adjustments to assets and liabilities
could also have deferred tax effects which would need adjusting so that only cash
payments for tax are included w ithin the statement of cash flows. 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 d ividend would be presented as a cash
outflow in financing activities.
On the disposal of Barham, the net assets at disposal, including goodwill, are
removed from the consolidated financial statements. Since Barham is overdrawn,
this wi ll 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 d isposal date are removed from the corresponding
assets and liabilities so that only cash flows are recorded within the consolidated
statement of cash flows.
(iii) IFRS 5 Non-current Assets Held for Sole and Discontinued Operations 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;
(ii) Is a single co-ordinated plan to dispose of a separate major line or area of

operations; and
(iii) Is a subsidiary acquired exclusively for resale.
Both entities would be components of the Moyes group since their operations and
cash flows are clearly distinguishable for reporting purposes. Barham has been sold
during the year but there appear 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 shou ld be
presented as discontinued or not.
To be classified as held for sale, a sale has t o be highly probable and the entity
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 International Accounting Standards Board (IASB)
has confirmed that in instances where control is lost, the subsidiaries' assets and
liabilities should be derecognised. Loss of control is a significant economic event and
fundamental ly 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 due to
other causes would be judgemental. It is possible therefore that Watson should be
classified as held for sale but to be classified as a discontinued operation, Watson
would need to represent a separate major line of business or geographical area of
operation.
Answers 129
(b) Share-based payment
IFRS 13 applies when another IFRS requires or permits fair volue measurements or
disclosures about fair value measurements (and measurements, such as fair value less
costs to sell, based on fair value or disclosures about those measurements). IFRS 13
specifically excludes transactions covered by certain ot her standards including share-
based payment transactions within the scope of IFRS 2 Shore-based Payment.
For cash settled shore-based payment transactions, t he fair va lue of the liability is
measured in accordance with IFRS 2 initially, at each reporting dote and at the date of
settlement using on option pricing model. The measurement reflects all conditions and
outcomes on a weighted overage basis, unlike equity settled transact ions. Any changes in
fair value ore recognised in profit or loss in the period. Therefore, t he SARs should h ove
been accounted for as follows:
Year Expense Liability Calculation

$ $
30 September 20X6 641,250 641,250 285 x 500 x $9 x ½ Time-apportioned over
vesting period. Using the
estimated (300 x 95%)
285 managers.
30 September 20X7 926,250 1,567,500 285 x 500 x $11 Expense is difference
between liabilities at
30 September 20X7 and
30 September 20X6
30 September 20X8 97,500 1,350,000 225 x 500 x $12 Cash paid is 60 x 500 x
$10.50, ie $315,000. The
liability has reduced by
$217,500 and therefore
the expense is the
difference of $97,500
The fair value of t he liability is $1,350,000 at 30 September 20X8 and the expense for the
year is $97,500.
17 Weston
Workbook reference. Group statements of cash flow ore covered in Chapter 17. Debt factoring is
covered in Chapter 8.
Top tips. In Port (a), the proceeds of d isposal calculation is a little tricky, but the best way to
approach it is to set out the working as for a profit/loss on disposal and find the proceeds as a
balancing figure. It is a lso important to d istinguish between cash flows and non-cash flows as well
as being c lear o n signoge. In Port (b) considers debt factoring. Remember that the substance of
the arrangement must be considered.
Easy marks. There ore many straightforward cash flows included in this question; the key is to
think each t ransaction through and ensure you include all of the areas of the statement of cash
flows affected in your answer. It is usually more than one.
130 Strategic Business Reporting (SBR) @BPP L{IJIN NG

M ffl\A
U@il:i·iH:h::i&
Marks
(a) (i) Discussion of director's expectat ion 3

IAS 7 requirements 2
IAS 7 extract s 2
Loss on disposal working 2
Net asset s at d isposal working 2
Goodw ill working 2
NC I at disposal working 2
15
(ii) Discussio n of impact of Sout hla nd

acquisitio n 3
IAS 7 extract a nd worki ngs 3
6
(b) Debt fact oring
• IFRS 9 requirements
• agreement 1 4
• agreement 2 2
9
-
30
(a) (i) Effect of Northern disposal o n Weston's consolid a t ed st atement of cash flow
The directors' expectation t hat the loss on d isposal of Northern w ill be added back to
the profit before t ax figure in t he operating cash flows section of the cash flow t o
arrive at net cash flow from operating activit ies is inco rrect . The p rofit before t ax
figu re of $183 million excludes t he results from t he d iscontinued operation, w hich is
presented separately in accord a nce with IFRS 5 Non-current Assets Held for Sale
and Discontinued Operations.
The overa ll discontinued result of $25 million is, however, represented as cash flows
in the consolidated statement of cash flows. It must be analysed between the
element r elating to the trading activit ies of Northern , which wil l cease on disposal,
a nd that relating to t he d isposal t ra nsaction , w hich is a one-off benefit to the
ongoing g roup :
• The profit relating to t ra d ing activities is adjusted to calculate cash generated
from discontinued operations, a nd
• The loss on d isposal is replaced with cash proceeds from t he sale (plus
Northern's overdraft at the disposal date), which is reported as a n investing
cash flow of the Group.
In addition Northern 's other cash flows m ust be classified as operat ing, investing or
f inancing and reported in t he consolidated stat ement of cash flows.
Cash flows at tributab le t o t he operating , investing and financing act ivities of the
Nort hern discontinued operation must be disclosed either on t he face of t he
consolidated statement of cash flows or in the notes, in accordance with IFRS 5, so
t hat a pict ure of the continuing group ca n be derived by the user.
Answers 131
In accordance with IAS 7 Statement of Cash Flows, the net cash flows arising from
losing control of a subsidiary, that is the proceeds on disposal less any cash held in
the subsidiary, must be presented separately and classified as cash flows from
investing activities.
In accordance with IAS 7, Weston must disclose each of the following :
(i) The total consideration received $85.4m (W1);
(ii) The portion of the consideration consisting of cash and cash equivalents
$85.4m;
(iii) The amount of cash and cash equivalents held by Northern w hen control is
lost ($2m); and
(iv) The amount of the assets a nd lia bilities other than cash or cash equivalents in
Northern when control is lost, summarised by each major category (see W2
below).
EXTRACT FROM W ESTON G ROUP STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 JANUARY 20X6:
Proceeds on disposal of Northern
Cash flows from investing activities Sm Sm
Proceeds on disposal of Northern: 85.4 (W1) + 2 87. 4
Net cash from investing activities 87.4
The bank overdraft of $2 million is added back to the fair value of consideration
received of $85.4 million, in order to show proceeds net of cash and cash equivalents
disposed of as part of the transaction.
Workings
Loss on disposal of Northern
s·ooo s·ooo
Fair va lue of consideration received ~ 85.4
Less share of carrying amount when control lost:
Net assets (W2) 129.0
Goodwill (W3) 9.0
Less non- control ling interests (W4) (23.6)
Loss on disposal per question
2 Net assets at date of disposal

The fair value of the property, plant and equipment at disposal will be $80m
as per the question plus the remaining balance of th e $16m fair va lue uplift
($16m less 4/8 years depreciation = $88m). A d eferred tax liability on t he fair
va lue adjustment would arise of (25% x $16m) = $4m which would be released
in line with the extra depreciation, so the carrying amount at disposal will be
only $2m ($4m - ($4m x 4/8)). The carrying amount of the entire deferred tax
liability at disposal is therefore $Sm ($6m per question + $2m).
s·ooo
Property, plant and equipment (see Note above) 88
Inventories 38
Trade and other receivables 23
Trade and other payables (10)
Deferred tax (see Note above) (8)
Bank overdraft _@
129
132 Strategic Business Reporting (SBR) @BPP LEAR'IING

MaDIA
3 Goodwill on acquisition of Northern
$m
Consideration transferred 132
160
Fair value of net assets at acquisition (124)
Impairment (75%) ..J?J)
Carrying amount of goodwill at disposal 9
4 Non-contr olling interests at date of disposal

$'000
Non-controlling interest at acquisition (FV) 28.0
NCI sha re of post-acquisition retained earnings: 20% x
(129 0N2) - 124 0N3)) 1.0
NCI sha re of goodwill impairment (20% x 27 0JV3)) (5. 4)
23.6
(ii) Impac t of a cq uisitio n of Sout hland o n W eston's consolidated st a t em ent of cash

flows
In accordance with IAS 7 Statement of Cash Flows, when accounting for an
investment in an associate, the statement of cash flows should show the cash flows
between the investor and associa te, for example, dividends and advances. So,
Weston includes in its statement of cash flows t he cash flows in respect of its
investments in Southland, and distributions and other payments or receipts between
it and the associate.
Therefore, the net cash flow from operating activities of the Weston g roup is
determined by adjusting the consolidated profit or loss for the share of profits of the
associate, Southland, because it is a non-cash contribution to group profits.
The investing section of the statement of cash flows incorporates:
(i) The cash outflow on the purchase of the 40% interest in Southland on
1 February 20X5.
(ii) The cash inflow received by the Weston Group, being its 40% share of the
dividend paid out by Southland during the financial year, received in Weston's
capacity as an equity shareholder.
EXTRACTS FROM WESTON G ROUP STATEMENT OF CASH FLOWS: FOR THE YEAR
ENDED 31 JANUARY 20X6: Impact of Southland associate
Cash flow from operating activities

Profit for the year: X
Sha re of profit of associate ~ )
X
Cash flows from investing activities
Dividends received from associate ($10m x 40%) 4
Purchase of associate /yV1) (90)
Net cash used in investing activities
Answers 133
Workings
Associate
Sm
b/d (per question) 0
P/ L 16
Acquisition of associate 90 ~
Cash rec'd (div. from associate)
10 X 40% ~)
cld (per question) 102
(b) Debt factoring

IFRS 9 Financial Instruments requires Weston to consider t he commercial substance rather
than the legal form of t he debt factoring arrangements. Under IFRS 9, the trade receivables
should be derecognised from the financial statements of Weston when the following
conditions a re met:
(i) When Weston has no fu rther rights to receive cash from the factor; and eit her
(ii) When substantially a ll of therisksandrewardsofownershiprelatingtothe receivables
havebeen t ransferredtothefactor, or if substantially a ll of the risks and rewards have
not been transferred, then
(iii) When Weston has nofurthercontrol over t he trade receivables

Agreement one
W ith agreement one there is a sharing of the risks and rewards of ownership as the
factoring is non-recourse except that Weston retains an obligation to refund t he factor 9%
of irrecoverable debts. It can be seen, however, that substantially a ll the risks and rewards
of ownership have passed to the factor. The probability of an individual default is low given
that there is low credit risk a nd the factor would suffer the vast majority of the loss arising
from any default. Weston also has no further access to the rewards of ownership as the
initial $32 million (80% x $ 40 million) is in full and final settlement. Furthermore, the factor
has assumed full control over the collectability of the receivables. The trade receivables
should be derecognised from the financial statements of Weston and $8 million, being t he
difference between the value of the receivables sold and t he cash received, should be
charged a s an irrecoverable debt expense against t he profits of Weston.
The guarantee should be treated as a separate financial liability in accordance with IFRS 9.
This would initially be measured at its fair value of $50,000.
Agreement two
The risks and rewards of ownership do not initially pass to the factor in relation to
agreement two. The factor has full recourse to Weston for a six-month period so the
irrecoverable debt risk is still with Weston. Furthermore, Weston still has the right to receive
further cash payments from the factor, the amounts to be received being dependent on
when and if the cust omers pay the factor. Weston therefore still has the risks associated
with slow payment by their customers. The receivables must not initially be derecognised
from the financial statements with the $8 million (20% x $40m) proceeds being treated as a
short-term liability due to the factor. The receivables and liability balances wou ld gradually
be reduced as the factor recovered the cash from Weston's cust omers which would be
adjusted for the imputed interest and expensed in profit or loss. Should there be any
indication of impairment during the six-month period, the receivables should be credited
with a corresponding charge to profit or loss.
Following six months the risks and rewards of ownership have passed to the factor and t he
balances on the loan and the receivables would be offset. The remaining balance following
offset within the receivables of Weston should be expensed in profit or loss as an
irrecoverable debt.
131+ Strategic Business Reporting (SBR) @BPP

LEARMMG
fAEDIA
18 Bubble
Workbook reference. Foreign exchange is covered in C hapter 16.

Top tips. In Part (a), you a re asked to set out a nd explain various extracts from the preparat ion of
a consolidated statement of financial position for a simple group structure involving an overseas
subsidiary with an adjustment for an intra-group loon. It is important to grab the easy marks for
basic consolidation workings and not get bogged down in any adjustments you find chal lenging.
Part (a) (ii) requests the t ranslation of Tyslor's statement of financial position, which is very
straightforward. It is necessary to provide a brief explanation of the adjustments, in case the
f igures are w rong.
Port (b) consists mainly in describing the principles of IAS 21. Do not worry too much if you did not
know the answer to the lost part of t he question, relating to the potential disposal of shores in
Tyslor - you can score a pass on t his part of the question wit hout getting it all right.
Easy marks. These are available in Part (a)(ii) for simply translating the statement of financial
position at the correct rate. The Salt goodwill calculation is also a straightforward one. Clear
workings, referenced logically, are a lways important.
In Part (b), make sure you read the question properly and discuss the treatment of monetary and
non-monetary items as well as the elements of the question related to the translation and
possible d isposal of an overseas entity, with the retention of a loan.
IHtM:i·iH:ii::i♦
Marks
(a) (i) lntragroup loan 5
(ii) Translation of Tysla r SOFP

Discussion 4
Calculation 4
8
(iii) Goodwill - Salt 3
Goodwill - Tyslar 5
8
(b) 1 mark per point up to a maximum 9

Maximum 30
(a) (i) lntrogroup loan

The loan is a foreign c urrency monetary item in Tyslar's financial statements which
means it needs to be retranslated at the closing rote of exchange. The exchange
differences should have been recorded through Tysla r's profit or loss and will
therefore affect retained earnings.
Exchange
Sm rate Dinars m
1 Februar y 20X5 10 9 dinars:$1 90.0
Cash paid 1 J uly 20X5 (5) 10 dinars:$1 (50.0)
40.0
Exchange rate loss - balancing figure 7.5
31 October 20X5 5 9.5 dinars:$1 47.5
Answers 135
As Tyslar has not retranslated the loan outstanding at yea r end, a correction is
needed to increase Tyslar's non-cu rrent liabilities by 7.5 million dinars and reduce
retained earnings by a corresponding amount.
Debit Profit or loss (retained earnings) 7.5 dinars (to (a) (ii))
Credit Non-current liabilities 7.5 dinars (to (a) (ii))
In addition, after retranslation, $5 million will be cancelled from bot h financial
assets and non-current liabilities to eliminate intragroup balances on
consolidation.
The intragro up loan will be eliminated from the consolidated SOFP.
Debit Non-current liabilities $5m

Credit Financial assets $5m
(ii) Translation of Tyslar's SOFP
In order to covert Tyslar's statement of financia l position appropriately in
preparation for consolidation into Bubble's financial statements, the assets and
liabilities shown in the foreign operation's statement of financial position are
translated at the closing rate at the year end, being 9 .5 dinars to t he dollar as at
31 October 20X5, rega rdless of the date on which those items originated. For
consolidation purposes, a subsidiary's share capita l and any reserves bala nces
at acquisit ion are translated at the historic rate at the date of acquisition (being
8 d inars to the dollar on 1 November 20X4 when Bubble acquired its interest).
The post-acquisition movements in retained earnings are broken down into the
profit and dividend for each year post-acquisition (here just one year - the year
ended 31 October 20X5). The p rofit for each post-acquisition year is translated at
actual rate or average rate for that year if it is a close approximation. Dividends are
translated at the actual rate. Tyslar did not pay a dividend in the current year.
The balancing figure on translating the statement of financial position represents
the exchange difference on translating the foreign subsidiary 's net assets. A further
exchange difference arises on goodwill because it is treated as an asset of the
subsidiary and is therefore retranslated at the closing rate each year end. The
exchange difference for the year is reported in other comprehensive income in the
consolidated statement of profit or loss and other comprehensive income. The group
share of cumulative exchange differences are recorded in the translation reserve
and the non-controlling interests' (NCI) share is recorded in the NCI working.
The translated assets and liabilities must then be aggregated wit h Tyslar's assets
and liabilities in the consolid ated statement of financial position on a line by line
basis.
The loan correction calculated in (a)(i) must be incorporated into Tyslar' s statement
of financia l position stated in d inars before the translation into dollars of the
corrected position is performed.
Translation of SOFP of Tys/ar at 31 October 20X5
Dinars (m)
loan adj
Dinars (m) (a)(i) Rate Sm
Property, plant and equipment 390 9.5 41.1
Financial assets 98 9.5 10.3
Inventories 16 9.5 1.7
Trade and other receivables 36 9.5 3.8
Cash and cash equivalents 90 9.5 9.5
630 66.4

Dinars (m)
loan adj
Dinars (m) (a)(i) Rate Sm
Share capital 210 8 26.3
Retained earnings
Pre-acquisition 258 8 32.3
Post-acquisition:
- Profit: y/e 31 October 20X5 34 (7.5) ((a)(i)) 8.5 3.1
(292 - 258)* = 26.5
Exchange difference (bal.fig) (9.6)
52.1
Non-current liabilities 110 7.5((a)(i)) 9.5 12.4

Current liabilities 18 9.5 1.9
630 66.4
* As Bubble has only owned its controlling shareholding in Tyslar for one year and no
dividends have been paid in the current year, profit for the year con be calculated as
the year end retained earnings less retained earnings at acquisit ion.
(iii) G ood w ill
Goodwill: Solt acquired 1 November 20X3
Sm Sm
Consideration transferred (for 80%) 110
Non-controlling interests at fair value 25
Fair value of identifiable assets acquired and liabilities
assumed (per O $120m - $1m)
Share capital 50
Retained earnings 56
Other components of equity 8
Fair value adjustment re non-depreciable land 6
(120 - (50 (SC) + 56 (RE) + 8 (OCE)))
Contingent liability at fair va lue _Q)
(119)
16
In accordance with IFRS 3 Business Combinations, contingent liabilities should be

recognised in the goodwill calculation where they o re a present obligation arising as
the result of a past event and their fair va lue can be measured reliably even if their
set tlement is not probable, as in Salt's case where a possible obligation has been
disclosed and the fair value hos b een measured at the acquisition dote.
Goodwill: Tyslar acquired 1 Novem ber 20X4
D inars (m) Rate Sm

Consideration transferred 368 46.0
Non-controlling interests 220 27.5
588 8
Less fair value of net assets at acq'n:
$210m + $258m (468) (58.5)
At 1 November 20X4 120 15 .0
Impairment loss (20% x $120m) (24) 8.5 ~
12.2
Exchange loss (bal.fig.) __Rl)
At 31 October 20X5 96 9.5 10.1
Answers 137
Any goodwill arising on the acquisition of Tyslor is treated as an asset of the foreign
operation and expressed in its f unctional currency, here dinars, and is retranslated
at the closing rate, here 9.5 as a t 31 October 20X5. Since NC I is measured at fair
value at acquisition, the goodwil l recognised in t he financial statements relates to
both the group and the NCI and so both the impairment and the exchange loss will
be apportioned 60:40 between the group and the non-controlling interest
respectively.
In summary:
Goodwill for consolidated SOFP will be ($16m + $10.1m) = $26.1m.
The impairment loss is $2.8m of which 60% ($1.?m) will be charged against group
retained earnings and 40% ($1.1m) will be charged to t he NCI.
Tutoria l note.
Here impairment of Tyslar's goodwill has been t ranslated at the average rate of 8.5
but IAS 21 also permits translation at the closing rate rate (9.5 here). Therefore, your
answer would a lso have been marked correct if you had used the closing rate - this
would have resulted in an impairment of $2.5 million and an exchange loss of
$2.4 million as shown below:
Goodwill: Tys/ar acquired 1 November 20X4

Rate
Dinars (m) Sm
Consideration transferred 368 46.0
Non- controlling interests 220 27.5
Less fair value of net assets at acq'n:

(210m share capita l + 258m retained earnings)
588
(468)
} 8
(58.5)
At 1 November 20X4 120 15.0
Impairment loss (20% x $120m) (24) 9.5 (2.5)
12.5
Exchange loss (bal.fig.) (2.4)
At 31 October 20X5 96 9.5 10.1
(b) IAS 21 issues

Monetary items are units of currency held and assets and liabilities to be received or paid
in a fixed or d eterminable number of units of c urrency. This would include foreign bank
accounts, receivables, payab les and loans. No n-monetary items are other items which
are in the statement of financial position. For example, non-current assets, inventories and
investments.
Monetary items are retranslated using the closing exchange rate (the year end rate). The
exchange d ifferences on retranslation of monetary assets must be recorded in profit or
loss. IAS 21 The Effects of Changes in Foreign Exchange Rates, is not specific under which
heading the exchange gains and losses should be classified.
Non-monetary items which are measured in terms of historical cost in a foreign currency
are tra nslated using the exchange rate at the date of the transaction; and non-
monet ary items which are measured at fair va lue in a foreign currency are translated
using the exchange rates at the date when the fair va lue was measured. Exchange
differences on such items are recorded consistently with the recognition of the
movement in fair va lues. For example, exchange differences on an investment property, a
fa ir value through profit and loss financial asset, or arising on an impairment, w ill be
recorded in profit or loss. Exchange differences on property, plant and equipment arising
from a revaluation gain wou ld be recorded in other comprehensive income.
138 Strategic Business Reporting (SBR) @BPPlEAANINC

MFm~
When translating a foreign subsidiary, the exchange differences an all the net assets,
including goodwill, are recorded within other comprehensive income. The proportion
belonging t o t he shareholders of the parent will usually be held in a separate translation
reserve. The proportion belonging to the non-controlling interest is not shown
separat ely but subsumed within the non-controlling interest figure in the consolidated
financial statements. If Bubble were t o sell all of its equity shares in Tyslar, the
t ranslation reserve w ill be reclassified from equity to profit o r loss. In addition, the
cumulative exchange differences attributable t o the non-controlling interest would be
derecognised but would not be reclassified to profit or loss.
When a monetary item relating to a foreign operation is not intended to be settled , the
item is treat ed as part of the entity's net investment in its subsidiary. There wil l be no
difference in the accounting treatment in the individual accounts of Tyslar and hence
exchange d ifferences on t he loan would remain in profit or loss. However, in the
consolidated financial statements such differences should initially be recorded in other
comprehensive income. These w ill be reclassified from equity to profit or loss on
subsequent disposal of the subsidiary. T his can cause practical issues in terms of
monitoring all of the individual exchange d ifferences to ensure that they are all correctly
classified in the consolidated f inancial statements.
19 Carbise
Workbook references. The underlying principles of IFRS 3 are covered in Cha p t er 11. Disposals of
interests in investment s are covered in Chapter 14. Foreign transactions and foreign entit ies a re
Top tips. In part (a), you must make sure that you apply your knowledge to the scenario given:
the examiner's report stated that weaker a nswers to this question tended to list the factors
determining the functiona l currency, with little application to t he scenario. Remember that there
are very few marks availa ble for stating knowledge, you m ust apply your knowledge to t he
scenario to gain the majority of the marks available.
In questions like this w here complex calculations are required , the exa miner hos advised t hat you
produce your calculation on one sheet of paper a nd simultaneously explain the calculation on
another sheet of paper. This wa y of p roducing a n answer will help you to explain each part of a
calculation as you perform it, enabling you t o generat e as man y marks as possible.
H@il:i·iH:ii::iM
Marks
(a) (i) Discussion of presentation a nd functional currency 2

Application of the above discussion to the scenario 5
7
(ii) Calculation of goodwill 2
Calculation of the exchange d ifference on goodwill 3
5
(iii) Expla nation of the goodwill calculation and application t o
the scenario 2
Explanation of the exchange gain and application t o the
scenario 2
4
(b) Explanation of Bikelite excha nge differences 3
Calculation of Bikelite exchange d ifferences for y/e 20X6:
Translation 3
Split between parent a nd NCI
7
(c) (i) Calculation of group profit or loss on disposal 3
(ii) Explanation of the accou nting treatment of Bikelite 4
30
Answers 139
(a) Explanatory note ta: Directors af Carbise
Subject: Foreign subsidiary Bikelite
(i) The presentation currency is the currency in which the financial st atements are
presented. IAS 21 The Effects of Changes in Foreign Exchange Rates perm its an
entity to present its individual financial st atements in any currency. It would
therefore be up to the directors of Bikelite to choose a presentation currency for its
individual financial stat ements. Factors which cou ld be considered include t he
currency used by major shareholders and the currency in which debt finance is
primarily raised.
The functional cu rrenc y is the c urrency of the primary economic environment in
which the entity operates. Since transactions are initially recorded in an ent ity's
functional cu rrency, the result s and financia l position would need to be retranslated
where this differed to the presentation currency.
When determining the presentation and functional currency of Bikelite,

consideration should first be given to w hether the functiona l currency of Bikelite
should be the same as Carbise, a t 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 p urchases. Revenue is invoiced in a
range of currencies suggesting a geographically diverse range of cust omers which,
although this allows Carbise access t o 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 for too low to come to this
conclusion. Bikelite also appears free to retain cash in a range of currencies and is
not obliged t o remit the cash to Carbise in the form of d ividends. No r does Bikelite
appear to be dependent on financing from Carbise with other invest ors taking up the
bond issue at the start of 20X6. The functional c urrency of Bikelite does not need t o
be the same as Carbise.
In c hoosing its functional currency, Bikelite should consider the following primary
fact ors: the currenc y w hich mainly influences the sales price for their goods, the
currency of the country whose competitive forces and regulations determ ine the
sales p rice and also the currency which influences labour, material and overhead
costs. The key determinant here is the currenc y which the majority of the
transactions are settled in. Bikelite invoices and is invoiced in a large range o f
currencies and so it would not be immediately clear as to t he appropriate func tional
c urrency. Nor is there detail about w hether there is a cu rrency in which competitive
forces and regulations could be important. We do not know, for example, what
currency Bikelite's major competitors invoice in.
Secondary factors including the currency in which financing activities are obtained
and the currency in which receipts from operating activities are retained can help
guide the entity where it is not immediately clear. In relation to Bikelite, a sig nificant
volume of their sales a re invoiced in d inars and the majority of their expenses too,
g iven that wages and overheads are also paid in dinars. Funds were raised in dinars
from the bond issue and so it would appear t hat the dinar should probably be the
functional cu rrency for Bikelite. It is also possible that Bikelite may lose their
autonomy on Carbise' s sale of their shares which could have implications for t he
determination of the functional cu rrency.
(ii) Goodwill in d inars on the acquisition of Bikelite would be dinar 42 million ca lc ulated
a s follows:
Dinars mi/lions
Considerat ion 100
FVof NC I 22
l ess net assets at acquisition (60 + 20) (80)
11+0 Strategic Business Reporting (SBR)

On acquisition, the goodwill in $ would be (dina r 42m/0.5) $84 million.
Goodwill at 30 September 20X6 would be:
Dinars
mi/lions Rate Sm
Goodwill at 1 January 20X2 42 0.5 84
Impairment y/e 31 December 20X5 (6) 0.4 (15)
Exchange gain 25.7 (bal)
Goodwill at 31 December 20X5 36 0.38 94.7
Current year exchange gain 8.2 (bal)
Goodwill at 30 September 20X6 36 0.35 102.9
Workings
Dinar impairment of 6 million is t ra nslated at the average rate of $1:0.4 dinar =

$15 million.
Goodwill at 31 December 20X5 would be t ra nslated at last year's closing rate of

$1:0.38 d inar = $94.7m .
Goodwill at 31 Sept ember 20X6 will be translat ed at $1:0.35 d inar= $102.9m.
(iii) On a business combination, goodwill is calculated by compa ring the fair value of t he
consideration plus non-controlling interest s (NCI) at acquisition with the fair value of
the identifiable net assets at acquisition. Carbise measures NCI using the fair value
method. This means that goodwill att ributable to the NCI is included within t he
overall calculation of goodwill. An adjustment of dinar 20 million is required to t he
property of Bikelite to ensure the net assets at acquisition are properly included at
their fair value.
At each year end, a ll assets (and liabilities) are retranslated using the closing rate of
exchange. Exchange differences a rising on the retranslation are recorded w ithin
equity. Since the non-controlling interest is measured under the fair va lue method,
the exchange difference would be apportioned 80%/20% between the owners of
Carbise and t he non-controlling interest. Onl\;j the current \;!ear's exchange
difference wou ld initiall\;j be recorded within other comprehensive income for the
\;jear ended 31 December 20X6 whereas cumulative exchange differences on goodwill
at 30 September 20X6 would be recorded within equit\;j.
(b) The net assets of Bikelite would have been retranslated each year a t t he closing rate of
exchange. There is therefore an exchange d ifference arising each \;jear by comparing t he
opening net assets at the opening rate of exchange w ith t he opening net assets at the
closing rate of exchange. An additional exchange difference arises through the profit or
loss of Bikelite each year being translated at the average rate of exchange in the
conso lidated stat ement of comprehensive income. The profit or loss will increase or
decrease t he net assets of Bikelite respectively w hich, as is indicated above, will be
translated at the closing rate of exchange w it hin the consolidated statement of financial
position. As with goodwill, the exchange differences are included within equity with 80%
attributable to the shareholders of Carbise and 20% to the NCI. Cumulative exchange
differences will be included within the consolidated statement of financial posit ion with just
current year differences recorded within other comprehensive income.
The carrying amount of the net assets of Bikelite on 1 January 20X6 wa s dinar 48 million.
The fair val ue of t heir opening net assets therefore would be dinar 64 million (dinar 48 +
16/ 20 x dinar 20 million). Bikelit e would o nly be consolidated for the first nine months of t he
year since Carbise loses control on 30 September 20X6. Losses per the individual accounts
for t he year ended 31 December 20X6 w ere dinar 8 m illion, so only dinar 6 million would be
consolidat ed. Additional depreciation of dinar 0 .75 m illion (dinar 20m/20 x 9/12) would be
charged for the first nine months of the year. Net assets at disposal in dinars would
therefore be dinar 57.25 million (dinar 64 - dinar 6.75). The exchange difference arising in
the statement of comprehensive income for the year ended 31 December 20X6 would be
$13.4 million calculated as follows:
O BPP
LEI ,r, NG
r,,-n.
Answers 11t1
Sm
Opening net assets at opening rate (dinar 64/0.38) 168.4
Loss for 9 months at average rate (dinar 6.75/0.37) (18.2)
Current year exchange gain (balance) 13.4
Net assets at 30 September 20X6 (dinar 57.25/0.35) 163.6
$10.7 million of the excha nge differences are attributed to the shareholders of Carbide
(80% x $13.4) and $2.7 million to the NCI.
(c) (i) G roup profit or loss on disposal on Bikelite
Sm
Proceeds 150
Net assets at disposal (see (b)) (163.6)
Goodwill at d isposal (see (a)(ii)) (102.9)
NCI a t d isposal 48.5
Exchange gains recycled to profit and loss 76.6
Group profit on d isposal 8.6
Workings
Exchange gains at 1 January 20X6 per question ore $74.1 million. Current year
exchange d ifferences on goodwill ore $8.2 million (see (b)(i)) and on the net assets
o re $13.4 million (see (b)). Cumulative exchange gains at 30 September 20X6 ore
therefore $95.7 million. On disposal, the parent's shore (80%) = $76.6 million should
be recycled to profit or loss.
NCI at disposal is calculated as follows:
Sm
NCI at 1 January 20X6 per question 47.8
NCI shore of loss to 30 September 20X6 (20% x dinar
6.75m (see (b))/0.37) (3.6)
NCI shore exchange gains for 9 months to 30 September 20X6 (20%
X (13.4 + 8 .2)) 4.3
NCI at 30 September 20X6 48.5
(ii) For the year ended 31 December 20X6, Corbise will consolidate Bikelite for the
first nine months of the year up to the dote of disposal of t he shares and subsequent
loss of control. NCI w ill be calculated on the first nine months of losses. 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 classified as gains which wil l be reclassified subsequently
to profit or loss.
On 30 September 20X6, a consolidated profit or loss on disposal w ill be ca lculated
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 dote. The cumulative exchange differences on the
translation of Bikelite would be reclassified to profit or loss.
Consideration should be given as to whether the disposal of Bikelite would constitute
a discontinued operation. For Bikelite to be classified as a discontinued operation , it
would need to represent a separate major line of business or geographical a rea of
operations. Since Bikelite was initially acquired by Carbise to gain easier access to
int ernational markets, it is likely that the criterion would be met.
11+2 Strategic Business Reporting (SBR) @BPP LEAR\IMG

MEDIA
20 Elevator
Workbook refe rence. Ethical issues are specifically covered in Chapter 2 of the Workbook but
feature throughout all chapters. Non-financia l reporting is covered in C hapter 18 .
Top t ips. Part (a)(i) on the et hical implications of the suggestion combines knowledge of no n-
financial reporting and ethics. There are marks available for comment on each. Part (a)(ii) discusses
t he benefits and drawbacks of reporting non-financial information from a n investor's perspective,
focusing on the employee information given in the question. Part (b) req uires d iscussion of t he ethics
surrounding the dubious land transaction.
Eas y marks. In Parts (a) and (b), t here are plenty of marks available for sensible d iscussion of
ethics as well as marks available in Part (b) for straightforward knowledge of ratios and
repurchase agreements. Link your a nswer to the scenario.
U@il:i·lH:M::i♦
Ma rks
(a) (i) Ethica l considerations 3

Implications for reported information 4
(ii) Comment on non-financial performance measures 4
11
(b) Financial reporting - 1 mark per point up to maximum 4

Ethical issues - 1 mark per point up to maximum 3
7
Professional m arks 2
20
(a) (i) Ethical considera t io ns

Ethical behaviour in t he fa ir treatment of employees is important t o the long term
success of a company, and how it is perceived by stakeho lders. The directors of
Elevator are considering not paying employees a discretionary bonus in order to
achieve profit targets. This will enab le the directors to collect t heir bonus. It is worth
noting that t here is nothing illegal about the proposal - the bonus paid to employees
is d iscretionar y rather than contractual and t herefore the compa ny has no legal
obligation to pay the bonus. It is the reason behind the non-payment that gives rise
to ethical considerations. The suggestion by the CEO would work in reducing
expenses and improving profit.
Mora lly, the suggestion is likely to have negative consequences for the company.
The employees will be unhappy that their bonus has been withdrawn, particularly if
there has been a past policy of paying a nnual bonuses. This may have a negative
impact on productivity a nd staff morale, and therefore on employee satisfaction
scores and possibly on employee retention rates that are reported as non- financial
informat ion wit hin t he annual report. It is not clea r what the gender composition of
the compa ny is to understand whet her there would a lso be implications for the
information reported on gender equality, which is a matter being widely reported in
the media. Companies are a lso under increasing pressure to reduce the wage gap
between management and employees. Not paying staff a bonus will have a negative
impact on this metric.
@BPP LEAR\lt G
1/;Jl'll~
Answers 11+3
The comments of the CEO imply thot he does not think the negotive impoct on non-
financial reporting will have an impact on the company as the information is not
widely read. This type of information is becoming increasingly important to the users
of financial statements as they care about companies' treatment of their employees
and see it as being important in the long term success of the company. If Elevator
did not report employee matters, it may have been able to 'hide' the proposal to not
pay the employee bonus from the users of the financial statements, however this
additional reporting will bring the issue more to their a t tention.
(ii) Implications for reported information

Financial performance measures a re often criticised for being backward-looking as
they report historical information, too focused on short- termism as there are often
incentives for achieving, for example, profit or revenue targets and for failing to
provide enough relevant information on the factors that drive the success of the
business. Wh ilst some speculative investors may only be interested in short term
performance, others w ill base investment decisions on how a business performs
over time and how well the business is expected to perform in the future. Information
that can help investors to evaluate this will be valuable. Reporting non-financial
performance information such as the staff information reported by Elevator has
the benefit of d isclosing to the investors the factors that management considers
important in ensuring the longer term viability and success of the business. Staff are
seen as important assets to businesses and employee satisfaction is an important
consideration for companies. Reporting non-financial information can help
companies to attract and retain the appropriate level of staff.
There are drawbacks of reporting non-financial information. It is generally more
difficu lt for investors to verify than quantitative information which can lead to
concerns about its reliability. As companies decide what information to report, it can
be difficult for investors to compare between companies and across different
periods. Non-financial information is also more open to manipulation than IFRS-
based information as there are no underlying standards or principles which
companies must apply. The IASB's Disclosure Initiative project is a lso concerned as to
the volume of information being reported by companies and whether extensive
disclosures a re clouding the information that is relevant to investors within the
(b) Sale of land
Accou nting treatment
The sale of land is a repurchase agreement under IFRS 15 Revenue from Contracts with
Customers as Elevator has an option to buy the land back from the third party and,
therefore, control has not transferred as the purchaser's ability to use and gain benefit
from the land is limited. Elevator must treat the transaction as a financing arrangement
and record both an asset (the land) and a financial liability (the cash amount received
whic h is repayable to the third party).
Elevator should not have derecognised the land from the financial statements because the
risks and rewards of ownership have not been transferred. The substance of the
transaction is a loan of $16 million, and the 3% 'premium' on repurchase is effectively an
interest payment.
Rec ording the transa ction as a sale is an attempt to manipulate the financial statements in
order to show an improved profit figure and more favourable cash position. The sale must
be reversed and the land reinstated at its carrying amount before the transaction. The
repurchase, ie the repayment of the loan, takes place one month after the year end, and
so this is a current liability:
Debit Retained earnings
(to reverse profit on disposal (16 - 12)) $4m
C redit Current liabilities $16m
11tlt Strategic Business Reporting (SBR) @BPP LEAR\,NC:

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Ethical issues
ACCA qualified accountants are required to comply with the fundament al principles of
ACC A's Code of Ethics and Conduct. This includes acting with integrity. The integrity of
the finance director appears to be compromised in this situation. The effect of the sale just
before the year end was to improve profits and to eliminate t he bank overdraft, making t he
cash position look better. However, this is effectively 'window dressing', and is not honest
as it does not represent the actual position and performance of Elevator.
Accountants must also act with objectivity, w hich means that t hey must not allow bias,
conflict of interest or undue influence of ot hers to override professional or business
judgements. Therefore, the directors must put the interests of the company and its
shareholders before their own interests. The pressure to meet profit targets and achieve a
bonus is in the self-interest of the directors and seems to have at least partly driven t he
transaction and t he subsequent accounting, which is clearly a conflict of interest.
Accountants must also comply with the principle of professional behaviour, which requires
compliance with relevant laws and regulations. In this case the accounting treatment does
not conform to IFRS. It is not clear from the scenario whether the f inance d irector is aware
of this or not. If he is aware, but he has applied an incorrect treatment anyway, he has not
complied with the principle of prof essiona l behavior. It may be t hat he was under undue
pressure from the CEO to record the t ra nsaction in this manner, if so there is potentia lly an
intimidation threat. If however, he is not aware that the t reatment is incorrect, then he has
not complied with t he principle of professional competence as his knowledge and skill are
not up to date.
21 Star
W o rkbo ok refe renc es. Ethics are covered in Chapter 2. Leasing is covered in Chapter 9.
To p tips . There are generous marks available for this th ree- part et hics question. Ensure you split
your time appropriately across the parts. Do not waffle. Remember to link your answer to the
scenario, the information is given for you to use it. In both parts (a) and (b) you must ensure that
your answer demonstrates a good understanding of ethical principles rat her than simply the
ability to reiterate the ethical codes.
Easy marks. Parts (b) and (c) are more generic so there is scope to gain marks for sensible
disc ussion.
Marks
(a) Lease agreement 6

(b) Ethical and social respons ibilities 9
(c) Internal auditor profit-related bonus 3
Professional marks 2
20
(a) Lea se agreem ent su bstance presentation
It is of crucial importance t hat stakehold ers of a company can rely on the financial
statements in order to make informed and a ccurat e decisions. The directors of Star have
an ethical responsibility to produce financial statements which comply with accounting
standards, are transparent and free from material error. Lenders will often attach
covenants to the terms of an agreement in order to prot ect their interests in an entity.
They would also be of crucial importance to potential debt and equity investors when
assessing the risks and returns from any future investment in t he entity.
Answers 11+5
The proposals by Star appear to be a deliberate attempt to circumvent t he terms of the
covenants. The legal form would be to treat the lease as a series of short-term leases. This
would be accounted for as expenses in profit or loss and not recognise the right-of-use
asset and the associated lease obligation that the substance of the transaction and IFRS 16
Leases requires. This would be a form of 'off-balance sheet finance' and would not report
the true assets and obligations of Star. It is likely that liquidity ratios would be adversely
misrepresented from the proposed accounting treatment. The operating profit margins ore
likely to be adversely affected by the attempt to use the short-term exemption, as the
expenses associated with the lease ore likely to be higher than the depreciation charge if a
leased asset was recognised, hence the proposal may actually be detrimental to the
operating profit covenant.
Star is aware that the proposed accounting treatment may be contrary to accounting
standards. Such manipulation would be a clear breach of the fundamental principles of
objectivity and integrity as outlined in the ACCA Code of Ethics. It is important that
accountants ore seen to exercise professional behaviour and due core at all times. The
proposals by Star ore likely to mislead stakeholders in the entity. This cou ld d iscredit the
profession creating a lock of confidence within the profession. The directors of Star must be
reminded of their ethical responsibilities and persuaded that the accounting treatment
must fully comply wit h accounting standards and principles outlined within the framework
should they proceed with the debt factoring agreements.
(b) Ethica l a nd socia l respo nsibilities
Ethics and corporate socia l responsibility ore important in themselves, but also because
they can improve business performance. At present the company is stagnating, because it
has focused on maintaining market shore and on its own shareholders at the expense of
other stakeholders. Corporate social responsibility is concerned with a company's
accountability to a wide range of stakeholders, not just shareholders. For Star, the most
significant of these include:
(i) Regulators
(ii) Customers
(iii) Creditors
(iv) Employees
Regulators
The relationship w ith regulators is not good, mainly because of a poor reputation on
environmental matters. Star just does the bore minimum, for example cleaning up
contamination only when legally obliged to do so.
Adopting environmentally friendly policies and reporting in detail on these in an

environmental report w ill go some way towards mending the relationship. Litigation costs,
which have a direct impact on profit, can be avoided.
C ust o m ers
Currently, Star provides poor customer support and mokes no effort to understand the
customs and cultures of the cou ntries in which it operates. Moreover, it makes no positive
contributions and does not promote socially responsible policies. This attitude could easily
alienate its present customers and deter new ones. A competitor who does make positive
contributions to the community, for example in sponsoring education or environmental
programmes, will be seen as having the edge and could take customers away from Star.
Corporate social responsibility involves thinking long- term about the community rather
than about short- term profits, but in the long-term, profits cou ld suffer if socially
responsible attitudes are not adopted.
C reditors
Suppliers are key stakeholders who must be handled responsibly if a reputation in the wider
business community is not to suffer. Star's policy of not paying small and medium-sized
companies is very shor tsighted. While such companies may not be in a position t o sue for
payment, the effect on goodwill and reputation will be very damaging in the long-term.
11+6 Strategic Business Reporting (SBR) @BPP LEAR\,NC:

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Suppliers may be put aff doing business wit h Star. Perha ps a key campanent can anly be
sourced fram a small supplier, wha will not sell to Star if word gets around that it daes not
pay. This unethical and damaging policy must be discontinued and relationships with all
suppliers fostered.
Employees
Emp loyees are very important stakeholders. Star's authoritarian approach to management
and its refusal to value employees or listen to their ideas, is potentially damaging to
business performance. High staff turnover is cost ly as new staff must be recruited and
trained. Employees who do not feel va lued will not work as hard as those who do. In
addition, employees may have some good ideas to contribute that would benefit
performance; at the moment Star is missing out on these ideas. Acting responsibly and
ethically is not just right; it should also lead to the company being more profitable in the
long term.
(c) Internal auditor bonus

For
The chief internal auditor is an employee of Star, which pays a salary to them. As part of
the internal control function, they are helping to keep down costs and increase
profitability. It could therefore be argued that the chief internal auditor should have a
reward for adding to the profit of the business.
Against
Conversely, the problem remains that, if the chief internal auditor receives a bonus based
on results, they may be tempted to allow certain actions, practices or transactions which
should be stopped, but which are increasing the profit of the business, and therefore t he
bo nus.
Conclusion
On balance, it is not advisable for the chief internal auditor to receive a bonus based on the
company 's profit.
22 Farham
IHiM:l·ifoh::i♦
Marks
(a) Application of the following discussion t o t he scenario:

Factory subsidence as an indication of impairment 2
Fair value 2
Allocation of impairment loss
Sale of Newall - HFS criteria, valuation and impairment 4
Required accounting treatment of the expected costs of sale 2
11
(b) Discussion of ethical principles 2
Application of ethical p rinciples to the scenario 5
7
20
Answers 11t7
(a) Fa c tory subsidence
The subsidence is an indication of impairment in relation to the production facility.

Consideration would be required t o choose a suitable cash-generating unit as presumably
the factory would not independently generate cash flows for Farham as a standalone
asset . The facilit y is likely to consist of b oth the fact ory a nd various items of plant and
machinery and so it wou ld not be possible t o independently measure t he ca sh flows from
each of the assets. The recoverable amount of the unit would need t o be assessed as t he
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 facilit y. For example, by
considering whet her similar facilities have been on t he market o r recently sold. Value in use
would be calculated b y estimating the p resent va lue of the cash flows generat ed from t he
product ion facility discounted at a suitable rat e of interest to reflect the risks to the
business. Where the ca rry ing amount exceeds the recoverable amount, an impairment has
occurred. Any impairment loss is allocated t o reduce the carrying amount of the assets of
the unit. This will be expensed in profit or loss and cannot be netted off t he revalua tion
surplus as the surplus does not specifically relate to t he facility impaired. No provision for
the repai r t o the fac tor y should be made because there is no legal or constructive
ob ligation to repair the factory.
Sale of Newall
The disposal of Newall appears t o meet the held for sale crit eria. Management has shown
commitment to the sale by approving the plan and reporting it to the media. A probable
acquirer has been found in Oldcast le, the sale is highly probable and expected to be
completed six months after the year end , well within the 12-month criteria . Newall would
be t reated as a disposal group since a sing le equity tra nsaction is the most likely form of
d isposal. Should Newall be deemed to be a separate major component of business or
geographica l area of the group, the losses of the group should be presented separately
as a discontinued operation within t he consolida ted financial statements of Farham.
Assets held for sale are valued at the lower of carrying amount and fair value less c osts
t o sell. The carrying amount consists of the net assets and goodwill relating to Newall less
the non-controlling interest's share. Assets within the d isposal group which are not within
the scope of IFRS 5 Assets Held for Sale and Discontinued Operations are adjusted for in
accordance w ith t he relevant standard first. This includes leased assets and it is highly
likely that the leased asset deemed surp lus to requirements shou ld be written off w it h a
correspond ing expense to 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
rota basis across t he other non-cu rrent assets of the group.
The c hief operating officer is wrong t o exclude any form of rest ructuring provision from
the consolidated financia l statements. The disposal has been com municated to the media
and a const ructive obligation exists. However, only directly attributable cost s of the
rest ruc turing should be included and not ongoing costs of the business. Future o perating
losses should be excluded as no obligating event has a risen and no provision is required
for t he impairment s of the owned assets as they would have been accounted for on
remeasurement to fair value less costs to sell. The legal fees and redunda ncy costs should
be provided for. The early payment fee should a lso be provided for despite being a f uture
operating loss. This is because the contract is onerous and t he losses are consequently
unavoidable. A provision is required for $13 million ($2 million+ $5 million+ $6 m illion). The
$6 million will be offset against the corresponding lease liability wit h only a net fig u re being
recorded in profit or loss.
(b) Ethics
Accountants have a duty to ensure that the financia l statements are fa ir, transp a re nt and
com p ly w ith a cco unti ng standa r d s. The account ant appears to have made a couple of
mistakes which wou ld be unexpected from a professionally qualified accountant . In
particu lar, t he 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 t o futu re operating losses. Accountants must carr y out their work with due care

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and attention for the financial statements to hove credibility. They must therefore ensure
that their knowledge is kept up to dote and that they do carry out their work in accordance
with the relevant ethical and professional standards. Failure to do so would be a b reach of
professional compet ence. The accountant must make sure that they address this issue
through , for example, attending regular training and professional development courses.
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 th is is contrary to IFRSs. 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 c reate a restructuring provision. All of the
adjustments required to ensure the financial statements comply with IFRS will reduce
profitability. It is true that the directors do have a responsibility to run the group on behalf
of their shareholders and to t ry to 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 unfairly t r ying 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.
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 t he ethical principles should extend to
all employees and not just qualified accountants. Threatening and intimidating
be haviour is unacceptable and against all ethical principles. The accountant faces an
ethical dilemma. They have a duty to produce financial statements which ore objective
and fair but to do so could mean that they lose their job. 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 rema in unmoved, the
accountant may wish to contact the ACCA ethical helpline and toke legal advice before
undertaking any fu rther action.
23 Gustoso
Marks
Application of the following disc ussion to the scenario:

• Provision 3
• Restructuring 5
• Contract 3
11
Application of the following discussion of ethical issues to the scenario:
• User expectations 1
• Nature of errors/bia s/intimidation 3
• Advice to accountant 3
7
Professional skills marks 2

20
Answers 11t9
Provision
IAS 37 Provisions, Contingent Liabilities and Contingent Assets stotes that a provision should only
be recognised if:
• There is o present obligation from a past event;

• An outflow of economic resources is probable; and
• The obligation can be measured reliably.
No provision should be recognised because Gustoso Co does not have an obligation to incur the
training costs. The expenditure could be avoided by cha nging the nature of Gustoso Co's
operations and so it has no present obligation for the future expenditure.
The provision should be derecognised. This will reduce liabilities by $2 million and increase profits
by the same amount.
Restructu ring
A provision for restructuring costs should only be recognised in the f inancial statements of
Gustoso Co where all of the above IAS 37 criteria are met. However for a restructuring provision
to be recognised there are additional requirements per IAS 37. A constructive obligation for
restructuring only arises where a detailed formal plan exists and a valid expect ation to those
affected by the restructuring that it will take place has occurred. Although the Board meeting
happened in November 20X7 Gustoso Co does not yet appear committed as other plans are
being explored It is unlikely therefore that the plan is detailed and specific enough for these
c riteria to be satisfied.
In the case of a restructuring provision, this should only includ e direct expenditure arising from
the restructuring and not associated with ongoing activities. Hence the leasing costs would not be
included in a restructuring provision however if a decision is made to exit from these leases, it is
likely they cou ld meet the requirements of an onerous lease contract in the 20X8 financial
statements. Gustoso Co should therefore look to IFRS 16 Leases and ca rry out an impairment
review of the right-of-use assets held under these lease contracts, applying the requirements of
IAS 36 Impairment of Assets.
As no announcement has been made to staff or lessors as at the reporting date there is no
obligation in existence os ot 31 December 20X7 and no provision con be recognised for the other
costs - professional fees and redundancy costs. However the finance director has indicated t hat
a final decision on the restructuring and an announcement is likely to take place before the
financial statements are authorised in April 20X8. If t his constitu tes a material event a risi ng after
the reporting date it should be treated as a non-adjusting event. Gustoso Co should disclose the
nature of t he restructuring and an estimate of its financial effect.
Contract
IFRS 9 Financial Instruments applies to contracts to buy or sell a non-financial item w hich can be
settled net in cash. Such contracts are usually accounted for as derivatives. However, contracts
which are for an entity's 'own use' of a non- financial asset are exempt from the requirements of
IFRS 9. The contract will qualify as 'own use' because Gustoso Co always takes delivery of the
wheat. This means that it falls outside the scope of IFRS 9 and so the recognition of a derivative is
incorrect .
The cont ract is an executory cont ract. Executory cont racts are not initially recognised in the
financial statements unless they are onerous, in which case a provision is required. This particular
contract is unlikely to be onerous because wheat prices may rise again. Moreover, the finished
goods which the wheat forms a part of will be sold at a profit. As such, no provision is required.
The contract will therefore remai n unrecognised until Gustoso Co takes delivery of t he wheat.
The derivative liability should be derecognised , meaning that profits w ill increase by $0.5 million.
Ethic a l implicatio ns
The users of Gustoso Co's financial statements, such as banks and shareholders, trust
accountants and rely on them to faithfully represent the effects of a company's transac t ions.
IAS 1 Presentation of Financial Statements makes it clear that this will be obtained when
accounting standards are correctly applied.

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The errors made by Gustoso Co overstate liabilities and understate profits. It is possible that
these are unintentional errors. However, incent ives exist to depart from particular IFRS and
IAS standards: most notably the bonus scheme. The bonus target in 20X7 has been exceeded,
and so the finance director may be attempting to shift 'excess' profits into t he next year in order
to increase the chance of meeting 20X8's bonus target. In this respect, the finance director has
a clear self-interest threat to objectivity and may be in breach of ACCA's Code of Ethics and
Conduct.
The accountant is correct to challenge the finance direct or and has an et hical responsibility to
do so. Despite the fact that the finance d irector is acting in an intimidating manner, the
accountant should explain t he technical issues to the director. If the director refuses to comply
with accounting standards, then it would be appropriate t o discuss the matter with other
directors and to seek professional advice from ACCA. Legal advice should be considered if
necessary. The accountant should keep a record of conversations and actions. Resignation
should be considered if the matters cannot be satisfactorily resolved.
21.t Fiskerton
Marks

• Correct accounting treatment of the lease 3
• Implications for the financial statements 2
• Implications for the debt covenant 2
7
(b) Consideration of whether it is performance satisfied over time or at
a point in time and application to t he scenario 3
Conclusion and implications for revenue
4
(c) Application of the following discussion of ethical issues to the
scenario:
• Classification of property as investment property 2
• Revaluation and manipulation of the debt covenant 3
Consideration of the ethical implications and t heir resolution 2
7
Professional 2
20
(a) The Holom property should not have been classified as an investment property because it
is a finance lease as the lease term is equal to the useful life and its residual value is
deemed to be minimal. Edingley should record a right to use asset and Fiskert on should
derecognise the property. Fiskerton should instead record a lease receiva ble equal to the
net investment in the lease. The property needs to be removed from invest ment properties
and the fair value gains of $8 million rever sed. In any case, 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 d ifferent location and qualit y of
the materials between the two buildings. It would appear that $22 million would have been
a more accurate reflection of fair value.
The incorrect treatment has enabled Fiskerton to remain within its debt covenant limits.
Gearing per the f inancial extracts is currently around 49.8% (50,000/(10,000 + 20,151 +
70,253)). Fair value gains on investment properties are reported w ithin profit or loss.
Retained earnings would consequently be restated to $62.253 million ($70.253m - $8m).
Gearing would subsequently become 54.1% (50,000/10,000 + 20,151 + 62,253).
Furthermore, retained earnings would be further reduced by correcting for rent al receipts.
Answers 151
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 t heir 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. It is likely that non-current
assets and non-current liabilities should be reclassified to current and recorded at their
realisable values. As an absolute minimum, should Fiskerton be able to renegotiate with
the bank, the uncertainties surrounding their ability to continue to trade would need to be
disclosed.
(b) At the inception of the contract , Fiskerton must determine whether its promise to construct
the asset is a performance obligation satisfied over t ime. Fiskerton only has rights during
the production of the asset over the initial deposit paid. It has no enforceable rights to the
remaining balance as construction takes place. Therefore it would not be able to receive
payment for work performed to date. Additionally, Fiskerton has to repay the deposit
should it fail to complete the construction of the asset in accordance with the contract.
There is a single performance obligation which is only met on delivery of the asset to the
customer. Revenue should not be recognised on a stage of completion basis but must be
deferred and recognised at a point of time. That is, on delivery of the asset to the customer.
(c) It is concerning that the property has been incorrectly classified as an investment property.
Accountants have an ethical duty t o 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 1
Presentation of Financial Statements.
The managing director appears to be happy to manipulate the financia l statements. A

self-interest threat 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 t o 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 p rinciples of int egrity, professional behaviour and objectivity.
It appears that the managing director is trying to defraud the bank by misrepresenting
the liquidity of t he business to avoid repayment of the loan. This would be in breach of
anti-money laundering regulations.
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 wh ich 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 d irector who implemented the excessive revaluations on the
property. It would appear that the managing d irector is exercising too much power over the
financial statements. The accountant must not be influenced by the behaviour of the
managing director and should produce financial statements which a re transparent and
free from bias. Instead, t he managing director should be rem inded of their ethical
responsibilities. The accountant may need t o consider professional advice should the
managing director refuse to correct the financial statements.

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25 Hudson
Workbook references. Ethics are covered in Chapter 2. Employee benefits and pensions are
covered in Chapter 5. Deferred tax is covered in Chapter 7. Restructuring provisions are covered
in Chapter 6.
Top tips. Question 2 of the exam w ill always feature a discussion of ethical issues and will have
two marks available for the application of ethical principles. In this question, parts (a) and (b)
related to the accounting treat ment of the issues in the scenario given, and part (c) required a
discussion of the ethical issues a rising, including actions that the accountant should take.
In this type of question, remember that ethical issues are likely t o be interwoven throughout the
scenario - you need to be able to spot them. Remember also that you must apply ethical
principles to t he scenario. Listing out ethical requirements is unlikely to gain you many marks.
U@il:\·Hi:li::IM
Marks
(a) Application of the following discussion to the scenario:

What should be included in the remeasurement component 2
Correct treatment of the basic component 2
Correct treatment of the additional pension contribution 2
Discussion of restructuring costs 2
8
(b) An explanation of temporary differences and asset tax base 3
Application of above discussion to the scenario 2
5
(c) Application of the following discussion of accounting issues to the
scenario:
Te rm ination payments 2
Tax losses 1
Consideration of the ethical implications and their resolution 2
5
20
(a) The remeasurement component is t aken to other comprehensive income and comprises:
• Actuaria l gains and losses, such as the return on plan assets which differs from the
expected return on the assets included within t he net interest figure;
• Changes in t he a sset ceiling not included within the net interest calculation.
Actuarial gains and losses are sometimes referred to as experience adjustments a nd arise
due to d ifferences 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 redu ndancies will create an unusually high level of staff turnover but
this should not be treated as part of t he remeasurement component. The redundancy will
cause the present va lue of the obligations arising from t he defined benefit to decrease. This
is c lassified as a curtailment rather than an experience adjustment to be included within
other comprehensive income.
@BPP LEAR\lt G
1/;Jl'll~
Answers 153
A distinction needs to be mode between the bosic settlement ond the additional pension
contribution. The basic settlement is an obligation which Hudson has to pay as
compensation for terminating the employee's services regardless of when the employee
leaves t he entit!:J. IAS 19 Emplo!:Jee Benefits requires such pa!:Jments to be recognised at the
earlier of when t he plan of termination is announced and when the entit!:J recognises the
associated restructuring costs associated with the closure of W!:Je.
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 profit or loss of Hudson for the 1:Jear ended 31 December 20X2.
The additional pension contribution is only paid to employees who complete service up to
the closure of division Wye. Since t his is expected in earl!:J 20X3, these should be accounted
for as a short-term benefit. In effect, the contributions are in exchange for the period of
service until redundancy. Hudson should estima t e t he number of employees who will
remain wit h Hudson until the closure of Wye. The cost of t his payment should then be
spread over the period of service. Since th is should be included within the current service
cost, this will have an adverse effect on the profit or loss in both 20X2 and 20X3.
In line with the criteria to recognise anl:J provision, as set out in IAS 37 Provisions,
Contingent Liabilities and Contingent Assets, an 'obligating event' must have arisen for a
restructuring provision and for the associated restructuring costs to be recognised.
Furthermore, specific conditions must exist for such an obligating event to have arisen in
relation to a restructuring provision:
• a detailed formal plan for the restructuring is in place identifying certain criteria
required by the accounting standard; and
• a valid expect ation 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.
In the case of Hudson, a valid expectation has been created because the restructuring has
been announced, t he redundancies have been confirmed and the d irectors have approved
the restructuring in a formal directors meeting. IAS 37 specificall!:J sets out that a provision
cannot be made where onl!:J a management or board decision to restructure has been
taken as it is not considered that this in itself g ives rise to an obligation to restructure.
IAS 37 also 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
emplo!:Jees redundant and costs of terminating certain leases and other contracts directl!:J
as a r esult of restructuring. However, it specifically excludes costs of retraining or
relocating staff, marketing or investment in new systems and distribution networks, as
these costs relate t o future operations and so do not fa ll under the definition of a provision.
Thus the costs of ongoing activities such as relocation activities cannot be p rovided for.
(b) Deferred taxes represent t he amounts of income taxes payable or recoverable in future
periods in respect of temporary differences.
Temporary differences are differences between the carrying amount of an asset or liability
and its tax base. A deferred tax asset arises where the tax base of an asset exceeds the
carrying amount. A deferred tax asset can also occur when the tax base of a liability differs
from its carrying amount; the eventual settlement of the liability represents a futur e tax
deduction. In relation to unused trading losses, t he carrying amount is zero since the losses
have not yet been recognised in the financial statement s of Hudson. A potential deferred
tax asset does arise but the determination of the tax base is more problematic.
The tax base of an asset is the amount which will be deductible against taxable economic
benefits from recovering the carrying amount of the asset. Where recovery of an asset will
have no tax consequences, the tax base is equal to the carrying amount.
Hudson operates under a tax jurisdiction which only allows losses to be carried forward for
two years. The maximum t he tax base could be is therefore equal to the amount of unused
losses for 20X1 and 20X2 since these only are available to be deducted from future profits.

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The tax base though needs to be restricted to the extent that there is a probability of
sufficient future profits to offset the trading losses.
The directors of Hudson should base their forecast of the future profitability on reasonable
and supportable assumptions. There appears to be evidence that this is not the case.
Hudson has a recent history of t rading losses and there is little evidence that there will be
an improvement in trading result s 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 a lso 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. 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) The directors of Hudson are paid a bonus based upon earnings before interest, tax
depreciation and amortisation (EBITDA). It is possible therefore, despite the losses, that
once these items are adjusted for t he directors may receive a bonus. A self-int erest threat
will arise. The directors have an incentive to manipulate the financial statements in order to
try to minimise the losses and maximise profits. Directors have an ethical responsibility to
produce financial statements which are fair, objective and a transparent record of the
entity 's affairs.
There is evidence that the d irectors are willing to manipulate the financial stat ements in a
way direct ly contrary to the ethical principles of integrity and objectivity. It is likely that a
net expense should be recognised for the termination payments on the assumption that
they would exceed t he reduction in present value of the obligation from the curtailment.
The directors are wishing to recognise this within other comprehensive income rather than
profit or loss despite knowing that it is contrary to international accounting standards.
This would improve profitability although it would not impact upon net assets due to a
corresponding decrease in equity. The directors also have not recognised a restructuring
provision despite the terms being communicated to staff. It is possible that this would be
treated as an exceptional cost and therefore would not impact on the bonus. It would
therefore be useful to examine the precise terms of the contracts in order to assess t he
potential impact on the bonus. The treatment does, however, at least in the short term,
help Hudson to improve their net assets position.
The deferred tax asset is based upon forecasts for too long a period and is also based on
unrealistic assumptions. Earnings before interest, tax, depreciation and amortisation will be
overstated as a direct consequence. Net assets will a lso 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 cred ibility and transparency of the financial
statements. Deliberate manipulation of financial statements wil l reduce stakeholders'
confidence in the reliability of the financial statements and the accountancy profession as
a whole. The directors are deliberating flouting International Financial Reporting Standards
(IFRS Standards) to improve their bonus and maintain debt covenant obligations.
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 arises from the directors' implying that the accountant would lose their job should
they not comply with the directors' instructions.
Answers 155
The accountant would also be bound by the ACCA Code of Ethics and must adhere to the
same ethical principles. They must not therefore comply w ith the directors' instructions. The
accountant should remind the d irectors of their obligations to comply w ith the Code of
Ethics. 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.
26 Stent
Work bo ok references. Ethics and related party transactions are covered in Chapter 2. Financial
instruments are covered in Chapter 8 .
To p t ips. Question 2 of the exam w ill always feature a discussion of ethical issues and will have
two marks available for the application of ethical principles. In this question, part (a) related to
the accounting treatment of the issues in the scenario given as well as the impact on gearing of
those accounting treatments. The examiner commented t hat a surprising number of candidates
did not discuss the impact on gearing and therefore missed out on some marks. Make sure you
answer each part of a requirement to maximise your score in each question.
Part (b) required a discussion of the ethical issues arising in the scenario. In SBR, ethical issues a re
likely to go beyond basic accounting errors and could involve personal relationships and
pressures that those relationships create - as seen in this question. Be sure to read the question
carefully in order to spot these kinds of issues.
IHiM:l·ifoH::i&
Marks

Cash advance from related party 4
Preference shares: convertible 4
Deferred tax asset 3
11
(b) Discussion of ethical principles 2
Application of ethical principles to the scenario, and
recommended action 5
7
20
(a) C ash a d vance from Budster Co

Stent Co's finance director also controls Budster Co, the company w hich has paid a cash
advance to Stent Co. International Accounting Standard (IAS) 24 Related Party Disclosures
requires an entity's financ ia l statements to contain disclosures necessary to draw attention
to the possibility that its financial st a tements may have been affected by the existence of
related parties and by transactions and outstanding balances with such parties. Included
in the definition of a related party is a person identified as holding significant influence over
the entity, or w ho is a member of the key management personnel of the entity. The finance
director, a key management personnel of Stent Co, is a related party. In this case, Stent
Co must disclose the nature of the related party relationship as well as information about
all t ransactions and out standing balances between Stent Co and Budster Co (owned and
156 Strategic Business Reporting (SBR) @BPP Lf/\RN NC

Mffll1\
controlled by the finance director), necessary for users to understand the potential effect
of the relationship on the financial statements.
The advance from Budster Co meets the Conceptual Framework definition of a liability:
Stent Co has a present obligation (legally enforceable as a consequence of a bindi ng
contract), the settlement of which involves Stent Co giving up resources embodying
economic benefits in order to satisf y the claim. IAS 1 Presentation of Financial Statements
states that an entity shall not offset assets and liabilities, unless requ ired or perm itted by
an International Financial Reporting Standard (IFRS). The finance director wants ta include
the receipt as a credit balance in trade receivables, netting off any amounts owed by
Budster Co from trading, with what appears to be a short-term loan. This would result in a
misclassification of a current liability under current assets. Offsetting a financia l asset and
a financial liability is permitt ed according to IAS 32 Financial Instruments: Presentation
when, and only when, an entity has a legally enforceable rig ht 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 t his case, so Stent Co should
report separately both assets and liabilities.
Except when it reflects the substance of the transaction or other event, offsetting detracts
from the ability of users both to understand the transactions, other events and conditions
which have occurred and to assess the entity's future cash flows. Stent Co would be
showing a lower current asset figure and concealing the liability, which if disclosed as a
current liability could be included in the debt element of t he gearing calcu lation. Gearing
would therefore increase.
Converti ble red eemable pref e re nce shares
IAS 32 defines an equity instrument as any contract which evidences a residual interest in
the asset s 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 contractua l obligation to
deliver a variable number, or is settled only by exchanging a fixed amount of cash or
another financial asset for a fixed number of its own equity instruments.
Preference shares which are required to be converted into a fixed number of ordinary
shares on a fixed date should be classified as equity (this is known as the 'fixed for fixed'
requirement t o which the finance director refers). However, 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. In this case, Stent Co has
issued convertible redeemable preference shares - which makes little commercial sense
from the company's perspective, as they offer the holder the benefit of conversion into
ordinary shares if share prices rise, and the security of redemption (at the choice of the
holder) if share prices fall.
IAS 32 notes that the substance of a financia l instrument, rather than its legal form,
governs its classification in the ent ity's statement of financial position. A preference share
which provides for mandatory redemption for a fixed or determinable amount at a fixed or
determ inable future date or gives the holder the right to require the issuer to redeem the
instrument at a particular date for a fixed or determinable amount is a financial liability.
Because the preference shares offer the holder the choice of conversion into ordinary
shares as well as redemption in two years' time, the terms of the financial instrument
should be evaluated to determine whether it contains both a liability and an equity
component. Such components are classified separately as compound financial
instruments, recognising separately the components of a financial instrument whic h
creates both a financial liability of the entity (a contractual arrangement to deliver cash or
another financial asset) and an equity instrum ent (a call option granting the holder the
right, for a specified period of time, to convert it into a fixed number of o rdinary shares of
the entity).
Answers 157
In accordance with IFRS 9 Financial Instruments, when the initial carrying amount of a
compound financial instrument is allocated t o its equity and liability components, the
equity component is assigned the residual amount after deducting from the fair value of
the instrument as a whole t he amo unt separat ely d et ermined for the liability component.
Stent Co would measure the fair value of the consideration in respect of the liability
component based on the fair va lue of a similar liability without any associated equ ity
conversion option. The equity component is assigned the residua l amount.
Gearing would increase if the draft financial stat ements had included the preference
shares within equity: the correction would increase non-current d ebt (the present value of
the future obligations) and decrease equity.
Def erred tax asset

In accordance with IAS 12 Income Taxes, a deferred tax a sset 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 t o the extent that it
has convincing evidence that sufficient taxable profit will be available against which the
unused tax losses ca n be u til ised. In such circumstances, the amount of the deferred tax
asset and the nature of the evidence supporting its recognit ion 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 o r unused tax cred its expire, whether the
unused tax losses result from identifiable causes w hich are unlikely to recur; and whether
tax planning opportunities are available to the entity which will create taxable profit in
the period in w hich t he unused tax losses or unused tax credits can be utilised. To t he
extent that it is not probable that ta xable profit w ill be available against which the
unused tax losses or unused tax credits ca n be utilised, the def erred tax asset sho uld not
be recognised.
The removal of a deferred t ax asset would reduce net assets, and equity. Gearing w ould
therefore inc rease.
(b) Ethical aspects
The ACC A Rulebook co ntains the bye -lows, regulations and Code of Ethics a nd 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 o nly been in her
position for a few months. The accountant should com p ly with the fundamenta l ethica l
princi ples set out in the ACCA Rulebook: to o ct with integrity, objectivity, professional
compet ence and due care, confidentiality and professional behaviour. The accountant
should be mindful of any threats to these fundamenta l et hical principles. In doing so, the
accountant should consider the releva n t fac t s, t he ethical issues involved, the
fundamental principles which are threatened, whether internal procedures exist which
mitigate the t hreats, and what alternative courses of action could be taken.
In this case, a ll fundamenta l ethical principles with the excep tion of confidentiality appear
under threat. The finance director appears to be allowing bias and undue infl uence from
the pressures imposed by debt covenant gearing a nd overdraft limits into the c hoice of
accounting t reatment, rather than following accounting standards. The compan y is in a
precarious position, reporting losses in the year. The finance d irect or should act
professionally, in accordance with applicable technical a nd professiona l standards,
comply with relevant law s and regu lations, and avoid a ny action which discredits the
profession.
The finance director faces a n advoca cy t hreat b y promoting accounting treatments w hich
compromise objectivity. The accountant faces an intimidation th reat given the comments
from the finance director, who presumably hos an influence over career prospects.
Assuming the accountant wishes to keep her job, t his intimidation threat is also linked to
one of self - interest. Before acting, the accountant should speak with the finance director,

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try to confirm the focts, and discuss the treatment w ith the finance director and explain the
risks of non-compliance: the safeguards of accounting regulations and the sanctions
imposed on those professional accountants who do not comply may resolve the issue. 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 t o undergo continuing professional
development. If the finance director refuses to comply with accounting standards, then it
would be appropriate to discuss t he 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
satisfactoril y resolved, would be resignation.
27 Janne
W o rkbook references. Investment property and foir value measurement are covered in Chapter 4.
IFRS Practice Statement 2 Making Materiality Judgements is covered in Chapter 20. Alternat ive
performance measures are covered in Chapter 18.
Top tips. For Part (a)(i) ensure that you r elate your answer to the relevant account ing standards,
IAS 40 and IFRS 13. The key message is that there is guidance on the measurement of foir value
which Janne should have been applying. In Part (a)(ii) requires a discussion of the measurement
principles in the Conceptual Framework in relation to Janne.
In Port (b) you need to make sure you answer the requirement: relat e your answer to Janne's
investors and reference the key applicable points of the practice statement. Part (c) covers
alternative performance measures which is a key topic for S8R. Again you need to consider
Janne's investors in your answer. Wider reading of articles, particularly t hose on the ACCA
website, will be extremely helpful in being able to a nswer questions such as those seen here in
Parts (b) and (c). The ESMA (European Securities and Markets Authority) Guidelines on Alternative
Performance Measures, wh ich are available on line, provide another perspective and will be
beneficial to read .
ll@ilr\·IH:ii::iM
Marks
(a) Investment properties discussion - 1 mark per valid point up to 9

(b) Annual report discussion - 1 mark per valid point up to 8
(c) Alternative performance measure discussion - 1 mark per valid
point up to 8
25
(a) (i) Investment p ropert ies
IAS 40 Investment Property allows two methods for valuing investment property: the
foir va lue model and the cost model. If the foir value model is adopted, t hen the
invest ment property must be va lued in a ccord a nce with IFRS 13 Fair Value
Measurement. Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the
measurement date.
Fair value is a ma rket - based m easurem ent rather than specific to the entity, so a
company is not a llowed to choose its own way of measuring foir value. Valuation
techniques must be those which are appropriate and for which sufficient data are
available. Entities should maximise the use of relevant o bservable inputs and
Q BPP
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r,.rru~ Answers 159
m inimise the use of unobservable inputs. The standard esta blishes a hierarchy for
the inputs that valuation techniques use to measure fair value.
Level 1 Quoted prices (unadjust ed) in active markets for identical assets or
liabilities
Level 2 Input s other t han quoted prices included within Level 1 that are
observable for the asset or liability, either direct ly or indirectly
Level 3 Unobservable inputs for the asset or liability
Although the directors claim that ' new-build value less obsolescence' is accept ed by
the industry, it may not be in accordance with IFRS 13. As investment property is
often unique and not t raded on a regular basis, fair value measurements are likely t o
be categorised as Level 2 or Level 3 valua tions.
IFRS 13 mentions three valuation techniques: t he market app roach, the income
approach and the cost approach. A market or income approach wou ld usually be
more appropriate for an investment property tha n a cost approach. The 'new-build
value less obsolescence' (cost approach) d oes not take account of the Level 2 inputs
such as sales value (market approach) and market rent (income approach). Nor does
it take account of reliable estimates of future discounted cash flows, or values of
sim ilar properties.
In conclusion, Janne must apply IFRS 13 t o the valuation of its investment property,
taking account of Level 2 inputs.
(ii) Selection of measurement basis
J anne should ensure that it has given adequate considerat ion t o its particular facts
and circumstances in deciding to use fair va lue as the measurement basis far its
investment property.
Applying t he principles in the Conceptual Framework, Janne should choose a

measurement basis should that provides information that is useful to the p rimary
users of its financial statements. To be useful, the information must be relevant and
provide a faithful representation .
The relevance of a measurement basis is affected b y:

• The characteristics of the asset - eg if information about changes in t he value
of investment property is important to Janne's primary users, using a cost
basis may not provide relevant information.
• How t he asset contribut es to future cash flows - which in part depends on

Janne's business activities.
As investment property makes up 60% of Janne's total asset s and assuming that
Janne is holding investment propert y bot h to obtain rental income and to benefit
from increases in value, it would be reasonable to assume that p rimary users wou ld
be very interested in changes in value, suggesting cost may not provide the most
relevant information.
However, sometimes the level of m easurement uncertainty associat ed with a
measurement basis is so high that the information would not be a faithf ul
representation. If significant measurement uncertainty exists th rough the use of
fair va lue, Janne should consider using cost instead. This principle is also included in
IAS 40 as it specifies that if, a t recognit ion, fair value is not expected t o be reliably
measurable on a continuing basis, cost should be used instead.
(b) Annual report
Too much information in annual reports can be problematic as it can o bscure relevant
information and prevent investors from identifying t he key issues that are likely to affect
their decisions.

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Removing unnecessory information from the annual report is therefore a good idea.
However, it must be done corefully to ensure that financial reports still meet their primary
objective of providing financia l information that is usef ul to existing and potential investors,
lenders and other creditors in making decisions about providing resources to the entity.
Disclosures ore prescribed by IFRS and therefore a re not optional. Management cannot
just determine which disclosures appear irrelevant.
However, materiality needs to be taken into account when making d isclosures. Practice
Statement 2 Making Materiality Judgements confirms that disclosure does not need t o be
made, even when prescribed by an IFRS, if the resulting information presented is not
material.
Although the finance d irector has used a disclosure checklist and determined tha t a ll
disclosures made were 'necessary', it is not clear whether an assessment has been made as
to whether the disclosures provide information t hat is material. If not, there is the pot ential
to reduce disclosure in Janne's annual report.
If the information provided by a disclosure could not reasonably be expected to influence

the decisions primary users make on the basis of Janne's financial statements, then it is not
material and does not need to be disclosed.
Reducing the size of the accounting policy note is a distinct possibility. Only significant
accounting policies are required to be disclosed by IAS 1. Determining w hat constitutes a
significant accounting policy requires judgement.
Janne could consider removing the accounting policies which would not affect a user's
understanding of the financial statements if they were not disclosed. Accounting policies
that require management judgement ore likely to be material and if so, should be cleorly
presented. This is so that investors can see where management judgement has been
applied and can assess management's stewardship.
Disclosures required by IAS 24 in relation to related porties ore necessary to draw attention
to the possibility that an entity's financial position and p rofit or loss may have been
affected by the transactions with related parties. So the managing director is not correct in
his assertion that because t he transactions a re undertaken on term s equivalent to 'arm's
length', they are not important to investors.
However, as with other disclosures, they only need to be made if the information provided
is material. Related party transactions may be of a relatively small size and therefore
considered not material from a quantitative perspective. However, Practice Statement 2
considers the fact t ha t the t ransaction is w ith a related porty to be a qualitative factor. A
qualitative factor reduces the threshold for assessing w hether something is material from a
quantitative perspective.
Without considering t he transactions more corefully, Janne cannot say t hat related porty
transactions are immaterial and need not be disclosed. Conversely, Janne should not
assume that just because the transaction is with a related party that it must definitely be
disclosed. Janne should apply the guidance provided in Practice Statement 2 in order t o
make a j udgement about what information a bout related porty transactions would be
useful to investors and other primory users.
(c) Additional p erformance m ea sure
'Adjusted net asset value per share' (adjusted NAV per share) is an additiona l performance
measure (APM). Entities are increasingly reporting APMs in addition to IFRS performance
measures, such as earnings per shore, in order to enhance a user's underst anding of the
financial statements. It is possible for Janne to present this APM, however, it cannot present
this measure instead of earnings per share (EPS). EPS is required by IAS 33 w hich must be
applied by listed entities. Therefore, in o rder to comply with IFRS, EPS and diluted EPS must
be present ed.
APMs should be provided to enhance the understanding of users of the accounts.
Investment properties are likely t o form the majority of Janne's assets. Therefore
management will be interested in the increase in the value of those properties and relat ed
finance (eg loans), both of which are taken into account in adjusted NAV per share.
Answers 161
Disclosing adjusted NAV per share should therefore enhance the understanding of investors
as it wil l a llow them to evaluate Janne through the eyes of management. Additionally, as
adjusted NAV per share is used by other companies in the same industry, disclosing it
should a llow investors to more effectively compare the performance of Janne with other
companies in the same industry.
However, APMs can also be misleading. Unlike EPS, there is no official definition of adjusted
NAV per share, so management can choose what items to include in the 'adjustment'.
Therefore it is open to bias in its calculation as management could decide to only adjust for
items that improve the measure. In order to counter the criticisms, management should
provide a description of what is included when arriving at adjusted NAV per share and
ideally reconcile the information back to the IFRS information included within the financia l
statements. Similarly, in order to be useful, the basis of the calcu lation needs to be
consistent from year to year, otherwise comparison between years will be inaccurate.
Furthermore, different companies may define the same measure in different ways, which
reduces the comparability between entities.
Ultimately adjusted NAV per share wil l only provide useful information to Janne's investors
if it is fairly presented. The European Securities and Markets Authority (ESMA) has
developed guidelines t hat address the issues surrounding the use of APMs. The guidelines
require appropriate description of APMs, consistency in how the APM is calculated and
presented from year to year as well as guidance for presentation, including that APMs
should not be presented w ith more prominence, emphasis or authority than the equivalent
IFRS measures, nor should they distract from IFRS disclosures.
It is advisable for Janne's directors to consider this guidance in determining whether to

present adjusted NAV per share and how it should be presented. They should a lso consider
whether providing further information in t he form of APMs will result in more information
being reported in the annual report which they are otherwise attempting to reduce.
28 SunChem
Workbook references. IAS 24 is covered in Chapter 2, IAS 38 in Chapter 4, IFRS 3 in Chapter 11 and
IFRS Practice Statement 2 in Chapter 20.
Top t ips. Part (a) deals with standards that should be familiar to you, but the issues require in-
depth consideration. In particular, you need to consider how IAS 38 and IFRS 3 interact, focusing
on the implications of acquiring technology, outlining the fact that the probability recognition
c riterion is always considered to be satisfied for intangible assets that are acquired separately or
in a business combination. You were also expected to discuss that a shell company without
employees (and hence w ithout processes required to make it a 'business') is an asset acquisition
as opposed to a business combination. Part (b) is on materiality and related parties - identifying
the related parties and d iscussing how such disclosures are useful to investors. You are advised to
jot down a plan or diagram of the relationships before launching into your answer.
Easy marks. There are marks for knowing the basics of the standards tested, but those marks wil l
not get you a pass on this question.
Marks
(a) 1 mark per point up to maximum 10

(b) (i) 1 mark per point up to maximum 4
(ii) 1 mark per point up to maximum 5
(iii) 1 mark per point up to maximum 6
25

(a) Intangible asset
SunChem has purchased a license which g ives it the right to use Jomaster's technology for
a specified period of time in order to manufacture a specific compound. The acquired
license meets the definition of an intang ible asset as it is:
• Identifiable (it arises from the contractual right to use Jomaster's technology for
three years);
• Non-monetary; and
• Has no physical substance (SunChem has not acquired a physical item of
machinery, but instead has acquired the right to use the technology to perform a
particular process).
Under IAS 38, an intangible asset should be recognised when
(i) It is probable t hat the future economic benefits which are attributable to the asset
will flow to the entity; and
(ii) The cost of the asset can be measured reliably.
IAS 38 states t hat the probability recognition criterion is a lways considered t o be satisfied
for inta ngible a sset s that are a cquired separately or in a business combination. This is
because t he price an entity pays to separately acquire an intangible asset will reflect the
entity 's expect ations about t he probability af economic benefits flowing to t he entity. Put
simply, by purchasing the intangible asset, SunChem expects economic benefits to flow
from it, even if it is not certain about the t iming or amount of those benefits.
Therefore SunC hem should recognise the lice nse as an int angible asset m easured a t
it s cost of $4 m illio n . As it has a finite usef ul life, the license should be a mortised from the
date it is available for use, ie when the m anufacturing of the compound begins. The
amortisation should be included as an expense in the statement of profit or loss.
At the end of each reporting period, SunChem should assess whether there is any
indication that the asset may be impaired , and if so, t he carrying amount of the asset
should be reduced and t he impairment loss should be recognised as an expense in profit or
loss.
Due to the nature of intangible assets, subsequent expe nditure wil l only rarely meet the
criteria for being recognised in the carrying amount of an asset. Thus, SunChem should
expense its own internal development expenditure, incurred in updating the technology in
accordance w ith Jomaster's requirements, until t he criteria for capitalisation in IAS 38 are
met and economic benefits are expected to flow to the entity from t he capitalised asset.
Acquisition of interest in Conew
SunChem wishes to acquire 65% of the equity of Conew. SunChem must assess whether
this acquisition qualifies as a business combination under IFRS 3 Business Combinations. A
business combination is a transaction in which an entity o btains control of a busi ness.
Under IFRS 3, a business consists of in puts and p rocesses applied t o t hose i n puts w hich
have the ability to contribute to the c rea tion of o ut p uts.
Conew has an 'input' in that it has an intangible asset. However, Conew does not have any
employees, and therefore does not have any processes which could be applied to the
intangible asset . Therefore, Conew d oes not meet the d efinition of a b usiness.
The acquisition of an interest in Conew is therefore an asset a cquisition , not a business

combination, a nd should be accounted for under IAS 38.
Answ ers 163

(b) (i) Materialit y
Practice Statement 2 was developed in response to concerns that some companies
are unsure how to make judgements concerning materiality. This can result in
excessive disclosure of immaterial information while important information can be
obscured or even m issed out of the financial statements.
This is particularly true for information disclosed in t he notes where it a p pears that
some companies use IFRS disclosure requirement s as a 'checklist' and therefore
provide a ll disclosures req uired by a St andard, whet her material or not.
Practice Statement 2 is not an IFRS and is therefore not mandat o ry in order to state
compl ia nce with IFRS in a financial report.
Key points
• Financial statements are not intended to satisfy the information needs of all
users, b ut should provide financia l information that is useful to primary users
(potential and existing investors, lenders a nd other creditors) in making
decisions about providing r esources to t he entity.
• If the information provided by a d isclosure is not material, t he entity does not

need to make that disclosure.
• Materia lity should be assessed from a q ualitat ive perspective as well as a

quantitative perspective. Practice Statement 2 recommends starting from
t he quantitative perspective and then applying qualitative factors to f urther
assess immaterial items. The presence of a qualitative factor lowers the
quant itative threshold for assessing materiality.
Practice Statement 2 contains a four-step process to help entities make materiality
judgements: identify, assess, organise and review.
(ii) Related parties
A person or a close member of that person 's family is a related party of a reporting
entity if t hat person:
(i) Has control or joint control over the reporting entity;
(ii) Has significant influence over t he reporting entity; or

(iii) Is a member of the key management personnel of the reporting entity or of a
parent of the reporting entity.
Tutoria l not e.
You will get very few, if any, marks for w riting up t he requirements of Standards. The
vast majority of marks a re available for the application of t hose requirements to the
scenario g iven. The definition of a related party has been given in this solution for
completeness, but you do not need to include this definition in an exam a nswer.
In SunChem:
• The finance d irector is a relat ed party, as she owns more than half of the
voting power (60%). In the absence of evidence to the contrary, she controls
SunChem and is a member of the key management personnel.
• The sales direct or is a lso a related party of SunChem as he is a member of the
key management personnel and is a close member (spouse) of t he family of
t he finance director.
• Their son is a related party of SunChem as he is a close member (son) of their
family.
• The operations direct or is a lso a related party as he owns more than 20% of
t he voting power in SunChem. In the absence of evidence to the contrary, the
operations direct or has significant influence over SunChem and is a member
of the key management personnel.
161+ Strategic Business Reporting (SBR) @ BPP

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An entity is related to a report ing entity if the entity is controlled or jointly controlled
by a person identified as a related party:
• Boleel is a related party because it is controlled b y related pa rties, the finance

and soles directors, for the benefit of a close member of their family, ie their
son.
• Ocean is a related party because it is controlled by a close family member

(spouse) of t he operations director (a related party).
In the absence of evidence to the contrary, the third owner of the shores is not a
related party. The person is a passive invest or w ho does not appear to exert
significant influence over SunChem .
(iii) IAS 24 requires related party disclosures in order to draw attention to the possibilit y
that on entity's financial position and profit or loss may hove been affected b y the
existence of related parties a nd b y transactions and outstanding balances w ith such
parties.
In this case, there is a single invest or owning 10% of the shores whose investment
may be affected by t he related party transactions undert aken.
It is not just invest ors that ore interested in such info rmation. The Conceptual
Framework states that the objective of financial reports is to provide information t hat
is useful t o existing and potential investors, lenders and ot her creditors of on entity.
So it is not just the passive investor that must be considered when determining what
to disclose.
Practice Statement 2 clarifies that if information provided by a disclosure could not

reasonably be expected to influence t he decisions primary users make based on the
financial st atements, then t hat disclosure need not be mode.
The involvement of related parties is a qualitative factor when assessing materiality.

This factor reduces the quantitative threshold a nd the ent ity should then go bock
and re-assess whether the information is material.
In the case of the laptop sold to the son, it is unlikely that this t ransaction would be
mat erial from a quantitative perspective. However, because the transaction is with a
related party, the quantitative threshold should be lowered. SunChem should give
consideration as to whether disclosing information about t his transaction would be
useful to its primary users. Given that the transaction is so small and hos not
reoccurred, it is probably not material.
In the case of the maintenance contract, it may be t hat t he contract is below the
q uantitative threshold even when this threshold is lowered for the fact that the
tra nsaction is with a related party. However, given that the contract is ongoing and
that it was awarded to a related party despite being more expensive, suggests that
disclosing t his information wou ld be useful t o primary users.
Answers 165
29 Egin Group
Workbook refere nce. Materiality, IFRS Practice Statement 2 and ED 2019/6 are covered in
c ha pter 20. Integrated Reporting is covered in Chapter 18. Related parties are covered in
Chapter 2.
Top tips. This question dealt with materiality as a current issue in part (a). The definition of
materiality in part (a)(i) is straightforward, but the consideration of how it could lead to a
reduction in clarity and understandability needs more thought. Credit wil l be given for valid
arguments. Integrated reporting has been tested in a number of contexts, here in t he context of
materiality. You needed to consider how materiality is relevant to the objective of the
International Integrated Reporting Framework. The best way to approach Part (b) is to prepare a
plan on you r exam by adding to the group structure provided any entities or individuals who are
not shown as well as any transactions between t he entities and individuals involved. Then you
need to apply the IAS 24 related party definitions.
Easy marks. The definition of materiality (part (a)(i)) was a good way to earn easy marks. You
could also pick up some easy marks by knowing the content of IFRS Practice Statement 2 and ED
2019/6 if you had revised these.
IHtM:i-lH:M::iM
Ma rks
(a) (i) Materiality and IFRS Practice Statement 2: 1 mark per well-
explained point up to 6 marks 6
(ii) Materiality and integrated reporting: 1 mark per well-explained
point up to 4 marks 4
10
(b) (i) Reasons 4

Materiality 2
6
(ii) Egin Group 5
Spade 3
Atomic
9
25
(a) (i) Definition of materiality and application of the concept
Information is material if omitting, misstating or obscuring it could reasonably be

expected to influence decisions that primary users make on the basis of financial
information about a specific reporting entity.
Materiality is an entity- specific aspect of relevance, based on the nature and/or

magnitude of the items to which it relates in the context of the entity's financial
report.
It is therefore d ifficult t o specify a uniform quantitative threshold for materiality

or predetermine what could be material in a particular situation.

Materialit y should ensure that relevant information is not omitted or mis-stated. In
2018, t he IASB amended the definition of materiality to clarify t hat relevant
information should not be obscured by information which is not useful to primary
users of financial statements, addressing the issue that too much information can be
just as p roblematic as the omission of information.
The Conceptual Framework describes materiality as an application by a particular

entity of the fundamental qualitative characteristic of relevance. When an entity
is assessing materiality, it is assessing whether the information is relevant to the
primary users of its own financial statements. Information relevant for one entity
m ig ht not be as relevant for another entity.
Although preparers may understand the concept of materiality, they may be less
certain about how it should be applied. Preparers may be reluctant to filter out
information which is not relevant to users as auditors and regulators may
challenge their reasons for the omissions, particularly where the disclosure is
required by an IFRS Standard.
IFRS Practice Statement 2: Making Materiality Judgements
IFRS Practice Statement 2 is non- mandatory guidance.
The guidance confirms the general requirement in IAS 1 that an entity need not
provide information which is not material:
• The recognition and measurement c riteria in an IFRS Standard only need to be

applied when the effect of applying them is material.
• An entity does not need ta make a certain disclosure, even if that disclosure
is part of a list of 'minimum required disclosures' in an IFRS Standard if the
information provided by that disclosure requirement is not material.
The guidance includes a suggested 4-step process to making materiality judgements

which includes identifying potentially material information and assessing whether
that information is material.
To assess w hether the information is material, preparers should assess whether the
information cou ld reasonably be expect ed to influence primary users. This requires
the consideration of both quantitative and qualitative factors.
Quantitative factors consider the size of t he effect of the transaction. These can be
assessed with t he help of a threshold - eg 5% of profit.
Qualitative factors are characteristics that make information more likely to influence
the decisions of primary users, they can be internal or external.
It is usuall y more efficient to assess items from a quantitative perspective first: if

an item exceeds the quantitative threshold, it is material and no further assessment
is required.
As the final part of the 4-step process, the entity should review a complete set of
draft financial statements, considering whether all material information has been
identified and whether materiality has been considered from a wide perspective and
in aggregate.
(ii) Materiality and the International Integrated Reporting Framework
Integrated reporting takes a broader view of business reporting, emphasising the need for
entities to provide information to help investors assess t he current shape and performance
of the business, the likely effect of management's plans, external issues and opportunities,
and the long- t erm value of a business. Integrated reporting is a process which results in
communication, through the integrated report, about how a business creat es value over
time.
An integrated report is a concise commun ication about how an organisation's strategy,
governance, performance and prospects lead to the creation of value over the short,
medium and long t erm .
Answers 167
Materiality is a guiding principle in t he Internat ional Integrated Reporting Framework. In
the Framework, a matter is considered material if it could substantively affect the
organisation's ability to create value over time.
For fi nancial reporting purposes, the nature or extent of an omission or misst atement in t he
organisation's financial statement s determines relevance. Matters which are considered
mat erial for financial reporting purposes, or for other forms of reporting, may a lso be
material for integrated reporting purposes if t hey are of such relevance and importance
that they could change the assessments of provid ers of financial capital w it h regard to the
organisation's ability to create value. Another feature of materiality for integrated
reporting purposes is that the definition emphasises the involvement of senior management
and those charged with governance in the materiality determination process in order for
the o rganisat ion to determine how best to disclose its va lue creation development in a
meaningful and transparent way.
(b) (i) Why it is important to disclose related party tran sactions
The directors of Egin are correct to sa y that related part y transactions are a normal
feature of business. However, where entit ies are members of the same group, for
example parent and subsidiary, the financial performance and position of both
entities can be affected by these transactions. An obvious instance of this is where
one group company sells goods to another at a rtificially low prices which can have a
detrimenta l impact on the stakeholders of the selling company.
In the a bsence of other information, users of the financial stat ements assume that a
company pursues it s interests independently a nd undertakes t ransactions on an
arm's length basis on terms that cou ld have been obtained in a transaction w ith a
third party.
Knowledge of related pa rty relationships and transactions affects the way in w hic h
users assess a company's operations and the risks and opportunities that it faces.
Therefore, details of an entity's controlling party and transactions with related
parties should b e disclosed.
It is essential to the stakeholders' p ositive view of a company's moral and ethical
behaviour that controls are in place to ca pture related party disclosures that are
accurate and complete. This serves to minimise the risk of unethical or fraudulent
behaviour.
Materiality judgement
Disclosure of relat ed party transactions, like a ll other disclosure in financia l
statements, is subject to the over-arching characteristic of materiality, as is
confirmed by IFRS Practice Statement 2: Making Materiality Judgements.
The size, nature and context of the related party transaction should be taken into
account. A transaction may be small, such that it wou ld be immaterial if it were not
with a related party. However, the fact that it is with a related party, w hich is a
qualitative factor, lowers the quantitative threshold for determining if it is material.
Ultimately, the entity needs to determine w hether disclosing the information could
reasonably be expected to influence primary users' decisions. If not, then it is not
mat erial and disclosure of that information is not required.
(ii) Nature of related party relationships
Within the Egin Group
Briars and Doye are related parties of Egin because they are m embers of the
same group (both subsidiaries of Egin). For the same reason, as fellow subsid iaries,
Briars and Doye are also related parties af each other. Eye is also a related
party of Egin because it is an associate of Egin . (Egin has significa nt influence
over Eye.)
Briars and Doye a re also related parties of Eye. There is only one director in
common and IAS 24 states that entities are not necessarily related simply because
they have a d irector (or other member of key management personnel) in common, or
because a member of key management personnel of o ne entity has significant
influence over the other entity. However, as Eye is a member of the same g roup
that Briars and Doye are members of , t hey are related.

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Although Tang was sold several months before t he year end it was a related party
of t he Egin Group until then. Therefore, the related party relationship between Tang
and the Egin Group should be d isclosed even though there were no t ransactions
between t hem during t he period.
Blue is a related party of Briers as a director of Briers controls it . Because the

d irector is not on the management board of Egin it is not clear whether Blue is also
a related party of Egin group. This would depend on whether the direct or is
considered key management personnel at a group level. The director's services as a
consultant to the group may mean that a related party relationship exists. The issue
would depend on whether this role meant that t his per son was d irecting or
controlling a major part of the group's activities and resources.
Between Spade and the Egin Group

Spade is a related party of Do y e because it exerts significant influence over
Doye. This means that the sale of plant and equipment t o Spade must be
disclosed. Egin is not necessarily a related party of Spade simply because both
have an investment in Doye. A related party relationship will only exist if one party
exercises influence over another in practice.
The directors have proposed that disclosures should stat e that prices charged to
related parties are set on an arm's length basis. Because the transaction took place
between related parties by defi nition it cannot have taken place o n an arm's
length basis and this descript ion cannot be substantiated and would be
misleading. Doye sold plant and equipment to Spade at normal selling prices and
this is the information that should be disclosed, provided t he terms can be
substantiated.
Between Atomic and the Egin Group
Atomic is a related party of Egin because it can exercise significant influence over
it. Atomic' s significant influence over Egin g ives it significant influence over Briers
and Doye as they are controlled by Egin. Eye is not a related party of Atomic as
Atomic has no ability to exercise control or significant influence over Eye.
Answers 169
30 Alexandra
Workbook references. IAS 1 Presentation of Financial Statements is covered in Chapter 1 and

IFRS 15 Revenue from Contracts with Customers in Chapter 3. Financial assets and impa irment
ore covered in Chapter 8. Related parties is covered in Chapter 2. Practice Statement 2 is
Top t ips. Part (a) was o n recla ssification of long-term debt as cu rrent - make sure you o re
familiar with IAS 1 a s it is not a difficult standard but is often overlooked by students - IAS 1
requires a liability to be classified as current if certain conditions ore met. In Port (b), for the
financial asset, you needed to identify w hich of the three stages in the cred it loss model is
appropriate then apply the relevant accounting treatment. Port (c) was on related party
disclosures for key management personnel and the effect of Practice Statement 2, which was
pretty straightforward if you were familiar with the topic.
Easy marks. Port (c) hos some easy marks for applying the definitions from IAS 24 to the
scenario.
Marks
(a) (i) Loon - accounting treatment - 1 mark per point up to 6

(ii) Impact on investors' analysis 3
9
(b) Financial asset
• Classification 3
• Impairment 2
5
(c) Directors remuneration accounting treatment - 1 mark per point
up to 4
Materiality discussion - 1 mark per point up to 5
Importance of disclosure to investors - 1 mark per point up to 2
11
25
(a) (i) Default on loon

Under IAS 1 Presentation of Financial Sta tements, a long -term financial liability
due to be settled within 12 months of the year end dote should be classified as a
c urrent liability. Furthermore, a long-term financia l liability that is payable on
d emand because the ent ity brea c hed a conditio n of its loon agreement should be
classified as c urrent at the reporting dote even if the lender hos agreed ofter the
yea r end, and before the financial statements ore authorised for issue, not to
demand payment as a consequence of the breach. This is because, at the reporting
dote, the entity does not hove the rig ht to defer settlement for at least 12 months
ofter that dote.

November 20XO 30April 20X1 17May 20X1 Date financial
statements
Condition of loan Reporting date Lender agrees not
approved for issue
agreement to enforce payment
breached. Long- resulting from
term liability breach
becomes payable
on demand
However, if the lender has agreed by the rep o rting date to provide a period of
grac e ending at least 12 m onths after th e year end within which the entity can
rectify the breach and during that time the lender cannot demand immediate
repayment, the liabilit y is classified as non-c urrent.
In the case of Alexandra, the wa iver was given before the reporting date, but only for
the loan to be repaid a month after the reporting date , then a further waive r was
agreed, but again only for a few weeks. It would not ther efore be appropriate for
Alexandra to c lassify the bond a s long-term debt in t he statement of financial
position as at 30 April 20X1.
The fact that Alexandra has defaulted and sought two loan wa ivers may cast doubt
on its ability to continue as a going concern , especially as the loan waivers may not
be renewed. If there is uncertainty regarding Alexandra's going concern status, IAS 1
requires Alexandra to disclose these uncertainties. If Alexandra ceases to be a going
concern, then the financial statements would need t o be prepared on a break-up
basis.
(ii) Impact on investors' analysis
Alexandra's incorrect presentation of this loan cou ld have a serious impact on

investors as they seek t o analyse t he financial statements. Investors need
information to help t hem assess the prospects for future net cash inflows to an
entity. Given that the bond obligation may become repayable immediately in this
case, Alexandra's ability to continue as a going concern and be able to generate any
future cash flows is clearly at risk.
According to t he Conceptual Framework, t he objective of financial reporting is to
provide financial information about the entity that is useful to primary users of the
financia l statements when making decisions about providing resources to the entity.
In Alexandra's case, reporting the loan as non-current is not useful to primary users;
it is misleading. In fact, it is materially misleading as it could quit e feasibly influence
the economic decisions the primary users of Alexandra's financial statements make
on the basis of those financia l statements.
(b) Financ ial asset
The loan is a financial asset held at amortised cost under IFRS 9 Financial Instruments.
Alexandra wishes to measure the loan at fair value. However, IFRS 9 states that t he
classification of an instrument is determined on initial recognition and that
reclassifications , which are not expected to occur frequently, are permitted only if the
entity 's business model changes.
Financial assets are subsequently measured at amortised cost if bot h of the following
apply:
(i) The asset is held with in a business model whose objective is to hold the assets to
collect the contractual cash flows; and
(ii) The contractual terms of the financial asset give rise, on specified dates, to cash
flows that are solely payments of principal and interest on the principal outstanding.
All ot her financial assets are measured at fair value.
0 BPP
LE/Pl 11-,u
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Answers 171
Alexandra's objective (and therefore its business model) for holding the debt instrument has
not changed, and so it cannot measure it at fair value but must continue to measure it at
amortised cost.
As Alexandra has adopted IFRS 9 Financial Instruments, it must apply the standard's
forward-looking impairment model. The financial statements must reflect the deteriorat ion
in the credit quality of the financial asset in order to provide users with more useful and
timely information.
As Alexandra has now determined that the credit risk associated with the asset has
increased significantly since initial recognition, it must now increase the allowance for
credit losses to reflect lifetime expected credit losses.
Alexandra is required to record the full amount of the increased allowance for cred it losses
immediat ely to reflect the impairmen t. The lifetime expected credit losses should be
calculated at the present value of expected cash shortfalls arising from all possible default
events over the loan's expected life.. The allowance should be increased t o S9.9m, and the
increase in t he allowance of $7.9m ($9.9m - $2m) should be charged to profit or loss.
Interest revenue relating t o the loan should continue to be calculated on the gross carrying
amount of the loan as it is not considered to be credit-impaired.
(c) Directors' remuneratio n
IAS 24 Related Party Disclosures requires that entities should disc lose key management
personnel compensation not only in tota l but also for eac h of the following categories:
• Short-term employee benefit s

• Post-employment benefits
• Other long -term benefits
• Termination benefit s
• Share-based payment
The remuneration for the directors of Alexandra fits into the categories of 'short-term
benefits' (ie salary and bonus) and 'share-based payment' (ie share options).
Only totals for each categor y need to be disclosed, not the earnings of individual board
members, so no cultural protocol will be breached by these disclosures. However,
Alexandra is a public limited company, and so local legislation and corporate governance
rules may require more detailed d isclosu re.
Non-executive directors
IAS 24 defines key mana g em ent per sonnel as those persons having authorit y and
responsibility for planning, directing and controlling the activities of the entity, directly
or indirectly, including any direct or (whether executive o r otherwise) of t hat entity.
Therefore Alexandra 's non- executive directors are members of Alexandra 's key
management personnel. The requ irement s of IAS 24 therefore a lso apply to the non-
executive directors' pay.
Effect of materialit y
Practice Statement 2 reaffirms that if information provided by a disclosure is not material,

ie that it could not reasonably be expected to influence the decisions primary users make
based on the financial statements, then that disclosure need not be made.
This applies equally to related party disclosures as to any other disclosures required by
IFRSs, even if they are required under the Standard as 'minimum disclosures'. So in a sense,
the finance director is correct - but only if the information provided by those related party
disclosures is not material.
How the board assesses whether the information is material is important. The boards'
assertion that the 'amounts involved are not material' suggests that perhaps they hove
only considered materiality from a qua n t itat ive perspective.

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Practice Statement 2 suggests it may be efficient ta first assess materiality from a
quantitative perspective. If an item is considered immaterial from a quantitative
perspective, the entity can then consider the presence of any qualitative facto rs and
assess materiality from that perspective.
The involvement of related parties is a qualitative factor. The fact that these transactions
are with related parties of Alexandra reduces the quantitative threshold that Alexandra
should use to determine if the transactions are material.
Sometimes the effect of a qualitative factor can reduce the quantitative t hreshold to zero -
thus the t ransaction is material despite how small it might be. This is likely to be the case
when considering directors' remuneration given that it is such a contentious area.
As such, Alexandra should make the disclosures required under IAS 24, unless they can
provide a well-supported argument as to why t he information is not material.
Importance of disclosure to investors
Disclosures about related parties are necessary to draw attention to the possibility that the
entity 's financial position and profit or loss may have been affected by the existence of
related parties and by transactions and outstanding balances with such parties.
Director's remuneration disclosures are particularly contentious. Public concern ab out
excessive director remuneration has existed for some time. Investors want to know how
much of an entity's income is being spent on its directors and whether this represents good
value for money. Given the default on t he bond and waivers to postpone interest
payments, it is likely that the company would come under criticism if payments to directors
were considered particularly high.
The disclosure of individual components of remuneration is important because it could
influence the performance of a director - eg a high early termination payment may be
seen to be rewarding poor performance.
31 Yanong
W o rkbook references. Fair value measurement is covered in Chapter 4. C urrent issues are
7
To p t ips. The transaction in exhibit 1 required an understanding of t he market definitions given in
IFRS 13. You are expected to be able to go beyond memorising t he valuation inputs. The fair va lue
measurement of the maize (in exhibit 2) was challenging. However, valuation techniques are used
extensively in corporate reporting and therefore you must become accustomed to using such
techniques in answering questions. Balancing this, the valuation of a non-financial asset (the
farmland, exhibit 3) was more straightforward. Exhibit 4 covered a current issue - the exposure
draft ED 2019/7 Genera/ Presentation and Disclosures. Exhibit 2 required some knowledge of
IAS 41 Agriculture, which a lthough not on in the SBR syllabus, is brought forward knowledge from
Financial Reporting. Do not be put off by this - it is clear from reading the first paragraph of this
question that the main focus of the discussion should be on IFRS 13 as per the suggested solution
below. IAS 41 would only ever form a very small part of any SBR question.
Eas y marks. These are available for identifying which standards apply and outlining the
principles applicable, and you w ill gain these marks whether or not you come to the correct
conclusion about the accounting t reatment. If you had revised ED 2019/7, then part (b) should
have been st raightforward.
Answers 173
U@il:i·iH:h::i&
Marks
(a) (i) 1 mark per point up to maximum 6
(b) 1 mark per point up to maximum 7
25
(a) (i) Fair value af agricultural vehicles

IFRS 13 says that fa ir value is an exit price in the principal market, which is the
market w ith the highest volume and level of activity. It is not determined based on
the volume or level of activity of the reporting entity's transactions in a particular
market. Once the accessible markets are identified, market-based volume and
activity determines the principal market . There is a presumption that the principal
market is the one in which the entity would normally enter into a transaction to sell
the asset or transfer the liability, unless there is evidence to the contrary. In practice,
an entity would first consider the markets it can access. In the absence of a principal
market, it is assumed that the transaction would occur in the most advantageous
market. This is the market which would maximise the amount which would be
received t o sell an asset or minimise the amount which would be paid to transfer a
liability, taking into consideration transport and transaction costs. In either case, the
entity must have access to the market on the measurement date. Although an entity
must be able to access the market at the measurement date, IFRS 13 does not
require an entity to be able to sell the particular asset or transfer the particular
liability on that date. If there is a principal market far the asset or liability, t he fair
value measurement represents the price in that market at the measurement date
regardless of whether that price is directly observable or estimated using another
valuation technique and even if t he price in a different market is potentially more
advantageous.
The principal (or most advantageous) market price for the same asset o r liability
m ight be different for different entities and therefore, the principal (or most
advantageous) market is considered from the entity's perspective which may result
in d ifferent p rices for the same asset.
In Yanong's case, Asia would be the principal market as this is the market in which
the majority of transactions for the vehicles occur. As such, the fair value of the
150 ve hicles would be $5,595,000 ($38,000 - $700 = $37,300 x 150). Actual sales of
the vehicles in either Europe or Africa would result in a gain or loss to Yanong when
compared with the fair value, ie $37,300. The most advantageous market would be
Europe as a net price of $39,100 (after all costs) would be achieved by selling there.
Yanong would therefore utilise the fair value ca lculated by reference to the Asian
market as this is the principal market.
IFRS 13 makes it clear that the price used to measure fair value must not be adjusted
for t ransaction costs, but should consider transportation costs. Yanong has currently
deduct ed transaction costs in its valuation of the vehicles. Transaction costs are not
deemed to be a characteristic of an asset or a liability but they are specific to a
transaction and will differ depending on how an entity enters into a transaction.
Wh ile not d educted from fair value, an entity considers transaction cost s in the
context of d etermining the most advantageous market because the entity is seeking
to determine the market which wou ld maximise the net amount which would be
received for the asset.
171t Strategic Business Reporting (SBR) @BPP LEAl~II C

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(ii) Accounti ng treatment of maize
Where reliable market- based prices or values are not available for a biological asset
in its present location and condition, fa ir value should be measured using a valuation
tec hnique. Relevant observable inputs should be maximised whilst unobservable
inputs should be minimised. An appropriate valuation technique would be the
present value of expected net cash flows from the asset, discounted at a current
market-based rate. In the measurement of fair value of growing crops, a notional
cash flow expense should be included for the 'rent' of the land where it is owned in
order that the value is comparable to an entity which rents its land. The fair value of
the biological asset is separate from the value of the land on which it grows.
3 months to 3 mont hs to
31 January 20X5 30 April 20X5 Total
Sm Sm Sm
Cash inflows 80 80
Cash outflows (8) (19) (27)
Notiona l rental charge for land J!) J!) __g)
Net cash flows (9) 60 51
Discounted at 2% (8.82) 57.67 48.85
Thus in the quarterly accounts at 31 October 20X4, the maize fields should be
recognised at $68.85 million ($20 million land plus $48.85 million maize). A fair value
gain of $48.85 million should be shown in profit or loss less t he operating costs of
$10 million.
At 31 January, Yanong has revised its projections for cash inflows to $76 million,
which means that the net cash flows at that date were projected t o be $(76 - 19 - 1)
m illion, ie $56 million. Discounted at 2%, t his amounts to $54.9 million. Thus, a fair
value gain of $(54 .9 - 48.85) million, ie $6.05 million, should be shown in profit or
loss together with the actual operating costs of $8 million.
At t he point of harvest , on 31 March 20X5, the maize is valued at $82 m illion which
means that a fair value gain of $(82 - 54.9) m illion, ie $27.1 million, is recognised in
profit or loss and the maize is classified as inventory. The actual operating costs for
the quarter would a lso be shown in profit or loss. W hen t he maize is sold, a further
profit of $(84 - 82) million, ie $2 m illion, is made on sale.
(iii) Farmland
A fa ir value measurement of a non-financial asset takes 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. The maximum value of a non- financial asset may arise
from its use in combination with other assets or by itself. IFRS 13 requires the entity
to consider uses which are physically possible, legally permissible and financially
feasible. The use must not be legally prohibited. In this case, Yanong's land for
residentia l development would only require approval from t he regulatory authority
and t hat approval seems to be possible, so this a lternative use cou ld be deemed to
be legally permissib le. Market participants would consider the probability, extent
and t iming of the approval which may be required in assessing whether a change in
the legal use of the non-financial asset could be obtained.
Yanong would need to have sufficient evidence to support its assump tion about
the potential for an alternative use, particularly in light of IFRS 13's presumption that
the highest and best use is an asset's current use. Yanong's belief that planning
permission was possible is unlikely to be sufficient evidence that the change of use is
legally permissible. However, the fact t he government has indicated that more
agricultural land should be released for residentia l purposes may provide additional
evidence as to the likelihood that the land being measured should be based upon
residentia l value. Yanong would need to prove that market participants would
consider residential use of the land to be legally permissible. Provided t here is
Answers 175
sufficient evidence to support these assertions, alternative uses, for example,
commercial development which would enable market participants t o maximise va lue,
should be considered, but a search for potential alternative uses need not be
exhaustive. In addition, any costs to transform the land, for example, obtain ing
planning permission or converting the land t o its alternative use, and profit
expectations from a market participant's perspective should also be considered in
the foir value measurement.
If there are multiple types of market participants who would use the asset differently,
these alternative scenarios must be considered before concluding on the asset's
highest and best use. It appears that Yanong is not certain about what constitutes
the highest and best use and therefore IFRS 13's presumption that the highest and
best use is an asset's current use appears to be valid at this stage.
(b) ED 2019/7 Genera/ Presentation and Disclosures was developed in response to feedback
from investors about comparability and transparency of performance reporting in financial
statements.
In particular, companies present statements of profit or loss that vary greatly in their
structure and content which makes comparisons between companies difficult. For example,
lots of companies present operating profit, but as operating profit is not defined in IFRS
Standards, companies calculate it in different ways, which reduces comparability between
To address this, the IASB has proposed a replacement standard to IAS 1 Presentation of
Financial Statements. The new standard would require that the statement of profit or loss
should:
• be divided into four categories: operating, integral associates and joint ventures,
investing, and financing (guidance on what to include in each category is provided)
• include three subtotals between these categories.
In addition, users have complained that some companies do not disaggregate information
enough and include large 'other' balances in their statements of profit or loss, while other
companies present tao much detail, which obscures material information. Users have a lso
complained that companies do not always present operating expenses in the most useful
way, often appearing to choose the easier (by function) method rather than the method
which presents the most useful information for their particular situation.
ED 2019/7 includes several proposals to improve the usefulness of the stat ement of profit or
loss t o address these issues, including to:
• include principles for aggregation a nd disaggregation of information in the new
standard
• require meaningful labels for aggregated information, not 'other' and where this
cannot be done, to provide extra disclosure in the notes
• include indicators in the new standard to help companies adopt t he method of
presenting operating expenses (by nature or by function) which provides the most
useful information.
• require disclosure in the notes of on analysis by nature where expenses are analysed
by function in the statement or profit or loss.
The exposure draft also includes a new definition of 'unusual income and expenses '. These
are items of limited predictive value to users of financial statements as t hey are not
expected to recur in future reporting periods. The proposals require companies to present a
single note which discloses for each unusual item, the amount recognised and in which line
item in the statement of profit or loss it is included. Companies must also provide a
description of the item and why it meets the definition of unusual. If the company presents
operating expenses by function, this note should also g ive an analysis by nature of the
unusual items.

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32Avco
Workbook refere nce. The distinction between debt and equity is covered in Chapter 8.
Cryptocurrencies are covered in Chapter 20.
Top t ips. The majority of the question covers the dist inction between debt and equity, which is
quite narrow in focus. The topic has featured in an article by the examining team which is
available on ACCA's website. The distinction between debt and equity is fundamenta l to any set
of f inancial statements, and it is essential that you can explain it w ith reference to IFRSs and the
Conceptual Framework. In Part (c), accounting for cryptocurrencies is an emerging issue that the
IASB has not yet issued any guidance on. You should crit ically assess the finance director's
suggestion that these are financial assets by reference to relevant Standards and the Conceptual
Framework.
Easy marks. This is a cha llenging question overall but you should understand and be able to
discuss the basic principles of debt v equity.
IHhl:i·iH:M::iW
Marks

(b) (i) 1 mar k per point up to maximum 8
(ii) Effects 4
(c) 1 mark per point up to maximum 5
25
(a) Cavor
B shares
The c lassification of Caver's B shares will be made by applying the principles-based
definitions of equity and liability in !AS 32 Financial Instruments: Presentation, and
considering the substance, rather than the legal form of t he instrument. 'Substance' here
relates only to consideration of the contractual terms of the instrument. Factors outside the
contractual terms are not relevant to the classification. The following factors demonstrate
that Caver's B shares are equity instruments.
(1) Divide nds are discretionary in that they need only be paid if paid o n the A shares,
on which there is no obligation t o pay dividends. Dividends on the B shares will be
paid at the same rate as on t he A shares, which w ill be variable.
(2) Caver has no obligation t o redeem the B shares.
Lidan
A financial liability under !AS 32 is a contractua l obligation t o deliver c a sh or another

financial asset to anothe r entity . The contractual obligation may arise from a
requirement to make payments of principal, interest or dividends. The contractual
obligation may be explicit, but it may be implied indirectly in the terms of the contract.
In the case of Lidan, the contractual obligation is not explicit . At first glance it looks as if
Lidan has a choice as to how much it pays to redeem the B shares. However, the conditions
of the financial instrument are such that the value of the set t lement in own shares is
considera b ly greater than t he cash settlement obligation . The effect of this is that
Lidan is implicitly obliged to redeem the B shares at for a c a sh amount of $1 per
share. The own-share settlement a lternative is uneconomic in comparison to the cash
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Answers 177
settlement alternative, and cannot therefore serve as a means of avoiding classification as
o liability.
IAS 32 states further that where a derivative contract has settlement options, all of the
settlement alternatives must resu lt in it being classified as an equity instrument,
otherwise it is a financial asset or liability.
In conclusion, Lidan's B shares must be classified as a liability
(b) (i) Classification differences between debt and equity
The distinction between debt and equity in on entity's statement of financial position
is not easily distinguishable for preparers of financial statements. Some financial
instruments may hove features of debt and of equity, which con lead to inconsistency
of reporting which con be confusing for t he users of financial statements.
IAS 32 requires the classification to be based on principles rather than d riven by
perceptions of users.
IAS 32 defines o n equity instrument as: 'any contract that evidences a residual
interest in the assets of an entity after deducting all of its liabilities' (para. 11). It must
first be established that an instrument is not a financial liability, before it can be
classified as equity.
A key feature of the IAS 32 definition of a financial liability is that it is a
contractual obligation to deliver cash or another financial asset to another
entity. The contractual obligation may arise from a requirement to make payments
of principal, interest or dividends. The contractual obligation may be explicit, but it
may be implied indirectly in t he terms of the contract. An example of a debt
instrument is a bond which requires the issuer to make interest payments and
redeem the bond for cash.
A financial instrument is an equity instrument only if there is no obligation to deliver
cash or other financial assets to another entity and if the instrument will or may be
settled in the issuer's own equity instruments. An example of an equity instrument is
ordinary shares, on which dividends are payable at the discretion of the issuer.
A less obvious example is preference shares required to be converted into a fixed
number of ordinar y shores on a fixed dote or on the occurrence of on event which is
certain to occur.
An instrument may be classified as an equity instrument if it contains a contingent
settlement provision requiring settlement in cash or a variable number of the
entity's own shares only on the occurrence of on event which is very unlikely to
occur - such a provision is not considered to be genuine. If the contingent
payment condition is beyond the control of both the entity and the holder of the
instrument, then the instrument is classified as a financial liability.
A contract resu lting in the receipt or delivery of on entity's own shores is not
automatically an equity instrument. The classification depends on the so-called
'fixed test' in IAS 32. A contract which will be settled by the entity receiving or
delivering a fixed number of its own equity instruments in exchange for a fixed
amount of cash is on equity instrument. In contrast, if the amount of cash or own
equity shares to be delivered or received is variable, then the contract is a
financial liability or asset.
There are other factors which might result in on instrument being c lassified as
debt.
(1) Dividends are non-discretionary.
(2) Redemption is at the option of the instrument holder.
(3) The instrument has a limited life.
(4) Redemption is triggered by a future uncertain event which is beyond the
control of both the issuer and the holder of the instrument.

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Other factors which might result in an instrument being classified as equity include
the following.
(1) Dividends are discretionary.
(2) The shares are non-redeemable.
(3) There is no liquidation date.
Although IAS 32 establishes principles for presenting financial instruments as

liabilities or equity, it is not always easy to apply these principles in practice.
(ii) Significance of debt/equity classification for the financial statement s

The distinction between d ebt and equity is very important for users who analyse
the financial statements. The classification can have a significant impact on the
entity's reported earnings and gearing ratio , which in turn can affect investment
decisions. Companies may wish to classify a financial instrument as equity , in order
to give a favourable impression of gearing, but this may in t urn have a negative
effect on the perceptions of existing shareholders if it is seen as diluting existing
equity interests.
The d istinction is also relevant in the cont ext of a business combinatio n where an
entity issues financial instruments as part consideration, or to raise funds to
settle a business combination in cash. Management is often called upon to
evaluate d ifferent financing options, and in order to do so must underst and the
classification rules and their potential effects. For example, c lassification as a
liability generally means that payments are treat ed as interest and c harged to
profit or loss, and this may, in tu rn, affect the entity' s ability to pay divide nds on
equity shares.
(c) The finance director has suggested that the investment in cry ptocurren cies should be
recorded as a financia l asset. Under IAS 32, a financial asset is 'cash, an equity instrument
of a nother entity or a contra ctual right t o receive cash, a n equity instrument or exchange
financial instrument s on favourable terms' (para. 11). C ryptocurrencies do not meet the
definition of cash as they are not generally accepted as legal t ender a nd also do not g ive a
contractual right to receive cash or other instruments. As such, it is not appropriate for
Avco to classify the investment as a financial asset.
In the absence of an IFRS Standard covering investments in cryptocurrencies, the directors

of Avco sho uld use judgement t o develop an appropriate accounting policy in accordance
with IAS 8 Accounting Policies, C hanges in Accounting Estimates and Errors. The directors
should consider:
• IFRS Standards dealing w ith similar issues. As we have discussed, cry ptocurrencies
do not meet the definition of financial assets and they d o not have physical
substance and t herefore cannot be accounted for as property, plant and equipment
or inventories. As cryptocurrencies do not have physical substance, it is likely that
IAS 38 Intangible Assets is the m ost appropriat e accounting sta ndard to refer to.
They also meet the other criteria of IAS 38 as they are identifiable a nd t hey are non-
monetary (as they do not result in fixed or determinable amounts of money).
• The Conceptua l Framework. The investment a ppears to meet the definition of an

asset : a present economic resource controlled by the entity as a result of past
events. Consideration should be given to the recognition c riteria and t o other issues
such as t he measurement basis t o apply and how measurement uncertainty may
affect that choice given the volati lity of cr yptocurrencies.
• The most recent pronouncements of ot her national GAAPs based on a similar

conceptual framework and accepted industry practice. The IFRS Interpretations
Committee issued an agend a decision in 2019 in which they defined what they
meant by a 'cr yptocurrency' and conclud ed that items w hich met t his definition
should be t reat ed as intangible assets. The director s should consider whether the
investment they hold meets the definition of cryptocurrency as defined in the
agenda decision, and if so, should apply the g uidance in the agenda decisio n.
Answers 179
The directors of Avco need to account for the investment in o way which provides useful
information to the primary users of its f inancial statements. This means the informat ion provided
by the accounting treat ment should be relevant and should faithfull y represent the investment.
33 Calendar Co
IHtM:i-iH:M::iM
Marks
(a) Discussion of the principles of relevant st andards (IFRS 15, IAS 38,
IAS 8) 3
Application of the principles to Calendar Co 3
6
(b) Discussion of IFRS 16 principles of right of control 4
Application of right of control principles to Calendar Co 5
9
(c) Discussion of principles of materiality and reference to Practice
Statement 2 4
Application of principles to PPE purchases by Calendar Co 3
Application of principles to disclosure checklist use by 3
Calendar Co
10
25
(a) Sole of intang ible
IFRS 15 Revenue from Contract s with Customers defines revenue as income arising from
on entity's ordinary activities. Calendar Co's ordinary activities do not involve selling
development projects. In fact, Calendar Co has mode no such soles since 20X0. It would
seem that Calendar Co's business model instead involves developing products for its
customers, who then take over its production, marketing and sale. Stage payments and
royalties are the incomes which arise from Calendar Co's ordinary activities and should be
treated as revenue.
Based on the above, Calendar Co is incorrect to recognise the gain as revenue. In fact,
IAS 38 Intangible Assets explicitly prohibits the classification of a gain on derecognition of
an intangible asset as revenue.
IAS 38 defines an intangible asset as an identifiable non-monetary asset w ithout physical

substance. Intangible assets held for sale in the ordinary course of business are outside the
scope of IAS 38 and ore instead accounted for in accordance with IAS 2 Inventories. The
fact that the development project was c lassified as an intangible asset upon initial
recognition further suggests that it was not held for sale in the ordinary course of business.
If the development was incorrectly categorised in the prior year financial statements as on
intangible asset, then , as per IAS 8 Accounting Policies, Changes in Accounting Estimates
and Errors, this should be corrected retrospectively. However, based on the infrequency of
such sales, it seems unlikely that the development was misclassified.
180 Strategic Business Reporting (SBR) @BPP LEAR~IIIC

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(b) Contract
IFRS 16 Leases soys that a contract contains a lease if it conveys the right to control the
use of on identified asset for a period of time in exchange for consideration. When deciding
if a contract involves the right to control on asset, the customer must assess whether they
hove:
• The right to substantially all of the identified asset's economic benefits;

• The right to direct the asset's use.
Calendar Co hos the right to use a specified aircraft for three yea rs in exchange for annual
payments. Although Diary Co con substitute the aircraft for on a lternative, t he costs of
doing so would be prohibitive because of the strict specifications outlined in the contract.
Calendar Co appears to hove control over the a ircraft during the three-year period
because no other parties con use the aircraft during this time, and Calendar Co makes key
decisions about t he aircraft's destinations and the cargo and passengers which it
transports. There ore some contractual restrictions which limit t he aircraft's use. Th ese
restrictions define the scope of Calendar Co's right of use but do not prevent it from having
the right to direct the use of the aircraft.
Based on t he above, the contract contains a lease. IFRS 16 permits exemptions for leases of
less than 12 months or leases of low value. However, this lease contract is for three years,
so is not short term, and is for a high value asset so a lease liability should hove been
recognised at contract inception. The lease liability should equal the present value of the
payments yet to be mode, using the discount rote implicit in the lease or, where
unavailable, the lessee's inc remental borrowing rote. A finance cost accrues over the year,
which is charged to profit or loss and added to the carrying amount of the lease liability.
The year-end cash payment should be removed from profit or loss and deducted from the
carrying amount of t he liability.
A right-of-use asset should hove been recog nised at the contract commencement at on
amount equal to the initial va lue of the lease liability plus the initial costs to Calendar Co of
negotiating the lease. The right-of-use asset should be depreciated over t he lease term of
three years and so one year's depreciation should be charged to profit or loss.
(c) Materiality
Calendar Co's financial statements should help investors, lenders and other creditors to
make economic decisions about providing it with resources. An item is material if omitting,
misstating or obscuring it might influence the economic decisions of the users of the
financial statements. Materiality is not a purely quantitative consideration; on item con be
material if it triggers non-compliance with lows and regu lations, or bank covenants.
Calendar Co should consider mat eriality throughout the process of preparing its fi nancial
statements to ensure that relevant information is not omitted , misstated or obscured.
Property, plant and equipment (PPE)
IAS 16 Property, Plant and Equipment states that expendit ure on PPE should be recognised
as on asset and initially measured at the cost of purchase. Writing off such expenditure to
profit or loss is therefore not in accordance with IAS 16.
According to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors,

financial statements do not comply w ith IFRS Standards if they contain materia l errors, or
errors mode intentionally in order to present the entity's financial performance and position
in a particular way. However, assuming that the aggregate impact of writing off small PPE
purchases to profit or loss is not material, then the financial stat ements would still comply
with IFRS Standards. Moreover, this decision seems to be a practical expedient which will
reduce the time and cost involved in producing financial statements, rather than a decision
mode to achieve a particular financial statement presentation.
If implemented, t his policy must be regularly reassessed to ensure that PPE and the
statement of profit or loss ore not materially misstated.
Answers 181
Disclosure not es
IAS 1 Presentation of Financial Statements states that application of IFRS Standards in an
entity 's financial statements will result in a fair presentation. As such, the use of a checklist
may help to ensure that all disclosure requirements within IFRS Standards are fulfil led.
However, IAS 1 and IFRS Practice Statement 2 Making Materiality Judgements both specify
that the disclosures required by IFRS Standards are only required if the information
presented is material.
The aim of disclosure notes is to further explain items included in the primary financial
statements as well as unrecognised items (such as contingent liabilities) and other events
which m ight influence the decisions of financial statement users (such as events after the
reporting period). As such, Calendar Co should exercise judgement about the disclosures
which it prepares, taking into account the information needs of its specific stakeholders.
This is because the disclosure of immaterial information clutters the financia l statements
and makes relevant information harder to find.
Calendar Co may also need to disclose information in addition to t hat specified in IFRS
Standards if relevant to helping users understand its financial statements.
31.t Lupin
Workbook references. Current and deferred tax is covered in Chapter 7. IFRS 2 is covered in
Chapter 10 and IFRS 16 in Chapter 9. Materiality and ED 2019/7 are covered in Chapter 20.
Top tips. Part (a) is asking you to apply the requirements of IAS 12 to three d ifferent items
including share options, a leasing transaction and an intra group sale. Part (b)(i) can be broken
down int o its component parts of discussion of the Conceptual Framework and temporary
differences, and credit is available for fairly general discussion of both. In (b)(ii). The tax
reconciliation is intended to be useful in helping stakeholders t o understand the income tax
expense in the statement of profit or loss and cannot be omitted just because it is complex to
prepare. Part (c) was fairly straightforward if you could remember w hat t he exposure draft was
about.
Easy marks. Part (a)(iii) is easier than (i) and (ii), though t hey ca rry the same number of marks.
Marks
(a) (i) Share options 4

(ii) Leased plant 4
(iii) Intra group 4
12
(b) (i) Conceptual Framework 2

Temporary d ifference 2
Liability
5
(ii) Tax reconciliation discussion 2
Omit from disclosures 2
4
(c) Unusual expenditure - current IFRS requirements 2

Usefulness to investors
ED 2019/7 proposals
4
Total 25

(a) (i) Sha re o ptions
Under IFRS 2 Share- based Payment the company recognises an expense far the
employee services received in return far the share options granted over the vesting
period. The related tax deduction d oes na t arise until the share opt ions are
exercised. Therefore, a d eferred t a x a sset arises, based on the difference between
the intrinsic value of the options and their carry ing amount (normally zero).
At 31 October 20X 4 the tax benefit is as follows:
$m
Carrying amount of share based payment
Less tax base of share based payment (16/2)
Temporary d ifference
The d ef e rred tax a sset is $2.4 m illio n (30% x 8). This is recognised at 31 October
20X4 p rovided that taxable profit is available against which it can be utilised.
Because the t ax effect of t he remuneration expense is greater than t he tax benefit,
the tax benefit is recognised in profit o r loss. (The tax effect of the remuneration
expense is 30% x $40 million "'" 2 = $6 million.)
At 31 October 20X5 there is no lon ger a deferred tax a sset because the options
have been exercised. The tax benefit receivable is $13 .8 mil lio n (30% x $46 million).
Therefore, the deferred t a x asset of $2.4 million is no longer required.
(ii) Leased p lant
Under IFRS 16 Leases, a right-of - use a sset and a lease liabilit y are recognised.
The lease liability is measured at the present value of f ut ure lea se payments
discounted using, if available, the interest rate im plicit in t he lease. Each instalment
payable is allocated partly as interest and partly as repayment of the liabilit y .
The right-of- use asset is measured initially at the amount of the initial measurement
of the lease liability, p lus certain other direct costs not incurred in this case, such as
legal fees. It is depreciated on a straight- line basis over the five years. The carrying
amount of the right-of-use asset far accounting purposes is the initial amo unt of
t he right- of- use a sset less d epreciation.
Tax relief is granted as lease rentals are paid, therefore the tax base of the lease
liability is zero as it is calculated as the carrying amount less any future tax-deductible
amounts. The tax base of the right -of- use asset is the amount deductible for tax in
fut ure, which is zero.
Therefore, at 31 October 20X5 a n et t empo rary d ifference arises as follows:
$m $m
Carrying amount in financial statements:
Asset:
Right-of-use asset 12.00
Less depreciation (12/ 5) (2.40)
9.60
Less lease liability
Liability at inception of lease 12.00
Interest (8% x 12) 0.96
Lease renta l (3.00)
(9.96)
0.36
Less tax base (0.00)
Temporary difference 0.36
A deferred t ax asset of $108,000 (30% x 360,000) arises.
Answers 183
(iii) Intra-group sale
Dahlia has made a profit of $2 million on its sale t o Lupin. Tax is payable on the
profits of individual companies. Dahlia is liable far tax on this profit in the current
year and will have provided far the related tax in its individual financial statements.
However, from the viewpoint of the group the profit will not be realised until the
following year, when the goods are sold to a third party and must be eliminated
from the consolidated financial statements. Because the group pays tax before the
profit is realised there is a temporary difference of $2 million and a deferred tax
asset of $600,000 (30% x $2 million).
(b) (i) The conceptual basis for accounting far deferred tax is questionable.
On one hand, deferred tax is focused on the statement of financial position, which is
in keeping with the Conceptual Framework. However, it can be argued that deferred
tax assets and liabilities do not meet the definition of assets and liabilities under
the Conceptual Framework. An asset is defined as a present economic resource
controlled by an entity as a result of past events and a liability is a present
obligation to transfer economic benefits, again as a result of past events. It is not
clear whether deferred tax assets and obligations can be considered present
resources or obligations.
IAS 12 Income Taxes is based on the idea that all c hanges in assets and liabilities
have unavoidab le tax consequences. W here the recognition criteria in IFRS are
dif ferent from those in tax law, the carrying amount of an asset or liability in the
financial statements is different from its tax base (the amount at which it is stated
for t ax purposes). These differences are known as temporary differences.
The practical effect of these differences is that the recognition of the transaction or
event occur s in a d ifferent accounting period from it s tax consequences. For
example, unless the accounting depreciation and tax depreciation (capital
allowances in the UK) are calculated on exactly the same basis, the amount of
accounting depreciation recognised in the financial statements in an accounting
period is different to the amount of tax on the same asset in the same period.
Under IAS 12, the tax effects of transactions are recognised in the same period as the
transactions themselves, but in practice, tax is paid in accordance with tax
legislation when it becomes a legal liability. This is considered another co nceptua l
weakness or inconsist ency, in that only one liability, that is tax, is being provided
far, and not other costs, such as overhead costs that may be associated with the
same transaction.
Conclusion
The shareholder is correct to question the basis far providing far deferred tax as
there does appear to be some inconsistency between IAS 12 and the Conceptual
Framework. Nonetheless, Lupin should apply the requirements of IAS 12.
(ii) The tax reconciliation shows how the tax cha rge in the statement of profit or loss can
be reconciled back to the expectation of some users of financial statements that
income tax is simply a company 's profit before tax multiplied by the applicable tax
rate.
It is true that the tax reconciliation can be complicated. This is particularly the case
when the tax affairs of the entity a re complex. However, this does not mean that t he
informat ion should be excluded. The Conceptual Framework states that excluding
information about complex phenomena from financial statements might make the
financial statements easier to understand, but it would also make them incomplete
and therefore potentially misleading.
The Conceptual Framework expects users of financial statement s to have a

reasonable knowledge of business and economic activities. Lupin should consider
whether t his is the case for this particular shareholder. However, if several
shareholders are complaining about the tax reconciliation, then Lupin could consider

IMlllA
including an explanator y note ta the tax reconciliation ta enable users of the
financia l st atements to fu lly understand it. While t his is not required by IAS 12, IAS 1
requires entities to consider whet her additional information should be presented t o
enable users to underst and t he impact of transactions or conditions on the ent ity's
financial position or performance.
The fact t hat the finance d irector finds the t ax reconciliation difficult to prepare is
not a valid reason for omit ting it. In fact, the finance director's comment raises
ethical concerns - is the finance director competent and aware of the requirements
of IFRS? The tax reconciliation is a key disclosure required by IAS 12. That is not to
say that a ll d isclosures required by an accounting standard must be given - it
depends on whether the disclosure is material.
IFRS Practice Statement 2 Making Materiality Judgements requires a preparer to

make materiality judgements and clarifies that if information provided b y a
disclosure could not reasonably be expected to influence the decisions users make
based on the financial statements, then that disclosure need not be made.
Given that the finance director fin ds it d ifficult to prepare the reconciliation suggests
that Lupin's tax affairs may be complex and therefore disclosing informat ion about
them is unlikely to be immaterial.
(c) IAS 1 Presentation of Financial Statements requires that the nature and amount of material
items of income or expense should be disclosed separately, either in the statement of profit
or loss or in t he notes. So if an item is material, ie it could reasonably be expect ed to
influence the decisions made by primary users on t he basis of the financia l statements, it
should be separately disclosed. However, the finance director has proposed that this item
of expenditure should be presented after profit after tax from ordinary activities.
Presenting t he item outside of ord inary activities effectively means the item is classified as
extraordinary. Presentation of items of income or expense as ext raord inary is not permitt ed
by IAS 1.
Where an expense is material and is not expected to recur, giving disclosure about it is
extremely useful to investors as it helps them in making predictions about t he future
performance of t he entit y. However, IFRS Standards do not currently explicitly require this
information. Companies often d isclose information about 'unusual' expenditure, but it is
not always c lear how they have defined 'unusual' and therefore the usefulness of t his
information is limited.
The IASB has sought to address this in ED 2019/7 by proposing the following.
• To define unusual income and expenses as income and expenses with limited
predictive value, ie when it is reasonably expected that it will not recur for several
years.
• Such items of unusual income/expenditure:

Would not be separately disclosed in the statement of profit or loss, instead
they wou ld be included within the appropriate lines in the statement af profit
or loss; and
Disclosure about t he unusual items would be given in a note, including a

description of t he items as well as the lines in the statement of profit or loss in
which the items are presented.
Answers 185
35 Lizzer
Workbook references. Disclosures relating to financial instruments are covered in Chapter 8 and
disclosures relating to events after the reporting period in Chapter 6. The user perspective, which
features throughout this question, is included in Chapter 18. Current issues - including the
disclosure project - are covered in Chapter 20.
To p t ips. Part (a)(i) asks for application of the disclosure requirements of IFRS 7, focusing on the
information provided to the debt-holders of Lizzer. Part (a)(ii) considers the specific requirements
of IAS 10 relating to events after the reporting date from the perspective of Lizzer's investors. Both
parts require you to apply your knowledge of the relevant standards in determining whether
disclosure should be made in two instances where the directors' view was that no further
information should be disclosed in the financia l statements. It is important to refer to the user
perspectives in your answer. You do not need a detailed knowledge of IFRS 7 to be able to answer
Part (a)(i). Marks could be gained for a logical discussion of the scenario involved. Part (b) asks
for a discussion about the optimal level of disclosure, and barriers to reducing disclosure.
Arguments both for and against extensive d isclosure could be made, as well as the case that too
much disclosure means that material information is obscured.
Easy marks. There are no obvious easy marks. However, Part (b) is rather open ended, so the
trick is to keep on writing, d rawing on your own experiences and examples and backing up your
argument s.
Ma rks
(a) (i) Reasons for debt- holders interest/advise directors - discussion

1 mark per point to a maximum of 6
(ii) Critique of directors' decision - d iscussion 1 mark per point to a

maximum of 6
(b) (i) Optimal level of disclosure - discussion 1 mark per point to a

maximum of 9
(ii) Barriers to reducing disclosure - discussion 1 mark per point to a

maximum of 4
25
(a) (i) Disclosure of debt risk
Users of financial statements

It is not fo r Lizzer a lone to determine who the primary users of its financia l
statements are. Primary users are defined by the Conceptual Framework as existing
and potential investors, lenders and other cr edito rs.
The debt- holders of Lizzer a re creditors of the entity. They have provided funds to
the entity from which t hey expect to r eceive a return , based on the performance of
the underlying investment s. The debt holders ultimately bear the risks and rewards
associated w ith the investments Lizzer has made. They will be interested in the
financia l statements of Lizzer in order to understand the risks associated with the
underlying investments and assess the impact on their own risk and return.

/FRS 7 requirements
The objective of IFRS 7 is to requir e entities to provide disclosures in their financia l
stotements t hot enable users to evaluate:
(1) The significance of financial instruments for the entity's financial posit ion and
performance
(2) The nature and extent of risks arising from financial instruments to which t he
entity is exposed during the period and at the reporting date, and how the
entity manages those risks
The key requ irement of IFRS 7 is to show t he extent to which an entity is ex posed
to different types of risk, relating to both recognised and unrecognised financial
instruments. The risk disclosures required by IFRS 7 are given from t he perspective of
management which should allow t he users of financial statements to better
u nderstand how management perceives, measures and manages the risks
associat ed w it h financial instruments.
C redit risk is one such risk. Credi t risk is the risk of loss to one party to a financial
instrument by failure to pay by the other party to the instrument .
Clearly d isclosures about credit risk are important to debt-holders. Such disclosures
are qualitative (exposure to risk and objectives, policies and processes for managing
risk) and quantitative, based on the information provided internally to management,
enhanced if t his is insufficient.
More important in this context is market risk. Market risk is the risk of fluctuations in
either fair value or cash flows because of changes in market prices. It comprises
currency risk, interest rate risk and other price risk. The debt- holders are exposed to
the risk of t he underlying investments whose value could go up or down depending
on market value.
Disclosures required in connection w ith market risk are:
(1) Sensitivity analy sis, showing the effects on profit or loss of changes in each
market risk
(2) If the sensitivity analysis reflects interdependencies bet ween risk variables,
such as interest rates and exchange rates the method, a ssumptio ns and
limitat io ns must be disclosed
(ii) Pot ential b rea c h of loa n covenants
The applicable standards here are IFRS 7 and IAS 10 Events after the Reporting
Period.
The directors of Lizzer are not correct in their decision not to disclosure additional
information about the breach of loan covenants after the year end date. According
to IFRS 7, Lizzer should have incl uded additional informatio n about the loan
covenants suffic ient t o enable th e user s of its financial statement s t o evaluate
the nature and ext ent of risks arising from financial instruments to which Lizzer is
exposed at the end of the reporting period.
This is particularly important in Lizzer's case because there was considerable risk at
the year end (31 January 20X3) that the loan covenants would be breached in the
near future, as indicated by the directo rs' and auditors' doubts about the company
continuing as a going concern.
The breach of loan covenants does not directly impact the investors as they have not
provided borrowings to Lizzer. However there are implications in terms of the ability
of Lizzer to continue as a going concern as this wil l have negative consequences for
the returns investors receive. Potential investors are unlikely to invest in a company
that is a going concern risk due to the uncertainty around its future.
Answers 187
Informa tion should have been given a bou t the conditions attached to the loans
and how close the entity was ot the year end to breaching the covena nts. IFRS 7
requires d isclosure of a dd itional informat ion about the covena nts relating to each
loan or g roup of loans, including headroom (the difference between the amount of
the loan facility ond t he amount required).
The actual breach of the loan covenants at 31 March 20X3 was a material event
after the reporting period. The breach, a fter the dat e of the financial statements
but before those stat ement s were a uthorised, represents a mat erial
non-adjusting event, which should have given rise t o further disclosures under
IAS 10 .
Although t he breach is a non-adjusting event, t here appears t o be some
inconsistency between the inform ation in the direct ors' a nd auditor's reports (which
exp ress going-concern doubts) and t he information in the financial stat ements,
which a re p repared on a going-concern basis. If any of the figures in t he stat ement
of financia l position ore affected, these w ill need to be adjusted.
(b) (i) Optimal leve l of disclosure
It is important to ensure the optimal level of disclosure in annual reports because

excessive disclosure ca n obscure relevant information a nd make it harder for users
to find the key points about the performance of the business and its p rospects for
long-term success. It is important that financia l statements are relevant, reliable
and can be understood.
However, it is equally important that usef ul information is presented in a coherent
wa y so that users can find w hat they a re looking for a nd gain a n understanding of
the compa ny's business and t he opportunities, risks and constraint s that it faces.
There has been a g radual increase in t he length of annual reports over time. Th is,
often, has not resulted in better information for the users of financial
st atements, but mo re confusion as to the reason for the disclosure.
Causes of excessive disclosure
Requirements of different regulators and standard-setters
A significant cause of excessive d isclosure in annual reports is the vast array of

requirement s imposed by laws, regulations a nd financial reporting standards.
Regulators and standard setters have a key role to play in reducing excessive
disclosure, both by cutt ing t he req uir ements that t hey themselves a lready impose
a nd by guard ing against the imposition of unnecessary new disclosures. A list ed
company may have to comply w ith listing rules, company law, international financial
reporting standards and the corporate governance codes. Thus a major source of
excessive disclosu re is the fact that different parties require differing disclosures
for the same matter.
Furthermore, many disclosure requirements have been introduced in new or revised

int ernational financial reporting standards in previous years without any review of
their overall impact o n the length or usefulness of the resulting financia l st atements.
Consideration of other stakeholders
Preparers now have t o c onsider many other stakeho lder s including employees,
u nions, environmentalists, suppliers, customers, etc. The disc losures required t o
meet the needs of this wider audien ce have contributed to the inc reased volume
of disclosure. The g rowth of previous initiatives on going concern, sustainability,
risk, t he business model and others t hat have been identified by reg ulators as 'key'
has also expand ed the annual report size.
Inappropriate use of 'checklists '
A problem that seems t o exist is that d isclosures a re being made because a

d isclosu re c hecklist sug g est s it may need to be made, without assessing whether
t he informatio n p rovid ed by the d isclosure is material in a company's particular
circumstances. This requires judgement .

IMlllA
Response of IASB
Better Communication in Financial Reporting is a major theme of the IASB's

workplan. As part of this, the IASB has several projects under the heading of the
Disclosure Initiative to address the perceived disclosure problem, as well as other
projects relating to t he primary financial statements.
As a result of the primary financial statements project, the IASB has issued ED 2019/7
General Presentation and Disclosures. The aim of proposals is to improve the
usefulness of information presented in financial reports, particularly with regards to
comparabil ity and transparency of performance reporting. The key features of the
proposals a re to require compan ies to:
• present defined sub-totals in t he st at ement of profit or loss

• disaggregate information in the statement of profit or loss in a more useful
way
• disclose information about alternative performance measures (performance
measures defined by management) presented in financial reports.
The Disclosure Initiative includes p roject s on materiality:
• The IASB believes that uncertainty on behalf of the preparers of financial

statements as to how the concept of materiality should be applied has
compounded the d isclosure issue. In response, the IASB issued IFRS Practice
Statement 2 Making Materiality Judgements in 2017.
• The practice statement contains a p rocess to help entities determine whether

information is material, as well as guidance on materiality factors, both
quantitative and qualitative. Ultimately the entity has to judge whether
information can reasonably be expected to influence the decisions of the
primary users. If not, the information is immaterial and does not have to be
disclosed, irrespective of the requirements of the individual IFRS.
• In 2018 the IASB amended the definition of materiality to make it clearer that
information is material if omitting, misstating or obscuring it could reasonably
be expected to influence the decisions of primary users of the financial
statement s, addressing the issue that too much information can be just as
problematic as the omission of information.
(ii) Barriers to reducing disclosure

Entities are sometimes reluctant to reduce the level of disclosure. These barriers are
behavioural and include the following :
(1) The percept ion that disclosing everythin g will satisfy a ll interested parties.
(2) The t hreat of criticism or litigation. Preparers of financial statements err on

t he side of caution rather than risk falling foul of the law by omitting a
required disclosure. Removing disclosures is seen as creating a risk of adverse
comment and regulatory challenge.
(3) C ut and paste mentality. If items were d isclosed in last year's a nnual report
and t he issue is still ongoing, t here is a tendency to copy t he disclosures into
t his year's report. It is thought t hat, if such disclosures are removed,
stakeholders may wonder whether t he financial statements still give a t rue
and fair view. Disclosure is therefore the safest option and the default position.
(4) C hecklist approach. W hile mat eriality should determine what is disclosed,
because what is material is what may influence the user, the assessment of
what is material can be a matter of judgement. The purpose of checklists is t o
include a ll possible d isclosures that could be material. Users may not know
which of the checklist disclosures is actually material in the context of their
specific needs.
Answers 189
36 Digiwire
Workbook references. IFRS 15 on revenue is covered in Chapter 3. IFRS 13 Fair Value

Measurement is covered in Chapter 4 and IFRS 9 Financial Instruments is covered in chapter 8.
Pensions and the amendment to IAS 19 are covered in Chapter 5.
Top tips. This question is set in the context of a digital business, something that the examiner has
highlighted could be a feature of questions in SBR. The company in t he question, Digiwire, sold
music licences to other companies who then provide dig ita l music to customers.
Part (a) concerned revenue recognition. In part (a)(ii), you were asked to show how the
accounting treatment was supported by the revised 2018 Conceptual Framework. The principles
in t he Conceptual Framework are crucial to SBR and are likely to feature in every exam in some
way. Therefore you need to make sure you know the principles in the Conceptual Framework and
be able to show how those principles support accounting standards, or in some cases, are at
odds with accounting standards.
Part (b) included a discussion of w hether cryptocurrency can be classified as a financia l asset or
intangible asset. The examiner report expressed surprise that answers to this question were
generally weak given that t here is a technical article on Cryptocurrency available on the ACCA
website. This highlights the importance of reading the technical articles available - see the exam
resources section of the ACCA website.
Part (c) included a d iscussion of the 2018 amendments to IAS 19. In this case, t he examiner
commented 'candidates who were unaware of the amendments should at least have been in a
position to critically describe the previous method by wh ich each cost was calculated.
Appropriate discussion would have been awarded marks'.
IMdM:i-iH:%:i&
Marks
(a) (i) Application of the following discussion to the

scenario:
• IFRS 15 non-cash consideration and IFRS 13
alternatives to value the shores (including shore
value calculation at year end) 3
• IFRS 9 remeasurement gains (including calculation) 2
(ii) App lication of the following discussion to the scenario:
• Revenue recognised over time 2
• Revised Conceptual Framework (2018) 2
9
(b) (i) Discussion and application of t he IFRS 11 requirements
to the scenario 2
(ii) Discussion of the derecognition of non- monetary assets
and application to the scena rio 2
Calculation of carrying amount of the joint venture
(iii) Discussion of the potential ways in which the
cryptocurrency cou ld be accounted for at fair value 4
9
(c) (i) Discussion of the difference in guidance on termination
benefits between FRS 102 and IAS 19 3
(ii) Calculation of c urrent service cost net interest,
remeasurement component 3
Discussion of impact
4
25

(a) (i) Revenue recognition: Clamusic Ca shares
IFRS 15 Revenue from Contracts with Customers requires that non-cash
consideration received should be measured at the fair value of the consideration
received. If fair value cannot be reasonably estimated, the consideration should be
measured by reference to the stand-alone selling price of the good or service
promised in the contract. The fair value of non-cash consideration may vary. If the
non-cash consideration varies for reasons other than the form of the consideration,
entities will apply the guidance in IFRS 15 related to constraining variable
consideration. However, if fair value varies only due to the form, t he variable
constraint guidance in IFRS 15 would not apply. In this case, the fair value varies due
to the form of the consideration which is equity shares and therefore the variable
constraint guidance in IFRS 15 does not apply.
The fair valuation of shares in an unlisted start-up company is problematic.
However, IFRS 13 Fair Value Measurement gives advice on how to measure unlisted
shares. It sets out three approaches: (i) market approach, such as the transaction
price paid for identical or similar instruments of an investee; (ii) the income
approach, for example, using discounted cash flow; and (iii) the adjusted net asset
approach.
In this case, the market approach has been used and the range of fair values is
significant based upon the professional valuation report. The range of fair values for
a 7% holding of shares would be $280,000 to $350,000 (7% of $4-$5 million) at the
date of the contract and $420,000 to $490,000 (7% of $6-$7 million) at the year
end. As t he fair valuation is based upon a similar listed company and is based upon
a controlling interest, a discount on the valuation of the shares should be applied to
reflect the lack of liquidity and inability to participate in Digiwire Co's policy
decisions. Thus an estimated value of the shares can be made which takes into
account the above facts. This cou ld be the mid-point of $315,000 (($280,000 +
$350,000)/2) at the date of the contract and $455,000 (($420,000 + $490,000)/ 2)
at the year end. Digiwire Co would therefore recognise revenue of $315,000 for the
receipt of shares from Clamusic Co, as the fair value of non-cash consideration is
measured at the contract inception date of 1 January 20X6. This revenue would not
be recognised at a point in time but would be recognised over the period of the
licence which is three years.
Clamusic Co share valuation at 31 December 20X6
The shares will be recognised at $455,000 (($420,000 + $490,000)/2) at
31 December 20X6. All equity investments in scope of IFRS 9 Financial Instruments
should be measured at fair value in the statement of financia l position, with value
changes being recognised in profit or loss. 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) with only dividend
income recognised in profit or loss.
If Dig iwire Co elects to present the remeasurements through other comprehensive
income (OCI), gains are never recycled through profit or loss. This means that, if the
investment in C lamusic Co is successful, when the investment is sold , there w ill be no
profit or loss effect since all gains will already have been recognised in OCI. Thus at
the year end, a gain of $140,000 ($455,000 - $315,000) will be recorded in profit or
loss or OCI dependent upon any election being made.
(ii) Revenue : royalties
As Digiwire Co retains an active role in the updating and maintenance of a sold
licence to ensure its continuing value to the client, revenue would be recognised over
the expected length of the contract or related client relationship. An entity must be
expected to undertake activities which significantly affect the licence to conclude
that revenue is recognised over time. However, reliable measurement of future
royalties is not available (see below). Thus, in this case, the revenue wou ld be
recognised over the three- year licence based upon the licence agreement. At the
y ear end, however, revenue from royalties can be calculated based upon the sales
for the period and it would be $50,000 (5% of $1 million).
Answers 191
The Conceptual Framework support
The International Accounting St andards Boord has chonged the definitions of

income ond expenses in the revised Conceptual Framework (the Framework) to align
with the revised definitions of an asset and a liability. The definition of income
encompasses both revenue and gains. Revenue arises in the course of the ordinary
activities of an entity and is referred to by a variety of different names including
sales, fees, interest, dividends, royalties and rent. Gains represent other items which
meet the defi nition of income and may, or may not, arise in the course of the
ordinary activities of an entit y. Gains represent increases in economic benefits and,
as such, a re no different in nature from revenue. Hence, they are not regarded as
constitut ing a separat e element in the IFRS Framework.
The revised Framework also states that an item which meet s the definit ion of an
element should be recognised if:
(a) it is probable that any future economic benefit associated with the item will
flow to or from the entity; and
(b) the item has a cost or value which can be measured with reliability.
Thus, in this case, the royalties cannot be measured with any certainty in t he future
and should not be recognised until certain. The definitions in the Fram ework relating
to revenue, recognition and gains are t herefore consistent with t he approach taken
by Digiwire Co.
(b) (i) It seems t hat Digiwire Co and TechGame jointly control FourDee Co and it appears
as t hough the arrangement is a joint venture (IFRS 11 Joint Arrangements) as the
parties have joint control of the a rrangement and have rights to the net assets of
the arra ngement. Joint control is t he contractually agreed sharing of control of
an arrangement, which exists only when decisions about the relevant activities
require the unanimous consent of the parties sharing control. This is the case with
FourDee Co.
A joint venturer recognises its interest in a joint venture as an investment and

accounts for that investment using the equity method in accordance with IAS 28
Investments in Associates and Joint Ventures unless the entity is exempted.
(ii) Digiwire Co has exchanged non-monetary assets for its investment in FourDee Co,
and thus needs to de-recognise t he assets it is contributing to FourDee Co. The
carrying amount of $6 million of the property is derecognised but t he intellectual
property of Dig iwire Co has been generated internally and does not have a carrying
amount. The cryptocurrency is recorded as an asset in the financial st atements of
Digiwire Co at $3 million but will be valued at $4 million, its fair value in the financial
statements of FourDee Co.
Accordingly, when a joint venturer contributes a non-monetary asset t o a joint

venture in exchange for an equity interest in the joint vent ure, the joint venturer
recognises a portion of the gain o r loss on disposal w hich is at tributable to the
other parties to the joint venture (except when t he contribution lacks commercial
substance). Essentially, Digiwire Co is required by IAS 28 to limit the profit on
disposal of its non- monetary assets to 50%. Effectively , Digiwire has only disposed
of 50% of the asset contributed to the joint venture. Thus the ca rrying amount of
the joint venture in Digwire's financial statements at 31 December 20X6 will be
$11.5 million (($6 + $3 carrying amounts derecognised for property and
cryptocurrency) + ((4 - 3)/2) + ((10 - 6)/2)). A gain of $2.5 million wil l be recorded
in profit or loss.
(iii) If the cryptocurrency meets t he definition of a financ ial asset, it is possible to
measure it at fa ir value. However, cr yptocurrency is not cash or cash equivalents
as its value is exposed to significant changes in market value and t here is no
contractual right to receive eit her cash or cash equivalents. Therefore,
cryptocurrency fails the definit ion of a financial asset.

IMlllA
If t he crypt ocurrency is to be recognised as an intangible asset, then the default
position would be to measure it at cost. However, t here may be an argument t o say
that there is an active market for the cryptocurrency in which case, it would be
possible for it to be measured at fair value. In this case, movements in that fair value
would be recognised through other comprehensive income and the gain would not
be recycled through profit or loss when the cryptocurrency is realised.
The best way to account for a cryptocurrency would be fair value as that is the va lue
at which the entity will realise their investment or transact in exchange for goods and
services. Accounting for cryptocurrency at fair value with movements reflected in
profit or loss would provide the most useful information to investors but existing
accounting requirements do not appear to permit this.
(c) (i) Before the amendment, IAS 19 Employee Benefits did not require entities to revise the
assumptions for t he calculation of current service cost and net interest during the
accounting period, even if an entity remeasured the net defined benefit liability or
asset in the event of a plan amendment, curtailment or settlement. The calculations
were based on the actuarial assumptions as at the start of the financial year.
However, the International Accounting Standards Board felt that it was

inappropriate to ignore any updated assumptions when determining current service
cost and net interest for the period.
Therefore, an amendment to IAS 19 states that when a plan amendment, curtailment

or set tlement occurs during the annual reporting period, an entity must:
• Determine current service cost for the remainder of the period after the plan
amendment, curtailment or settlement using the actuarial assumptions used
to remeasure the net defined benefit liability/ asset reflecting the benefits
offered under the plan and the plan assets after that event.
• Determine net interest for the remainder of the period after the plan
amendment, curtailment or settlement using: (i) the net defined benefit
liability/asset reflecting the benefits offered under the plan and the plan
assets after that event; and (ii) the discount rate used to remeasure that net
defined benefit liability/asset.
(ii) If Digiwire Co had not applied the revised IAS 19, then the current service cost would
have been $108 million (12 months x $9 million). On the application of the revised
standard, the current service cost would be $96 million ((8 months x $9 million) +
(4 months x $6 million)).
Thus there w ill be a reduction in the current service cost of $12 million.
Similarly, the net interest component before the amendment would have been
$900,000 (3% x $30 million).
After the amendment it would be $1,020,000 (($900,000 x 8/12) + (3.5% x $36m x

4/ 12)).
Therefore, there will be a change in the net interest element of $120,000 ($1,020,000
- $900,000).
The net effect will be t o change the re-measurement component by $11,880,000.
Answers 193
37 Moorland
Workbook reference. Chapter 18; Interpretation of financial statements for different

stakeholders.
Top tips. Part (a) requires knowledge of the purpose of a management commentary and the
requirements of IFRS Practice Statement 1. If you struggled w ith this, go back and revise the
content in C hapter 18. Management commentary featured in the December 2018 exam - so it
can and will be tested .
Part (b)(ii) covers alternative performance measures which is a key topic for SBR. You need to
consider Moorland's investors in your answer. Wider reading of articles, particularly those on the
ACCA website, wi ll be extremely helpful in being able to answer questions such as this. The ESMA
(European Securities and Markets Aut hority) Guidelines on Alternative Performance Measures and
IOSCO's (International Organisation of Securities Commissions) Statement on Non-GAAP
Financial Measures, both available online, provide a nother perspective and will be beneficial to
read .
Easy marks. Some marks are available for the principles of IFRS 8.
(a) The purpose of the management commentary is to provide a context for interpreting a
company 's financial position, performance and cash flows. According to IFRS Practice
Statement 1 Management Commentary, the principles and objectives of a Management
Commentary (MC) are as follows;
(i) To provide management's view of the entity's performance, position and progress
(ii) To supplement and complement information presented in the financial stat ements
To align with these principles, an MC should include forward-looking information, and all
information provided should possess the qualitative charac teristics described in the
Conceptual Framework.
Practice Statement 1 sa ys that to meet the objective of management commentary, an
entity should include information that is essential to an understanding of;
(i) The nature of the business

(ii) Management's objectives and its strategies for meeting those objectives
(iii) The entity's most significant resour ces, risks and relationships
(iv) The resu lts of operations and prospects
(v) The crit ical performance measures and indicators that management uses to
evaluate the entity's performance against stated objectives
The arguments for a mandatory MC a re largely to do with content and comparability. It is
argued that a mandatory MC will make it easier for companies themselves to judge what is
required in such a report and the required standard of reporting, thereby making such
reports more robust, transparent and comparable. If an MC is not mandatory then there
may be uncertainty as to content and the possibility of misinformatio n . There is also the
risk that, w ithout a mandatory MC, directors may take a minimalist approach to
disclosure which will make t he MC less useful and t he information to be disclosed will be in
hands of senior executives and directors.
However, the argu ments against a mandatory MC are that it could stifle the
development of the MC as a t ool for communication and may lead to a checklist
approach to p roducing it. It is argued that a mandatory MC is not required as market
forces and the needs of investors should lead to companies feeling the pressure to provide
a useful and reliable report. The IASB decided to issue a Practice Statement rather than an
IFRS and to leave it to regulators to decide who would be required to publish a
management commentary. This approach avoids the adoption hurdle, ie that the
perceived cost of applying IFRSs might increase, which could otherwise dissuade
jurisdictions/countries not having adopted IFRSs from requiring its adoption, especially
where requirements differ significantly from existing national requirements.
191t Strategic Business Reporting (SBR)

(b) (i) Operating segment
IFRS 8 Operating Segments describes an operating segment as a component of an

entity:
(1) Which engages in business activities from which it may earn revenues and
incur expenses;
(2) Whose operating results are regularly reviewed by the entity's chief operating
decision-maker to make decisions about resources to be allocated t o the
segment and assess its performance;
(3) For which discrete financial information is available.
There is a considerable amount of subjectivity in how an entity may apply these

criteria to its choice of operating segments. Usually an operating segment would
have a segment manager who maintains regular contact with the chief opera ting
decision-maker to discuss operating activities, financial results, forecasts or plans for
the segment. Therefore segment managers could have overall responsibility for a
particular product, service line or geographical area and so there cou ld be
considerable overlap in how an entity may apply the criteria. In such situations the
directors of Moorland should consider the core principles of the standard.
Information should be disclosed t o enable users of its financial statements to
evaluate the nature and financial effects of the business activities in which it
engages and the economic environments in which it operates.
Since Tybull is the only overseas subsidiary, it is likely that separate disclosure is
necessary so that users can better assess the performance of Tybull and its
significance to the group. The directors should consider whether there are other
segments which exhibit similar long-term financial performance and similar
economic characteristics to Tybull. In such circumstances it is possible to aggregate
the operating segments into a single segment. For example, t he segments should
have products of a similar nature and similar methods to distribute their products.
The segments should also have similar types of customer, production processes and
regulatory environment. The directors of Moorland would need to assess whether
such aggregation would limit the usefulness of the disclosures for the users of the
financia l statements. For example, it would no longer be possible to assess the gross
margins and return on capita l employed for Tybull on an individual basis, without
referring to its individual financial statements.
Operating segments can be reclassified where an entity c hanges its internal

organisational structure. As Tybull has not changed it s organisational structure,
it is unlikely that it would be able to argue for a reclassification of it s operating
segments. Should the directors of Moorland decide to reclassify the operating
segments and combine Tybu ll with other segments, IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors would need to be applied. A
retrospective adjustment would be required to the disclosures and the change would
need to be justified. An entity should only change its policy if it enhances the
rel iability and relevance of the financia l statements. This would appear unlikely given
the circumstances.
(ii) Unde rlying earnings per share
Underlying earnings per share (underling EPS) is an alternative performance

measure (APM). APMs should be provided to enhance the understanding of users of
the accounts.
However, APMs can be misleading. Unlike earnings per share, which is defined in
IAS 33 Earnings per Share, there is no official definition of underly ing EPS, so
management can choose what it ems to include or exclude in the underlying
earnings. Therefore it is open to bias in its calculation as management cou ld decide
to only adjust for items that improve the measure. Furthermore, d ifferent companies
may define the measure in different ways, which reduces the comparability between
entities.
Answers 195
(b) (i) Operating segment
IFRS 8 Operating Segments describes an operating segment as a component of an

entity:
(1) Which engages in business activities from which it may earn revenues and
incur expenses;
(2) Whose operating results are regularly reviewed by the entity's chief operating
decision-maker to make decisions about resources to be allocated t o the
segment and assess its performance;
(3) For which discrete financial information is available.
There is a considerable amount of subjectivity in how an entity may apply these

criteria to its choice of operating segments. Usually an operating segment would
have a segment manager who maintains regular contact with the chief opera ting
decision-maker to discuss operating activities, financial results, forecasts or plans for
the segment. Therefore segment managers could have overall responsibility for a
particular product, service line or geographical area and so there cou ld be
considerable overlap in how an entity may apply the criteria. In such situations the
directors of Moorland should consider the core principles of the standard.
Information should be disclosed t o enable users of its financial statements to
evaluate the nature and financial effects of the business activities in which it
engages and the economic environments in which it operates.
Since Tybull is the only overseas subsidiary, it is likely that separate disclosure is
necessary so that users can better assess the performance of Tybull and its
significance to the group. The directors should consider whether there are other
segments which exhibit similar long-term financial performance and similar
economic characteristics to Tybull. In such circumstances it is possible to aggregate
the operating segments into a single segment. For example, t he segments should
have products of a similar nature and similar methods to distribute their products.
The segments should also have similar types of customer, production processes and
regulatory environment. The directors of Moorland would need to assess whether
such aggregation would limit the usefulness of the disclosures for the users of the
financia l statements. For example, it would no longer be possible to assess the gross
margins and return on capita l employed for Tybull on an individual basis, without
referring to its individual financial statements.
Operating segments can be reclassified where an entity c hanges its internal

organisational structure. As Tybull has not changed it s organisational structure,
it is unlikely that it would be able to argue for a reclassification of it s operating
segments. Should the directors of Moorland decide to reclassify the operating
segments and combine Tybu ll with other segments, IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors would need to be applied. A
retrospective adjustment would be required to the disclosures and the change would
need to be justified. An entity should only change its policy if it enhances the
rel iability and relevance of the financia l statements. This would appear unlikely given
the circumstances.
(ii) Unde rlying earnings per share
Underlying earnings per share (underling EPS) is an alternative performance

measure (APM). APMs should be provided to enhance the understanding of users of
the accounts.
However, APMs can be misleading. Unlike earnings per share, which is defined in
IAS 33 Earnings per Share, there is no official definition of underly ing EPS, so
management can choose what it ems to include or exclude in the underlying
earnings. Therefore it is open to bias in its calculation as management cou ld decide
to only adjust for items that improve the measure. Furthermore, d ifferent companies
may define the measure in different ways, which reduces the comparability between
entities.
Answers 195
The CEO's wish to exclude impoirment on goodwill from the colculation of earnings
on the basis that it is unlikely to reoccur is also misleading to investors. An
impairment loss on goodwill could quite feasibly re-occur in the future as it is at least
partly dependent on circumstances outside of Moorland's control, such as the state
of the economy. Therefore, it could be argued that excluding the impairment loss
would make the measure of underlying earnings per share less usef ul to investors.
The CEO wishes to present underlying EPS 'prominently'. It is not clear what is meant
by this comment, however, Moorland should ensure that it complies with the
requirements of IAS 33 regarding the calculation and presentation of this alternative
EPS. IOSCO's (International Organisation of Securities Commissions) Statement on
Non-GAAP Financial Measures recommends that APMs are not presented more
prominently than GAAP measures, or in a way that confuses or obscures GAAP
measures.
Ultimately underlying earnings per share w ill only provide useful information to
Moorland's investors if it is fairly presented.
Moorland could improve the usef ulness of underlying EPS by:
• Including an appropriate description of how the measure is calculated
• Ensuring that the calculation of underlying EPS is consistent year on year and
t hat comparatives are presented
• Explaining the reasons for presenting the measure, why it is useful for
investors and for what purpose management may use it
• Presenting a reconciliation to the most directly reconcilable measure in the

financial statements, for example EPS calcu lated in accordance with IAS 33
• Not excluding items from underlying EPS that cou ld legitimately reoccur in the
future, such as impairment losses on goodwill
38Toobasco
Marks
(a) Discussion of the comparability of APMs

Application of the following discussion to the scenario:
Extraordinary items 2
Free cash flow and its description 2
EBITDAR 4
Tax effects
10
(b) (i) Adjustment of net cash generated from operating activities 4
(ii) Reconciliation to free cash flow 4
(iii) Application of the following discussion to the scenario:
Purchase and sale of cars
Purchase of associate
Foreign exchange losses
Pension payments
Interest paid
5
25

(a) (i) APMs are not defined by IFRSs and therefore may not be d irect ly comparable with
other companies' APMs, including those in the group's industry. Where the some
category of material items recurs each year and in similar amounts (in this example,
restructuring cost s and impairment losses), the entity should consider whether such
amounts should be included os part of underlying profit.
Under IFRS, items cannot be presented as 'extraordinary items' in t he financial
statements or in the notes. Thus it may be confusing to users of the APMs to see this
term used. It is not appropriate to state t hat o charge or gain is non-recurring unless
it meets the criteria. Items such os restructuring costs or impairment losses should
not be labelled os non-recurring where it is misleading. However, t he entity con make
an adjustment for o charge or gain which they believe is appropriate, but they
cannot describe such adjustments inaccurately.
(ii) The deduction of capital expenditures, purchase of own shores and the purchase of
int angible assets from the IAS 7 measure of cash flows from operating activities is
acceptable os free cash flow does not hove o uniform definition. As o resu lt, o clear
description and reconciliation showing how th is measure is calculated should be
disclosed. Entities should also ovoid misleading inferences about its usefulness. Free
cash flow does not normally represent the residual cash flow available as many
entities have mandator y debt service requirements which are not normall y deducted
from the measure. It would also be misleading to show free cash flow per share in
bold a longside earnings per share as they are not comparable.
(iii) When an entity presents an APM , it should present the most directly comparable
measure which has been calculated in accordance w ith IFRSs with equal or greater
prominence. The level of prominence would depend on the facts and circumstances.
In this case, the entity has omitted comparable information from an earnings release
which includes APMs such as EBITDAR. Additionally, the entity has emphasised the
APM measure by describing it as ' record performance' without an equall y prominent
description of t he measure calculated in accordance with IFRSs. Further, the entity
has provided a discussion of the APM measure without a similar discussion and
analysis of the same information presented from an IFRS perspective.
The entity has presented EBITDAR as a performance measure; such measures should
be reconciled to profit for t he year as presented in the statement of comprehensive
income. Operating profit would not be considered t he best starting point as EBITDAR
makes adjustments for items which are not included in operating profit such as
interest and tax.
The entity has changed the way it calculates the APM because it has treated rent
differently. However, if an entity chooses to change an APM, the change and the
reason for the change should be explained and any comparatives restated. A
change would be appropriate only in exceptional circumstances where the new APM
better achieves the same objectives, perhaps if there has been a change in t he
strategy. The revised APM should be reliable and more relevant.
(iv) The entity should provide income tax effects on its APMs depending on the nature of
the measures. The entity should include current and deferred income tax expense
commensurate with the APM and the APM should not be presented net of tax as
income taxes should be shown as a separate adjustment and explained.
Answers 197
(b) (i) Adjustment of net cosh generated from operating activities for errors in the
statement
Sm
Net cash generated from operating activities per question 278
Add cash inflows relating to the disposal of cars 30
Effect of changes in foreign exchange rates 28
Reclassification of interest paid 18
Tax credit not recorded 6
360
Less
Associate's profit - incorrectly included (12)
Associate's profit - non-cash flow _ f!)
(ii) Free cash flow reconciliation

Sm
Net capital expenditure (46)
Purchase of associate (20)
Dividend received from associate
Int erest received 10
Int erest paid (18)
Pension deficit payments 27
Free cash flow 298
(iii) Purchase and sale of cars
Daveed's presentation of cash flows from the sale of cars as being from investing
activities is incorrect as cash flows from the sale of cars should have been presented
as cash flows from operati ng activities ($30 m illion). IAS 16 Property, Plant and
Equipment (PPE) states that an entity which normally sells items of PPE which are
held for rental to others should transfer such assets to inventories at their carrying
amount when they cease to be rented and become held for sale. Subsequent
proceeds from the sale of such assets should be recognised as revenue in
accordance with IFRS 15 Revenue from Contracts with Customers and thus shown as
cash flows from operating activities.
Purchase of associate
Sm
Balance at 31 August 20X8 23
Less profit for period $16m x 25% (4)
Add dividend received $4m x 25% 1
Cost of acquisition (cash) 20
Therefore, cash paid for the investment is $20 million, and cash received from the
dividend is $1 million.
In order to arrive at the correct figure for net cash generated from operating
activities, the incorrect treatment of the profit for the yea r for the associate must be
eliminated ($12 million) and the correct adjustment of $4 million shown in net cash
generated by operating activities.
Foreign exchange losses
IAS 7 Statement of Cash Flows st ates that unrealised gains and losses arising from
changes in foreign exchange rates are not cash flows. The amounts reported in the
statement of cash flows included, in error, the effect of changes in foreign exchange
rates arising on the retranslation of its overseas operations. As a consequence, cash

MEDIA
generated from operating activities should be increased by $28 million. All exchange
differences relating to the subsidiary are taken to a separate component of equity,
until disposal of the foreign operation when t hey are recycled to the income
statement.
Pension payments
The pension payments are correctly included in operating cash flows. However,
they are excluded when calculating free cash flow. As the t ax cash benefit has not
been included, net cash generated from operating activities will be adj usted for the
$6 million and $27 million ($33m - $6m) w ill be excluded from the free cash f low
ca lculation.
Interest paid
Int erest paid which is capitalised into the cost of property, plant, and equipment
should be treated as cash flows arising from investing activities whereas interest paid
and capitalised into inventory should be classified in the operating section of the
statement of ca sh flows. Thus there should be a reclassification of interest paid of
$18 million from t he operating section to the investing activities section.
39 Tufnell
Workbook references. IFRS 5 is included in Chapter 14, deferred tax in Chapter 7, impairment in
Chapter 4 and ROCE and residual income are included in Chapter 18.
Top t ips. This question deals w ith a group re-organisation, deferred t ax and revaluation,
impairment and re-c lassification of a lease. These a re all linked in with a ca lculation of the effect
on ROCE. In Part (a)(i) there is no need to spend time giving t he IFRS 5 criteria for classification as
held for sale, since we are told in t he question that these criteria have been met.
Easy marks. None of this question is easy except for the calculation of ROCE. Do the parts you
feel sure about, but have a go at all parts as the first few marks are the easiest to pick up. The
professional marks wou ld be awarded for ana lysing the impact of the information, drawing
conclusions a nd considering the implications for ROCE.
HrffM:i·H!:M::iM
Marks
(a) (i) Discontinuance 7

(ii) Deferred tax asset 6
{iii) Impairment 5
{iv) Formation of opinion of impact on ROCE 2
(b) APM and residual income 3

Maxim um 25
(a) (i) The criteria in IFRS 5 have been met for North and South. As the assets are to be
disposed of in a single transaction, North and South together are deemed to be a
disposal group under IFRS 5.
The disposal group as a whole is measured on the basis requi red for
non- current a ssets held for sale. Any impairment loss reduces the carrying amount
of t he non-current assets in the disposal group, the loss being allocated in the order
required by IAS 36 Impairment of Assets. Before t he manufacturing unit s are
classified as held for sale, impairment is t est ed for on an individual cash-generating
u nit basis. Once classified as held for sale, the impairment testing is done on a
disposal group basis.
Answers 199
A disposal group that is held for sale should be measured at the lower of its carrying
amount and fair value less costs to sell. Any impairment loss is generally
recognised in profit or loss, but if the asset has been measured at a revalued amount
under IAS 16 Property, Plant and Equipment or IAS 38 Intangible Assets, the
impairment will be t reated as a revaluation decrease.
A subsequent increase in fair value less costs to sell may be recognised in profit or
loss only to the extent of any impairment previously recogn ised. To summarise:
Step 1 Calcu late carr ying amount under t he individual standard, here given as
$105 million.
Step 2 Classified as held for sale. Compare the ca rrying amount ($105m) with
fair value less costs to sell ($125m). Measure at the lower of carrying
amount and fair value less costs to sell, here $105 million.
Step 3 Determine fair value less costs to sell at t he year end (see below) and
compa re w it h carrying amount of $105 million.
Tufnell has not taken account of the increase in fair value less cost to
sell, but only part of t his increase can be recognised, calculated as
follows.
$m
Fair value less costs t o sell: North 40
Fair value less costs to sell: South 95
135
Carrying value (105)
Increase 30
Impairment previously recognised in North: $15m ($50m - $35m)

Step 4 The c hange in fair value less cost to sell is recognised but the gain
recognised cannot exceed any impairment losses to d ate. Here the gain
recognised is $50m - $35m = $15m
Therefore carry ing amount can increase by $15 million to $120 million as loss
reversals are limited to impairment losses p reviously recognised (under IFRS 5 or
IAS 36).
These adjustments will affect ROCE.
(ii) IAS 12 Income Taxes requires that deferred tax liabilities must be recognised for all
taxable temporary differences. Deferred tax assets should be recognised for
deductible tempora ry differences but only to t he extent t hat taxable profits w ill be
available against which t he deductible temporary differences may be utilised.
The differences between the carrying amounts and the tax base represent
temporary differences. These temporary differences are revised in t he light of the
revaluation for tax pu rposes to market value permitted by the government .
Deferred tax liability before revaluation
Carrying Temporary
amount Tax base difference
Sm Sm Sm
Property 50 48 2
Vehicles 30 28 2
4
O ther temporar y differences 5
9
200 St rategic Business Reporting (SBR) @BPP LEAR~IMG

IAEDIA
Provision: 30% x $9m = $2.7m
Deferred tax asset after revaluation
Carrying Temporary
amount Tax base difference
$m $m $m
Property 50 65 15
Vehicles 30 35 5
O ther temporary differences (5)
15
Deferred tax asset: $15m x 30% = $4.5m

This w ill have a considerable impact on ROCE. While the release of the provision of
$2.7 million a nd the creation of the asset of $4.5 million will not affect prof it before
int erest and tax, it w ill significantly affect the capital employed figure.
(iii) IAS 36 requ ires that no asset should be carried at more than its recoverable amount .
At each reporting date, Tufnell must review all assets for indications of
impairment, that is, indications that the carrying amount may be higher than the
recoverable amount. Such indications include fa ll in the market value of an asset or
adverse changes in t he technological, economic or legal environment of the
business. (IAS 36 has an extensive list of criteria.) If impairment is indic ated , then
the asset's recoverable amount must be calculat ed. The manufacturer has reduced
the selling price, but this does not automatically mean t hat the asset is impaired.
The recoverable amount is defined as the higher of the asset's fair value less
costs of d isposal and its value in use. If the recoverable amount is less than the
carrying amount, then the resulting impairment loss should be charged to profit or
loss as an expense (unless the asset was previously revalued).
Value in use is the discounted present value of estimated future cash flows expect ed
to arise from the continuing use of an asset and from its disposal at the end of its
useful life. The value in use of the equipment is calculated as follows:
Year ended
30 September Cash flows Discounted (10%)
$m $m
20X8 1.3 1.2
20X9 2 .2 1.8
20YO 2.3 1.7
4.7
The directors are proposing to write the asset down to its fair value of $2.5 million.
However, its value in use is higher than fair value and also higher than t he carrying
amount of the asset ($3m). So there has been no impairment and the asset should
remain at its carrying amount. Consequently there will be no effect on ROCE.
(iv) Reca lculation of ROCE
$m
Profit before interest and tax 30.0
Add increa se in value of disposal group 15.0
45.0
Capital employed 220.0

Add increase in value of disposal group 15.0
Add release of deferred tax provision and
deferred t ax asset : 4.5 + 2.7 7.2
242.2
.. ROC E is 45/ 242 .2 = 13.6%
O
BPP
LE/,,fl W
11.-111.
Answers 201
The directors were concerned that the above changes would adversely affect ROC E.
In fact, the effect has been favourable, as ROCE has risen from 13.6% t o 18 .6%, so
the d irectors' f ea rs were m isplaced .
(b) Alternative performance measures (APMs) report information t hat is not included on the
face of the financial statements. Companies often adjust reported financial information in
order to provide helpful additional information for the users of financial statements, telling
a c learer stor y of how the business has performed over the period. They allow t he direct ors
of a company more freedom and flexibility to report performance measures that are
important to them.
Residual income is one type of APM. Residual income is an entity va luation method that
accounts for the cost of equity ca pital. Performance of the subsidia ries should be
measured, in the interests of the g roup's shareholders, in such a way as to indicate what
sort of return each subsidiary is making on t he shareho lder's investment. Shareholders
them selves are likely to be interested in the performance of the group as a whole,
measured in terms of return on shareholders' capital, earnings per share, dividend yield,
and growth in earnings and dividends. These performance ratios cannot be used for
subsidiaries in the group, and so an alternative measure has to be selected, which
compa res the return from the subsidiary w ith the value of the investment in the subsidiary.
Residual income would provide a suitable indication of performance from the point of view
of the g roup's shareholders. Thi s could be calculated as:
Profit after debt interest
Minus A notional interest cha rge on the value of assets financed by shareholders'
capita l
Equals Residual income

Alternatively, residual income might be measured as:
Profit before interest (controllab le by the subsidiary's management)

Minus A notional interest charge on the controllable investment s of the subsidiary
Equals Residual income
Each subsidiary would be able to increase its residual income if it earned an incremental
profit in excess of the notional interest charges on its inc remental investments - ie in effect,
if it added to the va lue of the g roup's equity.
LtO Amster
Work book references. Financial instruments are covered in Chapter 8. The Conceptual
Framework is covered in Chapter 1.
Top t ips. This question might have alarmed you as you mig ht not have seen a capita lisation table
before. However, you must be prepared to encounter disclosures such os this, which are a
common feature of published financial statements and useful to investors. You should be able t o
work out that it requires adjusting in the same way as a statement of financial position would be.
For (a)(ii), you need to think about the principles around debt and equity classification for
f inancial instruments and try and relate this to the definitions in the Conceptual Framework.

U@il:i·iH:h::i&
Marks
(a) (i) 1 mark per point up to maximum 8

25
(a) (i) Importance of information concerning an entity's capital
Essentially there are two classes af capital reported in financial statements, namely
debt and equity. However, debt and equity instruments can have different levels of
right, benefit a nd risks. Hence, the details underlying a company's capital structure
are absolutely essential to assessing the prospects for changes in a company's
financial flexibility, and ultimately, its value.
For investors who are assessing the risk profile of an entity, the management and
level of an entity's ca pital is an important consideration. Disclosures about capital
are normally in addition to disclosures required by regulators as their reasons for
disclosure may differ from those of the International Accounting Standards Board
(IASB). The details underlying a company's capital structure are essential to the
assessment of any potential change in an entity's financial standing.
Investors have specific but different needs for information about capital depending
upon their approach to their investment in an entity. If their approach is income
based, then shortage of capital may have an impact upon future dividends. If ROCE
is used for comparing the performance of entities, then investors need t o knaw the
nature and quantity of the historical capitol employed in the business. Some
investors will focus on historical invested capital, others on accounting capitol and
others on market capitalisation.
Published information
As an entity's capital does not relate solely to financial instrument s, the IASB has
included these disclosures in IAS 1 Presentation of Financial Statements rather than
IFRS 7 Financial Instruments: Disclosures. Although IFRS 7 requires some specific
disclosures about financial liabilities, it does not have similar requirements for equity
instruments.
As a result, IAS 1 requires on entity t o disclose information which enables users to

evaluate the entity's objectives, policies and processes for managing capital. Th is
objective is obtained by disclosing qualitative and quantitative data. The former
should include narrative information such as what the company manages as capitol,
whether there are any external capital requ irements and how those requirements are
incorporated into the management of capita l. The IASB decided that there should be
disclosure of whether the entity hos complied with any external capitol requirements
and, if not, the consequences of non-compliance.
Besides the requirements of IAS 1, the IFRS Practice Statement, Management

Commentary suggests that management should include forward- looking
information in the commentary when it is aware of trends, uncertainties or other
fact ors which could affect the entity's capital resources. Additionally, some
jurisdictions refer to capital disclosures as part of their legal requirements.
Answe rs 203
In addition to the annual report, an investor may find details of the entity's capita l
structure where the entity is involved in a t ransaction, such as a sale of bonds or
equities. It can be seen that information regarding an entity's capital structu re is
spread across several docu ments including t he management commentary, the notes
to financia l statement s, interim financial statements and any document required by
securities regulators.
Integrated repo rting
The capitals identified by the International Integrated Reporting Council (IIRC) are:
financial capital, manufactured capital, intellectual capital, human capital, social
and relationship capit al, and natural capita l. Together, they represent stores of
value which are the basis of an organisat ion's va lue creation. Financial capit al is
broadly understood as the pool of funds available to an organisation. This includes
both debt and equity finance. This description of financial capital focuses on the
source of funds, rather than its application which results in the acquisition of
manufactured or other forms of capital. Financial capital is a medium of exchange
which releases it s value throug h conversion into other forms of capital. It is the pool
of f unds which is available to the organisation for use in t he production of goods or
the provision of services obtained through financing, such as debt, equity or grants,
or generated through operations or investments.
(ii) Wh ether an instrument is classified as either a financial liability or as equity is
important as it has a direct effect on an entity's reported results and financial
position. The critical feature of a liability is that, under the terms of t he instrument,
the issuer is or can be required to deliver either cash or another financial asset to the
holder and it cannot avoid this obligation. An instrument is classified as equity when
it represents a residual interest in the issuer's assets after deducting all its liabilit ies.
If t he financial instrument provides the entity an unconditional discretion, t he
financia l instrument is equity.
IAS 32 Financial Instruments Presentation sets out the nature of the classification
process but the standard is principle based and sometimes t he outcomes are
surprising to users. IAS 32 focuses on the contractua l obligations of the instrument
and considers the substance of the contractual rights and obligations. The variety of
instruments issued by entities makes this classification difficult with t he application
of t he principles occasionally resulting in instruments which seem like equity being
accounted for as liabilities. Recent developments in the t ypes of financial
instruments issued have added more complexity to capital structures with the
resu ltant difficulties in interpretation a nd understanding.
Equity and liabilities are classified separately in t he statement of financia l position.
The Conceptual Framework distinguishes the two elements by the obligation of the
entity to deliver cash or other economic resources from items which create no such
obligation. The stat ement of profi t or loss and other comprehensive income (OCI)
includes income and expenses arising from liabilities which is interest and, if
applicabl e, remeasurement and gain or loss on settlement. The statement does
not report as income or expense any changes in the carrying amount of the ent ity's
own equity instruments but does include expenses arising from the consumption of
services wh ich fall under IFRS 2 Share- based Payment. IFRS 2 requires a va luation of
the services consumed in exchange for the financial liabilities or equity instruments.
In the statement of financial position, the carrying amount of many financial

liabilities changes either w ith t he passage of t ime or if the liability is remeasured at
fair va lue. However, t he amount reported for classes of equity instruments generally
does not change after initial recognition except for non-controlling interest.
Liability classification typically results in any payments on t he instrument being
treated as interest and charged to earnings. This may in turn affect the entity's
ability to pay d ividends on its equity shares depending upon local legislation .
Equity classification avoids the negative impact which liability classification has on
reported earnings, gearing ratios and debt covenants. It also results in the
instrument falling outside t he scope of IFRS 9 Financial Instruments, thereby
avoiding the complicated ongoing measurement requirements of that standard.
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(b) In the case of the first class of preference shares, even though there are negative
consequences of not paying d ividends on the preferred shares as agreed contractually,
the company can avoid the obligation to deliver cash. The preferred shares do have
redemption provisions but these are not mandatory and are at the sole discretion of the
management committee and therefore the shares should be classified os equity.
In the case of t he second class, the contractual term requires no dividend to be paid to
ordinary shareholders if a payment is not made on the preferred shares. In this case, as
Amster can avoid the obligation to set tle the annual dividend, the shores ore classified as
equity. Thus $75 million should be transf erred from liabilities to equity.
IFRS 2 Share-based Payment states t hat cash settled share-based payment transactions
occur where goods or services ore paid for at amounts wh ich ore based on the price of the
company 's equity instruments. The expense for cash settled transactions is the cash paid
by t he company and any amounts accrued should be shown as liabilities and not equity.
Therefore Amster should remove the following amount from equity and show it as a liability.
Expense for year to 30 November 20X7 is:
((1,500 - 180 employees x 250 awards x $35) x ½ = $3.85 million

As a result of the adjustments to the financial statements, Amster's gearing ratio will be
lowered significantly as the liabilities w ill d rop from 53.8% of tota l capitalisation to 33.2%
of total capitalisation. However, the ROCE may stay t he same even though there is an
increase in shareholders equity as total capitalisat ion has not changed. However, this will
depend upon t he definition used by the entity for capita l employed.
Amster G roup - ca pitalisa t io n t abl e
30 November 20X7 Adjustment 30 November 20X7

Sm Sm Sm
Long-term liabilities 81 3.85 84.85
Pension plan deficit 30 30.00
Cumulative preference shares 75 (75)
Liabilities 186 114.85
Non-controlling interest 10 10 .00
Shareholders equity 150 (75 - 3.85) 221.15
G roup equity 160 231.1 5
Total capitalisation 346 346.00
1+1 Havanna
W o rkbook refe re nces. Revenue recognition is covered in Chapter 3, IFRS 5 Non-current Assets
Held for Sale and Discontinued Operations in Chapter 14 and sale and leaseback in Chapter 9.
To p t ips. Revenue recogn ition is an area in which preparers of accounts may wish to interpret the
standard in such a way as to present the resul t s in a favourable light. In Part (a), you need to
explain why the proposed treatment is unacceptable, not just state t hat it is.
Part (b), which tests IFRS 5, requires clear, logical thinking: there are two potential impairments,
the first in calculating the adjusted carr ying amount of the disposal group at the time of
c lassification as held for sale, and then again on comparison of t his adjusted carrying amount
with fair value less costs to sell.
Part (c)(i) requires you to demonstrate wider reading on the impact of IFRS 16. For part (c)(ii), the
difficulty w ith sale and leaseback often lies w ith identifying whether the t ransfer of the asset
constitutes a sale but here the question actually states t hat the transaction constitutes a sale so
you just need to explain why the directors' understanding is incorrect and advise on the correct
accounting treatment in the context of the scenario.
Answers 205
U@il:i·iH:h::i&
Marks
(a) Revenue recognition - 1 mark per point to a maximum 5
(b) IFRS 5 explanation - 1 mark per point to a maximum 5
(c) (i) Key changes to financial statements from IFRS 16 - 1 mark per point to 6
a maximum
(ii) Sale and leaseback - 1 mark per point to a maximum 5
(iii) Effect on interest cover - 1 mark per point to a maximum 2
25
(a) Contracts with sports organisations

Havanna has t reated the services provided under the contracts as a single performance
obligation satisfied at a point in time, when the customer signs the contract.
However, there are potentially at least three separate performance obligations in the
form of the different services provided by Havanna to the sports organisations. These a re
access to Havanna's database of members, admission to health clubs and provision of
coaching (and other benefits).
Under IFRS 15, Hovanna is providing a series of distinct services that are substantially
the same and have the same pattern of transfer to the customer.
This is the case because both of the following criteria are met:
(1) Each distinct service in the series meets the c riteria to be a performance
obligation satisfied over time (ie when the customer simultaneously receives and
consumes the benefits provided by the entity). This is the case with all three of the
services offered by Havanna to the sports organisations.
(2) The same method would be used to measure the entity's progress towards
complete satisfaction of the performance obligation to t ransfer each distinct
service in the series to the customer. This is the case for Havanna as the most
appropriate measure would be a time-based measure as Havanna has an obligation
to provide their services on a continuous basis over the 9 to 18- month contract.
Therefore, Havanna's services qualify as a series of distinct goods and services that are
substantially the same w hich should be grouped together as a single performance
obligation which is satisfied over time.
For performance obligations satisfied over time, IFRS 15 requires an entit y to recognise
revenue over time by measuring progress towards complete satisfaction of that
performance obligation.
Havanna should recognise revenue on a straight-line basis over the period of the
contract rather than when the customer signs the contract.
(b) Sale of division
The division to be sold meets the criteria in IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations to be classified as held for sale and has been classified as a
disposal group under IFRS 5.
A disposal group that is held for sale should be measured at the lower of its ca rrying
amount and fair value less cost s to sell. Immediately before classification of a disposal
group as held for sale, the entity must recognise impairment in accordance with applicable
IFRS. Any impairment loss is generally recognised in profit or loss, but if the asset has been
measured at a revalued amount under IAS 16 Property, Plant and Equipment or IAS 38
Intang ible Assets, the impairment will be treated as a revaluation decrease.
206 St rategic Business Reporting (SBR) @BPP LEAl~II C

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Once t he d isposal group has been c lassified as held for sale, any fu rt her impairment loss
will be based on the difference between the adj usted carrying amounts and the fair
va lue less cost to sell. The impairment loss (if any) will be recognised in profit or loss. For
assets carried at fair value prior to initial classification, the requirement to deduct costs to
sell from fair value w ill result in an immediate charge to profit or loss.
Havanna has calculated the impairment as $30 million, being the difference between the
carrying amount at initial classification and the value of the assets measured in
accordance w ith IFRS. However, applying the treatment described above:
Step 1 Calculate carrying amount under applicable IFRS: $90m - $30m = $60m
Step 2 C lassified as held for sale. Measure at the lower of the adjusted carrying
amount under applicable IFRS ($60m) and fair val ue less costs to sell of
$38.5 million ($40m expected sales prices less expected costs of $1.5m).
Therefore, an additional impairment loss of $21.5 million is required to write
down the carrying amount of $60 million to the fair value less costs to sell of
$38.5 million.
(c) Briefing note for directors
(i) Key changes investors will see as a result of IFRS 16

IFRS 16 has brought all lease obligations (with limited exemptions for short- term
leases and low value assets) on to the statement of financial position because on
lease commencement, a lessee recognises a right-of-use asset and a corresponding
lease liability.
Under IAS 17, lessees only recognised an asset and liability in respect of leases that
met the definition of a finance lease. Leases t hat were not classified as finance
leases were t herefore 'off-balance sheet'. This made investor analysis of financial
statements more difficult as invest ors had to estimate the assets and liabilities
resulting from off-balance sheet leases when calculating ratios.
IFRS 16 w ill reduce complexity in financial statements as it should a llow comparisons

to be made between those companies who lease assets and those who borrow to
buy asset s.
The requirement to recognise right- of-use assets and lease liabilities under IFRS 16
will result in more information about leases both on the statement of financial
position and in the notes and will provide a more accurate reflection of the impacts
of lease arrangements on an entity's financial statements.
The carrying amount of lease assets will typically reduce more quickly than the
ca rrying amount of lease liabilities. This will result in a reduction in reported equity
for companies with previous material off- balance sheet leases.
IFRS 16 requires a lessee to disclose lease liabilities separately from other liabilities as
a separate line item, or together with other similar liabilities, in a manner which is
relevant to understanding the lessee's financial position. A lessee will also split lease
liabilities into current and non-current portions, based on the timing of payments.
Investors should bear in mind that some sectors and some companies will be more
affected than others. As a resu lt, companies with previous material off- balance sheet
leases will report higher assets and financial liabilities.
(ii) Sale and leaseback
This is a sale and leaseback transaction which should be accounted for in

accordance with IFRS 16 Leases. IFRS 16 requires an initial assessment to be made
regarding whether the transfer constitutes a sale, here we are told t he IFRS 15
criteria have been met.
Havanna should derecognise the carr ying amo unt of t he asset ($4.2m) and
recognise a right-of-use asset at the proportion of t he previous carrying amount
that relates to the right-of-use a sset retained.
Answers 207
A gain o r loss should then be recognised in relation to the rights transferred to the
buyer- lessor. Although there is a gain t o be recognised in profit or loss, this will not
be the $0.8 million (being soles price of $5m - carrying amount of $4.2m) the CEO
hos calculated.
Hovonno should a lso recognise a lease liability at the present value of lease
payments of $3.85 million.
The right-of-use asset at the start of the leaseback should be calculated as:
Carrying amount x present value of lease payments/Fair volue

= $4.2m x $3.85m/$5m = $3,234,000.
Hovonno should only recognise t he amount of gain that relates to the rights
transferred. The gain on sole of t he building is $800,000 ($5,000,000 -
$4,20 0,000), of which:
($800 ,000 x $3.85m/ $5m) = $616,000 relates t o the right s retained.

The balance, $184,000 ($800,000 - $616,000), relates to t he rights transferred to
the buyer and should be recognised as a gain.
At the st art of t he lease Hovonno should account for the transaction as follows:
Debit Credit
$ $
Cash 5,000,000
Right-of - use asset 3,234,000
Build ing 4,200,000
Lease liability 3,850,000
Goin on rights transferred 184,000
8,234,000 8,234,000
The rig ht- of-use asset should be depreciated over ten years (being the shorter of
the lease term and the remaining useful life of the asset). The gain will be
recognised in profit or loss and the lease liability will be increased each year by
the interest charge and reduced by the lease payments.
(iii) Effect on interest cover
The interest cover ratio in its most simple form is on entity's earnings before interest
and tax d ivided by its interest expense for the period. In stating that the transaction
will help to ensure that the interest cover covenant will be met, the CEO hos foiled to
toke into account the additional finance cost that wil l arise as a result of the lease
liability.
Furthermore, earnings will be increased b y the gain on the rig hts transferred of
$0.184 million, but t his is for less t han the $0.8 million gain expected by the CEO.
More information would be required as to the interest payable on t he lease in order
to quantify wh ether the interest cover will indeed improve as a result of the sole a nd
leaseback.
Lt2 Crypto
Workbook references. IFRS 16 Leases is covered in C hapter 9. IFRS 10 is covered in Chapter 11 ,

and IFRS 11 is covered in C hapter 15. IFRS 9 Financial Instruments is covered in Chapter 8.
Top t ips. There ore two professional marks available in this q uestion for clarity and quality of t he
discussion in port (b). This will be the case for o ne question in section B of every exam - two
prof essional marks will be available in t he questio n t hat requires analysis from the perspective of
a stakeholder.
Po rt (o)(i) required advice on the t reatment of on investment. The examiner's report stated that
many answers to this question were w eak - with many candidates focusing on only on IFRS 11,
rather t han first looking at the issue of control under IFRS 10. Port (o)(ii) was extremely
c ha llenging and required advice on the t reatment of on embedded derivat ive contract which was
then modified into o n executory contract.
208 St rat egic Business Reporting (SBR) @BPP LENIN INC

~•rm.,
Part (b)(i) required a discussion on the key changes from an investor perspective of the
application of the lessee accounting requirements in IFRS 16. Remember in this part of your
answer to consider the investor and not just state the accounting adj ustments required. Part (b)(ii)
required a discussion on how IFRS 16 would impact on three accounting ratios and more generally
from the financial statement s now that previously reported ' off-balance sheet' leases are now
on-balance sheet. Ensure you link the effect on each ratio to the change in accounting
treatment required under IFRS 16.
__J
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Ma rks
(a) (i) Discussion of the following accounting issues and application

to the scenario:
• The definition of control per IFRS 10 and joint control per
IFRS 11 3
• Power over the investee 3
6
(ii) Discussion of the following accounting issues and application
t o the scenario:
• IFRS 9 requirements for embedded derivatives and
hybrid 3
• IFRS 9 requirements for contract modifications 2
5
(b) (i) Discussion of the IFRS 16 requirements 3
Implications for investors 3
6
(ii) Description of the IFRS 16 impact on accounting numbers 2
Impact on the following ratios:
• Interest cover 2
• ROCE
• Debt to EBITDA
6
25
(a) (i) Before assessing w hether an entity has joint control over an arrangement, an ent ity
must first assess whether the parties control the arrangement in accordance with
the definition of control in IFRS 10 Consolidated Financial Statements. If not, an
entity must determine whether it has joint control of the arrangement. IFRS 11 Joint
Arrangements defines joint control as 'the cont ractua lly agreed sharing of control of
an arrangement, which exists only when decisions about the relevant activities
require the unanimous consent of the parties sharing control'. This means an
assessment as to whether any party can prevent any of the other parties from
making unilateral decisions w ithout its consent. It must be c lear which combination
of parties is required t o agree unanimously to decisions about the relevant activities
of the arrangement. In the case of Kurran, there is more than one combination of
parties possible to reach the required majority. As a result, Crypto does not have
joint control.
In addition t o the above, Crypto does not control Kurran because IFRS 10 states
that control requires power over the investee which gives the investor the ability to
direct the relevant activities. C rypto does not have the ability to direct the relevant
activities as it can only block decisions, and cannot make decisions by itself. Also,
there is no shareholder agreement w hich sets out shareholders' voting rights and
obligations and thus the other shareholders can act together to prevent Crypto from
making decisions in its own interest. Crypto does not have joint control as agreement
between itself and other board members has to occur for a decision to be made.
Therefore, it appears that Kurran is an associate of Crypto and would apply IAS 28
Investments in Associates and Joint Ventures.
Answers 209
(ii) IFRS 9 Financial Instruments states that 'any embedded derivative included in a
contract for the sale or purchase of a non-financial item that is denominated in a
foreign currency shall be separated when its economic characteristics and risks are
not closely related to those of the host contract'. Thus, in contrast to the treatment
for hybrid contracts with financial asset hosts, derivatives embedded with a financial
liability will often be separately accounted for. That is, they must be separated if
they are not closely related to the host contract, they meet the definition of a
derivative, and the hybrid contract is not measured at fair value through profit or
loss (FVTPL).
The contract is a hybrid contract containing a host contract which is an executory

contract to purchase electricity at a price of 20 million euros and a non-closely
related embedded foreign currency derivative wit h an initial fair value of zero to buy
20 million euros, sell 25 million dollars. However, t he derivative should have been
valued at FVTPL and not fair value t hrough other comprehensive income.
At the date of t he modification of the contract to the functional currency of C rypto,

there is a significant change to the contract which will trigger a reassessment of its
position under IFRS 9. As the contract no longer has a non-closely related embedded
derivative, the entire arrangement will be accounted for prospectively as an
executory contract which is outside the scope of IFRS 9. The embedded derivative will
be derecognised and it is likely that Crypto will have to pay the counterparty 2
million euros in compensation.
(b) (i) IFRS 16 Leases introduces a single lessee accounting model and should reduce the
number of off-balance sheet leases. Upon lease commencement, a lessee recognises
a right-of- use asset and a lease liability. After lease commencement, a lessee
measures the right- of- use asset using a cost model less accumulated depreciation
and accumulated impairment. The lease liability is initially measured at the present
value of the lease payments payable over the lease term , discounted at the rate
implicit in the lease if that can be readily determined. Lease liabilities include only
economically unavoidable payments.
Investors should bear in mind that some sectors and some companies will be more
affected than others. As a resu lt, companies with previous material off- balance sheet
leases will report higher assets and financial liabilities. The standard will reduce
complexity in financial statements as it should allow comparisons to be made
between those companies who lease assets and those who borrow to buy assets.
Investors will no longer have to estimate the assets and liabilities resulting from off-
balance sheet leases when calculating ratios as there should be fewer off- balance
sheet leases. IFRS 16 w ill result in more information about leases both on the
statement of financial position and in the notes and will provide a more accurate
reflection of the economics of leases. The carrying amount of lease asset s will
typica lly reduce more quickly than the carrying amount of lease liabilities. This w ill
result in a reduction in reported equity for companies with previous material off-
balance sheet leases.
IFRS 16 requires a lessee to disclose lease liabilities separately from other liabilities as
a separate line item, or together with other similar liabilities, in a manner which is
relevant to understanding the lessee's financial position. A lessee will also split lease
liabilities into current and non-current portions, based on the timing of payments.
(ii) The recognition of an asset which was previously unrecognised will result in a higher
asset base, which will affect ratios such as asset turnover. The recognition of a
liability which was previously unrecognised will result in higher financial liabilities,
which will affect gearing. The recognition of depreciation and interest instead of
operating lease expense will result in higher operating profit because interest is
typically excluded from operating expenses and w ill affect performance ratios.
Similarly, profit measures which exclude interest and depreciation but previously
included operating lease expense, suc h as EBITDA, will be higher under IFRS 16.

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Interest cover: there will be an increase in the earnings measure (ie EBITDA) which will
not be proportionate to the increase in interest. The change in the ratio will depend
on the characteristics of the lease portfolio.
Return on capital employed: it is likely that ROCE will be lower under IFRS 16
because the increase in operating profit is unlikely to be proportionate to the
increase in capital employed.
Debt to EBITDA: ratio of debt to EBITDA is likely t o be higher because debt will
increase by more than the increase in earnings. Debt w ill increase because of the
fact that lease liabilities will be recognised on the statement of financia l position. For
companies wh ich have material off-balance sheet leases, IFRS 16 is expected t o
result in higher profit before interest because a company presents the implicit
int erest in lease payments for former off- balance sheet leases as part of finance
costs. Previously, the entire expense related to off- balance sheet leases was included
as part of operating expenses. The size of the increase in operating profit, and
finance costs, will depend on t he significance of leasing activities to the company.
'+3 Operating segments
Workbook references. The topics in this question are covered in Chapter 18.
Top tips: Parts (a) and (b) require you to apply the criteria in IFRS 8 to two different companies.
In (a) you need to consider the allocation of common costs to operating segments and explain
how those costs differ to amounts in the financial statements because IFRS 8 is based on
internally reported information. In (b) you need t o determine whether the company was correct in
aggregating two reportable segments (t here is plenty of information in the scenario to suggest
otherwise) and consider how investors use segmental information in t heir appraisal of companies.
Part (c) considers the disclosure of social and environmental information in financia l statements.
Easy marks. There are some easy marks for definitions in Part (b).
Marks
(a) Accell - allocation of common costs - discussion 1 mark per point to a

maximum of 7 marks. Points may include:
Impact on profit/net assets of allocation 1
IFRS 8 guidance on allocation 1
Suggested basis for a llocation for each cost in scenario 3
Differing amounts in segment report to financial statements 2
7
(b) (i) Velocity - application of IFRS 8:
Criteria for aggregation 1
Customer base/risk 2
Conclusion
4
(ii) Velocity - discussion of investor appraisal and segments:
Used to determine cash flows
Aggregation less useful
Conclusion
Ethics
4
(c) 1 mark per relevant well-explained point 8
25
Answers 211
(a) Accell - allocation af camman c asts under IFRS 8
If operating segment d isclosure is to f ulfil a usef ul function, costs need to be appropriat ely
assigned to segments. Centrally incurred expenses and central assets can be significant,
and the basis chosen by an entit y to allocate such costs can therefore have a significant
impact on t he financial statements. In t he case of Accell, head office management
expenses, pension expenses, t he cost of managing properties and interest a nd rela ted
interest-bearing a ssets could be mat erial amounts, w hose misalloca tion cou ld mislead
users.
IFRS 8 does not prescribe a basis on which to allocate common costs, but it does requ ire
that that basis should be reasonable. For exam ple, it would not be reasonable to a llocate
t he head office management expenses to the most profitable business segment t o d isguise
a pot ential loss elsewhere. Nor would it be reasonab le to a llocate the pension expense to a
segment w ith no pensionable employees.
A reaso nable basis on which to allocate com mon costs for Accell might be as follows:
(i) Head offic e management cost s. These could be allocated on the basis of revenue
o r net assets. Any a llocation might be criticised as arbitrary - it is not necessaril y the
c a se that a segment wit h a hig her revenue requires more adm inistration from head
office - but t his is a fairer basis t han most.
(ii) Pension expense. A reasonable a llocation might be on the basis of t he number of
employees or salary expense of each segment.
(iii) Costs of managing properties. These could be allocated on t he basis of the value
of t he properties used by each business segment, or t he t ype and age of t he
properties (older properties requiring more attention than newer ones).
(iv) Interest and interest-bearing assets. These need not be allocated t o the same
segment - the int erest receivable could be allocated t o t he p rofit or loss of one
segment a nd t he related interest-bearing asset to the asset s and liabilities of
a nother. IFRS 8 c alls t his asymmetrical allocation.
The a mounts report ed under IFRS 8 ma y d iffer fro m those repo rted in the financial
stat ements because IFRS 8 requires t he information to be presented on the same basis as
it is reported internally, even if t he accounting policies are not the same as those of t he
conso lidated financia l statements. For example, segment information may be reported on
a cash basis rather than an accruals basis or different accounting policies may be adopted
in the segment report w hen allocating centrally incurred costs if necessary for a better
understanding of t he reported segment informat ion.
IFRS 8 requires r econci liatio ns between the segments' reported amounts and those in the
conso lida t ed financial statements. Entities must disclose t he nat ure of such d ifferences,
and of t he basis of accounting for transactio ns between reportable segments.
(b) (i) Velocity - o p erating segments
IFRS 8 Operating Segments requires operating segments to be reported separately if
they exceed at least one of certain quantitative thresholds. An entity can choose to
aggregate two or more operating segments into a single operating segment before
apply ing the quantitative thresholds if t hose operating segments have similar
ec ono mic characteristic s, and the segments are similar in all of t he following
aggregation criteria:
(i) The nature of t he products and services
(ii) The nature of t he production process
(iii) The type or class of customer for their products or services
(iv) The methods used to d ist ribute their products or provide their services
(v) If applicable, the nature of t he regu latory environment.
Operating segment s can a lso be aggregated if, after app lying the q ua ntitative
th resholds, no operating segments are found to be reportable, in order to produce a
reportable segment. This can only be done if t he operating segments have similar
econo m ic cha rac t eristics, and the segments are similar in a majority of the above
aggregation criteria.

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Management have a choice a s to whether to aggregate operat ing segments that
meet the aggregation criteria. But in making that choice, management must
consider the core principle of IFRS 8 w hich is to provide useful information ta users in
evaluating the business.
Velocity has aggregated segments 1 and 2, but this aggregation may not be
permissible under IFRS 8. While the products and services are similar, the customers
for those pr oducts and services a re different. Therefore the t hird aggregation
criteria has not been met.
In the local market, the decision to award the contract is in the hands of the local
authority, which also sets prices and pays for the services. The company is not
exposed to passenger revenue risk, since a contract is awarded by competitive
tender.
By contrast, in the inter-city train market, the customer ultimately determines
whether a train route is economically viable by choosing whet her or not to buy
tickets. Velocity sets the ticket prices, but will be influenced by customer behaviour
or feedback. The company is exposed to passenger revenue risk, as it sets p rices
which customers may or may not choose to pay.
It is possible that t he f ifth criteria, regulatory environment , is not met, since the local
authority is imposing a different set of rules to that which applies in the inter-city
market.
In conclusion, the two segments have different economic characteristics and so

shou ld be reported as separate segments rather than aggregated.
(ii) Relevance t o investor analysis
Contrary to the managing director's views, IFRS 8 provides information that makes
the financial statements more useful to investors. The objective of financial
statements is to provide financial information t o primary users (not just investors)
which enables them to make decisions about providing resources to the entity.
In making t hose decisions, investors and creditors consider the returns they are likely
to make on t heir investment. This requires assessment of the amount, timing and
uncerta inty of the future cash flows of Velocity as well as of management's
stewardship of Velocity 's resources. How management derives profit is therefore
relevant information to an investor.
Inappropriately aggregating segments reduces the usefulness of segment

disclosures to investors. IFRS 8 requires information to be disclosed t hat is not readily
available elsewhere in the financial statements, therefore it provides additional
information which a ids an investor's understanding of how t he business operates
and is managed.
In Velocity's case, if the segments are aggregated, then the increased profits in
segment 2 will hide the decreased profits in segment 1. However, the fact profits have
sharply declined in segment 1 would be of interest to investors as it may suggest that
future cash flows from this segment are at risk.
The fact that the director was pleased at the aggregation of the segments raises
concern that perhaps Velocity is trying to conceal facts from investors. The reasons
for t his should be investigated further to determine if there is any unethical practice
taking place.
(c) Social and environmental information
There are a number of factors which encourage compan ies to disclose social and
environmental information in their financia l stat ements. Public interest in corporate social
responsibilit y has increased in recent years and in an age where society is increasingly
aware of the impact of both individual and business decisions on the c limate, environment
and sustainability, it remains a key area of focus for reporting accountants.
Answers 213
Although financial statements ore intended for present and potential investors, lenders and
other creditors, there is recognition that companies have a responsibility to a number of
different stakeholders. These include customers, employees and the general public, all
of whom are potentially interested in the way in which a company's operations affect the
natural environment and the w ider community. These stakeholders can have a
considerable effect on a company's performance. As a result, most compan ies now take
positive steps to build a reputation for social and environmental responsibility.
Therefore, the disclosure of environmental and social information is essential.
It is a lso generally accepted that corporate social responsibility is actually an important

part of an entity's overall performance. Responsible practice in areas such as reduction
of damage to the environment and fair recruitment practices increase shareholder value.
Companies that act responsibly and make social and environmental disclosures are
perceived as better investments than those that do not.
Another factor is commitments by governments t o achieve, for example, climate change

targets or to meet Sustainable Development Goals by 2030 and the pressure placed on
companies to make a posit ive contribution towards achieving such targets. Although there
ore no IFRS Standards that specifically require environmental and social reporting, it may
be required by company legislation and stock exchange requirements. There are now a
number of awards for environmental and social reports and high-quality disclosure in
financial statements. These provide further encouragement to disclose information.
At present c ompanies ore normally able to d isclose as much or as little information os
they wish in whatever manner that they wish. This causes a number of problems.
Companies tend to disclose information selectively and it is difficult for users of the
financial statements to compare the performance of different compa nies. However,
there ore good arguments for continu ing to allow companies a certain amount of freedom
to determine the information that they disclose. If detailed rules are imposed, companies
are likely to adopt a 'c hecklist' approach and will present informatio n in a very general
and standardised way, so that it is of very little use to st akeholders.
'+'+ Skizer
Marks
(a) (i) Discussion of the Conceptual Framework and IAS 38 6

recognition criteria
(ii) Application of the following discussion to t he scenario:
20X7 initial assessment of recognition criteria (met/not met),
IAS 38 derecognition criteria and potential impairment
assessment 2
20X8 reclassification as R&D is not a change in estimate and
impairment assessment 2
If recognition criteria not met
(iii) Application of the following discussion to t he scenario: 5
Consideration of Skizer's business model 2
The application of IFRS 15 to Skizer 2
4
(b) (i) Discussion of IFRS 3 recognition of intangible assets and
information provided about different intangible assets so
that investor adjustments can be made 3
Discussion of cost or revaluation under IAS 38 a nd
2
differences
Discussion of differences in t reatment of R&D and
development expenditure 2
7
211+ Strategic Business Reporting (SBR)

@BPP lE.Alt~+ tlG
11.rm~
Marks
(ii) Discussion of measurement choices mode in th e financial
statements 2
Consideration of whether IR co n supplement financia l
statements thereby providing more useful information for
investors
3
25
(a) (i) The Conceptual Framework d efines on asset as a present economic resource
controlled by the entity as a result of post events. An economic resource is a right
that hos the potential to produce economic benefits. Assets should be recogn ised if
they meet t he Conceptual Framework definition of on asset and such recognition
provides users of financial statements with information that is useful (ie it is relevant
and results in faithful representation). This is subject to the criteria that the benefits
the information provides must be sufficient to justify the costs of providing that
information. The wording of the recognition criteria in the Conceptual Framework
allows for flexibility in how this criteria could be applied by the IASB in amending or
developing Standards.
IAS 38 Intangible Assets defines on intangible asset as on identifiable non-monetary
asset without physical substance. IAS 38 retains the 2010 Conceptual Framework
definition of on asset which specifies that future economic benefits ore expect ed t o
flow to the entity. Furthermore IAS 38 requires on entity to recognise on intangible
asset, if, and only if:
(a) It is probable that t he expected future economic benefits that ore attributable
to the asset will flow to the entity; and
(b) The cost of the asset con be measured reliably.
This requirement applies whether o n intangible asset is acquired externally or

generated internally. The probability of future economic benefits must be based on
reasonable and supportable assumptions about conditions which will exist over the
life of the asset. The probability recognition criterion is always considered to be
satisfied for intangible assets which ore acquired separately or in a business
combination. If the recognition criteria ore not met, IAS 38 requires the expenditure
to be expensed when it is incurred.
The Conceptual Framework does not prescribe a 'probability criterion', and thus
does not prohibit the recognition of asset s or liabilities with a low probability of on
inflow or outflow of economic benefits. In terms of intangible assets, it is arguable
that recognising on intangible asset with a low probability of economic benefits
would not be useful to users given that the asset hos no physical substance.
The recognition criteria and definition of on asset in IAS 38 ore different to those in
the Conceptual Framework. The criteria in IAS 38 ore more specific, but arguably do
provide information that is relevant and a faithful representation. When viewed in
this way, the requirements of IAS 38 in terms of recognition appear to be consistent
w ith t he Conceptual Framework.
Answers 215
(ii) Skizer should have assessed whether the recognition criteria in IAS 38 were met at
the t ime the entity capitalised the intangible assets. If the recognition criteria were
met, then it was not appropriate to derecognise the intangible assets. Acc ording to
IAS 38, an intangible asset should be derecognised only on disposal or when no
future economic benefits are expected from its use or disposal. If there were any
doubts regarding the recoverability of the intangible asset, then Skizer should have
assessed whether the intangible a ssets would be impaired . IAS 36 Impairment of
Assets would be used to determine whether an intangible a sset is impaired.
Further, the reclassification of intangible assets to research and d evelopment costs

does not constitute a change in an accounting estimate. IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors states that a change in accounting
estimate is an adjustment of the carrying amount of an asset or liability, or related
expense, r esulting from reassessing the expected future benefits and obligations
associat ed w ith that asset or liability. However, if Skizer concludes that the
inta ngible assets' carrying amounts exceed their recoverable amounts, an
impairment loss should be recognised. The costs of t he stakes in the development
projects c an be determined and will not have been estimated.
If t he recognition criteria were not met, then Skizer would have to recognise
retrospectively a correction of an error, in accordance with IAS 8.
(iii) Gains arising from derecognition of an intangible asset cannot be present ed as

revenue as IAS 38 explicitly forbids it. There is no indication that Skizer's business
model is to sell development project s but, rather, it undertakes the development of
new products in conjunction with third party entities. Skizer's business model is to
jointly develop a product, then leave the production to partners. As Skizer has
recognised an intangible asset in accordance with IAS 38, and fu lly impaired t he
asset , it cannot a rgue that it has thereafter been held for sale in the ordinary course
of business. Therefore, according to IAS 38, t he gain from the derecognition of the
inta ngible asset cannot be classified as revenue under IFRS 15 Revenue from
Contracts with Customers but as a profit on the sale of t he intangible asset.
(b) (i) Under IFRS 3 Business Combinations, acquired intang ible assets must be recognised
and measured at fair value if they are separable or arise from other contractual
rights, irrespective of whether the acquiree had recognised the assets prior to the
business combination occurring. This is because there should always be sufficient
information t o reliably measure the fair value of these assets. IFRS 3 requires a ll
inta ngible a ssets acquired in a business combination to be treated in the same way
in line with the r equirements of IAS 38. IAS 38 requires intangible a sset s w ith finite
lives t o be amortised over t heir useful lives a nd intangible a ssets wit h indefinite lives
to be subject to an annual impairment review in accordance w it h IAS 36.
However, it is unlikely that all inta ngible assets acquired in a business combination
will be homogeneous and invest ors may feel that there are different types of
inta ngible assets which may be acquired. For example, a patent may only last for a
f inite period of time and may be thoug ht as having an identifiable future revenue
stream. In this case, amortisation of th e patent would be logical. However, there are
other intangible assets which are g radually replaced by the purchasing en tity's own
intangible assets, for examp le, customer lists, and it ma!J make sense to account for
these assets w ithin goodwill. In such ca ses, investors may wish to reverse
amortisation charges. In order to decide whether an amortisation charge makes
sense, investors require greater detail about the nature of the identified intangible
asset s. IFRSs do not permit o different accounting t reatment for this distinction.
IAS 38 requires an entity to choose either the cost model or the reva luatio n model
for each class of intangible asset. Under t he cost model, after initia l recognition
intangible assets should be carried at cost less accumulated amortisation and
impairment losses. Under the revaluation model, intangible assets may be carried at
a revalued amount, based on fair value, less an y subsequent amortisation and
im pairment losses only if fair value can be determined by reference t a an active
market. Such active markets a re not common for intangible assets. If a n intangible

IMlllA
asset is reported using the cost model, the reported figures for intangible assets such
as trademarks may be understated when cam pared to their foir values. Based upon
the principle above regarding the different types of intangible asset, it would make
sense for different accounting treatments subsequent to initial recognition. Some
intangible assets should be amortised over their useful lives but other intangible
assets should be subject to on annual impairment review, in the some way as
goodwill.
IAS 38 requ ires a ll research costs to be expensed with development costs being
capitalised only ofter the technical and commercial feasibility of the asset for sole or
use hos been established. If an entity cannot distinguish the research phase of an
internal project to create an intangible asset from the development phase, t he entity
treats the expenditure for that project as if it were incurred in the research phase
only. There is some logic to the capitalisation of development expenditure as
internally generated intangible assets but the problem for investors is disclosure in
this area as companies do not hove a consistent approach to capitalisation. It is
often unclear from disclosures how the accounting policy in respect of research and
development was applied and especially how research was distinguished from
development expenditure. One of the issues is that the disclosure of relevant
information is already contained within IFRSs but preparers are failing to comply
with t hese requirements or the disclosure is insufficient.
Int angible asset disclosure con help analysts answer questions about the innovation
capacity of companies and investors can use the disclosure to identify companies
with intangible assets for development and commercialisation purposes.
(ii) Measuring the contribution of intangible assets to future cash flows is fundamental
to integrated reporting and w ill help explain the gaps between the carrying amount,
intrinsic and market equity value of an entity. As set out above, organisations are
required t o recognise intangible assets acquired in a business combination.
Consequently, the intangible assets are only measured once for this purpose.
However, organisations are likely to go further in their integrated report and disclose
the change in va lue of an intangible asset as a result of any sustainable growth
strategy or a specific initiative. It is therefore very useful to communicate the value
of intangible assets in an integrated report. For example, on entity may decide to
disclose its assessment of the increase in brand value as a result of a corporate
social responsibility initiative.
lt5 Cloud
Work book references. Integrated Reporting and other aspects of performance reporting are 7
covered in Chapter 18 of the Workbook. The Conceptual Framework is covered in Chapter 1.
Hedge accounting is covered in Chapter 8 and transfers from t he revaluation surplus are covered
in Chapter 4.
Top t ips. Part (a) of the question covered two topics: the issue of recognition of income and
expenses in profit or loss vs other comprehensive income, reclassification between the two, and
integrated reporting. Because the question is fairly open-ended, our answer is longer than would
be needed in an exam where only some of the points would need to be made in order to get the
marks.
Port (b) required the application of Port (a) in terms of determining which elements of a profit or
loss should be reported in OCI and which element s in profit or loss.
Easy ma rks . Describing the principles and key components of the <IR> Framework is
straightforward textbook knowledge. Other than th e hedge accounting, Part (b) on the
measurement of assets should be relatively easy.
Answers 217
U@il:i·iH:h::i&
Marks
(a) (i) 1 mark per point up to ma ximum 6
25
(a) (i) C urrent presentatio n r equirements
IAS 1 requires the presentation of either one combined statement of profit or loss and
other comprehensive income (SPLOCI) or two separate statements, t he statement of
profit or loss (SPL) and the statement of comprehensive income.
Separate disclosure is required of those items of other comprehensive income (OCI)

which would be reclassified t o profit or loss and those items of OCI which would
never be rec lassified to profit or loss, along with the related tax effects of each
category.
C o nce pt ual ba sis
The conceptual basis for w hat should be classified as OCI is not clear. This has led to
an inconsist e nt use of OCI in IFRS.
Opinions vary but there is a feeling that OCI has become a ho me for anything
controversia l because of a lack of clear definition of what should be included in the
statement.
Many users are thought to ignore OCI, as the changes reported are not caused by
the operating flows used for predictive purposes. It is also difficult for users to
u nderstand t he concept of OCI as opposed to profit or loss which, a lt hough subject
to accounting stand ards, is a n easier notion to g rasp.
The definitions of profit and loss and OCI in IAS 1 are not particularly helpful in
u nderstanding the conceptual basis:
• Profit or loss is the t otal of all items of income and expenses except those items
of income or expense which are recognised in OCI
• OCI comprises items of income and expense that are not recogn ised in profit
or loss as required or permitted by other IFRSs
The IASB has been asked to define w hat financial performance is, clarify the
meaning and importance of OCI and how the distinction between profit or loss and
OCI should be made in practice. Many st akeholders were hoping t hat the
Conceptual Framework as revised in 2018 would answer these questions, but t he
matter has not been adequately addressed.
The revised Conceptual Framework identifies the SPL as the primary source of
information about an entity's performance and states that in principle, therefore, all
income and expenses are included in it.
However, it goes on to say that in developing IFRSs the IASB may include income or
expenses arising from a c ha nge in t he current va lue of a n asset o r liability as
OCI when they determine it provides more relevant information or a more faithful
representation.
So although there is more guidance on what constitutes OCI, t he conceptual basis

for it is still not clear.

tl.J'.l")IA.
(ii) Reclassification adjustments
Reclassification adjustments are amounts reclassified ta profit or loss in the

c urrent period which were recognised in OCI in the cu rrent or previous periods.
Items which may be reclassified include foreign currency gains on the disposal of a
foreign operation and realised gains or losses on cash flow hedges.
Items which may not be reclassified are changes in a revaluation surplus under IAS
16 Property, Plant and Equipment, and actuarial gains and losses o n a defined
benefit plan under IAS 19 Employee Benefits.
However, the notion of reclassification and when or which OCI items should be
reclassified is not clear. The revised Conceptual Framework (2018) states that in
principle, OCI is recycled to profit or loss in a future period when doing so results in
the provision of more relevant information or a more faithful representation. While
providing more guidance than the previous Concept ual Framework, the conceptual
basis for when OCI should be reclassified is not clear.
Arguments far and against reclassification
It is argued t hat reclassification p rotects t he integrity of profit or loss and provides

users with relevant information about a transaction which o ccurred in the
period. Additionally, it can improve comparability where IFRSs permits simi lar items
to be recog nised in either profit o r loss or OCI.
Those against reclassification argue that the recycled amounts add to the
complexity of financial reporting , may lead to earnings management and the
reclassification adjustments ma y not meet the definitions of income or expense in the
period as the change in the asset or liability may have occurred in a previous period.
(iii) Integrated Reporting
The <IR> Framework establishes principles a nd concepts which govern the overall
content of an integrated report. This enables each company to set o ut its own
int egrated report rather than adopting a checklist approach.
The integrat ed report aims to provide an insight into the company's resources and
relationships (known as capitals) and how the company interacts w ith the external
environment and the capitals to c reate value. These capitals can be financial,
manufactured, intellectual, human, social and relationship, and natural capital but
companies need not adopt t hese classifications.
Int egrated reporting is built around the following key components:

(1) Organisational overview and the external environment under w hich it operates
(2) Governance struct ure and how this supports its ability to create value
(3) Business model
(4) Risks and opportunities and how t hey are dealing with them and how they
affect the company's ability to create va lue
(5) Strategy and resource allocation
(6) Performance and achievem ent of strategic objectives for the period and
outcomes
(7) Outlook and challenges facing the company and their implications
(8) The basis of presentation needs to be determined including what matters are
to be included in the integrated report and how the elements are quantified or
evaluated
Answers 219
An integrated report should provide insight into the nature and quality of the
organisation's relationships with its key stakeholders, including how and to what
extent the organisation understands, takes into account and responds to their needs
and interest s. The report should be consistent over t ime to enable comparison with
other entities.
'Value' depends upon t he individual company 's own perspective. It can be shown
through movement of capital and can be defined as value created for the
com pany or for others. An integrated report should not attempt to quantif y value,
as assessments of va lue are left to those using the report.
An integrated report does not contain a st at ement from those 'charged with
governance' acknowledging their responsibility for the integrated report. This may
undermine the reliability and credibility of the integrated report.
There has been discussion about whether the <IR> Framework constitutes suitable
criteria for report preparation and for assurance. There is a degree of uncertainty
as to measurement standards to be used for the information reported and how a
preparer can ascertain the completeness of the report. The IIRC has stated that the
prescription of specific measurement methods is beyond t he scope of a p rinciples-
based framework .
The <IR> Framework cont ains informat ion on t he principles-based approach and
indicates that there is a need to include quantitative indicators whenever practicable
and possible. Additionally, consistency of measurement methods across different
reports is of paramount importance. There is outline guidance on the selection of
suitable quantitative indicators.
There are additional concerns over the ability to assess futu re disclosures, and there
may be a need for confidence intervals to be disclosed. The preparation of an
int egrated report requires judgement but there is a requirement for the report to
describe its basis of preparation and presentation, including the significant
frameworks and methods used to quantify or evaluate material matters. Also
included is the d isclosure of a summary of how the company determined the
mat eriality limits and a description of the reporting boundaries.
A company should consider how to describe the disclosures without causing a

significant loss of competitive advantage. The entity will consider what advantage a
competitor could actually gain from information in the integrated report, and will
balance this against the need for disclosure.
(6) At 30 April 20X5, Cloud should w rit e down the steel, in accordance with IAS 2 Inventories,
to its net realisable value of $6 million, therefore reducing profit by $2 million. C loud should
reclassify an equivalent amount of $2 million from equity to profit or loss. Thus there is no
net impact on profit or loss from t he write down of inventor y. The gain remaining in equity
of $1 million will affect profit or loss when the steel is sold. Therefore, on 3 June 20X5, the
gain on the sale of $0.2 m illion with be recognised in profit or loss, and the remaining gain
of $1 million will be transferred to profit or loss from equity.
As regards the property, plant a nd equipment, at 30 April 20X4, there is a revaluation
surplus of $4 million being the difference between the carrying amount of $8 million
($10 million - $2 million) and t he revalued amount of $12 million. This revaluation surplus
is recognised in other comprehensive income.
At 30 April 20X5 the asset's value has fallen to $4 million and t he carrying amount of the
asset is $9 million ($12 million - $3 million). The entity will have transferred $1 million from
revaluation surplus to retained earnings, being the d ifference between historical cost
depreciation of $2 million and depreciation on the revalued amount of $3 m illion. The
revaluation loss of $5 million will be charged first against the revaluation surplus remaining
in equity of ($4 million - $1 million), ie $3 million and the balance of $2 million will be
charged against profit or loss.
IAS 1 requires an entity to present a separate statement of changes in equity showi ng
amongst other items, total comprehensive income for the period, reconciliations between
the carrying amounts at the beginning and the end of the period for each component of
equity, and an analysis of other comprehensive income.

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'+6 Allsop
Workbook refere nce. Revenue from contracts with customers is covered in Chapter 3, deferred
tax is covered in Chapter 7 and foreign currency transactions are covered in Chapter 16.
Integrated Reporting is covered in Chapter 18 .
Top t ips. Part (a) of this question is difficult and contains two cha llenging situations. Make sure
you do not spend a ll of your time on this part of the question and miss out on the marks available
for the d iscussion in part (b). You should aim t o generate one point per mark in part (b).
Remember that you w ill gain marks for any valid point - not just those shown in the suggested
solution below. In a discussion question like part (b), it is helpful to consider both benefits and
limitations then come to a conclusion at the end of your answer.
Easy marks. There were easy marks you could pick up in part (b) for presenting the benefits and
limitations of an integrated report.
11@11:\·Hi:li::i&
Marks
(a) (i) Explanation 3

Calculation 4
Explanation - historical rate
8
(ii) Bonus is variable consideration
Exclude bonus from transaction price at contract inception/end
of first year
Satisfy performance obligation over time so recognise revenue
over time
Recognise 65% of fixed consideration as revenue in first year
4 December 20X5: contract modified - include bonus in
transaction price
Not an adjusting event after reporting period - account for in
second year
Update percentage complete and estimates of revenue and cost s
7
(b) Usefulness of statement of cash flows and the Integrated Report
- Discussion 1 mark per point to a maximum of 8 marks.
Points may include: 8
Usefulness of statement of cash flows
Liquidity, solvency, financial adaptability
Comparison of cash flows and profit
Predictive value
Link to rest of financial statements
Integrated Report
Limitations of financia l statements
Aim of integrated reporting
Benefits of integrat ed reporting
Problems with integrated reporting
25
@BPP LEAR\lt G
1/;Jl'll~
Answers 221
(a) (i) Deferred tax charge
Investments in foreign branches (or subsidiaries, associates or joint arrangements)
are affected by changes in foreign exchange rates. In this case, the branch's
taxable profits are reported in dinars, and changes in the dinar/dollar exchange rate
may g ive rise to temporary differences. These differences can arise where the
carrying amounts of non- monetary assets, such as property, are translated at
historical rates and the tax base of those assets are translated at the closing rate.
The closing rate may be used to translate the tax base because the resulting figure
is an accurate measure of the amount that w ill be deductible in future periods.
The deferred tax is charged or credited to profit or loss.
The deferred tax arising will be calculated using the tax rate in the foreign
branch's jurisdiction, that is 20%.
Property Dinars Exchange Dollars

('000) rate ($'000)
Carrying amount:
Cost 6,000 5 1,200
Depreciation for the year (500) (100)
Carrying amount 5,500 1,100
Tax base:
Cost 6,000
Tax depreciation (750)
Tax base 5,250 6 875
Taxable temporary difference 225
Deferred tax liability at 20% 45

The deferred tax charge in profit or loss will therefore increase by $45,000.
If t he tax base had been translated at the historical rate, the tax base would have
been $(5.25m + 5m) = $1.05m. This gives a taxable temporar\:J difference of $1.1m -
$1.05m = $50,000, and therefore a deferred tax liability of $50,000 x 20% =
$10,000. This is considerably lower than when the closing rate is used.
(ii) Contract t o construct mac hine
Allsop should account for the promised bundle of goods and services as a single
performance obligation satisfied over time in accordance with IFRS 15. At the
inception af the contract, Allsop expects the following:
Transaction price $1,500,000
Expected costs $800,000
Expected profit (46. 7%) $700,000
The $100,000 bonus is variable consideration under IFRS 15. At the contract
inception, Allsop should exclude the $100,000 bonus from the transaction price
because, given that it is unlikely to complete construction within 24 months, it
ca nnot conc lude that it is highly pro bable that a significant reversal in the
amount of c umulative revenue recognised would not occur if it were included.
Completion of the construction of the machine is highly susceptible to factors
outside t he entity's influence.
This is a contract in which Allsop satisfies its performance obligation over time.
Therefore, revenue should a lso be recognised over time by measuring the progress
towards complet e satisfaction of that performance obligation. By the end of the
first year, Allsop has satisfied 65% of its performance obligation on t he basis of costs
incurred to date. Costs incurred to date are therefore $520,000 ($800,000 x 65%).
Allsop reassessed the variable consideration of $100,000 and concluded that the
amount was still constrained which means that it may not y et be inc luded in the
222 Strategic Business Reporting (SBR) @BPP LEl"\INC

WOii\
transaction price. Therefore, ot 30 November 20X5, only t he portion of the fixed
consideration of $1,500,000 related t o progress to date is recognised as revenue.
This results in revenue of $975,000 ($1,500,000 x 65%). The following amounts
should therefore be included in the statement of profit o r loss:
Revenue $975,000
Costs $520,000
Gross profit $455,000
However, on 4 December 20X5, the contract was modified. As o result, t he fixed
consideration o nd expected costs increased by $110,000 and $60,000, respectively.
This inc reased the fixed consideration to $1,610,000 ($1,500,000 + $110,000) and the
expect ed costs to $860,000 ($800,000 + $60,000).
The t otal potentia l consideration after the modification was $1,710,000 ($1,610,000
fixed consideration + $100,000 completion bonus) as Allsop concluded t hot receipt of
the bonus was highly probable and that including the bonus in the transaction price
would not result in a significant reversal in the amount of cumulative revenue
recognised in accordance with IFRS 15. Allsop also concluded that the contract
rema ined a single performance obligation. Thus, Allsop should account for the
contract modification as if it were port of the original contract. Therefore, Allsop
should update its estimates of costs and revenue as follows:
Allsop hos satisfied 60.5% of its performance obligation ($520,000 actual costs
incurred compa red to $860,000 total expected costs). It should recognise additional
revenue of $59,550 [(60.5% of $1,710,000) - $975,000 revenue recognised to dote]
at the dote of the modification as a cumulative catch-up adjustment. As the
contract amendment took place ofter the year end, th e addit ional revenue would
not be treated as an adjusting event after the reporting period. Therefore, it should
be accounted for in the year ended 30 November 20X6 rather than as an adjustment
in the year ended 30 November 20X5.
(c) Usefulness of statements of cash flows
Liquidity, solvency and financial adaptability

Statements of cash flows provide valuable information to stakeholders on the entity's
liquidity (its ability to pay its short-term obligations), solvency (its a bility to meet its long-
term financial commitments) and financial adaptability (its ability to ta ke effective action
to a lter the amount and timing of its cash flows to respond to unexpected needs or
opportunities). Information about cash flows helps stakeholders to understand the entity's
operations and evaluate its investing and f inancing activit ies.
Comparison of cash flows and profit
Cash flows are objective and verifiable a nd so are more easily understood than profits.
Profits con be m anipulated through t he use of judgement or by the c hoice of a par ticular
accounting policy. Operating cash flows ore therefore useful for highlighting the
differences between cash and profits. The cash generated from operations is a useful
indication of the quality of the profits generated by a business. Good quality profits wil l
generate cash and increa se the financial adaptability of an entity.
Predictive value
Cash flow information will also hove some predictive va lue. Information about an entity's
cash flows during a period can help users to assess the entity's ability to generate future
net cash inflows. Therefore, it may assist stakeholders in making judgements on t he
amount, t iming and degree of certainty of future cash flows.
Link to rest of the financial statements
Cash flow information should be used in conjunction with the rest of the financial
statement s. The adjustment of non-cash items within operating activities may not be
easily understood. The classification of cash flows can be manip ulated between operating,
investing and financing activities, often to present the cash flows from operating activities
Answers 223
favourably. It is important therefore not to examine the cash flow information in isolation. It
is only through on analysis of the statement of financial position, statement of profit or loss
and other comprehensive income and notes, together with the statement of cash flows,
that a more comprehensive picture of the entity's position and performance develops.
Integrat ed Report
Aim of integrated reporting

Integrated reporting is designed to convey a wider message of organisational
performance, covering all of an entity's resources, known as 'capitals' and how it uses
these capitals t o create va lue over the short-, medium - and long-term.
Benefits of integrated reporting

Integrated reporting will provide stakeholders with valuable information which would not
be immediately accessible from an entity's financial statements.
Financ ial statements are based on historica l information and may lack p redictive value.
They are essential in corporate reporting , particularly for compliance purposes but do not
provide meaningful information regarding business value.
The p rimary purpose of an integrated report is to explain ta providers of capital how the
organisat ion generates va lue over time. This is summarised through an examination of
the key activities and outputs of the organisation whet her they be financial, manufactured,
intellectual, human, social or natural.
An integrated report seeks to exam ine the externa l environment which t he entity operates
within and to provide an insight into the entity's resources and relationships to generate
value. It is principles based and should be driven by materia lity, including how and to
what extent the entity understands and responds to the needs of its stakeholders. This
would include an analysis of how the e ntity has performed within its business
environment, together with a description of prospects and cha llenges for the future . It
is this strategic direction which is lacking from a traditional set of financial statements and
will be invaluable to stakeholders to make a more informed assessment of the organisation
and its prospects.
Conclusion
Arguably, an Integrated Report may give improved information to stakeholders and

therefore provide a coherent story about the business which goes above and beyo nd that
provided by the stat ement of cash flows regarding liquidity, solvency and the financia l
adaptability of a business. It may help the entity to think holistically about its strategy and
manage key risks, as well as make informed decisions and build investor confidence.
'+7 Kiki Co
IHtM:i·iH:M::iM
Marks
(a) (i) Discussion of releva nt principles af revenue recognition 2

Application to the gift cards issued by Kiki Co 4
6
(ii) Discussion of relevant principles of revenue recognition 2
Application to the roya lty income of Kiki Co 2
Principle and treatment of the loss allowance 2
6

Marks
(b) General implications of the measurement choice 2
Investor perceptions re asset base/SOFP 4
Investor perceptions re SOPL/performance measures 5
11
Professional 2
25
(a) (i) Gift cards

IFRS 15 Revenue from Contracts with Customers says that revenue should be
recognised when or as a performance obligation is satisfied by transferring the
promised good or service to the customer. When a customer buys a gift card they
are pre-paying for a product . Revenue cannot be recognised because the entity has
not yet transferred control of an asset and so has not satisfied a performance
obligation. As such, cash received in respect of gift cards should be initially
recognised as a contract liability.
IFRS 15 refers to a customer's unexercised rights as breakage. The guidance for
variable consideration is followed when estimating breakage. In other words, the
expected breakage is included in the transaction price if it is highly probable that a
significant reversal in the amount of cumulative revenue recognised will not occur
once the uncertainty is subsequently resolved . This means that if the company is
unable t o reliably estimate the breakage amount, then revenue for the unused
portion of the gift card is recognised when the likelihood of the customer exercising
their rema ining rights becomes remote. However, if an entity is able to reliably
estimate the breakage amount, then it recognises the expected breakage amount as
revenue in proportion to the pattern of rights exercised by the customer.
In relation to Kiki Co, it appears that the amount of breakage can be reliably
determined and so this should be recognised in revenue as the gift ca rd is redeemed.
For every $1 redeemed, Kiki Co should recognise $1.43 ($1 x 100/70) in revenue.
(ii) Royalty
According to IFRS 15, an entity should only account for revenue from a contract with
a customer when it meets the following criteria:
• The contract has been approved;

• Rights regarding goods and services can be identified;
• Payment terms can be identified;
• It is probable the seller will collect the consideration it is entitled to.
At inception of the agreement, Kiki Co and Colour Co entered an explicit contract

which specified payment terms and conditions. Moreover, Colour Co had a strong
credit rating and so payment was probable. As such, it wou ld seem that the above
criteria were met. IFRS 15 says that revenue from a usage-based royalty should be
recognised as the usage occurs.
Whether a contract with a customer meets the above criteria is only reassessed if
there is a significant cha nge in facts and circumstances. In July 20X7, Colour Co lost
major customers and sources of finance. As such, it was no longer probable that Kiki
Co would collect the consideration it was entitled to. From July 20X7, no further
revenue from the contract should be recognised.
According to IFRS 9 Financial Instruments, non- payment is an indicator that the
outstanding receivables are credit impaired. A loss allowance should be recognised
equivalent to the difference between the gross carrying amount of the receivables
and the present value of the expected future cash flows receivable from Colour Co.
Any increase or decrease in the loss allowance is cha rged to profit or loss.
Answers 225
(b) Investment pro perties
In accordance with IAS 40 Investment Property, the buildings should be initiall y measured
at cost.
If the cost model is applied, then the buildings w ill be recognised at cost less accumulated
depreciation and impairment losses.
If the fair value model is applied, t hen the buildings w ill be remeasured to fair value at each
reporting dote. Goins and losses on remeasurement o re recognised in the statement of
profit or loss. No depreciation is charged.
Assuming that property prices rise, the fair value model will lead to on increase in reported
assets on t he stat ement of financial position. In contrast, investment property measured
using the cost model is depreciated, which reduces its carrying amount. This means that
the fair value model may make Kiki Co appear more asset-rich. Some stakeholders may
place importance on on entity's asset base, as it con be used as security for obtaining new
finance. However, repo rt ing higher assets con sometimes be perceived negatively . For
example, asset turnover ratios will deteriorate, and so Kiki Co may appear less efficient.
If assets increase, then equity also increases. As such, t he fair value model may lead to
Kiki Co reporting a more optimistic gearing ratio. This may reduce the perception of risk,
encouraging further investment.
Statement of profit or loss
In times of rising prices, the use of t he fair value model will lead to gains being reported in
the stat ement of profit or loss. This will increase profits for the period. In contrast , t he
depreciation charged under the cost model will red uce profits for t he period. Therefore,
earnings per shore, a key stock market and investor ratio, is likely to be higher if the fair
value model is adopted.
However, it should be noted that fa ir values ore volatile. In some years, fair value gains
may be much larger t han in other years. If propert y prices decline, then t he fair va lue
model w ill result in losses. As such, reported profits o re subject to more volatility if the fair
value model is adopted. This may increase st akeholders' perception of risk. In contrast, the
depreciation expense recorded in accordance with the cost model will be much more
predictable, meaning that investors will be better a b le to predict Kiki Co's future results.
Many entities now present a lternative performance measures (APMs), such as EBITDA
(earnings before interest, tax, depreciation and amortisation). Other entities present
'underlying profit' indicators, which st rip out the impact of non- operating or non-recurring
gains or losses (such as the remeasurement of investment properties). Although the use of
APMs hos been criticised, Kiki Co may consider them to be useful in helping investors to
assess underlying business performance through the eyes of management and to eliminate
the impact of certain accounting policy choices.
Statement of ca sh flow s
Accounting policy choices hove no impact on the operating, investing or financing cash
flows reported in the statement of cash flows.
Disclosure
It should be noted that entities using t he cost model for investment properties are required
to d isclose the fair value. Such disclosures enable better comparisons to be drown between
entities which account for investment property under different models.

IMlllA
'+8 Holls
U@il:i·iH:ii::i&
Marks
(a) (i) Arguments for and against the non-binding framework 4

(ii) • A d iscussion of understandability, relevance and
comparability 3
• Application of the above characteristics to MC 2
5
(b) An explanation of why taxable profits a re different from
accounting profit 2
Application of the following explanations to the scenario:
• Tax reconciliation 4
• Tax rat es 3
• Deferred taxation 5
14
2
25
(a) (i) The IFRS Practice Statement Management Commentary provides a broad, non-
binding framework for the presen tation of management commentary. The Practice
Statement is not an IFRS. Consequently, entities apply ing IFRSs are not required to
comply with the Practice Statement, unless specifically required by t heir jurisdiction.
Furthermore, non- com pliance w ith the Practice Statement will not prevent an entity's
financial st atements from complying with IFRSs.
It can be argued that t he International Accounting Standards Board's objectives of
enhancing consistency and comparability may not be achieved if the framework is
not mandatory. A standard is more likely to guarantee a consistent application of
the principles and practices behind the management commentary (MC).
However, it is difficult to create a standard on t he MC which is sufficiently detailed
to cover the business models of every entity or be consistent with all IFRSs. Some
ju risd ictions take little notice of non- mandatory guidance but the Practice Statement
provides regulators with a framework t o develop more aut horitative requirements.
The Practice Statement allows companies to adapt the information provided to
particular aspects of their business. This flexible approach could help generate more
meaningful disclosures about resou rces, risks and relationships which can affect an
entity's value and how these resources are managed. It provides management with
an opportunit y to add context to the published financial information, and to explain
their future strategy and objectives without being restricted by the constraints of a
standard.
If t he MC were a full lFRS, t he integration of management commentaries and the
information produced in accordance with IFRSs cou ld be cha llenged on t echnical
grounds, as we ll as its practical merits. In addition, there could be jurisdictional
concerns that any form of integration might not be accepted by local regulators.
(ii) The Framework states that 'an essential quality of the information provided in
financia l st atements is that it is readily understandable by users'. The MC should be
written in plain language and a style appropriate to users' needs. The primary users
of management commentary are those identified in the Conceptual Framework. The
form and content of the MC will vary between entities, reflecting the nature of their
business, the strategies adopted and the regulatory environment in which they
operate. Users should be able to locate information relevant to their needs.
Answers 227
Information has the quality of re levance when it has the capacity to influence the
econom ic decisions of users by helping them evaluate past , present or f uture events
or confirming, or correcting, their past evaluations. Releva nt financial information is
capable of making a difference to the decision made b!:J users. In order t o make a
difference, financial information has predictive value, confirmatory value or both.
The onus is o n management to determine what information is important enough t o
be included in the MC to enable users to 'understand' the financial statements and
meet the objective of the MC. If the entity provides too muc h information, it could
reduce its relevance and understandability. If material events or uncertainties are
not disclosed, t hen users may have insufficient information to meet their needs.
However, unnecessary detail may obscure important information especially if

entities adopt a boiler- plate approach. If management presents too much
information about, for example, all t he risks facing an organisation, this will conflict
with t he relevance objective. There is no single optimal number of disclosures but it is
useful to convey t heir relative importance in a meaningful way.
Comparability is the qualitative characteristic which enables users t o identify

and understand similarities and differences amongst items. It is important for users
to be able to compare information over t ime and between entities. Comparabilit y
between entities is problematic a s the MC is designed to reflect the perspectives of
management and the circumsta nces of ind ividual entities. Thus, entities in the same
industry may have different perceptions of what is important and how they measure
and report it. There are some precedents on how to define and calc ulate non-
fina ncial measures a nd financial measures which are not produced in accordance
with IFRSs but there are inconsistencies in the definition and calculation of these
measures.
It is sometimes suggested that t he effectiveness of the overall report may be
enhanced by strengthening the links between financial statements and the MC.
However, such suggestions raise concerns about maintaining a clear d istinction
between the financial statement information and other information.
An entity should ensure consistency in terms of wording, definitions, segment

disclosures, et c between the fina ncial st atements and the MC t o improve the
understanding of financial performance.
(b) Current tax is based on taxable profit for the year. Taxable p rofit is different from
accounting profit due to temporary differences between accounting and tax treatments,
and due to items which are never ta xable or tax deductible. Tax benefits such as tax credits
ore not recognised unless it is probable that the tax positions are sustainable.
The Group is required to estimate the corporat e tax in each of the many jurisdictions in
whic h it operat es. The Group is subject to tax audits in many jurisdictions; as a result, the
Group may be required t o make an adju stment in a subsequent period which could have a
material impac t on the Group's profit for the year.
Tax reconc iliatio n
The tax rate reconciliation is important for understanding the tax c harge reported in t he
financial statements a nd why the effective tax rate differs from the statutory rote.
Most com panies will reconcile the g roup's annual tax expense to the statutory rote in the
country in which the pa rent is based. Hence the rote of 22% is used in the tax
reconciliation. It is important that the reconciliation explains the reasons for the d ifferences
between the effective rate and the statutory rate. There should be minimal use of the
'other' category . In this case, the other category is q uite significant ($14 million) and there
is no explanation of what 'other' constitutes.
One-off and unusual items ca n have a significant effect on the effective tax rate, but
financial statements a nd notes often do not include a detailed discussion of them. For
example, the brand impa irment a nd disposals of businesses should be explained to
investors, as they are probably material items. The explanation should include any
potential rever sal of the treatment.

IMlllA
Some profits recognised in the financial statements are non-taxable such as the tax
relating to non-taxable gains on disposals of businesses and in some jurisdictions, taxation
relief on impairment losses w ill not be allowable for taxation. The reasons for these items
not being allowed for taxation should be explained to investors.
Tax ra t es
As the Group is operating in multiple countries, the actual tax rates applicable to profits
in those countries are d ifferent from the local tax rate. The overseas tax rates are higher
than local rates, hence the increase in the taxation charge of $10 million. The local rate is
different from the weighted average tax rate (27%) of the Group based on the different
jurisdictions in which it operates. Investors may feel that using the weighted tax rate in the
reconciliation gives a more meaningful number because it is a better estimate of t he tax
rate the Group expects to pay over the long term. Investors will wish to understand the
company 's expected long-term sustainable tax rate so they can prepare their cash flow or
profit fo recasts.
Information about the sustainability of the tax rate over t he long term is more important
than whether the rate is high or low compared to other jurisdictions. An adjustment can be
made to an investor's financial model for a long-term sustainable rate, but not for a volatile
rate where there is no certainty over future performance. For modelling purposes, an
understanding of the actual cash taxes paid is critical and the cash paid of $95 mi llion can
be found in the statement of cash flows.
Def err ed taxatio n
Provision for deferred tax is made for temporary differences between the carry ing amount
of asset s and liabilities for financial reporting purposes and t heir value for tax purposes.
The amount of deferred tax reflects t he expected recoverable amount and is based on t he
expected manner of recovery or settlement of the carry ing amount of assets and liabilit ies,
using the basis of taxation enacted or substantively enacted by the financia l statement
date.
Deferred tax assets are not recognised where it is more likely than not that the assets will
not be realised in the future and reference to IAS 37 Provisions, Contingent Liabilities and
Contingent Assets is useful in this regard . The evaluation of deferred tax assets'
recoverability requires judgements to be made regard ing the availability of futu re taxable
income.
Management assesses the available evidence to estimate if sufficient future taxable income
will be generat ed to use the existing deferred tax assets. A significant piece of objective
negative evidence evaluated was the loss incurred in t he period prior to the period ended
30 November 20X7. Such objective evidence may limit the ability to consider other
subjective evidence such as projections for future growth. Deferred taxes are one of the
most d ifficult areas of the financial statements for investors to understand. Thus there is a
need for a clear explanation of the deferred tax balances and an analysis of the expected
timing of reversals. This would help investors see the time period over which deferred tax
assets arising from losses might reverse. It would be helpful if the company provided a
breakdown of which reversals would have a cash tax impact and which would not.
As the p roposed tax law was approved, it is considered to be enacted. Therefore, t he rate
of 25% should be used to calc ulate the deferred tax liability associated w ith the relevant
items which affect deferred taxation.
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 m illion 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. Thus a deferred tax liability of $1.25 million
($5 million x 25%) should be recognised and as $3 m illion of these taxable temporary
differences are expected to reverse in the y ear in which the deductible temporary
differences reverse, Holls can also recognise a deferred tax asset for $0.75 million
($3 million x 25%). The recognition of a deferred tax asset for the rest of the deductible
Answers 229
temporary differences will depend on whether future taxable profits sufficient to cover the
reversal of this deductible temporary difference are expect ed to arise. Deferred tax assets
and liabilities must be recognised gross in the statement of financial position. However, it
may be possible to offset the deferred tax assets and t he deferred tax liabilities if there is a
legally enforceable right to offset the current income tax assets against current income tax
liabilities as the amounts relate to income tax levied by the same taxation authority on the
same taxable entity.
After the enactment of a new tax law, when material, Halls should consider disclosing the
anticipated current and future impact on their results of operations, financial position,
liquidity, and capital resources. In addition, Holls should consider disclosures in the critical
accounting estimates section of t he management commentary to the extent the changes
could materially affect existing assumptions used in making estimat es of tax- related
balances. Changes in tax laws and rates may affect recorded deferred tax assets and
liabilities and the effective tax rate in the f uture.
'+9 Guidance
W orkbook referenc es. The Conceptual Framework is covered in Chapter 1. Analysis is covered in
Chapter 18. IFRS 10 Consolidated Financial Statements is covered in Chapter 11.
Top tips. There are two professional marks available in this question for clarity and quality of
the discussion in part (b). This wi ll be the case for one question in section B of every exam - two
professional marks will be available in t he question that requires analysis from t he perspective of
a stakeholder.
Part (a) required a discussion of why a reporting entity may choose a particular accounting
policy where IFRS allows a choice, and the impact of faithful representation and comparability
on the choice. You need to know that faithful representation and comparability are qualitative
characteristics of useful information, as described in the Conceptual Framework. The Conceptual
Framework is fundamental to SBR, you must make sure you are familiar with it .
Part (b)(i) required calculation of return on equity ratio (ROE) and discussion on the usefulness to
investors of that ratio and its component parts. The examiner commented that some candidat es
didn't include discussion of the component parts of ROE, despite this being clearly stated in t he
requirement - make sure you read requirements careful ly and ensure you answer each part of
each requirement.
Part (b)(ii) asked for a discussion of the impact of the accounting transactions in the scenario on
the ROE ratio (and its components), and a recalculation of a more comparable ROE between the
two years. The examiner commented 'better answers included a description of t he impact on
each component as well as the ROE (meeting the question's whole requirement) and provided a
tab le in which the original accounting data is adjusted for each t ransaction'. Remember that
laying out your answers clearly helps the marker to see what you hove done, enabling t hem to
award you marks more easil y.
230 St rategic Business Reporting (SBR) @,1rr11.,

BPP
l[>\1111111\iC
U@il:i·iH:h::i&
Marks
(a) Discussion of the issues relating to accounting choice 3
Discussion of whet her faithful representa tion and
comparability are affected 3
6
(b) (i) Discussion of t he m eaning of t he return on equity (ROE)
and its component parts 3
Calculation of ROE for the years ended 31 December
20X5 and 20X6 2
5
(ii) App lication of t he following discussion to t he scenario:
• Transfer of property to SPE 2
• Buy bock of shores 2
• Raising loon capitol 2
• Purchase of associate 2
• Calculat ion of the impact on ROE and its 4
component parts
12
25
(a) Where an IFRS st andard a llows a n entity an accounting choice, then t he financial
statements will be influenced and affected by t hat choice. Management's intent and
motivation w ill influence accounting information. The accounting policy chosen con be
driven by self-interest , by a wish t o maximise t he interests of shareholders, or by a wish
to provid e information. Where there is flexibility when apply ing t he IFRS standard, the
financial statements can become less comparable. Entities may use the financia l c hoices
to increase earnings, and manipulate accounting figures in order to influence cont ractual
outcomes which depend on the accounting figures reported.
Accounting choices exist to provide companies which operate under different business
models with the option of utilising an accounting method which best represents their
operations. An y accounting choice in IFRS standards should still resu lt in t he financial
statements being faithfu lly represented . A faithful represent ation means t hat to the
maximum extent possible, the financial statements are complete, neutral and free from
error. A fait hful representation is affected by the level of measurement uncertainty in the
Comparability is one of the four qualitative characteristics which enhances the usefulness of
information. Thus accounting information would be more useful if it can be compared with
similar information from other entities, or from the same entity.
However, it is extremely difficult for entities to have 'comparable' financial information.
Comparability is crucia l to improve fina ncial reporting quality but it can be argued that
comparability is made more d ifficult by t he fact that the Board allows entities to choose
between alternative measurement bases. Environmental, economic, political, cultural,
operational differences could be solved with the existence of accounting choices in the
standards, but these choices could be at t he cost of comparability, especially if there are
internal or external factors influencing the reliable disclosure of an item. A fait hful
representation might lead to comparability, because it should reflect the characteristics of
the asset or liability.
(b) (i) The return on equity (ROE) ratio measures the rate of return which the owners of
issued shares of a company receive on their shareholdings in terms of profitability.
ROE signifies how good the company is in generating profit on the investment it
receives from its shareholders. This metric is especially important from an investor's
Answers 231
perspective, as it can be used ta judge haw efficiently the firm will be able to use
shareholder's investment to generate additional revenues.
The net profit margin (net profit/sales) tells how much profit a company makes on
every dollar of sales. Asset turnover (sales/assets) ratio measures the value of a
company's sales or revenues generated relative to the carrying amount of its assets.
The asset turnover ratio can often be used as an indicator of the efficiency with
which a company is deploying its assets in generating revenue. The equity ratio
indicates the relative proportion that equity is used to finance a company's assets.
The equity ratio is a good indicator of the level of leverage used by a company by
measuring the proportion of the total assets which are financed by shareholders, as
opposed to creditors.
20X5 20X6
Net profit margin 15% 17.3%
Asset turnover 0.8 1.05
Equity ratio 1.43 2.1
Return on equity 17% 38%
(ii) Setting up of special purpose entit y (SPE)
IFRS 10 Consolidated Financial Statements states that an investor controls a SPE

when it is exposed, or has rights, to variable returns from its involvement with the SPE
and has the ability to affect those returns through its power over the SPE. This
revised definition of control focuses on the need to have both power and variable
returns before control is present. Power is the current ability to direct the activities
which significantly influence ret urns. Guidance Co obtains the rewards from the
assets transferred and is exposed to the risks. By transferring their assets t o a SPE,
the asset turnover ratio will be significantly larger. However, the SPE should be
consolidated by Guidance Co in its group financial statements and the property
included in assets and the charge eliminated from revaluation reserves in its single
entity financial statements. The latter will increase shareholder equity.
Miscellaneous transactions
A major concern about using ROE is when a company buys bock its shares, it
decreases the equity on the statement of financia l position and in the case of
Guidance Co, its cash and consequently its total assets. As a result , the
performance metrics - asset turnover and ROE - will be affected. The ROE figure
could produce a misleading indicator as to how well a company is being managed.
As the equity portion of ROE shrinks, the ROE metric gets larger. The ROE calculation
can become meaningless if a company regularly buys back its shares and thus as a
result there may be better metrics for investors to use such as the P/E ratio.
Guidance Co hos raised loon capitol of $20 million during the period and this
amount will not be included in the ROE ca lculations because ROE is based on assets
as opposed to net assets. One company may hove a higher ROE than another
company simply because it finances the business through loon capital rather than
raising equity capitol. It con be argued t hat ROE is not a meaningful measure of
performance, as it tokes no account of the amount of debt involved in creating
profits.
Therefore, return on capitol employed may be a better c urrent measure for
Guidance Co.
Guidance Co hos included the profit from the purchase of on associate in the
current year's figures. If the share of the resu lts of the associate were excluded, this
would allow Guidance Co's profitabilit y to result exclusively from Guidance Co' s
asset base. It could be argued that the full value of the company's reported profit
including the associate could distort the analysis of Guidance Co's performance as
compared to the last financial year.
There is no need to adjust for the original $15 million investment in the associate
because one asset is merely being replaced by another but the total assets remain
the same.

IMlllA
Adjusted am ounts
SPE Shares
propert!:I cancelled Associate Tota/
Sm Sm Sm Sm
Net profit before tax 38 (4) 34
Sales 220 220
Assets 210 50 30 290
Equity 100 50 30 (4) 176
Adj ust ed ca lculations
20X5 20X6 20X6

(adjusted) (unadjusted)
Net profit margin 15% 15.5% 17.3%
Asset turnover 0.8 0 .76 1.05
Equity ratio 1.43 1.65 2.1
ROE 17% 19.3% 38%
It can be seen that if the impact of the transactions in the period were eliminated,
then there has been a significant reduction in ROE and its component parts. The buy
back of shares and the purchase of the associate were legitimate transactions but
they were eliminated in order to determine comparative metrics. The raising of the
loan capita l was also legitimate but was not adjusted for because ROE is based on
assets, not net assets. The transfer of assets to a SPE was contrary to IFRS 10 and
would have been reversed in any event. Although financial metrics are intended to
enable comparisons between companies, the relative performanc e of any particular
company can be affected by transactions both acceptable and unacceptable under
accounting standards.
50 Pensions
Workbook reference. Pensions are covered in Chapter 5.
Top t ips. Pa rt (a)(i) is very straig htforward, but make sure you relate your answer to the pension
schemes of Joydan. In Part (a)(ii) it is important that you have an in-depth knowledge of the
differences between the two schemes rather than just a general view of the differences.
Part (b): for both of the elements in Part (b) you must ensure that you are identifying the rules
which surround the issues and explaining t hem, in order to gain full marks you will need to make
sure that you have applied the rules to the scenario in the question.
Easy marks. There are marks for straightforward bookwork that you can get even if you don't get
a ll the calculations right.
IHtM:i-iH:M::iM
Marks
(a) Joydan (i) Explanation 8

(ii) A scheme 7
B scheme 2
(b) William Provision for relocation costs 4
Curtailment (past service cost) of defined benefit
pension plan 4
25
Answers 233
(a) Briefing note fo r the directors of Joydan
(i) Defined contribution plans and defined benefit p lans
W it h defined contribution plans, the employer (and possibly, as here, current
employees too) pay regular contributions into t he plan of a given or 'defined' amount
each year. The contributions are invested, and the size of the post-employment
benefits paid to former employees depends on how well or how badly the plan's
investments perform. If the investments perform well, the pla n will be able to afford
higher benefits than if the invest ments performed less well.
The B scheme is a defined contribution plan. The employer's liability is limited to
the cont ributions paid.
With defined benefit plons, the size of the post-employment benefits is determined
in advance, ie the benefits are 'defined'. The employer (and possibly, as here, cu rrent
employees too) pay contribut ions into the plan, and the contributions a re invest ed.
The size of the contribut ions is set ot an amount that is expected to earn enough
investment returns to meet the obligation to pay the post-employment benefits. If,
however, it becomes apparent t hat the assets in the fund are insufficient, the
employer will be required to make additional contributions into t he plan to m ake up
the expected shortfall. On the other hand, if the fund's asset s appear to be larger
tha n they need to be, and in excess of what is required to pay the post-employment
benefits, the employer may be allowed to take a 'contribution holiday' (ie st op
paying in contributions for a while).
The main d ifference between the two types of plans lies in who bears the risk : if the
employer bears the risk, even in a small way by guaranteeing or specifying t he
return, the plan is a defined benefit plan. A defined contribution scheme must g ive a
benefit formula based solely on the amount of the contributions.
A defined benefit scheme may be created even if there is no legal obligation, if an
employer has a practice of guaranteeing the benefits payable.
The A scheme is a defined benefit scheme. J oydan, the employer, guarantees a
pension based on the service lives of t he employees in the scheme. The company's
liability is not limited t o the amount of the contributions. This means that the
employer bears the investment risk: if the return on the investment is not sufficient to
meet the lia bilities, the company will need to make good the d ifference.
(ii) Accounting treatment: B scheme
No a ssets or liabilities will be recog nised for this defined contribution scheme,
other than current liabilities to reflect amounts due to be paid to the pension scheme
at year end. The contributions paid by t he company of $10 million will be charged
to profit or loss. The contributions paid by the employees wil l not be a cost to the
compa ny but will be adjusted in ca lculating employee's net salary.
Accounting treatment: A scheme
The accounting treatment is as follows:
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME NO TES
Expense recognised in profit or loss for the year end ed 31 October 20X7
Sm
Current service cost 20.0
Net interest on the net defined benefit liability (10 - 9.5) 0.5
Net expense 20.5
Other comprehensive income: remeasurement of defined benefit plans (for the year
ended 31 October 20X7)
Sm
Remeasurement gains or losses o n d efined benefit obligation (29.0)
Remeasurement gains or losses o n plan assets (excluding amount s
in net interest) 27.5
(1.5)
231t Strategic Business Reporting (SBR) @BPP LEAR\ING

MEDIA
STATEMENT OF FINANCIAL POSITION NOTES
Amounts recognised in statement of financial position
31 October 1 November
20X7 20X6
$m $m
Present value of defined benefit obligation 240 200
Fair value of plan assets (225) (190)
Net liability 15 10
Change in the present value of the defined benefit obligation

$m
Present value of obligation at 1 November 20X6 200
Interest on obligation: 5% x 200 10
Benefits paid (19)
Loss on remeasu rement through OCI (balancing figure) 29
Present value of obligation at 31 October 20X7 240
Change in the fa ir value of plan assets

$m
Fair value of plan assets at 1 November 20X6 190.0
Int erest on plan assets: 5% x 190 9.5
Contributions 17.0
Benefits paid (19.0)
Gain on remeasurement through OCI (balancing figure) 27.5
Fair value of plan assets at 31 October 20X7 225.0
(b) Relocation costs and reduction to net pension liability

A provision for restructuring should be recognised in respect of the relocation of the
provision during the year ended 31 May 20X3 in accordance with IAS 37 Provisions,
Contingent Liabilities and Contingent Assets. This is because William's board of directors
authorised a detailed formal plan for the relocation shortly before the year end (13 May
20X3) and William has raised a val id expectation in affected employees that it will carry
out the restructuring by informing them of the main features of the plan. As the relocation
is due to take within two months of the year end (July 20X3), the time value of money is
likely to be immaterial. Therefore, no discounting is required and a provision should be
recognised at the estimated relocation costs of $50 m illion.
The reduction in the net pension liability as a result of the employees being made
redundant and no longer accruing pension benefits is a cu rtailment under IAS 19 Employee
Benefits. IAS 19 defines a curtailment as occurring when an ent ity significant ly reduces the
number of employees covered by a plan. It is t reated as a type of past service costs. The
past service cost may be negative (as is the case here) when the benefits are withdrawn so
that the present value of the defined benefit obligation decreases. IAS 19 requires the past
service cost to be recognised in profit or loss at the earlier of:
• When the plan curtai lment occurs; and

• When the entity recognises the related restructuring costs.
Here the restructuring costs (and corresponding provision) are recognised in the year
ended 31 May 20X3 and the plan curtai lment will not take place until after the year end in
July 20X3 when the employees are made redundant. Therefore, the reduction in the net
pension liability and corresponding income in profit or loss should be recognised at the
earlier of these two dates, ie when the restructuring costs are recognised in the year ended
31 May 20X3.
Both the relocation costs and income from the reduction in t he net pension liability are
likely to require separate disclosure in the statement of profit or loss and other
comprehensive income or in the notes to the accounts per IAS 1 Presentation of Financial
Statements due to their materiality.
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Answers 23 5
51 Kayte
Workbook references. The Conceptual Framework and interim financial reporting are covered in
chapt er 1. IAS 16 is covered in C hapter 4. IFRS 5 is covered in Chapter 13.
To p tip s. Part (a) required you to discuss the probability recognition criterion in the 2010
Conceptual Framework. Don't be put off by the fact this is the 2010 Conceptual Framework, as
the relevant part of it has been g iven in the question. The question told you which standards to
discuss - make sure you address what it asks for. Part (b)(i) covered the application of IAS 16 and
was demanding, indicative of w hat could be asked in an SBR exam on topics covered in your
earlier studies.
Eas y marks. There were some easy marks available in part (a) for stating the recognition criteria
in t he 2018 Conceptual Framework. In part (b)(ii) you should have been able to appl y the IFRS 5
accounting treatment for non-c urrent assets held for sale even if you were unfamiliar with IAS 34.
Marks
(a) Inconsistent application of the probability criterion (one per example) 3

Changes t o the recognition criteria in 2018 Conceptual Framework 3
6
(b) (i) Vessels sold after 10 years 5
Vessels kept for 30 years 5
Fu nnels 2
12
(ii) Int erim follow same accounting polic ies as for annual
financia l statements
Measure asset at lower of carrying amount and fair value
less costs to sell
1.10.20X3: Recognise impairment loss of $100,000
1.12.20X4: Reverse impairment loss of $120,000 as less than
cumulative impairment losses to date of $45,000
31.5.20X4: Can only recognise $330,000 of t he $430,000
increase in fair value less costs to sell (up to remaining
cumulative impairment losses to date)
5.6.20X4: Recognise gain on disposal
Gain on disposal is non-adjusting event after the reporting
period
7
25
(a) Probability c riterio n

Different accounting standards use different levels of proba bility t o discuss when assets
and liabilities should be recognised in the financial statements.
For example:
• Economic benefits from property, plant and equipment and intang ible assets need to
be probable to be recognised; but to be classified as held for sale, the sale has to be
highly probable.
• Under IAS 37 Provisions, Contingent Liabilities an d Con tingent Assets, a provision

should be p robable to be recognised, but uncertain asset s on the other hand would
have to be virtually certa in to be disclosed. This could lead to a situa tion where two
sides of the same court case have two different accounting treatments despite the
likelihood of payout being identica l for both parties.

• Contingent consideration is recognised in the financial stat ements regardless of the
level of p robability. Rather the fair value is adjusted to reflect the level of
u ncert a int y of the contingent consideration.
The 2018 Conceptual Framework requ ires an item to be recognised in the financia l
statements if:
(a) The it em meets the definition of an element (asset, liability, income, expense or
equity); and
(b) Recognit ion of t hat element provid es users of the financial statement s w ith
information that is useful, ie with:
• Releva nt information about the element

• A faithful representat ion of the element
W hile this will not remove the inconsistencies in recognition criteria that currently exist
across IFRS Standards, it does provide a basis for the IASB to consider when developing
new Standards and revising existing Standards.
Furthermore, the new criteria may mean t hat more assets and liabilities wit h a low
probability of inflow or outflow of economic resources are likely to be recognised. The
crite ria a lso allow for Standards to contain recognition criteria that may be considered
inconsistent , but t his may be a necessary consequence of providing the most useful
information.
(b) (i) Vessels
Vessels sold at ten years old
Kayte's estimate of the residual life of these vessels is based o n a cquisit ion c ost.
This is unaccep t able under IAS 16 Property, Plant a nd Equipment. IAS 16 defines
residual value as:
'The estimated amount tha t an entity would currently obtain from disposal of
t he asset, af ter deducting the estimated costs of disposal, if t he asset were
already of the age and in the condition expected at t he end of its useful life.'
(para. 6)
IAS 16 requires that property, plant and equipment must be depreciated so that
its depreciable amount is a llocated on a systematic basis over its useful life.
Deprecia b le amount is t he cost of an asset less its residua l value. IAS 16 stipulates
that the residual value must be r eview ed at lea st ea c h financ ial y ear-end and,
if expect a tions differ from previous estimates, any change is accounted for
prospectively as a change in estimate under IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors.
Kayte's model implies t hat the residual value of the vessels remains constant through
the vessels' useful life. However, the r esidua l va lue sho uld be adjust ed, particularly
as t he date of sale approaches and the residual value approaches proceeds of
disposal less costs of disposal at the end of the asset's useful life.
Following IAS 16, if t he residual value is greater than an asset's carrying amount,
the depreciation c harge is zero until such time as the residual va lue subsequently
decreases to an amount below the asset's carrying amount. The residual value
should be t he value at the reporting date as if the vessel were already of the age
and condition expected a t the end of its useful life. Depreciable amount is affected
by an increase in the residual va lue of an asset because of past events, but not by
expectation of changes in future events, other t han the expected effects of wear
and tea r.
The usefu l life of the vessels (10 y ears) is sho rter than the t ota l lif e (30 yea rs) so
it is the residual value at t he end of the 10- year useful life that must be est ablished.
Answers 237
Vessels kept for 30 years
Kayte correctly uses a residual value for these vessels based upon the scrap
value of steel. The deprecia b le amou nt of t he vessels is therefore t he cost less the
scrap va lue of steel, and the vessels should be d epreciated over the 30-year period.
The engine is a significa nt part of the asset and should be depreciated separately
over its useful life of ten yea rs until the date of the next overhaul. The cost of the
overha ul sho uld be capita lised (a necessary overha ul is not considered a da y-to-da y
servicing cost) a nd any carrying amount relating to t he engine before overha ul
should be derecognised. Generally however the depreciation of t he original amount
ca pitalised in respect of t he eng ine w ill be calculated to have a carrying amount
of nil when the overhaul is undertaken.
Funnels
The f unnels should be identified as signif icant parts of the asset and depreciated
across their useful lives of 15 years. As t his has not occurred, it will be necessary to
determine what the carrying amount would have been had the funnels been
initially separately identified. The initia l cost of t he f unnels can be determined by
reference t o replacement cost , and the a ssociated depreciation charge determined
using the rate for the vessel (over 30 years). There will t herefore be a significant
carryi ng am ount to be w ritten off at t he time the replacement funnels are
capitalised.
(ii) Property
IAS 34 requirement
In accordance with IAS 34 Interim Financial Reporting, an entity must a pply the
same accounting policies in its interim financial statements as in its annual f inancial
statements. Measurements should be made on a ' year to date' basis. Kayte's interim
financia l statements are for the six months to 30 November 20X3.
Kayte must apply the provisions of IFRS 5 Non-Current Assets Held for Sale and
Discontinued Operations to t he valuation of the property.
Appl ic ation of IFRS 5
In accordance with IFRS 5, an asset held for sale should be m easured at t he lower
of its carrying amount and fair value less costs to sell. Immediately before
classification of the a sset as held for sale, the entit y must recognise impairment in
accord ance w ith applicable IFRS. Any impairment loss is generally recognised in
profit or loss, but if the asset has been measured at a revalued amount under IAS 16
or IAS 38 t he impairment will be t reated as a revaluation d ecrease. Once the asset
has been classified a s held for sale, any impairment loss will be based on t he
difference betw een the adjusted carrying amounts and the fair value less cost
t o sell. The impairment loss (if any) w ill be recognised in profit or loss.
A subsequent inc rease in fair value less costs to sell may be recognised in profit or
loss only to the extent of any impairment previously recognised. To summarise:
Step 1 Calcu late carr ying amount under t he applicable account ing standard,
here IAS 16:
Depreciation of $500,000 per year implies a useful life of ten years,
of which eight yea rs a re rema ining at 1 June 20X3. Depreciat ion must
then be c ha rged for the four mont hs to 1 October 20X3, the date of
classification as held for sale is calcu lated on t he carrying amount net
of the impairment loss incurred on 31 May 20X3, over t he remaining
useful life of eight years:
$5m cost - $1m accumulated deprecia tion - $0.35m impairment /

- - - - - - - - - - - - - - - - - - - - - - - x 4 12
8-year remaining useful life
= $152,083 (rounded to $0.15 million)
238 Strategic Business Reporting (SBR) @BPP LEARhlNG

IAEDIA
So the corrying amount at 1 October 20X3 is $5m - $1m - $0.35m -
$0.15m = $3.5 million
St ep 2 Classified as held for sale. Compare the carrying amount ($3.5 million)
with fair value less costs to sell ($3.4 m illion). Measure at the lower of
carrying amount and fair value less costs to sell, here $3.4 million,
giving an initial write-down of $100,000. Cease depreciation.
St ep 3 Determine fair value less costs to sell at t he date of the interim financial
statements, 1 December 20X3, here given as $3.52 million and compare
with carrying amount of $3.4 m illion. This gives a gain of $120,000.
The impairment previously recognised is: $350,000 + $100,000 =
$450,000. The gain of $120,000 is less than this, and may therefore be
credited to profit or loss, and the property is carried at $3.52 m illion.
Step 4 On 31 Moy 20X4, fair value less costs to sell is $3.95 million. The change
in fair value less cost to sell is recognised but the gain recognised
cannot exceed any impairment losses to dote. Impairment losses to
dote are $350,000 + $100,000 - $120,000 = $330,000, and this is less
than the change in fair value less costs to sell of $430,000 (S3.95m -
$3.52m). This restricted gain of $330,000 is recognised, and the
property is carried at $3.85 million ($3.52m + $330,000).
52 Fill
Marks
(a) A d iscussion of potential measurement basis, NRV and relevant 3

Standards
Application of IAS 2 to the scenario 4
7
(b) A d iscussion of IAS 16 and application to the scenario 4
A d iscussion of IAS 36 and application to the scenario 4
8
(c) A d iscussion of control in the Conceptual Framework and other
relevant Standards 4
A discussion of a business combination per IFRS 3 2
Application of the above discussions to the scenario 4
10
25
(a) (i) Inventories should be valued at t he lower of cost and net realisable value. The
Conceptual Framework acknowledges a variety of measurement bases including
historical cost, current cost, value- in-use and fair value. Historical cost is consistent
with t he cost valuation in IAS 2, however value in use and fair value are not:
• Value-in-use requires the use of the present value of future cash flows.
• Fair value is a market-based measurement, not an entity-specific

measurement. When determining fair value, the assumptions used are those
that market participants would use when pricing the asset, this would not toke
into consideration entity- specific factors like the cost needed t o complete on
asset and sell it.
Answers 239
The Conceptuol Framework is not a Standard and does not override the
requirements of a Standard, therefore in order t o determine NRV, the directors
would need to refer to IAS 2 Inventories.
(ii) IAS 2 defines NRV os the estimated selling price in the ordinary course of business
less the costs of completion and costs of sale.
NRV is on entity-specific measure which should be determined on the basis of

conditions which existed at the date of the statement of financial position.
To estimate NRV, Fill should take into consideration future price movements if they
provide information about the conditions at the reporting date. However, normally
these movements would reflect changes in the market conditions after that date
and therefore would not affect the calculation of NRV.
The NRV w ill be based upon the most reliable estimate of t he amounts which will be
realised for the coal.
Fill should calculate the NRV of the low carbon coal using the forecast market price
based upon when the inventory is expected to be processed and realised. The
forecast market price should be adjusted for the time value of money (where this is
material) and for processing and selling costs to give a reasonable estimate of NRV.
Future changes in the forecast market price or the processing and sale of the low
carbon coal may result in adjustments to the NRV. As these adjustments are c hanges
in estimates, IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
will apply with the result t hat such gains and losses will be recognised in the
statement of profit or loss in the period in which they arise.
Tuto rial not e.
The year-end spot price will provide good evidence of the realisable value of the
inventories at the year end. The forward contract price may be appropriate if the
company has an executory contract to sell coal at a future date. However, if the
company does not have an executory contract, but instead a financial instrument
u nder IFRS 9 Financial Instruments or an onerous contract recognised as a provision
under IAS 37 Provisions, Contingent liabilities and Contingent Assets, t he forward
contract price is unlikely t o be used to calculat e NRV.
(b) IAS 16 Property, Plant and Equipment (PPE) requires an entity to recognise in the carrying
amount of PPE t he cost of replacing part of such an item. When each major inspection
is performed, its cost is recognised in the carrying amount of the item of PPE as a
replacement if the recognition crit eria are satisfied. Any remaining carrying amoun t of
the cost of a previous inspection is derecognised. The costs of perform ing a major
reconditioning are capitalised if it gives access to futu re economic benef its. Such costs
will include the labour and materials costs ($3 million) of performing the reconditioning .
However, costs which do not relate to the replacement of components o r the installation of
new assets, such as routine maintenance costs, should be expensed as incurred.
It is not a cceptable to accrue the costs of reconditioning equipment as there is no legal or

apparent constructive obligation to undertake the reconditioning. As set out above, t he
cost of the reconditioning should be identified as a separate component of the mine asset
at initial recognition and depreciated over a period of two yea rs. This will result in the same
amount of expense being recognised as the proposal to create a provision.
IAS 36 Impairment of Assets says that at the end of each reporting period, an entity is
required to assess whether there is any indication t hat an asset may be impaired. IAS 36
has a list of external and internal indicators of impairment. If there is an indication that an
a sset may be impaired, t hen the asset's recoverable amount must be calculated.
Past and future reductions in selling prices may indicate that the future economic benefits
whic h relate to the asset have been reduced. Mining assets should be tested for impairment
whenever indicators of impairment exist. Impairments are recognised if a mine's carrying
amount exceeds its recoverable amount. However, the nature of mining assets is that they
21+0 St rat egic Business Reporting (SBR) @~•FOi.,

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often have o long useful life. Commodity prices con be volatile but downward price
movements are more significant if they are likely to persist for longer periods. In this case,
there is evidence of a decline in forward prices. If t he decline in prices is for a significant
proportion of the remaining expected life of the mine, this is more likely to be an
impairment indicator. It appears that forward contract prices for two years out of the three
years of the mine's remaining life indicate a reduction in selling prices. Based on market
information, Fill has also calculated that the three-year forecast price of coal will be 20%
lower than t he current spot price (Part (a) of question).
Short-term market fluctuations may not be impairment indicators if prices are expected to
return to higher levels. However, despite the difficulty in making such assessments, it would
appear that the mining assets should be tested for impairment.
(c) The Conceptual Framework for Financial Reporting states that an entity controls an
economic resource if it has the present ability to d irect t he use of the economic resource
and obt ain the economic benefits that may flow from it. An entity has the ability to direct
the use of an economic resource if it has the right to deploy that economic resource in its
activities. Although control of an economic resource usually arises from legal rights, it can
also arise if an entity has the present ability to prevent all other parties from directing the
use of it and obtaining the benefits from the economic resource. For an entity to control a
resource, the economic benefits from the resource must flow to the entity instead of
another party.
Although the Conceptual Framework gives some guidance on the definition of control,
existing IFRSs also provide help in determining whether Fill controls the mine and therefore
should account for it as a business combination:
• IFRS 10 Consolidated Financial Statements states that on investor controls an

investee when it is exposed, or has rights, to variable returns from its involvement
with t he investee and has t he ability to affect those returns through its power over
the investee.
• IFRS 15 Revenue from Contracts with Customers lists indicators of the transfer of
control of an asset to a customer. One of the indicators is that the customer has the
significant risks and rewards of ownership of t he asset which is basically exposure to
significant variations in the amount of economic benefits.
A business combination is defined in IFRS 3 Business Combinations as a transaction or

other event in which an acquirer obtains control of one or more businesses. A business is
further defined as 'an integrated set of activities and assets that is capable of being
conducted and managed for the purpose of providing a return .. .' Thus the producing mine
represents a business and Fill now owns a majority of the interest in the business.
However, this is not a business combination as Fill does not have the ability to affect
decisions unless another participant agrees to vote with Fill. Although Fill will control 52%
of the mine, it cannot direct the use of the economic resource unless one of the other
participants agrees with an operating decision proposed by Fill and approval is given by
72% of participants. However, Fill can prevent the other parties from directing the use of
the mine if the purchase goes ahead, because the other two parties cannot make an
operating decision without Fill's consent. Prior to the purchase of the additional investment,
the approval of decisions required agreement by 72% of the participating interests. A joint
control situation existed between the entities. Following the additiona l purchase, there is
still a joint control situation as Fill's interest does not meet the 72% threshold. Therefore the
transaction will be treated as an asset acquisition and no goodwill will arise on the
acquisition.
Answers 21t1
53 Zedtech
U@il:i·iH:ii::i&
Marks
(a) (i) Discussion of recognition per current Conceptual Framework 2

Discussion of the ED's approach to recogn ition 2
Comparison and cont rast 3
7
(ii) Discussion of IAS 12 recognition criteria 2
Discussion of IAS 37 recognition c riteria 2
Discussion of recognit ion in business combinations 2
6
(b) (i) Discussion of the collectabilit y of consideration 2
Discussion of performance obligations 3
5
(ii) Application of the above principles to:
0 inventory 2
lnventoryX 3
Collectability assessment 2
7
25
(a) (i) Existing IFRS Standards did not consistently apply the recognition criteria included in
the 2010 Conceptual Framework and t hus t he revised 2018 Conceptual Framework
set s out new principles for t he recognition in the financial statements. The revised
2018 Conceptual Framework defines recognition as the process of capturing for
inclusion in the financial statements an item wh ich meets t he definition of an
element. Assets and liabilities are both elements of the financial statements, along
with equity, income and expenses. This approach requ ires recognition decisions to
be made by reference to t he qualitative characteristics of useful financial
information.
The revised 2018 Conceptual Framework requires that t he elements of financial

statements should be recognised if it provides users of financial statements with
information that is useful, ie with:
• Relevant information about the element

• A faithful representat ion of the element
Recognition is subject to cost con st ra int s: t he benefits of the information provided

by recognising an element should justify the costs of recogn ising that element.
Recognition may not provide relevant information where it is uncertain whether an

asset exists, or is separable from goodwill, or whether a liability exists and where
there is only a low probability t hat an inflow or outflow of economic benefits will
occur. Additionally, if t he level of measurement uncertainty is so high that the
resulting information has lit tle relevance, t hen recognition should not occur. The IASB
decided that the revised 2018 Conceptual Framework should not cont a in a
'probability criterion' , which means t hat there may be recognition of assets or
liabilities wit h a low probability of an inflow or outflow of economic benefit.
(ii) According to IAS 12 Income Taxes, deferred tax liabilities are recognised for a ll
taxable temporary differences, with three exceptions. However, deferred tax asset s
a re only recognised to the extent that it is probable that taxable profit will be
available against which the deductible temporary differences can be utilised. Thus
21+2 Strategic Business Reporting (SBR) @BPPLEAR~lt C

IA£1llA
the standard applies a probability threshold to deferred tax assets but not ta
liabilities.
Although the 2010 Conceptual Framework gave the same threshold for recognit ion
of assets and liabilities, IAS 37 Provisions, Contingent liabilities and Contingent
Asset s requ ires the recognition of assets when they are virtually certa in but for
liabilities when they are probable, defined as more likely than not. IAS 37 also
requires the recognition of liabilities for constructive obligations. Thus, t he definition
of an obligation under IAS 37 can often be broader than in other standards, for
example, IAS 32 Financial Instruments: Presentation. IAS 37 includes a probable
outflow threshold for the recognition of provisions but t he recognition threshold
does not apply to obligations wh ich normally fall w ithin the scope of IAS 37 when
they are acquired as part of a business combination.
IFRS 3 Business Combinations requires recognition of the contingent liabilities of

a subsidiary irrespective of t heir probability. IFRS 10 Consolidated Financial
Statements requires recognition at fair value of contingent consideration t o be
received for a business which is disposed of, even if the inflow is not probable. Thus,
these items are recognised under IFRS 3/IFRS 10 when they arise from a business
combination, whereas they are not recognised in the normal course of business.
(b) (i) IFRS 15 Revenue from Contracts with Customers states that on entity must first
identify the contract with the customer and as part of that identification, the entity
has to determine whether it is probable that the consideration which the entity is
entitled to in exchange for the goods or services will be collected. An assessment of
collectability is included as one of the criteria for determining whether a contract
with a customer exists.
IFRS 15 states t hat the entity must identify the performance obligations in t he
contract. Once an entity has identified the contract w ith a customer, it evaluates the
contract ual terms and its customary business practices to identify all the promised
goods or services wit hin the contract and determine which of those promised goods
or services will be treated as separate performance obligations. An entity will hove to
decide whether the obligations ore distinct or part of a series of distinct goods and
services wh ich are substantially the same and have the same pattern of transfer to
the customer. A good or service is distinct if the customer can benefit from the good
or service on its own.
(ii) Technology entities often ent er into transactions involving t he delivery of multiple
goods and services.
As regards 0inventory, it seems that all of the individual goods and services in t he
contract are distinct because the entity regularly sells each element of the contract
separately and is not providing the significant service of integrating the goods and
services. Also, as the customer could purchase each good and service without
significantly affecting the other goods and services purchased, there is no
dependence upon individual elements of the service. Thus hardware, professional
services and hosting services should each be account ed for as separate performance
obligations.
Regarding lnventoryX, the professional services are distinct because Zedtech

frequently sells those services on a stand-alone basis.
However, the hardware is always sold in a combined contract with the professional
and hosting services and the customer cannot use the hardware on its own. As a
result, the hardware is not distinct and because the hardware is integral to t he
delivery of the hosted software, the hardware and hosting services should be
accounted for as one performance obligation while the professional services, which
are d istinct, would be a separate performance obligation.
Answers 21+3
When performing the collectability assessment, Zedtech only considers the
customer's ability and intention ta pay the expected consideration when due.
Zedtech has entered into an arrangement and does not expect to collect the full
contract ual amount such that t he contract contains an implied price concession.
Therefore, Zedtech needs to assess the collectability of the amount to which it
expects to be entitled, rather t han the stated contractual amount. Zedtech assesses
whether collectability is probable, whether the customer has the ability and intent
to pay the estimated transaction price. Zedtech w ill determ ine that the amount
to which it expects to be entitled is $2.4 million and performs the col lectability
assessment based on that amount, rather t han the contractual price of $3 million.
51+ Emcee
W o rkboo k references. IAS 38 Intangible Assets, IAS 23 Borrowing Costs and IFRS 13 Fair Value
Measurement are covered in Chapter 4. IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations is covered in Chapter 14 and IAS 24 Related Party Disclosures in Chapter 2.
To p tips. This is a multi-standard question in which the three parts are independent. You should
scan read all parts of the question and attempt the part you feel most comfortable w ith first. The
issues covered are borrowing costs (Par t (a)), intangible assets, non-current assets held for sale
and impairment of assets (Part (b)) and fair value measurement and related party transactions
(Part (c)). The recommended approach is to discuss the general principles of the relevant
standards and then apply them to the scenario. Part (b) is broken d own into four elements so
ensure you provide an answer to each.
Eas y marks. No part s of t his question are particularly easy - the main way to get the marks is to
break down the scenario into its constituent parts and make sure you deal with each relevant
stand ard.
Marks
(a) Discussion of IAS 23 requirements and calculation of capitalised interest

- 1 mark per point to a maximum 6
(b) Discussion of IAS 38 recognition requirements, applicability of IFRS 5 and
impairment under IAS 36 - 1 mark per point to a maximum 11
(c) Discussion of IFRS 13 and IAS 24 - 1 mark per point to a maximum 8
25
(a) Bo rrowing costs
IAS 23 Borrowing Costs requires borrowing costs incurred on acquiring or constructing an

asset to be ca pitalised if the asset takes a substantial period of time to be prepared for its
intended use or sale. Borrowing costs should be capitalised during construction and include
the costs of general borrowings which would have been avoided if the expenditure on the
a sset had not occurred. The general borrowing costs are determined by applying the
weighted average of the borrowing costs applicable to the general pool
The weighted-average carrying amount of the stadium during the period is:
$(20 + 70 + 120 + 170)m/4, t hat is $95 million.
The capitalisation rate of the borrowings of Emcee during the period of construction is 9%
per annum, therefore the total amount of borrowing costs to be capitalised is the weighted-
average carrying amount of the stadium multiplied by the capitalisation rate.
That is ($95m x 9% x 4/ 12) $2.85 million.
21tlt Strategic Business Reporting (SBR) @BPP l£-"IN NC

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(b) Players' registrations
Acquisition
IAS 38 Intangible Assets states that an entit!:j should recognise an intangible asset where it
is probable that future economic benefits will flow to the entity and the cost of the asset
con be measured reliably. Therefore, the costs associated with the acquisition of players'
registrations should be capitalised at the fair value of the consideration payable. Costs
would include t ransfer fees, league levy fees, agents' fees incurred by the club and other
directly attributable costs. Costs also include the fair value of any contingent
consideration, which is primarily payable to the player's former club with associated
league levy fees, once payment becomes probable. Subsequent reassessments of the
amount of contingent consideration payable would be also included in the cost of the
player's registration. The estimate of the fair value of the contingent consideration payable
requires management to assess the likelihood of specific performance conditions being
met, which would trigger the payment of the contingent consideration. This assessment
would be carried out on on individual player basis. The additional amount of contingent
consideration potentially payable, in excess of the amounts included in the cost of players'
registrations, would be disclosed. Amounts capitalised would be fully amortised over the
period covered by the player's contract.
Extension
Where o ploying contract is extended, any costs a ssociated with securing the extension
ore added to the unamortised carrying amount ot the dote of the extension and the
revised carrying amount is amortised over the remaining revised contract life.
Sole of registrations
Playe r reg istrations would be classified as assets held for sale under IFRS 5 Non-
Current Assets Held for Sole and Discon tinued Operations when their carrying amount is
expected to be recovered principally through a sale transaction and a sole is considered
to be highly probable. Additionally, the registrations should be actively marketed by
Emcee, which it appears that t hey are. It would appea r that in these circumstances that
management is committed to a pion to sell the registration, t hat the asset is available for
immediate sale, that an active programme to locate a buyer is initiated by circu lating
clubs. IFRS 5 requires that it is unlikely t hat the plan to sell the registrations will be
significantly changed or withdrawn. In order to fulfil the last criteria of IFRS 5, it may be
prudent to only c lass these registrations as held for sale where unconditional offers have
been received prior to a period end.
However, because of the subjectivity involved, in the case of player registrations these
assets would be stated at the lower of t he carrying amount and fair value less costs to sell,
as t he carrying amount will already be stated in accordance wit h IFRSs.
Gains and losses on disposal of players' registrations would be determined by comparing

the fair value of the consideration receivable, net of any transaction costs, with the
carrying amount and would be recognised in profit or loss within profit on disposal of
players' registrations. Where a part of the consideration receivable is contingent on
specified performance conditions, this amount is recognised in profit or loss when the
conditions are met.
The player registrations disposed of, subsequent to the year end, for $25 million, w ith an
associated net book value of $7 million, wou ld be disclosed as events after the reporting
date.
Impairment review
IAS 36 Impairment of Assets states that entities should annually test their assets for
impairment. An asset is impaired if its carrying amount exceeds its recoverable amount
which is the higher of the asset's fair value less costs of disposal and its value in use. It is
difficult to determine t he value in use of an individual player in isolation as that player
(unless via a sale or insurance recovery) ca nnot generate cash flows on his own. Whilst any
individual player cannot really be separated from the single cash-generating unit (CGU),
Answers 21+5
being the basketball ar football team, there may be certain circumstances where a player
is taken out of the CGU, when it becomes clear that they w ill not play far the club again. If
such circumstances arise, the ca rrying amount of the player should be assessed
against the best estimate of the player's fa ir va lue less any c a st s t o sell and an
impairment c ha rge made in profit o r lass, which reflects any loss arising.
(c) Valuation of stadiums
IFRS 13 Fair Value Measurement would value the st adiums at the price w hich would b e
rec eived t a sell t he asset in an o rderly t ransa c tion between market part icipants at the
measurement date. The price would be the one which maximises t he value of the asset or
the group of assets using the principal of the highest and best use. The price wou ld
essentially use Level 2 inputs which ore inputs other than quoted market prices included
within Level 1 which are observable far the asset or liability, either directly o r indirectly.
Property naming rights present complications when va luing property. The status of t he
property dictates its suitability far inviting sponsorship attached to its name. It has nothing
to do with t he property itself but this can be worth a significant amount. Therefore, Emcee
could inc lude t he pro perty naming rig hts in t he valuatio n of t he stadiums and write it off
over t hree years.
IAS 24 Related Party Disclosures sets out t he criteria far two entities to be treated as
related parties. Such criteria include being members of t he same group or where a person
or a close member of that person's family is related to a reporting ent ity if that person has
control or joint control over the reporting entity. IAS 24 deems that parties are not related
simply because they have a director or key manager in common. In this case, there are
t wo direct o r s in common and it appears as though the entities are not related . However,
the regulator will need to est ablish whether t he spo nso rs hip d ea l is a related party
tra nsact ion (RPT) far the purpose of t he financial cont rol provisions. There would need to
be demonstrat ed that the airline may be expected to influence, or be influenced by, the
club or a related party of the club. If the deal is deemed to be an RPT, the regulato r will
consider whether the sponsorship is at fair value.
55 Scramble
W o rkbook references. Intangible assets a nd impairment are covered in Chapter 4. IFRS 9

Financial Instruments is covered in Chapter 8.
To p tips. Parts (a) and (b) were on impairment testing. You may have found Part (b), requiring
determination of the discount rate to be used, rather difficult, and you may have needed to draw
on your financia l management studies. Part (c) was on intangible assets (agents' fees on transfer
of players to the club and extension of players' contracts) and an IFRS 9 financial a sset (rights to
ticket sales of another football club).
Easy marks. There are no obvious easy marks in t his question.
IHiM:\-fH:ii::i♦
Marks
(a) Intangible assets - subjective assessment 7

(b) Cash-generating units - subjective assessment 8
(c) Intangible assets - subjective assessment 10
25
21+6 Strategic Business Reporting (SBR) @"r'"·'

BPP
L[t,RNINC
(a) Internally developed intangibles
IAS 38 Intangible Assets allows internally developed intangibles to be capitalised

provided certain criteria (technological feasibility, probable future benefits, intent and
ability t o use or sell the software, resources to complete the software, and ability to
measure cost) are met. It is assumed, in the absence of information to the contrary, that
they have; accordingly Scramble's treatment is correct in t his respect .
Scramble is also correct in expensing the maintenance costs. These should not be
capitalised as they do not enhance t he value of the asset over and above t he original
benefits.
As regards subsequent measurement, IAS 38 requires t hat an entity must choose either
the cost model o r the revaluation model for each class of intangible asset. Scramble has
chosen cost , and this is acceptable as an account ing policy.
Intangible assets may have a finite or an indefinite useful life. IAS 38 states that a n
entity may treat an intangible a sset as having an indefinite useful life, when, having regard
to a ll relevant factors there is no foreseeable limit to the period over which t he asset is
expected t o generate net cash inflows for the entity.
'Indefinite' is not the same as 'infinite'. Computer software is mentioned in IAS 38 as an

intangible that is prone to technological obsolescence and whose life may therefore be
short. Its useful life should be reviewed each reporting period to determine whether
events and circumstances continue to support an indefinite useful life assessment for t hat
a sset. If th ey do not, the change in the useful life assessment from indefinite to finite should
be accounted for as a change in an accounting estimate.
The asset should also be assessed for impairment in accordance with IAS 36 Impairment
of Assets. Specifically, the ent it y must test t he intangible asset for impairment annually,
and whenever there is an indication that the asset may be impaired. The asset is test ed by
comparing its recoverable amount with it s carrying amount.
The cash flows used by Scramble to determine value in use for the purposes of impairment
testing do not comply with IAS 36. Scramble does not analyse or investigat e the
differences bet ween expected and actual cash flows, but this is an important way of
testing the reasonableness of assumptions about expected cash flows, and IAS 36 requires
such assumptions to be reasonable and supported by evidence.
Scramble is also incorrect to include in its estimate of future cash flows those expected to
be incurred in improving the games and the expected increase in revenue resulting
from that expense. IAS 36 requires cash flow projections to relate to the asset in its current
condition. Nor should cash flow estimates include tax payments or receipts as here.
(b) Discount rate for impairm ent
While the cash flows used in testing for impairment are specific to the entity, the discount
rate is supposed to appropriately reflect the c urrent market assessment of the time
va lue of money and the risks specific to the asset or cash-generating unit. When a
specific rate for an asset or cash-generating unit is not d irectly available from the market,
which is usually the case, an estimat ed discount rate may be used instead. An estimate
should be made of a pre-tax rate that r eflects th e cu rrent market a ssessment of the
time value of m oney and the risks specific to the asset that have not been adjusted for
in the esti mate of future cash flows. According to IAS 36, this rate is the return that the
investors would req uire if they chose an investment t hat would generate cash flows of
amounts, timing and risk profile equivale nt to those that the entity expect s to derive from
the asset s.
Rates that should be considered are the entity's weighted average cost of capital, the
entity 's incremental borrowing rate or other market rates. The objective must be to obtain a
rate which is sensible and justifiable. Scramble should not use the risk- free rate adj usted by
the company specific average credit spread of outstanding debt ra ised two years ago.
Inst ead the credit spread input applied should reflect the c urrent market assessment of
the c redit spread at the time of impairment t esting, even though Scramble does not
intend raising any more finance.
Answers 21t7
Disclosures
W ith regard to the impairment loss recognised in respect of each cash-generating unit,
IAS 36 requires disclosure of:
• The amount of t he loss

• The events and circumsta nces that led t o the loss
• A description of the impairment loss by class of asset
It is no defence to maintain that t his information was common knowledge in the market.
The disclosures are still needed. It should be noted that IAS 1 requires disclosure of material
items, so this information needs to be disclosed if the loses are material, with materiality
determ ined using a suitable measure such as percentage of profit before tax.
(c) Recognition of intangible a ssets
Registration rights and agents' fees

The relevant standard here is IAS 38 Intangible Assets. An intangible asset may be
recognised if it is contro lled by the entity (it g ives the entity the power to benefit from t he
asset), if it meets the identifiability criteria in IAS 38, if it is probable t ha t future economic
benefits attributable to the asset will flow to the entity and if its fair value can be measured
reliably. For an intangible asset to be identifiable the asset must be separable or it must
arise from contractual or other legal rights. It appears that these criteria have bee n met :
(i) The registration rights are contractual.
(ii) Scramble has control, because it may transfer or extend t he rights.
(iii) Economic benefits will flow to Scramble in the form of income it can earn w hen fans
come to see the player play.
IAS 38 specifies the items that make up the cost of separately acquired assets:
(i) Its purchase price, including import duties and non-refundable purchase taxes, after
deducting trade discounts and rebates; and
(ii) Any d irectly attributable cost of preparing the asset for its intended use.
IAS 38 specifically mentions, as an example of directly attributable costs, 'professional fees

arising directly from bringing the asset to its working condition'. In this business, the
players' registration rights meet the definition of intangible a ssets. In addition,
Scramble is incorrect in believing that the agents' fees paid on extension of players'
contracts do not meet the criteria to be recog nised as intangible assets. The fees are
incurred to service the player registratio n rights, and should therefore be capitalised as
intangible a ssets.
Rights to revenue from ticket sales
Whether Rashing can show these rights as intangible asset s depends on whether the IAS 38
criteria have been met. Since Rashing has no discretion over the pricing of the tickets and
cannot sell them, it cannot be said to control the asset. Accordingly, the rights cannot be
t reated a s an intangible asset.
The entity is only entit led to cash generated from ticket sales, so the issue is one of a
contrac tua l right to receive c a sh. The applicable standard is therefore not IAS 38 but
IFRS 9 Financial Instruments, under which the rights to ticket revenue represent a financial
asset.
IFRS 9 has two classifications for financial assets: amortised cost and fair value. Financial
assets are classified as being at amortised cost if both of the fol lowing apply.
(i) The asset is held with in a business model whose objective is to hold the a ssets to
collect t he contractua l cash flows.
(ii) The contractual terms of the financial a sset give rise, o n specified dates, to cash
flows that are solely payments of principal a nd interest on t he principal o utstanding.

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All ot her financial assets are mea sured at fair va lue.
Rashing's receipts are regular cash flows, but they are based on ticket revenues, which are
determ ined by match attendance. Therefore, they are not solely payments of principal and
interest, and do not meet the criteria for classification at amortised cost. Consequently,
the financial asset should be classified as being at fair value under IFRS 9.
56 Estoil
Workbook reference. Impairment is covered in Chapter 4 of your Workbook .
Top tips. IAS 36 is brought forward knowledge from earlier studies, however, in SBR the depth of
discussion required is greater, and the scenario requires more thought. Part (a) required a
discussion of factors to take a ccount of in conducting an impairment test. There are five factors
provided in the question a nd you should use these as headings under whic h t o structure your
answer. The discussion required drew on your financial management knowledge (eg WACC).
Eas y marks. There are no obvious easy marks in t his question.
H@il:i-lH:M::i♦
Marks
(a) C hanges in circumstances 3

Market capitalisation 2
Allocating goodwill 2
Valuat ion issues 6
Disclosures 2
15
(b) Discount rate 5
Cash flow forecast 5
10
25
(a) Entities must determine, at each reporting date, whether there are any indications that
impairment has occurred. Ind icators of impairment may be internal or ext ernal. The
following factors need to be considered when conducting an impairment test under IAS 36
Impairment of Assets.
(i) C hanges in circumstances in the repo rting period

Circumstances may change d ue to internal factors, for example matters as physical
damage, adverse changes to the methods of use of the asset, management
restructuring and over-estimation of cash flows, and external fact ors, such a s
adverse changes in the markets or business in which the asset is used, or adverse
changes to the technological, econo mic or legal environment of the business.
If such indicators come to light between the date of t he impairment t est and the end
of t he next reporting period, more than one impairment test may be required in
the accounting period. In addition, tests for im pairment of goodwill and some other
inta ngible assets may be performed at a ny t ime d uring the accounting period,
provided it is performed at the same time each year. Not all goodwill is tested at the
y ear end - some ent ities test it at an interim period . Should impairment indicators
arise after the annual im pairment test has been performed, it may be necessary to
test goodwill for impairment again at t he year end.
A possible indicator of impairment is volatility in the market, for example, sharp

changes in commodity prices may cause t he assets of m ining and energy companies
to be impaired. In such cases, the assets affect ed should be tested in the interim
period .
Answers 21t9
(ii) Market capitalisation
A strong indicator of impairment is when t he carrying amount of an entity's assets
exceeds the entity's market capitalisation, suggesting that the entity is overvalued.
However, there may not be a direct correlation between the market capitalisation
and the impairment loss arising from a lower return generated on the entity's assets
-th e market may have taken other factors into account. The discrepancy does,
however, highlight the need for the entity to examine its cash-generating units,
and possibly to test goodwill for impairment. The reason for the shortfall must be
examined and understood, even t hough IAS 36 does not require a formal
reconciliation between an entity's market capitalisation, its fair value less costs to
sell and its value in use.
(iii) Allocating goodwill to cash- generating units

Goodwill arising on an acquisition is required to be allocated to each of the
acquirer's cash-generating units (CGUs), or to a group of CGUs, that are expected
to benefit from the synergies of the combination. If CGUs are subsequently revised
or operations disposed of, IAS 36 requires goodwill to b e reallocated, based on
relative va lues, to the units affected.
The difficulty w ith t his is that IAS 36 does not give guidance as to what is meant
by relative va lue. While fair value less costs t o sell (FVLCS) could be used, this is
not mandated by the standard. However, the entity may still need to carry out a
valuation process on the part retained. Va lue in use (VIU) is a possibility, but the
measure needs to be one that con be applied equally to both the part retained and
the part disposed of. VIU has the obvious problem that it w ill be much the same as
FVLCS for t he operations disposed of, but there could be significant differences
between VIU and FVLCS for t he part retained. Alternatively, there could be
reasonable ways of estimating relative value by using an appropriate industry or
business surrogat e, for example revenue, profits, industry KPls.
(iv) Valuation issues
The basic principle of IAS 36 is that an asset should be carried at no more than its
recoverable amount, that is the amount to be recovered through use or sale of the
asset . If an asset's val ue is higher than its recoverable amount, an impairment
loss has occurred. The impairment loss should be written off against profit or loss for
the year.
The recoverable amount is defined as the higher of the asset's fair value less
cost s of disposal and the asset's value in use. Measuring both of these requires the
use of estimates and assumptions, some of which may be problematic.
(1) Fair value less cost s of disposal is defined a s the price that would be
received to sell the asset in an orderly transaction between market
participants at the measurement date under current market cond itions, net of
costs of disposal. IAS 36 g ives a 'hierarchy of evidence' for this, with 'price in a
binding sale agreement' at the top, only likely to be available if the asset is
held for sale, and allowing, in the absence of any active market, estimates
based on a discounted cash flaw (DCF) model, which may not be reliable.
(2) Determining the types of future cash flows which should be included in the
measurement of VIU can a lso be difficult. Under IAS 36 an asset or CGU
must be tested in its current status, not the status that management wishes it
was in or hopes to get it into in the near future. Therefore, the standard
requires VIU to be measured at the net present va lue of the future cash flows
the entity expects to derive from the asset or CGU in its current condition over
its remaining useful life. This means that it is not appropriate to take account
of management plans for enhancing the performance of the asset or CGU,
even t hough these may bring a bout an increase in value.

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(3) While the cash flaws used in testing far impairment are specific ta the entity,
the discount rate is supposed ta appropriately reflect the current market
assessment af the time value af money and the risks specific to the asset
or cash-generating unit. When a specific rate far an asset or cash-
generating unit is not directly available from the market, which is usually the
case, the discount rate t o be used is a surrogat e. An estimate should be made
of a pre-tax rate that reflects the current market assessment of the time
value of money and the risks specific to the asset that have not been
adjusted far in the estimate of future cash flows. According t o IAS 36, this rat e
is the return that the investors would require if th ey chose an investment that
would generate cash flows of amount s, timing and risk profile equivalent to
t hose that the entity expects to derive from the assets.
Rates that should be considered are the entity 's weighted average cost of
capita l (WACC), the entity ' s incrementa l borrowing rate or other market rates.
The objective must be to obtain a rate which is sensible and justifiable.
(4) The test is further complicated by the impact of taxation. IAS 36 requires that
VIU be measured using pre-tax cash flows and a pre-tax discount rate , but
WACC is a post-tax rate, as are most observable equity rates used by va luers.
(5) There is a need for consistency in determining the recoverable amount and
carrying amount which are being compared. For example, in th e case of
pensions, there can be significant d ifferences between t he measurement basis
of the pension asset or (more likely) liability and the cash flows that relate to
pensions.
(6) IAS 36 requires that corporate assets must be alloca t ed to a cash-generating
unit on a 'reasonable a nd consistent basis, but does not expand on this.
(v) Disclosures
With regard to the impairment loss recognised in respect of each cash-generating
unit, IAS 36 would d isclosure of :
(1) The amount of t he loss
(2) The events and circumstances t hat led to the loss
(3) A description of the impairment loss by class of asset
It is no defence to maintain that this information was common knowledge i n the
market. The disclosures are still needed.
(b) (i) Discount rate
Estoil has not complied with IAS 36 Impairment of Assets in its use of one discount
rate far all cash-generating units (CGUs) regardless of the currency of the country in
which the cash flows are generated . IAS 36 requires that future cash flows must be
estimated in the c urrency in which they will b e generated and then discount ed
using a discount rate appropriate for that currency. The present value thus
ca lc ulated must be translated using the spot exchange rate at the date of the
val ue in use ca lcu lation.
The currency in which the estimated cash flows are denominated has an impact on
many of t he inputs to the weighted average cost of capital (WACC) ca lculation,
including the risk-free interest rate. Estoil was incorrect in using the ten- ye ar
government bo nd rate for its own jurisdiction as the risk-free rote because
government bond rotes differ between countries due to d ifferent expectations about
future inflation, and so there may be a discrepancy between the expected inflation
reflected in the estimated cash flows and the risk- free rate.
IAS 36 requ ires that the discount rate should appropriately reflect the c urrent
market assessment of the t ime val ue of money and the risks specific to the asset
o r cash-generating unit. Applying one discount rote for a ll the CGUs does not
achieve this. The WACC of the CGU or of t he company of wh ich th e CGU is
currently port should generally be used to determine the discount rote. The
company 's WACC may only be used for all CGUs if t he risks associated with the
individua l CGUs do not materiall y diverge from the remainder of the group, and this
is not evident in the case of Estoil.
Answers 2 51
(ii) Cash flow forec asts
IAS 36 requ ires that any cash flow projections ore based upon reasonable and
supportable a ssumptions over a maximum period of five years unless it can be
proven t ha t longer estimates ore reliable. The assumptions should rep resent
management's best estimate of the range of econo mic conditio ns expected to
obtain over the remaining useful life of the asset. Management must a lso assess
the reasonableness of the assumptions by examining the reasons for any differences
between post forecasted cash flows a nd actual cash flows. The assumptio ns that
form the basis for current c a sh flow projec tio ns must b e consistent w ith past
actual outcomes.
Fariole has fa iled t o co mply w ith the requirements of IAS 36 in the preparation of its
cash flow forecasts. Although t he realised cash flow forecasts for 20X4 w e re
negative and well below projected cash flows, the directors significantly increased
budgeted cash flows for 20X5 . This increase was not justified, and costs doub ts
on Foriole's ability to budget realistically .
IAS 36 requ ires estimates of future cash flows to include:
(1) Projections of cash inflows from t he continuing use of the asset
(2) Projections of cash outflows which are necessarily incurred to generate the
cash inflows from continuing use of the asset
(3) Net cash flows to be received (or paid) for the disposal of the asset at the end
of its useful life
Forecast cash outflows must include those relating to the day-to-day servicing of
the asset. This will includ e future cas h o utflows needed t o maint a in the level of
econo mic benefits expect ed to b e g ene rated by the a sset in it s c urrent
c onditio n . Fariole hos not taken into account expected changes in working capital
a nd capital expenditure, but it is ver y likely that investments in working capital a nd
capital expenditure wou ld be necessary to maintain the assets of the CGUs in their
current cond ition.
In conclusion, t he cash flow forec a st s used by Fariole are not in a ccord ance w it h
IAS 36.
57 Evolve
Workbook references. IAS 32 Financial Instruments: Presentation and IFRS 9 Financial
Instruments ore covered in Chapter 8. IFRS 5 Non-current Assets Held for Sole and Discontinued
Operations is covered in Chapter 14. IAS 16 Property, Plant and Equipment and IAS 40 Investment
Property are covered in Chapter 4 and IAS 12 Income Taxes in Chapter 7.
To p tips. Port (a) is tricky. It asks how the potential payment of cash in the future t o equity
shareholders should be classified . It had to be classified as a financial liability as there was a
contractual obligation to deliver cash as a result of a put option to sell the rights back to the
company. An event after the reporting period provided additional evidence of the valuation a nd
should therefo re be treated as an adjusting event. Port (b) is more mainstream. The directors hod
not c lassified the assets of a subsidiary as held for sale, even though the IFRS 5 criteria were met,
on the grounds that they d id not have a binding agreement to sell. However, this is not required
for a sale to be considered 'highly probable' under IFRS 5, and so the assets should have been
c lassified as held for sale. Part (c) required consideration of three issues. First, a gain arising
where a subsidiary which was purchased at less than the market value of its sole asset sh ould not
be treated as a bargain purchase because this treatment is only available for a business
combination, and the substance of the transaction was the purchase of an asset rather than a
business combination. Second, the company wishes to use the cost model, the asset should have
been recorded at cost, even if this is less than market value, so the potential gain should not have
been recorded in profit or loss or added to t he cost of t he asset. Third , the deferred tax liability
arising on the difference from market value should not be capita lised as it is not linked to bring ing
the asset to the condit ion necessary for its operations,
Easy marks. There ore no easy marks in this question. Marks are not as d ifficult to earn in Port
(b), as opposed t o Parts (a) or (c).
252 Strategic Business Reporting (SBR) @BPP L(AAN NG

Mfr)l.\
U@il:i·iH:h::i&
Marks
(a) 1 mark per paint up to maximum 9
25
(a) Obligation to purchase own equity instru ments

A financial liability for the present value of t he maximum amount payable to shareholders
should be recognised in the financial statements as of 31 August 20X6. At 31 August 20X6,
the rights are equivalent to a written put option because they represent for Evolve a
purchase obligation w hich gives shareholders the right to sell the entity's own equity
instruments for a fixed price. The fundamental principle of IAS 32 Financial Instruments:
Presentation is that a financial instrument should be classified as either a financial liability
or an equity instrument according to the substance of the contract, not its legal fo rm, and
the definitions of financial liability and equity instrument. IAS 32 states that a contract
which contains an entity's obligation t o purchase its own equity instruments gives rise to a
financial liability, which should be recognised at the present value of its redemption
amount. lAS 32 also states t hat a contractual obligation for an entity to purchase its own
equity instruments gives rise to a financial liability for the present value of the redemption
amount even if the obligation is conditional on the counterparty exercising a right to
redeem , as is the case with t he scrip issue of Evolve.
Evolve had set up the conditions for the share capital increase in August 20X6 and,
therefore, the contract gave rise to financial liabilities from that date and Evolve should
have recognised a financial liability for the present value of the maximum amount payable
to shareholders in its financial statement s for the year ended 31 August 20X6. A non-
adjusting event under IAS 10 Events After the Reporting Period is an event after t he
reporting period which is indicative of a condition which arose after the end of the
reporting period. However, it could be argued that the transferring of the free allocation
rights back to Evolve is in fact an adjusting event as it is an event after the reporting period
which provides further evidence of cond itions which existed at the end of the reporting
period.
(b) C lassification as held for sale
The non-current a ssets of Resource should have been presented as held for sale in the
financial statements, in accordance with IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations, as at 31 August 20X6. IFRS 5 states that the appropriate level of
management must be committed to a plan to sell the asset for the sale to be probable.
Evolve's acceptance of a binding offer in August 20X6 and the publication of this
information indicated a high probability of sale. Despite t he uncertainties surrounding the
sale, the transaction remained highly probable at 31 August 20X6. IFRS 5 requires an entity
to cla ssify a non-current asset as held for sale if its carrying amount will be recovered
principally throug h sale rather than through continuing use.
IFRS 5 does not require the existence of a binding sales agreement in order to classify a
non- current asset as held for sale but only a high probability of its occurrence. The
acceptance of an offer by Evolve indicates that the transaction met the criteria to be
classified as held for sale at 31 August 20X6. The finalisation of the agreement on 20
September 20X6 only confirmed the situation existing at 31 August 20X6. Further, Evolve
ca nnot apply IFRS 5 measurement criteria w ithout classifying the item as held for sale in its
statement of financial position particu larly as a profit or impairment may arise when using
suc h criteria. IFRS 5 also states that immediately before the initial classification of the asset
as held for sale, the carrying amount of the asset should be measured in accordance with
applicable IFRSs. This was already t he case as regards t he non-current assets of Resource.
Answers 253
Other criteria which indicate that the nan-current assets should be shown as held for sale
include the fact that a buyer for the non-current assets has been found, the sale occurred
within 12 months of classification as held for sale, the asset was actively marketed for sale
at a sales price which has been accepted, and despite the uncertainties at 31 August 20X6,
events after the reporting period indicate that the contract was not significantly changed
or withdrawn. The fact that the information regarding the uncertainties was not publicly
disclosed is irrelevant.
Thus as the non-current asset s met the criteria to be classified as held for sale, they should
have been measured and presented as such in the financial statements. Assets classified as
held for sale must be presented separately on the face of the statement of financial
position.
(c) Investment property
IFRS 3 Business Combinations must be applied when accounting for business

combinations, but does not apply where the acquisition is not of a business. In this case,
the acquisition was essentially that of an asset and therefore the measurement
requirements of IFRS 3 would not apply.
IAS 40 Investment Property states t hat the cost of an investment propert y comprises its
purchase price and any directly attributable expenditu re, such as professional fees for
legal services. IAS 16 Property, Plant and Equipment states that the cost of an item of PPE
comprises any cost d irectly attributable to bringing the asset to the condit ion necessary for
it to be capa ble of operating in the manner intended by management. Hence if Evolve
wishes to use t he cost basis for accounting for t he investment property, the potential gain
should not have been recorded in profit or loss or a dded to the cost of the asset.
Evolve should have recognised the tax payment as an expense in the statement of profit or
loss and other comprehensive income. Administrative and other general overhead costs are
not costs of an item of PPE according to IAS 16. The specific fiscal treatment and the tax to
be paid were not linked to bringing the asset to the condition necessary for its operations,
as t he asset would have been operational w ithout the tax. As such, the tax is a cost linked
to the activity of Evolve and should be accounted for as an expense in accordance with
IAS 12 Income Taxes and included in the profit or loss for the period, unless that t ax arises
from a transaction recognised outside profit or loss.
58 Gasnature
Workbook references. IFRS 9 Financial Instruments is covered in Chapter 8, IFRS 11 Joint

Arrangements in Chapter 15 a nd IAS 10 Events after the Reporting Period in Chapter 6.
Top tips. Part (a) is a good example of applying mainst ream syllabus topics (IAS 16) to an unusual
situation ('irrecoverable gas'). Part (b) on 'own use' contracts has come up before, and t he case
could be argued either way. There were marks available for dealing with fundamental principles
of whether t he contract is a financial contract or an executor y contract. If the argument s seem
complex, the good news is that there are only six marks for this part of the question, and you can
make up the marks in Part (c), which is more m a instream.
Easy marks. Part (c) is relatively straightforward, and you should by now be familiar with the
IFRS 11 criteria for distinguishing joint ventures from joint operations.
251t Strategic Business Reporting (SBR) @BPP lURN NG

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U@il:i·iH:h::i&
Marks
(c) (i) 1 mar k per point up to maximum 5
(ii) 1 mar k per point up to maximum 5
25
(a) Joint arra ngement
The c lassification of a joint arrangement as a joint operation or a joint venture depends

upon t he rights and obligations of the parties to the arrangement (IFRS 11 Joint
Arrangements). A joint arrangement occurs where two or more parties have joint control.
The contractually agreed sharing of control of an arrangement exists only when decisions
about the relevant activities require the unanimous consent of the parties sharing control.
The structure and form of the arrangement determines the nature of the relationship.
However, regardless of the purpose, structure or form of the arrangement, the
classification of joint arrangements depends upon the parties' rights and obligations
arising from the arrangement. A joint arrangement which is not structured through a
separate vehicle is a joint operation. In such cases, the contractua l a rrangement
establishes the parties' rights and obligations. A joint operator account s for the assets,
liabilities, revenues and expenses relating to its involvement in a joint operation in
accordance w ith t he relevant IFRSs. The arrangement wit h Gogas is a joint operation as
there is no separate vehicle involved and they have agreed to share services and costs w ith
decisions regarding the platform requiring unanimous agreement of the parties. Gasnature
should recognise its share of t he asset as property, plant and equipment.
Under IAS 16 Property, Plant and Equipment (PPE), the cost of an item of property, plant
and equipment includes the initial estimate of the present value of dismantling and
removing the item and restoring the site on which it is located. IAS 37 Provisions,
Contingent Liabilities and Contingent Assets conta ins requirements on how to measure
decommissioning, restoration and similar liabilities. Where the effect of the t ime va lue of
money is material, the amount of a provision should be the present va lue of the
expenditures expected to be required to settle the obligation. Thus costs incurred by an
entity in respect of obligations for dismantling, removing and restoring the site on which an
item of property, plant and equipment is located are recognised and measured in
accordance w ith IAS 16 and IAS 37. Gasnature should recognise 55% of the cost of
decommissioning the underground storage facility. However, because Gasnature is a joint
operat or, there is also a contingent liability for 45% of the decommissioning cost s and there
is a possible obligation for the remainder of the costs depending on whether some
uncertain future event occurs, that is Gogas goes into liquidation and cannot fund the
decommissioning costs. Therefore Gasnature, should a lso disclose a contingent liability
relating to the Gogas's share of the obligation to the extent that it is contingently liable for
Gogas's share.
IAS 16 states that property, plant and equipment are tangible items which:
(i) Are held for use in the production or supply of goods or services, for renta l to others,
or for administrative purposes; and
(ii) Are expected to be used during more than one period.
Answers 255
Thus Gasnature should classify and account for its share af the irrecoverable gas as PPE.
The irrecoverable gas is necessary for the storage facility to perform its function. It is
therefore part of the storage facility and should be capitalised as a component of the
storage facility asset. The irrecoverable gas should be depreciated to its residual value over
the life of the storage facility. However, if the gas is recoverable in full when the storage
facility is decommissioned, then depreciation will be recorded against the irrecoverable gas
component only if the estimated residual value of the gas decreases below cost during the
life of the facility. When t he storage facilit y is decommissioned and the cushion gas
extracted and sold, the sale of t he irrecoverable gas is accounted for as the disposal of a n
item of PPE in accordance with IAS 16 and the gain or loss recognised in profit or loss. The
natural gas in excess of the irrecoverable gas which is injected into the facility should be
treated as inventory in accordance w it h IAS 2 Inventories.
(b) Contract with Agas
IFRS 9 Financial Instruments applies to those contracts t o buy or sell a non- financial it em
which ca n be settled net in cash with the exception of contracts whic h are held for the
purpose of the receipt or delivery of a non-financial item in accordance with the entity's
expected purchase, sale or usage requirements (own use contract). In other w ords, it will
result in physical deliver y of the commodity, in this case the extra gas. Contracts which are
for an entity's 'own use' are exempt from t he requirements of IFRS 9. Such a contract can
be irrevocably designated as measured at fair value through profit or loss even if it was
entered into for the above purpose. This designation is available only at inception of the
contract and only if it eliminates or significant ly reduces a recognition inconsistency
(sometimes referred to as an 'a ccounting mismatch') wh ic h would otherwise a rise fro m not
recognising that contract becau se it is excluded from the scope of IFRS 9 . There are various
ways in w hich a contract to buy or sell a non- financia l item can be settled net in cash or
another financial instrument or by exchanging financia l instruments. These include the
following:
(i) When the terms of the contract permit either party to settle it net in cash
(ii) When the ability to settle net in cash is not explicit in the t erms of the contract, but
the entity has a practice of settling similar contracts net in c ash
(iii) When, for similar contract s, the entity hos o practice of toking delivery of the
underlying and selling it wit hin a short period after delivery, for the purpose of
generating o profit
(iv) When t he non-finonciol item which is the subject of t he contract is readily
convertible to cash
A writ ten option to buy or sell a non-financial item which can be settled net in cash is within
the scope of IFRS 9. Such a contract can not be entered into for the purpose of the receipt
or delivery of t he non-financial item in accordance with the entities expected purchase,
sale or usage requirements. Contracts to buy o r sell a non-financia l item, suc h as a
commodity, which ca n be settled net in cash or another financial instru ment, or by
exchanging financial instruments, are within th e scope of IFRS 9. They are accounted for os
derivatives. A level of judgement w ill be required in this oreo as net settlement s caused by
unique event s beyond management's control may not necessarily prevent t he entity from
applying the 'own use' exemption to all similar contracts.
The contract entered into by Gosnoture with Agos seems t o be on own use contract w hich
fa lls o utside IFRS 9 ond therefore would be treat ed os on executory contract. However, it
could be argued thot the contract is net settled because the pen a lty mechanism requires
Agosto compensate Gosnoture ot the c urrent prevailing market price. Further, if natural
gos is readily convertible into cosh in the location where the delivery tokes ploce, the
contract could be considered net settled . Additionally, if there is volume flexibility, then the
contract cou ld be regarded os o written op t ion, which falls within the scope of IFRS 9.
However, the contract will probably still q ualify as 'own use' as long as it has been entered
into ond continues to be held for the expected cou nterparties' sales/usoge requirements.
Additiona lly, t he entit y has not irrevocably designated the contract os measured ot fair
value through profit or loss, thus adding weight t o the 'own use' designation.

IMlllA
(c) (i) It is not acceptable to accrue the costs of the overhaul. The ent it y does not have a
const ructive obligation to u ndertake t he overhaul. Under IFRS, costs related to major
inspection and overhaul are recognised as part of t he carrying amount of property,
plant and equipment if they meet the asset recognition criteria in IAS 16 Propert!,J,
Plant and Equipment. The major overhaul component will then be depreciated on a
straight-line basis over its useful life (ie over the period to the next overhaul) and any
remaining carrying amount w ill be derecognised when the next overhaul is
performed. Costs of the day-to-day servicing of the asset (ie routine maintenance)
a re expensed as incu rred. Therefore the cost of the overhaul should have been
identified as a separate component of the refinery at initial recognit ion and
depreciated over a period of two years. This will result in the same amount of
expense being recognised in profit or loss over the same period as the proposal to
create a provision.
(ii) Since there were no indicators of impairment at the period end, a ll costs incurred
u p t o 31 August 20X5 amounting to $5 million should remain capitalised by the entity
in the financial statements for the year end ed on that date. However, if mat erial,
disclosure should be provided in the financial statements of the additional activity
during t he subsequent period which determined the exploratory drilling was
u nsuccessf ul. This represents a non-adjusting event as defined by IAS 10 Events After
the Reporting Period as an event which is indicative of a condition which arose after
the end of the reporting period. The asset of $5 million and addit ional drilling costs of
$2 million incurred subsequently would be expensed in the following year's financial
statements.
59 Complexity
W o rkbook refe re nces. Financial instrumen ts are covered in Chapter 8.
To p tips. This is a largely discursive question relating to financial instruments, focusing on the
perceived problems with accounting for fi nancia l instruments. It requires understanding of IFRS 9
and IFRS 13, as well as an awareness of current issues around financial instruments.
Easy marks. The calculation is a good source of easy marks as it is straightforward. And ther: J
are marks for bookwork - listing the problems of complexity and advantages of fa ir value.
Marks
(a) (i) Identical payment 2

Carrying amount 2
Fair value 2
6
(ii) Hedging discussion 5
Effectiveness discussion 4
9
(b) (i) 1 mar k per point up to maximum 6
(ii) 1 mar k per point up to maximum 4
10
25
Answers 257
(a) (i) IFRS 9 Financial Instruments requires an entity ta value its financial liabilities at
amortised cast with an option to designate them as measured at fair val ue through
profit ar lass if it reduces or eliminates on accounting mismatch or because a group
of liabilit ies is managed and its performance evaluated on a fair value basis. The
accounting treatment applied will impact on how the initial and new loans are
measured and at what carrying amount they ore presented within the financial
statements.
The carry ing amounts under the amortised cost and fair value methods a re
ca lcu lated as follows :
Amortised cost
Using amortised cost, both the initial loan and t he new loon result in single
payments that ore almost identical on 30 November 20X9:
Initial loan: $47m x 1.05 for 5 years = $59.98m
New loon: $45m x 1.074 for 4 years= $59.89m

However, the carrying amounts at 30 November 20X5 will be different:
Initial loan: $47m + ($47m x 0 .05) = $49.35m

New loon: $45m
Fair value
If the two loans were carried at fair value, both the initial loan and the n ew loan
wo uld have the same carrying amount, and be carried at $45 million at
30 November 20X5. This is because both loans result in a single repayment of
$59 million o n 30 November 20X9 and so are effectively worth the same amoun t .
As the second loon was obtained on 30 November 20X5, the fai r value of a loon
with repayment of $59 million on 30 November 20X9 must be t he amount
borrowed at the market rote on that date, ie $45 million. There would be a net
profit of $2 million, mode up of the interest expense of $47m x 5% = $2.35m and
the unrealised gain of $49.35m - $45m = $4.35m.
(ii) Hedge accounting

IFRS 9 Financial Instruments allows hedge accounting but only if all of the following
conditions a re met.
(i) The hedging relationship consists o nly of eligible hedging instruments and
eligible hedged items.
(ii) There must be formal documentation (including identification of the hedged
item, the hedging instrument, the nature of the risk that is to be hedged and
how the entity w ill assess the hedging instrument's effectiveness in offsetting
the exposure to changes in t he hedged item's fair value or cash flows
attributable to the hedged risk).
(iii) The hedging relationship meets all of the IFRS 9 hedge effectiveness criteria.
IFRS 9 defines hedge effectiveness as the degree to which changes in the fair value
or cash flows of the hedged item attributable to a hedged risk ore offset by changes
in the fair value or cash flows of the hedging instrument . The directors of Complexity
have asked whether hedge effectiveness can be calcu lated. IFRS 9 uses an
objective-based a ssessment for hedge effectiveness, under which the following
criteria must be met.
(i) There is on economic relationship between the hedged item and the hedging
inst ru ment , ie the hedging instrument and the hedged item hove va lues t hat
generally move in the opposite direction because of the some risk, w hich is the
hedged risk;

LEAR\,NC:
IMlllA
(ii) The effect of credit risk does not dominate the va lue changes that result
from that economic relationship, ie the gain or loss from credit risk does not
frustrate the effect of changes in the underlying item on the value of the
hedging instrument or the hedged item, even if those changes were
significant; and
(iii) The hedge ratio of the hedging relationship (quantity of hedging instrument
vs quantity of hedged item) is the some as t hat resulting from the quantity of
the hedged item that the entity actually hedges and t he quantity of the
hedging instrument that the entity actuall y uses to hedge thot quantity of
hedged item.
(b) (i) IFRS 9 Financial Instruments provides a model for the classification and
measurement of financial instruments that is based on principles and the entity's
underlying business model. Many users find financial instruments to be complex
often due t o the nature of the financial instruments themselves and the many
different ways in which they con be measured. The measurement method
depends on:
(1) The applicable financia l reporting standard . A variety of IFRSs and IASs
apply t o the measurement of financial instruments. For example, financial
assets may be measured using consolidation for subsidiaries (IFRS 10), the
equity method for associates and joint ventures (IAS 28 and IFRS 11) or IFRS 9
for most other financial assets.
(2) The ca t egorisation of the financial instrument. IFRS 9 classifies financial
assets as measured at amortised cost, fair value through profit or loss o r
fa ir value through other comprehensive income A financial asset may only
be classified as measured at amortised cost if the object of the business model
in which it is held is to collect contracted cash flows and its contractual terms
give rise on specified dotes to cash flows that ore solely payments of principal
and interest. Financial liabilities ore generally accounted for at amortised cost
but may be accounted for under the fair value model as was shown in (o)(i).
(3) Whether hedge accounting hos been applied. As was d iscussed in (o)(ii),
hedge accounting is complex, for example when cash flow hedge accounting
is used, gains and losses may be split between profit or loss for the year and
other comprehensive income (items that may subsequently be reclassified to
profit or loss). In addition, there may be mismatches when hedge accounting
applies reflecting the underlying mismatches under t he non-hedging rules.
Some measurement methods use on estimate of cu rrent value, and others use
historical cost. Some include impairment losses, others do not.
The different measurement methods for financial instruments creates a number of
problems for preparers and users of account s:
(1) The t reatment of a particular instrument may not be the best, but may be
determined by other factors.
(2) Goins or losses resulting from different measurement methods may be

combined in the some line item in the statement of profit or loss and other
comprehensive income. Comparabi lity is therefore compromised.
(3) Comparability is also affected when it is not clear what measurement method
hos been used.
(4) It is difficult to apply t he criteria for deciding which instrument is to be

measured in which way. As new types of instruments ore created, the criteria
may be applied in ways that ore not consistent.
Answers 259
(ii) The accountant's suggestion that information relating to financial instruments is too
complex to disclose is not a good enough reason to avoid making disclosures in the
financial statements. IFRS 7 Financial Instruments: Disclosure requires extensive
disclosures that will enable the users of financial statements to better understand the
quantitative effects of financial instruments (the numbers within the financial
statements) and to evaluate the nature and extent of risks that arise from financial
instruments and how Complexity manages those risks. That is not to say that a ll
information relating to financial instruments needs to be disclosed and it is important
that t he accountant focuses on making material d isclosu res only.
Practice Statement 2 clarifies that if information provided by a disclosure could not

reasonably be expected to influence the decisions users make based on the f inancial
statements, then that d isclosure need not be made. The assessment of materiality
needs to be made from a quantitative perspective first and then any qualitative
factors should be considered.
The reporting accountant should not view the requirements of IFRS 7 as a

prescriptive list of items that must be disclosed. They must apply judgement to
assess what requires d isclosure and present it in a manner that will be of benefit to
the users of the financia l statement s.
60 Carsoon
Workbook ref erences. Leases are covered in Chapter 9, financial instruments in Chapter 8 and
revenue in Chapter 3. Fair value is covered in Chapter 4 .
Top tips. Allocate your time appropriately across this three- part question. The parts are
independent of each other so you should scan read a ll parts and attempt the one you feel most
comfortable w ith first. The key to Part (a) is to understand that Carsoon is t he lessor, not the
lessee and therefore the distinction between finance leases and operating leases applies. Part (b)
asks you to advise on measurement issues far a financial instrument. The calculation is
straightforward if you have understood the principles; if not, you would be advised to briefly state
the measurement principles of IFRS 13 as far as you can and move on quickly to another part of
the question. Part (c) of the question, on contractual revenue, is challenging as it gets into the
specific detail of IFRS 15, but it is a topical area you should be familiar with. Ensure you
breakdown your response to cover each element.
Easy marks. Part (a) contains generous marks far using the information in the question to explain
how to class ify Carsoon's vehicle leases in the context of IFRS 16. Parts (b) and (c) are more
c hallenging but Part (c) contains some easy marks if you know that the general administration
costs and the wasted materials costs should be expensed.
IHiM:\-IH:ii::i&
Marks
(a) C lassification of lease as operating lease not finance lease, accounting

requirements far lease payments and assets and cash flow implications -
1 mark per point up to maximum 9
(b) Type of financial asset, IFRS 13 requirem ents, account far financial asset -
(c) Discu ss each of penalties, counter c la im and additional costs 1 mark per point
up to maximum 8
25
260 St rategic Business Reporting (SBR) @ BPP

LENIN ING
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(a) Under IFRS 16 Leases, Carsaan is a lessor and must classify each lease as an operating ar
finance lease. A lease is classified as a finance lease if it transfers substantially all of the
risks and rewards incidental ta ownership af the underlying osset. All other leases are
classified as operating leases. Classification is mad e at the inception of the lease. Whether
a lease is a finance lease or an operat ing lease depends on the substance of t he
transa c tion rather than the form .
In this case, the leases are op erating leases. The lease is unlikely to transfer ownership of
the vehicle to the lessee by the end of the lease term as the option to purchase the vehicle
is at a price which is higher than fair value at the end of the lease term . The lease term is
not for t he major part of the economic life of the asset as vehicles normally have a length of
life of more than t hree years and the maximum unpenalised mileage is 10,000 miles per
annum. Additionally, the present value of t he minimum lease payments is unlikely to be
substantiall y a ll of the fair value of the leased asset as the price which the customer can
purchase the vehicle is above market value, hence the lessor does not appear to have
received an acceptable return by t he end of the lease. Carsoon also stipulat es the
maximum mileage and maintains the vehicles. This wou ld appear t o indicate t hat t he risks
and rewards remain with Carsoon.
Carsoon should account for the leased vehicles as property, plant and equipment (PPE)
under IAS 16 Property, Plant and Equipment and depreciate them taking into account the
expected residual value. The rental payments should go to profit or loss on a straight-line
basis over the lease term . Where an item of PPE ceases to be rented and becomes held for
sale, it should be transferred to inventor y at its carrying amount. The proceeds from t he
sale of such assets should be recognised a s revenue in accordance with IFRS 15 Revenue
from Contracts with C ustomers.
IAS 7 Statement of Cash Flows states that payments from operating activities are primarily
derived from the principal revenue-producing activities of the entity. Therefore, t hey
generally resu lt from the transactions and other events which enter into the determination
of profit or loss. Therefore, cash receipts from the d isposal of assets formerly held for renta l
and subsequently held for sale should be treated as cash flows from operating activit ies
and not investing activities.
(b) For financial assets which are debt instruments measured at fair va lue t hrough other
comprehensive income (FVOCI), both amortised cost and fair value information are
relevant because debt instrument s in this measurement category are held for both the
collection of contractual cash flows and the realisation of fair values. Therefore, debt
instruments measured at FVOCI are measured at fair va lue in the st a t eme nt of fin anc ia l
posit ion. In profit or loss, interest revenue is calculated using the effect ive interest rate
method. The fair value gains and losses on these financial assets are recognised in other
comprehensive income (OCI). As a result, the difference between the total change in fa ir
value and t he amounts recognised in profit or loss are shown in OCI. When these financia l
assets are derecognised, the cumulative gains and losses previousl!,j recognised in OCI are
reclassified from equity to profit or loss. Expected credit losses (ECLs) do not reduce the
carrying amount of t he financial assets, which remains at fa ir value. Instead, an amount
equal to the ECL allowance which wou ld arise if the asset were measured at amortised cost
is recognised in OCI.
The fair value of the debt instrument therefore needs to be ascertained at 28 February
20X7. IFRS 13 Fair Value Measurement states that Level 1 inputs are unadjusted quoted
prices in active markets for identical assets or liabilities which the entity can access at the
measurement date. In-house models are a lternative pricing methods which do not rely
exclusively on quoted prices. It would seem that a Level 1 input is availa b le, based upon
activity in the market and further that, because of the active market, there is no reason to
use the in-house model to value the debt.
Therefore, the accounting for the instrument should be as follows:
Initial measurement
The bonds will be init ia lly recorded at $6 million and interest of $0.24 million will be received
and credited to profit or loss.
Answers 261
Subsequent measurement
At 28 February 20X7, the bonds will be valued at $5.3 million, which recognises 12-month
credit losses and other reductions in fair value. The loss of $0.7 million will be charged as an
impairment loss of $0.4 million to profit or loss, representing the 12-month e)(pected credit
losses and $0.3 million to OCI. When the bond is sold for $5.3 million on 1 March 20X7, the
financial asset is derecognised and the loss in OCI ($0.3 million) is reclassified to profit or
loss. Also, the fact that the bond is sold for $5. 3 million on 1 March 20X7 illustrates that this
should have been t he fair value on 28 February 20X7.
(c) IFRS 15 Revenue from Contract s with Customers specifies how to account for costs
incurred in f ulfilling a contract w hich are not in the scope of another standard. Costs to
fulfil a contract w hich is accounted for under IFRS 15 are divided into t hose which give rise
to an asset a nd those which are expensed as incurred. Entities w ill recognise an asset w hen
costs incurred to fu lfil a contract meet certain criteria, one of which is t hat the costs are
expect ed t o be recovered.
For costs to meet the 'expected to be recovered' crit erion, they need t o be either explicitly
reimbursable under the contract or reflect ed through t he pricing of the contract and
recoverable through the margin.
The penalt y and additional costs attributable to the contract should be considered when
they occur and Carsoon should have included t hem in the tota l costs of the contract in the
period in which they had been notified.
As regards the counter claim for compensation, Carsoon accounts for the c laim as a
contract modification in accord ance with IFRS 15. The modification does not result in any
additional goods and services being provided to the customer. In addition, all of t he
remaining goods and services after t he modification are not distinct and form part of a
single performance obligation. Consequently, Carsoon should account for t he modification
by updating the t ransaction price and the measure of progress towards complete
satisfaction of the performance obligation. However, on the basis of information available,
it is possible to consider t hat the counter claim had not reached an advanced stage, so
that c laims submitted to t he client shou ld not be includ ed in total revenues.
When the cont ract is modified for t he construction of t he storage focility, an additional
$7 million is added to the consideration w hich Carsoon will receive. The additional $7 million
reflects the stand-alone selling price of the cont ract modification . The construction of the
separate storage facility is a distinct performance obligation and the contract modification
for t he additiona l storage facility is accounted for as a new cont ract which does not affect
the accounting for the existing contract. Therefore the contract is a performance obligation
which has been satisfied as assets are only recognised in relation to satisf ying futu re
performance obligations. General and administrat ive costs cannot be capitalised unless
these costs are specifically chargeable to the customer under the contract. Similarly,
wasted mat erial costs are expensed where they are not chargeable to the customer.
Therefore a total expense of $15 million will be charged to profit or loss and not shown as
assets.
61 Leigh
W o rk book refe re nce. Share-based payments are covered in Chapter 10. Associates are covered
in Chapter 11.
To p t ips. This was a difficult q uestion which dealt with several share-based pa yment
transactions. However, not a ll such transactions were dealt with by a single accounting standard.
Part (a) dealt with the cost of a business combination and the issue of shares as purchase
consideratio n. It also dealt with shares given t o employees as remuneration. The events are dealt
with under the separate accounting standards IFRS 2 and IFRS 3. Part (b) dealt with t he purchase
of property, plant and equipment, a nd the grant of rights to a director w hen there is a choice of
settlement. This part of the question was quite technically demanding. Part (c) dealt with the
issue of shares to acquire an associate and the subsequent accounting for t he associate.
Eas y marks. It is difficult t o identify easy marks for t his question.
262 Strategic Business Reporting (SBR) @BPP LEJ\RNll'IC

MintA.
U@il:i·iH:h::i&
Marks
(a) Hash 7
Employees 3
(b) Property , plant and equipment 5
Director 4
(c) Handy 6
25
(a) Shares issued to the directors
The 3 million S1 shares issued to the directors on 1 June 20X6 as part of the purchase
consideration for Hash are accounted for under IFRS 3 Business Combinations rather than
under IFRS 2 Share- based Payment. This is because they are not remuneration or
compensation , but sim ply part of t he purchase p rice of the company. The cost of the
business combination will be the t otal of t he fair va lues of the consideration given by Leigh
plus any attributable costs. The t otal fair value here is $6 million, of which $3 million is
share capita l and $3 million is share premium.
The contingent consideration - 5 ,000 shares per director to be received on 31 May 20X7 if
the directors are still employed by Leigh - may, however, be seen as compensation a nd
thus fall to be t reated under IFRS 2. The fact that the additional payment of shares is
linked to continuing employment suggests t hat it is a compensation arrangement, and
therefore IFRS 2 will apply .
Under IFRS 2, the fair value used is that at the grant date, rather than when the shares
vest. The market value of each share at that date is $2. (Three million shares are valued a t
$6 m illion.) So the total value of the compensation is 5 x 5,000 x $2 = $50,000.
The $50,000 is charged to prof it or loss with a corresponding increase in equity.

Shares issued to employees
These shares are remuneration and are accounted for under IFRS 2.
The fair val ue used is t hat at the dote of issue, as the grant date and issue date are t he
same, that is, $3 per shore. Because the shares are given as a bonus they vest
immediately and are presumed to be consideration for past services.
The tota l of $3 million would be changed to profit or loss and included in equit y.
(b) Purc hase of property, plant and equipment
Under IFRS 2, the purchase of property, plant and equipment would be treated as a share-
based payment in which the cou nterparty has a c hoice of settlement, in shares or in cash .
Such transactions are treated as cash-settled to the extent that the entity has incurred a
liability. It is treated as the issue of a compound financial instrument, with a debt and an
equity element.
Similar to IAS 32 Financial Instruments: Presentation, IFRS 2 requires the determinatio n of

the liability element and the equity element. The fair value of the equit y element is t he fair
value of the goods or services (in this case the property) less t he fair value of t he debt element
of the instrument. The fair value of the property is $4 million (per question). The share price of
$3.50 is the expected share price in three months' time (assuming cash settlement). The fair
value of t he liability component at 31 May 20X7 is its present value: 1.3 million x $3 = $3.9m.
Answers 263
The journal entries are:
Credit Liability $3.9m
Credit Equity $0.1m
In three months' time, the debt component is remeasured to its fair value. Assuming the
estimate of the future share price was correct at $3.50, the liability at that date will be
1.3 million x $3.5 = $4.55m. An adjustment must be made as follows:
Debit Expense (4.55 - 3.9) $0.65m
Credit Liability $0.65m
Choice of share o r cash settlement
The share-based payment to the new director, which offers a choice of cash or share
settlement , is a lso t reated as the issue of a compound instrument. In this case, the fair
va lue of the services is determined by th e fair value of the equity instrum ent s given.
The fair value of the equity a lternative is $2.50 x 50,000 = $125,000. The cash alternative
is valued at 40,000 x $3 = $120,000. The difference between these two va lues - $5,000 -
is deemed to be the fair value of the equity component. At the settlement date, the
liability element would be measured at fair value and the method of settlement chosen by
the director would determine the final accounting treatment.
At 31 May 20X7, the accounting entries wou ld be:
Debit Profit or loss - d irectors' remuneration $125,000

C redit Liability $120,000
C redit Equity $5,000
In effect, the director surrenders the right to $120,000 cosh in order to obtain equity worth
$125,000.
(c) Investment in Hardy
The investment in Hardy should be treated as an associate under IAS 28 Investments in
Associates and Joint Ventures. Between 20% and 50% of the share capital has been
acquired, and significant influence ma!J be exercised through the right to appoint directors.
Associates ore accounted for as cost plus post acquisition change in net assets, generally
cost plus share of post-acquisition retained earnings. The cost is the fair value of t he
shares in Leigh exchanged for the shares of Handy. However, negative goodwill arises
because the fair value of the net assets of Hardy exceeds this. The negative goodwill must
be added bock to determine t he cost to be used for the carr!Jing amount, and, following a
reassessment, cred ited to profit or loss (Dr Cost 0 .2, Cr P/ L 0.2).
Sm
Cost: 1m x $2.50 2.5
Add bock negative goodwill: (2.5 + (9 x 70% 'NCI') - 9) 0.2
2.7
Post-acquisition profits: (5 - 4) x 30% 0.3
Carrying amount at 31 Moy 20X7 3.0
Note. The 0.2 is not part of post-acquisition retained earnings. It is adjustment to t he

original cost to remove t he negative goodwill.
Because negative goodwill has arisen, the investment must be impairment tested. A
comparison must be made with the estimated recoverable amount of Hard!J'S net assets.
The investment must not be carried above the recoverable amount:
Recoverable amount at 31 May 20X7: $11m x 30% = $3.3m

The recoverable amount is above the ca rrying amount, so the investment at 31 May 20X7
will be shown at $3 million.
261t Strategic Business Reporting (SBR) @BPP LEAR\IMG

MEDIA
62 Mehran
Workbook references. IFRS 13 is covered in Chapter 4. IFRS 9 is covered in Chapter 8.

Top t ips. Most of this question is on IFRS 13 Fair Value Measurement. As well as the fair value
hierarchy, it is important to be familiar the principles behind the standard, particularly the
'highest and best use' principle, and that of the 'principal and most advantageous market'. You
are expected to understand the nature of the valuation hierarchy and not just quote the
requirements. Although financial instruments can be t ricky, you can use a similar thought process
to more common items; for examples, if a fair valuation were to be placed on a motor car, the
market prices for a similar car would be used and adjusted if the mileage on the car was
significantly different. The same principle applies to shares.
Easy marks. Working out the most advantageous market is quite straightforward. The numbers
are given to you for a reason!
11@11:\·Hi:li::i&
Marks

Maximum 25
(a) Land and brand name
IFRS 13 Fair Value Measurement requires the fair value of a non-financial asset to be
measured based on its highest and best use from a market participant's perspective. This
requirement does not apply to financial instruments, liabilities or equity. The highest and
best use takes into account the use of t he asset which is physically possible, legally
permissible and financially feasible. The highest and best use of a non-financial asset is
determ ined by reference to its use and not its classification and is determined from the
perspective of market participants. It does not matter whether the entity intends to use the
asset differently. IFRS 13 allows management to presume that the current use of an asset is
the highest and best use unless market or other factors suggest otherwise.
In this case, the agricultural land appears to have an alternative use as market participants
have considered its use for residential purposes. If the land zoned for agricultural use is
currently used for farming, the fair value should reflect the cost structure to continue
operating the land for farming, including any tax credits which cou ld be realised by market
participants. Thus, the fair value of the land if used for farming would be $(5 + (20% of 0.5))
million, ie $5.1 million.
If used for residential purposes, the value should include all costs associated with
changing the land to the market participant's intended use. In addition, demolition and
other costs associated with preparing the land for a different use should be included in
the valuation. These costs would include the uncertainty relat ed to whether the approval
needed for cha nging the usage would be obtained, because market participants wou ld
take that into account when pricing va lue of the la nd if it had a different use. Thus, the
fair value of the land if used for residential purposes would be $(7.4 - 0 .2 - 0.3 - 0.1)
million x 80%, ie $5.44 million. Therefore the value of the land would be $5.44 million on
the highest and best use basis. In this situation, the presumption that the current use is
the highest and best use of the land has been overridden by the market factors which
indicate that residential development is the highest and best use. A use of an asset need
not be legal at the measurement date, but it must not be legally prohibited in the
jurisdiction.
@BPP LEAR\lt G
1/;Jl'll~
Answers 265
In the absence of any evidence to the contrary, Mehran should value t he brand on the
basis of the highest and best use. The fair value is determined from the perspective of a
market participant and is not influenced by the Mehran's decision ta discontinue the brand.
Therefore the fair value of the brand is $17 million.
(b) Fair value of inventory
IFRS 13 sets out the concepts of principal market and most advantageous market.
Transactions take place in either t he principal market, which is the market with the great est
volume and level of activity for t he inventory, or in the absence of a principal market, the
most advantageous market. The most advantageous market is t he market which maximises
the amount which would be received to sell t he inventory, after taking into account
transaction costs and transportation costs. The price used to measure the inventory's fair
value is not adjusted for transaction costs although it is adjusted for transport costs. The
principal market is not necessarily the m arket with the greatest volume of activity for the
particular reporting entit1:1. The principle is based upon the importance of the market from
the participant's perspective. However, the principal market is presumed t o be the market
in which the reporting entity transacts, unless there is evidence to the contrary. In
evaluating the p rincipal or most advantageous markets, IFRS 13 restricts the eligible
markets to onl1:1 t hose which can be accessed at the measurement date. If t here is a
principal market for the asset or liability, IFRS 13 states t hat fair va lue should be based on
the price in that market, even if the price in a different market is higher. It is onl1:1 in the
absence of the principal market t hat t he most advantageous market should be used. An
entity does not have to undertake an exhaustive search of all possible markets in o rder to
identif y the principal or most advantageous market . It should take int o account all
information which is readily available.
There is a presumption in the standard that the market in which the entity normally
transacts to sell the asset or transfer the liability is the principal or most advantageous
market unless there is evidence to the contrary.
In th is case, the greatest volume of transactions is conducted in the domestic market -

direct to manufacturer s. There is no problem with obtaining data from trade journals but
the problem for Mehran is that there is no data to substantiate the volume of activity in the
domestic market - direct ta retailers even t hough Mehran feels t hat it is at least 20,000
tonnes per annum. The most advantageous market is the export market where after
transport and transaction costs the price per t onne is $1,094.
Domestic Domestic
market - market - d irect
d irect to to Export
retailers manufacturers market
$ $ $
Price per tonne 1,000 800 1,200
Transport costs per tonne 50 70 100
Selling agents' fees per tonne 4 6
Net price per tonne 950 726 1,094
It is difficult to determine a principal market because of the lack of information. It cou ld be

argued that the domestic market - direct to manufacturers has the highest volume for the
produce, and is therefore the principal market by which Mehran should determine fair
value of $730 ($800 - $70). However, because of the lack of information surrounding the
domestic market - direct to retailers , the principal or most advantageous market will be
presumed to be the market in which Mehran would normally enter into transactions which
would be the export market. Therefore the fair value wou ld be $1,100 ($1,200 - $100) per
tonne.

(c) Investment in Erha m
Measuring the fair value of individual unquoted equity instrument s which constitute a
non-cont rolling interest in a private company fa lls within the scope of IFRS 9 Financial
Instruments in accordance with the principles set out in IFRS 13. There is a range of
commonly used valuation techniques for measuring the fa ir value of unquoted equity
instruments and income approaches as well as the adjusted net asset method are
acceptable. IFRS 13 states that fair value is a market-based measurement, although it
acknowledges that in some cases observable market transactions or other market
information might not be available. IFRS 13 does not contain a hierarchy of valuation
techniques nor does it prescribe the use of a specific valuation technique for meeting the
objective of a fair value measurement. However, IFRS 13 acknowledges that, given specific
circumstances, one valuation technique might be more appropriate than another. The
market approach t akes a transaction price paid for an identical or a simila r instrument in
an investee and adjusts the resultant va luation. The transaction price paid recently for an
investment in an equity instrument in an investee which is similar, but not identical, to an
investor's unquoted equity instrument in the same investee would be a reasonable starting
point for estimating the fair value of t he unquoted equity instrument.
Mehran would take the transaction price for the preferred shares and adjust it to reflect
certain differences between the preferred shares and t he ordinary shares. There would be
an adjustment to reflect the priority of the preferred shares upon liquidation.
Mehran should acknowledge the benefit associated with control. This adjustment relat es
to the fact that Mehran's individual ordinary shares represent a non-controlling interest
whereas the preferred shares issued reflect a controlling interest. There will be an
adjustment for the lack of liquidity of the investment which reflects the lesser ability of t he
ordinary shareholder to initiate a sale of Erham relative to the preferred shareholder.
Further, t here will be an adjustment for the cumulative dividend entitlement of the preferred
shares. This would be calculated as the present value of the expected future dividend
receipts on the preferred shares, less the present value of any expected dividend receipts
on the ordinary shares. The d iscount rate used should be consistent w ith the uncertainties
associated with the relevant dividend streams.
Mehran should review the circumstances of the issue of the preferred shares to ensure
that its price was a valid benchmark. Mehran must, however, use all information about
the performance and operations of Erham w hich becomes reasonably available to it after
the date of initial recognition of the ordinary shares up to the measurement date. Such
information can have an effect on the fair value of the unquoted equity instrument at
31 March 20X6. In addition, Mehran should consider the existence of factors such as
whether the environment in which Erham operates is dynamic, or whether t here have been
changes in market conditions between t he issue of the preferred shares and t he
measurement date.
63 Canto
Wo rkbook references. Property, plant and equipment, investment properties, intangible assets
and impairment of assets are all covered in Chapter 3. Basic groups a re covered in Chapter 10.
Top t ips. Split your t ime fairly over each part of this three-part q uestion to maximise the marks
you gain from the time spent. Parts (a) and (b) both require the discussion of multiple standards
to gain the most marks. Part (c) focusses on IAS 36 and the impairment of a CGU. It is more
involved, with the selection of appropriate discount rates and the allocation of impairment, but it
is not a complicated scenario assuming you have revised IAS 36.
Easy marks. Part (a) has generous marks available for a discussion and application of IFRS 13,
IAS 16 and IAS 40 knowledge. There a lso are marks for straightforward calculations in Part (c).
J
Answers 267
U@il:i·iH:h::i&
Marks
25
(a) Fa ir va lue
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. In respect of property:
• The fair value measurement of a non-financial asset such as property takes into
account the entity'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.
• The highest and best use of property takes into account the use of the asset which is
physically possible, legally permissible and fina ncially feasible.
• There are three levels in the IFRS 13 fair value hierarchy, based on the valuation
technique used. Due to the lack of an active market for identical assets, it would be
rare for property to be classified in Level 1 of the fair value hierarchy. In market
conditions where property is actively purchased and sold, the fair value
measurement might be classified in Level 2. However, that determination will depend
on the fact s and circumstances, i ncluding the significance of adjustments to
observable data. In this regard, IFRS 13 provides a property specific example, stating
that a Level 2 input would be the price derived from observed transactions involving
sim ilar property interests in similar locations. Accordingly, in active and transparent
markets, property valuations may be classified as Level 2, provided that no
significant adjustments have been made to the observable data. If significant
adjustments to observable data are required, the fair value measurement may fa ll
int o Level 3.
PPE t o Invest ment property
IAS 40 Investment Property permits entities to choose between a fair value model and a
cost model. One method must be adopted for all of an entity's investment property. A
change is permitted only if this results in a more appropriate presentation. IAS 40 notes
that th is makes it highly unlikely for a change from a fair value model to a cost model to
occur. Transfers to or from investment property should only be made when there is a
change in use, which is evidenced by the end of owner- occupation, which has occurred in
this case. For a transfer from owner-occupied property to investment property ca rried at
fa ir value, IAS 16 Property, Plant and Equipment (PPE) should be applied up to the date of
reclassification. Any difference arising between the carrying amount under IAS 16 at that
date and t he fair value is dealt with as a revaluation under IAS 16.
The aggregate fair value of the site, including the industrial and retail outlets, is higher to
market participants than the sum of the fair value of the individual property interests
because of synergies and complementa ry cash flows. Consequently, the fair value of the
site as a whole would be maximised as a group of assets. The fair value is determined for
the whole site even if the asset is disaggregated when applying IAS 40.
Thus providing that the above criteria have been met, Can to may value the property at
$25 million.

tl.J'.l")IA.
Canto will recognise o depreciation expense of $0.5 million in profit or loss in the year to
28 February 20X7 while the property is accounted for using a cost model under IAS 16 . At
28 February 20X7, Canto will transfer the property from PPE to investment property. The
investment property will be recognised at its fair value of $25 million, the carry ing amount
of PPE of $13.5 million ($15 million - accumulated depreciation of $1.5 million) will be
derecognised and the increase of $11.5 m illion will be a revaluation surplus.
(b) IFRS 3 Business Combinations states t hat an acquirer should recognise, separately from
goodwill, the identifiable intangible assets acquired in a business combination. An asset is
identifiable if it meets either the separability or cont ractual- legal criteria in IAS 38
Intangible Assets.
Customer relationship intangible assets may be either contractual or non-contractual:

(i) Contractual customer relationships are normally recognised separat ely from
goodwill as they meet the contractua l-legal criterion.
(ii) However, non-contractual customer relationships are recognised separately from
goodwill only if they meet the separable criterion.
Consequently, determining whether a relationship is contractual is critical to identifying

and measuring both separately recognised customer relationship intangible asset s and
goodwill, and d ifferent conclusions cou ld lead to substantially different accounting
outcomes.
O rder backlog
The order backlog should be treated as an intangible asset on the acquisition. The fair
value of the order backlog is estimated based on t he expected revenue to be received, less
the costs to deliver t he product or service.
Water a cquisition rights

The rights are valuable, as Binlory cannot manufacture vehicles without them. The rig hts
were acquired at no cost and renewa l is certain at little or no cost. The rights cannot be
sold other than as part of the sale of a business as a whole, so t here exists no secondary
market in the rights. If Binlory does not use the water, then it will lose the rights. In this
case, the legal rights cannot be measured separately from the business as a whole and
therefore from goodwill. Therefore, the legal rights should not be accounted for as a
separate intangible asset acquired in t he business combination because the fair value
cannot be measured reliably as the legal rights cannot be separated from goodwill.
(c) IAS 36 Impairment of Assets requires that assets be carried at no more than their carrying
amount. Therefore, entities should test all assets within the scope of the Standard if
indicators of impairment exist. If the recoverable amount (which is the higher of fair value
less costs of d isposal and value in use) is more t han carrying amount, the asset is not
impaired. It further says that in measuring value in use, the d iscount rate used should be
the pre- tax rate w hich reflects current market assessments of the time value of money and
the risks specific to the asset. The discount rate should not reflect risks for which future
cash flows have been adjusted and should equal the rate of return which investors would
require if they were to choose an investment which would generate cash flows equivalent to
those expected from the asset. Therefore pre-tax cash flows and pre-tax discount rates
should be used to calculate value in use.
Date year ended Pre-tax cash flow Discounted cash

flows (@8%)
Sm Sm
28 February 20X8 8 7.41
28 February 20X9 7 6.00
29 February 20Y0 5 3.97
28 February 20Y1 3 2.21
28 February 20Y2 13 8.85
Total 28.44
Answers 269
The CGU is impaired by the amount by which the carrying amount of the cash-generating
unit exceeds its recoverable amount .
Recoverable amount
The fair value less costs to sell ($26.6 million) is lower than t he va lue in use ($28. 44 million).
The recoverable amount is therefore $28. 44 million.
Impairment
The carrying amount is $32 million and therefore the impairment is $3.56 million .
Allocating impairment losses

Canto will allocate the impairment loss first to the goodwill and then to other assets of the
unit pro rota on t he ba sis of the carrying amount of each asset in the cash-generating unit .
When allocating t he impairment loss, t he carrying amount of an asset cannot be reduced
below its fair value less costs to sell.
Consequently, the entity will allocate $3 million to goodwill and then allocate $0.1 million
on a pro rot a basis to PPE (to reduce it to its fair value less costs to sell of $9.9 million) and
other assets ($0.46 million to the ot her assets). This would mean t hat the carrying amount s
would be $9.9 million and $18.54 million respectively.
61.t Ethan
Workbook refere nces. Deferred tax is covered in Chapter 7. Investment property, impairment
and fair value are covered in Chapter 4 , and financia l instruments in Chapter 8.
Top tips. In Part (a), you should focus on IFRS 13. Part (b) required application of the fair value
option in IFRS 9 Financial Instruments. The option is used where such application would eliminate
or significant ly reduce a measurement or recognition inconsistency between the debt liabilities
and the investment propert ies to which t hey were related in this question. In Part (c), candidates
needed to recognise that, in classifying the B shares as equity rather tha n as a liability, t he entity
had not complied with IAS 32 Financial Instruments: Presentation. There were point ers t o the
shares being classified as a liability, in particular the fact that entity was obliged to pay an
annual cumulat ive dividend on the B shares and did not have discretion over the distribution of
suc h dividend.
Eas y marks. There are no obviously easy marks in this question.
Hlil:i·IH:h::i◄
Marks
(a) Fa ir value of investment properties 13

(b) Fa ir value option - IFRS 9 7
(c) B shares of subsidiary 5
25
(a) Fair value of investm ent properties
The fair va lue of an asset is the price that would be received to sell an asset or paid t o
transfer a liability in an orderly transaction between market participants at t he
measurement date (IFRS 13 Fair Value Measurement). IFRS 13 states that valuat ion
techniques must be those wh ich are appropriate and for which sufficient data are
available. Entit ies should maximise the u se of relevant o bservab le inp uts and minimise
the use of unob servable inputs. The standard establishes a three- level hierarchy for the
inputs that valuation techniques use to measure fair va lue.
270 Strategic Business Reporting (SBR) @BPP l[NININC

~•FOi,\
Level 1 Quoted prices (u nadjusted) in active markets for identical assets or liabilities
that the reporting entity can access at the measurement date
Level 2 Inputs other than quoted prices included within Level 1 that a re observable for
t he asset or liability, either directly or indirectly, eg quoted prices for similar
assets in active markets or for identical or similar assets in non-active markets
or use of quoted interest rates for valuation purposes
Level 3 Unobservable inputs for the asset or liability, ie using the entity's own
assumptions about market exit value
Although an active market exists for Ethan's investment properties, Ethan uses a
discounted cash flow model to measure fair value. This is not in accordance with IFRS 13.
As the fair value hierarchy suggests, IFRS 13 favours Level 1 inputs, that is market-based
measures, over unobservable (Level 3) inputs such as discounted cash flows.
Goodwill and deferred tax
If the fair value of t he investment properties is not measured correctly in accordance wit h
IFRS 13, this means that t he deferred tax liability on investment properties may also be
inco rrect. In addition, as goodwill is calculated as consideration t ransferred less fair value
of net assets, goodwill may be incorrect. This is because deferred tax is ca lculated on the
difference between the ca rrying amount of the asset and its tax base. So if the carrying
amount is incorrect, the deferred tax wil l be incorrect. The goodwill calculat ion uses the fair
value of all net assets, not just the investment properties and the related deferred tax
liability, so it is incorrect to use an increase in the deferred tax liability as the basis for
assessing whether goodwill is impaired.
The reasoning behind Ethan's approach is that a s the deferred tax liability decreases, the
fa ir value of net assets increases, thereby decreasing goodwill. However, this method of
determ ining whet her goodwill is impaired does not accord with IAS 36 Impairment of
Assets. IAS 36 requires that goodwill should be reviewed for impairment annually for any
indicators of impairment, which may be internal or ext ernal, and are not confined t o
changes in the deferred tax liability. Where it is not possible to measure impairmen t for
individual assets, the loss should be measured for a cash-generating unit.
The recoverable amount is defined as the higher of:
(i) The a sset's fa ir value less costs to sell. This is the price that would be received to
sell the asset in an orderly transaction between market participants at the
measurement date under current market conditions, net of costs of disposal.
(ii) The asset's value in use. This is the present va lue of estimated future cash flows
(inflows minus outflows) generated by the asset, including its estimated net disposal
value (if any) at the end of its useful life.
If an asset's carrying amount is higher t han its recoverable amount, an impairment
loss has occurred. The impairment loss should be written off against profit or loss for the
year, a nd the corresponding credit (write-off) applied first to goodwill, t hen to the
investment properties, then to other assets pro- rota.
Deferred tax assets on losses
In theory, unused t ax losses give rise to a deferred tax asset. However, IAS 12 Income Taxes
states that deferred tax a ssets should only be recog nised to the extent that t hey are
regarded as recoverable. They should be regarded as recoverable to the extent that on
the basis of all the evidence available it is probable that there will be suitable taxable
profits against whic h the losses can be recovered. It is unlikely that f uture taxable profits
of Ethan will be sufficient to realise all of the tax loss because of:
(i) The announcement that a substantial loss w ill be incurred this year instead of the
expect ed profit
(ii) Considerable negative variances against budgets in the past
Consequently, Ethan should not recognise the deferred tax asset.
Answers 271
(b) IFRS 9 fair value option
Generally under IFRS 9 Financ ial Instruments, the debt issued to finance its investment
properties would be accounted for using amortised cost, while the properties themselves
are at fair val ue. This is an accounting m ismatch, that is a recognition or measurement
inconsistency between the debt liability and the asset to which it relates. The asset and
liability, and the gains and losses arising on t hem, wou ld be measured on d ifferent bases.
The IFRS 9 fair va lue option a llows an entity to designate a liability at initial recognition
as being at fair va lue through profit or loss if using this opt ion would eliminate or
significantly reduce an accounting mismatch. Ethan has argued that the basis of
measurement of the debt and the investment properties is similar, particularly as regards
interest rates. This argument holds good in respect of the interest, and so t he fair value
option would be allowed.
However, IFRS 9 stipulates t hat if a liability is designated as being at fair value through
profit or loss, changes in the fair value that are due to changes in the liability's credit
risk must be recognised directly in other comprehensive income rather than profit or
loss. Such c hanges may not be reclassified to profit or loss in subsequent years,
although a reserves transfer is permitted from other components of equity to retained
earnings. On the other hand, if changes in the fair value attributable to the credit risk
of the liability create or enlarge an accounting mismatc h in profit or loss, t hen all fair
value movements are recog nised in profit or loss.
(c) B shares of subsidiary
Ethan's accounting treatment of the B shares (as equity instruments) does not comply with
IAS 32 Financial Instruments: Presentation. The IAS 32 definition of a financial lia bility
includes any liability that is a contractual obligation t o deliver ca sh or another financia l
asset t o another entity. A financial instrument may only be classified as an equity
instrument rather than a liability if the instrument does not include an obligation ta deliver
cash or other fina ncial asset to another entity, or to exchange financia l instruments with
another entity under conditions that are potentially unfavourable.
In the subsidiary's books, the B shares would be treated as a financial liability. They
contain an obligation to deliver cash in the form of a fixed dividend. The dividend is
cumulative and must be paid whether o r not the subsidiary has sufficient legall y
distributable profits when it is due, and so the subsidiary cannot avoid this obligatio n.
In the consolidated financia l statements, the B shares would also be treated as a
financial liability, the intragroup element of this liability (70%) w ould ca ncel against the
investment in B shares in the parent's (Ethan's) statement of financial position. The
shares owned by external p arties would not cancel; they would remain a financial
liability. It is incorrect t o treat them as non- controlling interest because they are not
equity.
65 Whitebirk
Workbook reference. Small and medium- sized entities are covered in C hapter 18 of your
Workbook.
Top t ips. Part (a) on the main differences between the IFRS for SMEs and fu ll lFRS was reasonably
straightforward. Part (b) required you to apply the standard to specific areas: goodwill, research
and development expenditure, investment property and impairment. Remember not to use full
IFRS!
Easy marks. This was a rich source of easy marks for the well- prepared candida te. Make sure
your arguments are well-structured in order to earn those two marks for clarity and quality of
discussion.
BPP
272 Strategic Business Reporting (SBR) © l[AJININ(i
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U@il:i·iH:h::i&
Marks
(a) Subjective assessment including professional 11
(b) (i) Business combination 4
(ii) Research and develop ment expend iture 3
(iii) Investment property 2
(iv) Int angible 2
22
(a) Modifications to redu ce the burden of reporting for SMEs
The IFRS for SMEs has simplifications t hat refl ect the needs of users of SMEs' financial
statements and cost-benefit considerations. It is designed to facilitate financial reporting
by small and medium-sized entities in a number of ways:
(i) It provides significantly less guidance t han full IF RS. A great deal of the guidance in
full IFRS would not be relevant to the needs of smaller entit ies.
(ii) Many of the principles for recognising and mea suring assets, liabilities, income and
expenses in full lFRSs are simplified . For example, goodwill and intangibles are
always amortised over their estimated useful life (or ten years if it cannot be
estimated). Research and development costs must be expensed. With defined benefit
pension plans, all actuarial gains and losses are to be recognised immediately in
other comprehensive income. All p ast service costs are to be recognised immediately
in profit or loss. To measure the defined benef it obligation, the projected unit credit
method must be used.
(iii) Where f ull lFRSs allow accounting poliC!:J choices, the IFRS for SM Es allow s o nl!:J the
ea sier option . Examples of alternatives not allowed in the IFRS for SM Es include:
revaluation model for intangible assets and propert!:J, plant a nd equipment,
proportionate consolidation for investments in jointl!:j-COntrolled entities and choice
between cost a nd fair value models for investment property (measurement depends
on the circumstances).
(iv) To pics not relevant to SMEs are o m itted : earnings per share, interim financial
reporting, segment reporting, insurance and assets held for sale.
(v) Sig nifica ntly f ew e r disclosures a re required.
(vi) The standard has been w ritten in clear la nguage t hat can easily be translated.
The above represents a considerable reduction in reporting requirements - perhaps

as much as 90% - compared with list ed entities. Entities will naturall!:J wish t o use the
IFRS for SMEs if they can, but it s use is restric t ed.
The restrictions are not relat ed to size. There are severa l disadvantages of basing
the definition on size limits a lone. Size limits are arbitrary and different limits are
like ly t o be appropriate in differ e nt countries. Most people believe that SM Es are
not simply smal ler versions of list ed entities, but differ from them in more
fundamental ways.
The most important wa!:J in which SMEs differ from other entities is t hat they are not
usually public ly account able. Accordingly, there are no quant it ative th resholds
for qualification as a SME; instead, the scope of the IFRS is determined by a t est of
public a ccountability . The IFRS is suitable for all entities except those whose
securities are publicly traded and financial institutions such as banks and insurance
companies.
Answers 273
Another way in w hich the use of the IFRS for SM Es is restricted is that users cannot
c herr y p ick from t his IFRS and full lFRS. If an entity adopts the IFRS for SMEs, it
must adopt it in it s entirety.
(b) (i) Busi ness combination
IFRS 3 Business Combinations a llows an entity to measure non-controlling interests

at acquisition at either fair value or at the proportionate share of the acquiree's net
asset s. The IFRS for SMEs o nly allows no n-controlling int erest s t o be mea sured at
t he pro p ortionate share af the a cquiree's net a ssets. This avoids the need for
SMEs to determine the fair value of the non-controlling interests when undertaking a
business combination.
In addition, IFRS 3 requires goodwill to be tested annually for impairment. Th e IFRS

for SM Es requires good w ill t o be amo rt ised inst ead. This is a much simpler
approach and the IFRS for SMEs specifies that if an entity is unable to make a
reliable estimate of the useful life, it is presumed to be ten years, simplif ying things
even further.
Goodwill on Whitebirk's acquisition of Close will be calculated as:
$ '000
Consideration transferred 5,700
Non-controlling interest: 10% x S6m 600
6,300
Less fair value of identifiable net assets acquired (6,000)
Goodwill 300
This goodwill of $0.3 million will be amortised over ten years, that is $30,000 per annum.
(ii) Researc h and d evelo p ment expendit u re
The IFRS for SMEs requires all internally generated research and development
expenditure to be expensed t hro ug h p rofit o r loss. This is simpler t han full l FRS -
IAS 38 Intangible Assets requires internally generated assets to be capitalised if
certain criteria (proving future economic benefits) are met, and it is often difficult to
determine whether or not they have been met.
Wh itebirk's tota l expenditure on research ($0.5m) and development ($1m) must be
written off to profit or loss for the year, giving a charge of $1.5 million.
(iii) Investment propert y
Investment properties must be held at fair value through profit or loss under the IFRS
for SM Es where their fair value can be measured without undue cost or effort, which
appears to be the case here, given that an estate agent valuation is available.
Consequently a gain of $0.2 million ($1.9m - $1.?m) will be reported in Whitebirk's
profit or loss for the year.
(iv) Inta ngible a sset

IAS 36 Impairment of Assets requires annual impairment tests for indefin ite life
int angibles, intangibles not yet available for use and goodwill. This is a complex,
time-consuming and expensive test.
The IFRS for SMEs only requires impairment tests where there are indicators of
impairment. In the case of Whitebirk's intangible, there are no indicators of
impairment, and so an impairment test is not required.
In addition , IAS 38 Intangible Assets does not require intangible assets with an
indefinite usef ul life to be amortised. In contrast, under the IFRS for SMEs, all
int angible assets must be amortised. If the useful life cannot be established r eliably,
it must not exceed ten years.
271t Strategic Business Reporting (SBR) @BPP Lll\R'IING

M ,DIA
ACCA
Strategic Business
Reporting
(I nternationa I)
Mock Examination 1
Questions
Time allowed 3 hours 15 minutes
This exam is d ivided into two sections
Section A BOTH questions are compulsory and MUST be atte mpted
Section B BOTH questions are compulsory and MUST be attempted
DO NOT OPEN THIS EXAM UNTIL YOU ARE READY TO START

UNDER EXAMINATION CONDITIONS
0 BPP
LEAUIING
tA'Ol"
275
LCAl\ ti(;
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Section A - BOTH questions are compulsory and MUST
be attempted
1 Joey
(a) Joey, a public limited company, operates in the media sector. Joey has investments in two
companies, Margy and Hulty. The draft statements of financial position at 30 November
20X4 are as follows:
Joey Margy Huft y

Sm Sm Sm
Assets
Non-current assets
Property, plant and equipment 3,295 2,000 1,200
Investments in subsidiaries
Margy 1,675
Hulty 700
5,670 2,000 1,200
Current assets 985 861 150

Total assets ~ 2,861 ~
Share capital 850 1,020 600
Retained earnings 3,340 980 350
Other components of equity 250 80 40
Total equity 4,440 2,080 990
Total liabilities 2,215 781 360

Total equity and liabilities 6,655 2 ,861 1,350
The following information is relevant to the preparation of the consolidated financial

statements:
(1) On 1 December 20X1, Joey acquired 30% of t he ordinary shares of Margy for a cash
consideration of $600 million when the fair value of Margy's identifiable net assets
was $1,840 million. Joey has equi t y accounted for Margy up to 30 November 20X3.
Joey's share of Margy's undistributed profit amounted to $90 million and its share of
a revaluation gain amounted to $10 million for the period 1 December 20X1 to
30 November 20X3. 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. The cash consideration paid has been added to the equity
accounted balance for Margy at 1 December 20X3 to give the carrying amount at
30 November 20X4.
At 1 December 20X3, the fair value of Margy's identifiable net assets was
$2,250 million. At 1 December 20X3, the fair value of the equit y interest in Margy
held by Joey before the business combination was $705 million and the fair value of
the nan-controlling interest of 30% was assessed as $620 million. The retained
earnings and other components of equity of Margy at 1 December 20X3 were
$900 million and $70 million respectively. It is group policy to measure the non-
controlling interest at fair value.
(2) At the time of the business combination with Margy on 1 December 20X3, Joey
included in the fair value of Margy's identifiable net assets, an unrecognised
contingent liability with a fair value of $6 million in respect of a warranty claim in
progress against Margy, considered to have been measured reliably. In March 20X4,
there was a revision of the estima te of the liability to $5 million. The amount has met
the criteria to be recognised as a provision in current liabilities in the financial
statements of Margy and the revision of the estimate is deemed to be a measurement
period adjustment.
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Mock exam 1: Questions 277
(3) Buildings with a carrying amount of $200 million had been included in the fair value
of Margy's identifiable net assets at 1 December 20X3. The buildings have a
remaining useful life of 20 years at 1 December 20X3 and are depreciated on the
straight-line basis. However, Joey had commissioned an independent valuation of
the 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 decrease does not affect the fair value of the non-controlling
interest at acquisition and has not been entered into the financial statements of
Margy. The excess of the fair value of the net assets over their carrying amount, at
1 December 20X3, is due to an increase in the value of non-depreciable land and the
contingent liability.
(4) On 1 December 20X3, Joey acquired 80% of the equity interests of Hulty, a private
entity, in exchange for cash of $700 million, gaining control of Hulty from t hat date.
Because the former owners of Hulty needed to dispose of t he investment quickly,
they d id not have sufficient time to market the investment to many potential buyers.
The fair value of the identifiable net assets was $960 million. Joey determined that
the fair value of the 20% non-controlling interest in Hulty at that date was
$250 million. Joey reviewed the procedures used to identify and measure the assets
acquired and liabilities assumed and to measure the fair value of both the non-
controlling interest and the consideration transferred. After that review, Hulty
determined that the procedures and resulting measures were appropriate. The
retained earnings and other components of equity of Hulty at 1 December 20X3 were
$300 million and $40 million respectively. The excess in fair value is due to an
unrecognised franchise right, which Joey had granted to Hulty on 1 December 20X2
for five years. At the time of the acquisition, the franchise right could be sold for its
market price. It is group policy to measure the non-controlling interest at fair value.
All goodwill arising on acqu isitions has been impairment tested with no impairment
being required.
(5) From 30 November 20X3, Joey carried a property in its statement of financial
position at it s revalued amount of $14 million in accordance with IAS 16 Property,
Plant and Equipment. Depreciation is charged at $300,000 per year on the straight-
line basis. In March 20X4, the management decided to sell the property and it was
advertised for sale. On 31 March 20X4, the sale was considered t o be highly
probable and the criteria for IFRS 5 Non-current Assets Held for Safe and
Discontinued Operations were met. At that date, the property's fair value was
$15. 4 million and its va lue in use was $15.8 million. Costs to sell the property were
estimated at $300,000. On 30 November 20X4, the property was sold for
$15.6 million. The transactions regarding the property are d eemed to be material
and no entries have been made in the financial statements regardin g this property
since 30 November 20X3 as the cash receipts from the sale were not received until
December 20X4.
Required
(a) (i) Explain, showing relevant ca lculations and with reference to IFRS 3 Business
Combinations, haw the goodwill balance in Joey's consolidated financia l
statements at 30 November 20X4 should be calculated. (10 marks)
(ii) Explain how the transaction described in Note 5 above should be accounted
for in Joey' s consolidated financial statements at 30 November 20X4.
(6 marks)
(iii) Prepare, showing required calculations, an extract from Joey's consolidated
statement of financial position showing the group retained earnings at
30 November 20X4. (4 marks)

IMlllA
(b) The Joey Group has granted to the employees of Margy and Hulty, some of whom are
considered key management personnel, options over its own shares as at 7 December
20X4. The options vest immediately. Joey is not proposing to make a charge to the
subsidiaries for these options.
Joey does not know how to account for this transaction.

Required
Explain to Joey how the above t ransaction should be dealt with in t he subsidiaries'
financial statements and Joey's consolidated financial statement s, and advise on any
disclosures that may be requ ired to ensure external stakeholders are aware of the
transaction. (5 marks)
(c) Joey took out a foreign currency loan of 5 million dinars at a fixed interest rate of 8% on
1 December 20X3. The interest is paid at the end of each year. The loan will be repaid after
two years on 30 November 20X5. The in terest rate is the cu rrent market rate for similar
two-year fixed interest loans.
Joey is unsure how to account for the loan and related interest.
The average currency exchange rate for the year is not materially different from the actual
rate.
Exchange rates: $1 =dinars

1 December 20X3 5.0
30 November 20X4 6.0
Average exchange rate for year ended 30 Novem ber 20X4 5.6
Required
Explain to Joey how to account for the loan and interest in the financial statements for the
year ended 30 November 20X4. ( 5 marks)
(Total= 30 marks)
2 Ramsbury 39 mins
The directors of Ramsbury, a public limited company which manufactures industrial cleaning
products, are preparing the consolidated financial statements for the year ended 30 June 20X7.
In you r capacity as advisor to the company, you become aware of the following issues.
In the draft consolidated statement of financial position, the directors have included in cash and
cash equivalents a loan provided to a director of $1 million. The loan has no specific repayment
date on it but is repayable on demand. The d irectors feel that t here is no problem w it h this
presentation as International Financial Reporting Standards (IFRS) a llow companies to make
accounting policy choices, and that showing the loan as a cash equivalent is their choice of
accounting policy.
On 1 July 20X6, there was an amendment to Ramsbury's defined benefit pension scheme
whereby the promised pension entitlement was increased from 10% of final salary t o 15%. A bonus
is paid to t he directors each year which is based upon t he operating profit margin of Ramsbury.
The directors of Ramsbury are unhappy that there is inconsistency on the presentation of gains
and losses in relation to pension scheme with in the consolidated financial statements.
Additionally, they believe that as the pension scheme is not an integral part of the operating
activities of Ramsbury, it is misleading to include the gains and lasses in profit or loss. They
therefore propose to change their accounting policy so that a ll gains and losses on the pension
scheme are recognised in other comprehensive income. They believe that this will make the
financial statements more consistent, more understandable and can be justified on the grounds
of fair p resentation. Ramsbury's pension scheme is currently in deficit.
Required
Discuss t he ethical and accounting implications of t he above situations, with reference where
appropriate, to International Financial Reporting Standards. (18 marks)
(2 marks)
(Total = 20 marks)
0 BPP
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Section B - BOTH questions are compulsory and MUST
be attempted
3 Klancet
Kloncet is a public limited company operating in the pharmaceuticals sector. The company is
seeking advice on several financial reporting issues.
(a) Kloncet produces and sells its range of drugs th rough th ree separate divisions. In addition,
it hos two laborat ories w hich carry out research and development activities.
In the first laboratory, the research and development activity is funded internally and
centra lly for each of the three d ivisions. It does not carry out research a nd 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 tot a l revenues.
The performance of the second laboratory's activities and of the three separate divisions is
regularly reviewed by t he ch ief operating decision maker (CODM). In addition to the heads
of d ivisions, 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 activit ies, a llocation of
resources and financial results of the laboratory.
The managing director does not think IFRS 8 provides information that is useful to investors.
He feels it just odds more pages to financial statements that o re a lready very lengthy . The
finance director partially agrees with the managing director and believes that the IASB's
practice statement on materiality confirms his opinion that not all t he d isclosure
requirements in IFRS 8 ore necessary.
Required
(i) Advise the managing director, with reference to IFRS 8 Operating Segments, whether
the research and development laboratories should be reported as two separate
segments. ( 6 marks)
(ii) Discuss the managing director's view t hat IFRS 8 does not provide useful information
to investors. (5 ma rks)
(iii) Discuss whether the finance direct or is correct in his opinion about IFRS 8. You
should briefly refer to Pract ice St atement 2 Making Materiality Judgements in your
answer. (4 ma rks)
(b) Kloncet is collaborating with Retta, a third party, to develop t wo existing drugs owned by
Kloncet.
Project 1
In the case of the first drug, Retta is simply d eveloping the drug for Kloncet without taking
any risks during t he development phase and will hove no further involvement if regu latory
approval is given. Regulatory approval hos been refused for t his drug in the post. Klancet
will retain ownership of potent rights a ttached to the drug. Retta is not involved in the
marketing and production of the drug. Kloncet hos agreed to make two non-refundable
payments to Retta of $4 million on the signing of the agreement and $6 million on
successful completion of t he development.
280 St rat egic Business Reporting (SBR) @BPP LEAR\,NC:

IMlllA
Project 2
Kloncet and Retto hove entered into a second collaboration agreement in which Kloncet
will pay Retto for developing and manufacturing on existing drug. The existing drug
already hos regulatory approval. The new drug being developed by Retto for Kloncet will
not differ substantially from the existing drug. Kloncet w ill hove exclusive marketing rights
to the drug if the regulatory authorities approve it. Historically, in this jurisdiction, new
drugs receive approval if they do not d iffer substantially from on existing approved d rug.
The contract terms require Kloncet to pay on upfront payment on signing of the contract, a
payment on securing final regulatory approval, and a unit payment of $10 per unit, which
equals the estimated cost plus a profit margin, once commercial production begins. The
cost-plus profit margin is consistent with Kloncet's other recently negotiated supply
arrangements for similar drugs.
Required
Prepare notes for a presentation to the managing director of Kloncet as to how to account
for the above contracts with Retto in accordance with IFRSs. (8 m arks)
Professional marks will be awarded in Part (a) for clarity and quality of presentation.
(2 marks)
(Total= 25 marks)
'+ Jayach
(a) Joyoch, a public limited company, carries on asset that is traded in different markets. The
asset hos to be valued at fair va lue under International Financial Reporting Standards.
Joyoch currently only buys and sells the asset in the Australasian market. The data
relating to the asset ore set out below.
Year to 30 November European Australasian

20X2 Asian market market market
Volume of market - units 4million 2 million 1 million
Price S19 $16 $22
Costs of entering the $2 $2 $3
market
Transaction costs $1 $2 $2
Additionally, Joyoch hod acquired on entity on 30 November 20X2 and is required to fair
value a decommissioning liability. The entity hos to decommission a mine at the end of its
useful life, which is in three years' time. Joyoch hos determined that it will use a valuation
technique to measu re the fair value of the liability. If Joyoch were allowed to transfer the
liability to another market participant, then the following data would be used.
Input Amount
Labour and material cost $2 million
Overhead 30% of labour and materia l cost
Third party mark- up - industr y overage 20%
Annual inflation rote 5%
Risk adjustment - uncertainty relating to cash flaws 6%
Risk-free rote of government bonds 4%
Entity's non-performance risk 2%
Required
Discuss, with relevant computations, how Joyoch should measure the fair value of the
above asset and liability under IFRS 13. (11 marks)
0 BPP
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(b) Joyoch hos recently employed a new managing director. The managing director hos
convinced the board that on investment in a new cryptocurrency, iCoin, would generate
excellent capitol gains. Consequently, Joyoch purchased 50 units of iCoin for $250,000
on 20 December 20X1. The finance director hos expressed concern about how t o report this
investment in Joyoch's 31 December 20X1 financial statements. Given the lock of an
accounting standard for such investments, he sees no alternative but to include it as a cash
equivalent. As the amount invested is less than the quantitative threshold Joyach hos used
to assess materiality, he is not planning to provide any further information about the
investment in the financial statements.
Required
(i) In t he absence of a specific accounting standard on cryptocurrencies, discuss how

Jayoch should determine how to account for the investment in iCoin under IFRS
Standards. (4 marks)
(ii) Discuss the finance director's decision not to provide any f urther disclosures about
the investment in the financial statements, making reference t o IFRS Practice
Stat ement 2 Making Materiality Judgements. (4 marks)
(c) The directors of Joyoch hove received on email from its majority shareholder.
To: Directors of Joyoch

From: A Shareholder
Re: Measurement
I hove recently seen on article in the financial press discussing the 'mixed measurement
approach ' that is used by lots of compa nies. I hope th is isn't the case at Joyoch because
'mixed' seems to imply 'inconsistent'? Surely it would be better to measure everything in the
same way? I would appreciate it if you could you provide f urther information at the next
annual general meeting on measurement bases, covering what approach is token at
Joyach a nd why, and the potential effect on investors trying to analyse the financial
statements.
Required
Prepare notes for the directors of Joyoch which d iscuss the issues raised in the
shareholder's email. You should refer to the Conceptual Framework where appropriate in
your answer. (6 marks)
(Total = 25 marks)
282 Strategic Business Reporting (SBR) @ BPP

L[AANINC
Mflll,\
Ans\Yers
DO NOT TURN THIS PAGE UNTIL YOU HAVE

COMPLETED THE MOCK EXAM
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Section A
1 Joey
Workbook references. Basic groups and the principles of IFRS 3 are covered in Chapter 11. St ep
acquisitions are covered in Chapter 12. IFRS 5 is covered in Chapter 14. Share-based payment is
covered in Chapter 10. IAS 21 is covered in Chapter 16.
To p t ips. For step acquisitions, it is important to understand the transaction - here you have an
associate becoming a subsidiary, so the goodwill calculation for Margy needs to include the fair
value of the previously held investment s. Remember to discuss the principles rather than just
working through the calculations. The examiner has stated that a candidate w ill not be able to
pass t he SBR exam on numerical elements alone. The other goodwill calculation is very
straightforward, the only unusual aspect being t hat it is a gain on a bargain purchase.
Don 't skimp on parts (b) and (c) - there are five marks available.
Easy marks. There are some easy marks available in Part (a) for the standard parts of
calculations of goodwill and retained earnings. The calculations in part (c) should also be
relatively easy.
IHiii:i·ifoii::iM
Marks
(a) (i) Goodwill

Calculat ion 4
Discussion - 1 mark per point up to maximum 6
(ii) Asset held for sale
Calculation 3
Discussion - 1 mark per point up to maximum 3
(iii) Retained earnings 4
20
(b) Subjective assessment of discussion - 1 mark per point up to
maximum 5
(c) Calculation 3
Discussion 2
10
30
(a) (i) Goodwill
IFRS 3 Business Combinations requires goodwill to be recognised in a business

combination. A business combination takes place when one entity, the acquirer,
obtains control of another entity, the acquiree. IFRS 3 requires goodwill to be
ca lc ulated and recorded at the acquisition date. Goodwill is the difference between
the consideration transferred by the acquirer, t he amount of any non-controlling
interest and the fair value of the net assets of the acquiree at the acquisition date.
When the business combination is achieved in stages, as is the case for Margy, the
previously held interest in the now subsidiary must be remeasured to its fair value.
BPP
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Mock exam 1: Answers 285
Applying t hese principles, the goodwill on the acquisition of Hulty and Margy should
be calculated as follows:
Hulty Margy
Sm Sm Sm Sm
Consideration transferred 700 975
Non-controlling interest (at fair value) 250 620
Fair value of previously held equity 705
interest (Note (1))
Less fair value of net assets at acquisition

Share capital 600 1,020
Retained earnings 300 900
Other components of equity 40 70
Fair value adjustments:
Land (Note (2) and W1) 266
Contingent liability (Note (3)) (6)
Franchise right (W1) 20
(960) (2,250)
Gain on bargain purchase (Note (4)) (10) 50
Measurement period adjustments:
Add decrease in FV of buildings (Note (5)) 40
Contingent liability: $6m - $5m (Note (3)) (1)
Goodwill ~
Notes
(1) Margy is a business combination achieved in stages, here moving from a 30%
owned associate to a 70% owned subsidiary on 1 December 20X3. Substance
over form dictates the accounting treatment as, in substance, an associate
has been disposed of and a subsidiary has been purchased. From 1 December
20X3, Margy is accounted for as a subsidiary of Joey and goodwill on
acquisition is calculated at this date. IFRS 3 requires that the previously held
investment is remeasured to fair value and included in the goodwill calculation
as shown above. Any gain or loss on remeasurement to fair value is reported in
consolidated profit or loss.
(2) IFRS 3 requires the net assets a cquired to be measured at their fair value at
the acquisition date. The increase in the fair value of Margy's net assets (that
are not the result of specific factors covered in Notes (3) and (5) below) is
attributed to non-depreciable land.
(3) In accordance with IFRS 3, contingent liabilities should be recognised on
acquisition of a subsidiary where they are a present obligation arising as the
result of a past event and their fair value can be measured reliably (as is the
case for the warranty claims) even if their settlement is not probable.
Contingent liabilities after initial recognition must be measured at the higher
of the amount that would be recognised under IAS 37 Provisions, Contingent
Liabilities and Contingent Assets and the amount initially recognised under
IFRS 3.
(4) As the goodwill calculation for the acquisition of Hulty results in a negative
va lue, this is a gain on a bargain purchase and should be recorded in profit or
loss for the year attributable to the parent. Before doing so, Joey must review
the goodwill calculation to ensure that it has correctly identified a ll of the
assets acquired and a ll of the liabilities a ssumed, along with verifying that its
measurement of t he consideration transferred and the non-controlling interest
is appropria te. Joey has completed this exercise and thus it is appropriate to
record the negative goodwill and related profit.

l~AR IMG
IA[DIA
(5) As a result of the independent property va luation becoming available during
the measurement period, the carrying amount of property, plant and
equipment as at 30 November 20X4 is decreased by $40 million less excess
depreciation charged of $2 million ($40m/20 !:Jears), ie $38 million. This will
increase the carrying amount of goodwill by $40 million as IFRS 3 allows the
retrospective adjustment of a provisional figure used in the ca lculation of
goodwill at the acquisition date where new information has become available
about the circumstances that existed at the acquisition date. Depreciation
expense for 20X4 is decreased by $2 million.
Workings
Hulty: Fair value adjustments
At acq'n Movement At year end

1 Dec 20X3 (over 4 30 Nov
years) 20X4
Sm Sm Sm
Franchise: 960 - (600 + 300 + 40) 20 (5) 15
2 Margy: Fair value adjustments
Movement At year end

At acq 'n (reduced 30 Nov
1 Dec 20X3 dep'n) 20X4
Sm Sm Sm
Land: 2,250 - (1,020 + 900
+ 70) + 6* 266 266
Property, plant and equipment (40) 2 (38)
*Contingent liability
(ii) Asset held for sale
At 31 March 20X4, the criteria in IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations have been met, and the property should be classified as
held for sale. In accordance with IFRS 5, an asset held for sale should be measured
at the lower of its carr!:Jing amount and fa ir value less costs to sell. lmmediatel!:J
before classification of the asset as held for sale, the entity must recogn ise any
impairment in accordance with the applicable IFRS. An!:J impairment loss is generally
recognised in profit or loss. The steps are as follows:
Step 1 Calcu late carr!:J ing amount under applicable IFRS, here IAS 16 Property,
Plant and Equipment:
At 31 March 20X4, the date of classification as held for sale,
depreciation to date is calculated as $300,000 x 4/12 = $100,000. The
carrying amount of the propert!:J is therefore $13.9 million ($14.0 -
$0.1m). The journal entries are:
Debit Profit or loss $0.1m
Credit Property, plant and equipment (PPE) $0.1m
The difference between the carr1:1ing amount and the fair value at
31 March 20X4 is material, so the property is revalued to its fair value of
$15.4 million under IAS 16's revaluation model:
Debit PPE ($15.4m - $13.9m) $1.5m
Credit Other comprehensive income $1.5m
Step 2 Consider whether the propert1:1 is impaired b1:1 comparing its carr1:1ing
amount, the fair value of $15.4 million, with its recoverable amount. The
recoverable amount is the higher of value in use (given as $15.8 million)
and fair value less costs to sell ($15.4m - $3m = $15.1m.) The propert1:1 is
not impaired because the recoverable amount (value in use) is higher
than the carr1:1ing amount (fair value). No impairment loss is recognised.

Step 3 Classify as held for sale and cease depreciation under IFRS 5. Compare
the carrying amount ($15.4 million) with fair value less costs to sell
($15.1 million). Measure at t he lower of carrying amount and fair value
less costs to sell, here $15.1 million, giving an initial write-down o f
$300,000.
Debit Profit or loss $0.3m
Credit PPE $0.3m
Step 4 On 30 November 20X4, the property is sold for $15.6 million, wh ich,
after deducting costs to sell of $0.3 million gives a profit or $0.2 million.
Debit Receivables $15.3m
Credit PPE $15.1m
Credit Profit or loss $0.2m
(iii) Retained earnings
J OEY GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 NOVEMBER 20X4
(EXTRACT)
Sm
Retained earnings 0N1) 3,451.7
Workings
Group retained earnings
Joey Hu/ty Margy

Sm Sm Sm
At !:Jear end 3,340.0 350 980
FV adjustment: dep'n reduction (part (a)(i) 2
W2)
FV adjustment: franchise amortisation (part (a)(i) W1) (5)
Liabilit!:J adjustment (6 - 1)* (part (a)(i)) 5
Gain on bargain purchase (port (a)(i)) 10.0
Profit on derecognition of associate 0N2) 5.0
Asset held for sale: (0.2 - 0.1 - 0 .3) (part (a)(ii)) (0.2)
At acquisition (900)
_fil
Group share:
Hult!:J: 80% x 45 36.0

Marg!:J: 70% x 87 60.9
3,451.7
* The worront!:J claim provision of $5 million in Margy's financial statements must be

reversed on consolidation to avoid double counting. This is because the contingent
liability for this warrant!:! claim was recognised in the consolidated financial
statements on acquisition of Morg!:J.
2 Profit on derecognition of 30% associate
Sm
Fair value of previously held equity interest at date control
obtained 705
(per question/((a) (i))
Carrying amount of associate: 600 cost+ 90 (post-acq'n RE) + 10
(post acq'n OCE)
Profit

(b) Share-based payment
This arrangement w ill be governed by IFRS 2 Share- based Payment, which includes within
its scope transfers of equity instruments of an entity's parent in return for goods or
services. C lear guidance is g iven in the Standard as to when to treat group share-based
payment transactions as equity settled and when to treat them as c ash settled.
To determine t he accounting treatment, the group entity receiving the goods and services
must consider its own rights and obligations as well as the awards granted. The
amount recognised by the group ent ity receiving t he goods and services w ill not
necessarily be consistent w ith the amount recognised in t he consolidated financial
statements.
Group share-based payment transactions must be treated as equity settled if either of

the following apply:
(i) The entity grants rights to its own equity instruments.

(ii) The entity has no obligation to settle the sha re-based payment t ransactions.
Treatment in consolidated financial statements
Because the group receives all of the services in consideration for the group's equity
instruments, the transaction is treated as equity settled. The fair value of the share-based
payment at the grant date is charged to profit or loss over the vesting period with a
corresponding credit to equity. In t his case, the options vest immediately on the grant
date, the employees not being required t o complete a specified period of service and t he
services therefore being presumed to have been received. The fair value w ill be taken by
reference to the market value of the shares because it is deemed not normally possible to
measure directly t he fair value of the employee services received.
Treatment in subsidiaries' financial statements
The subsidiaries do not have an obligation t o settle the awards, so the grant is treated as
an equity settled transaction. The fair value of the share-based payment at the grant date
is c harged to profit or loss over the vesting period with a corresponding c redit t o
equity. The parent, Joey, is compensating the employees of the subsidiaries, Margy and
Hulty, with no expense to the subsidiaries, and t herefore the credit in equity is treated as
a ca pital contribution . Because the shares vest immediately, the expense recognised in
Margy and Hu lty's statement of profit or loss will be the full cost of the fair va lue at grant
date.
IAS 24 d isclosur es
Some of the employees a re considered key management personnel and therefore IAS 24
Related Party Disclosures should be applied. IAS 24 requ ires disclosure of the related party
relationship, the transaction and any outstanding balances at the year end date. Such
disclosures are required in order to provide sufficient information to the users of the
financial statements about the potential impact of related party transactions on an entity 's
profit or loss and financial position.
IAS 24 requires that an entity discloses key management personnel compensation in tota l
and for several categories, of which share- based payments is one. IFRS Practice Statement
2 Making Materiality Judgements confirms that disclosures required in IFRSs need only be
made if the information provided by the disclosure is material. Some related party
transactions may be assessed as immaterial and therefore not disclosed. That said, the
remuneration of key management personnel is of great interest to investors and it would be
difficult to see how it cou ld be considered immaterial.
(c) Foreign c urrenc y loan
On 1 December 20X3
On initial recognition (at 1 December 20X3), the loan is measured at the transaction p rice
translated into the functional currency (the dollar), because the interest is at a market rate
for a similar two-year loan. The loan is translated at the rate ruling on 1 December 20X3.

Debit Cash 5m + 5 $1m
C redit Financial liability (loan payable) $1m
Being recognition of loan
Year ended 30 November 20X4

Because there are no transaction costs, the effective interest rate is 8%. Interest on the loan
is translated at the average rate because this is an approximation for the actual rate
Debit Profit or loss (finance cost): 5m x 8% + 5.6 $71,429
C redit Financial liability (loan payable) $71,429
Being recognition of finance costs for the year ended 30 November 20X4
On 30 November 20X4
The interest is paid and the following entry is made, using the rate on the date of payment
of $1 = 6 dinars
Debit Financial liability (loan payable) 5m x 8% + 6 $66,667

C redit Cash $66,667
Being recognition of interest payable fo r the year ended 30 November 20X4
In addition, as a monetary item, t he loan balance at the year-end is translated at the spot
rate at the year end: 5m d inars + 6 = $833,333. This gives rise to an exchange gain of
£1,000,000 - $833,333 = $166,667.
The exchange gain on the interest paid of $71,429 - $66,667 = $4,762 is added to the
exchange gain on retranslation of t he loan of $166,667. This gives a total exchange gain of
$4,762 + $166,667 = $171,429.
2 Ramsbury
Workbook references. The Conceptual Framework is covered in Chapter 1 and ethics is covered
in Chapter 2. Employee benefits are covered in C hapter 5.
Top tips. As with all questions, ensure that you apply your knowledge to the scenario provided
and t hat your answer is in context. It is not enough to simply discuss t he accounting
requirements. You must draw out the ethical issues. Where relevant, you should identify any
threats to the fundamental principles in ACCA's Code of Ethics and Conduct.
IHGii:i·ifoH::iM
Marks
Accounting issues 1 mark per point to a maximum 9

Ethical issues 1 mark per point to a maximum 9
20
Treatment of loan to director
The directors have included the loan made to the directo r a s part of the cash and cash
equivalents balance. It may be that t he directo rs have misunderstood the definition of cash and
cash equivalents, believing the loan to be a cash equivalent. IAS 7 Statement of Cash Flows
defines cash equivalents as short-term , highly liquid investments that are readily convertible to
known amounts of ca sh and whic h are subject to an insignificant risk of changes in va lue .
However, the loan is not in place to enable Ramsbury to manage its short-term cash
290 St rategic Business Reporting (SBR) 0 BPP

Lfl\lN NG
1,\flllfo.
commitments, it has no fixed repayment date and the likelihood of the director defaulting is not
known. The classification as a cash equivalent is therefore inappropriate.
It is likely that the loan should be treated as a financial asset under IFRS 9 Financial Instruments.
Further information wou ld be needed , for example, is the $1 million the fair value? A case could
even be made that, since the loan may never be repaid, it is in fact a part of the director's
remuneration, and if so should be treated as an expense and disclosed accordingly. In addition,
since the directo r is likely to fall into the category of key management personnel, related party
disclosures under IAS 24 Related Party Disclosures a re likely to be necessary.
The treatment of the loan as a cash equivalent is in breach of the two fundamental qualitative
characterist ics prescribed in the IASB's Conceptua l Framework for Financial Reporting, namely:
(i) Relevance. The information should be disclosed separately as it is relevant to users.
(ii) Faithfu l representation. Information must be complete, neutral and free from error.
C learly this is not the ca se if a loan to a d irector is shown in cash.
The t reatment is also in breach of the Conceptual Framework 's key enhancing qualitative
characterist ics:
(i) Understandability. If the loan is shown in ca sh, it hides the t rue nature of the practices of
the company, making the financial statements less understandable to users.
(ii) Verifiability. Verifiability helps assure users that information faithfully represents the
economic phenomena it purports to represent. It means that different knowledgeab le and
independent observers could reach consensus that a particu lar depiction is a faithful
representation. The treatment d oes not meet this benchmark as it reflects the subjective
bias of the d irectors.
(iii) Comparability. For financial statem ents t o be comparable year-on-year and with other
companies, tran sact ions must be correctly classified, which is not the case here. If the cash
balance one year includes a loan to a director and the next year it does not, then you are
not comparin g like w ith like.
In some countries, loans to directors are illegal, with directors being personally liab le. Even if this
is not the case, there is a pot ential conflict of interest between that of t he director and that of
the company, which is why separat e disclosure is required as a minimum. Directors are
respo nsible for the financial statements required by statute, and thus it is their responsibility to
put right any errors that mean that the financial statements do not comply with IFRS. There is
gen erally a legal requirement to maintain proper accou nting records, and recording a loan as
cash conflicts with this requirement.
In obscuring the nature of the transaction, it is possible that the directors a re motivated by
personal interest, a nd a re thus failing in thei r duty to act honestly and ethica ll y. There is
potentiall y a self- interest threat to the fundamental principles of the ACCA Code of Ethics and
Conduc t. If one transaction is misleading, it cast s doubt on the credibility of the financial
statements as a whole.
In conclus ion, t he t reatment is problematic a nd should be r ectified .
Eth ical implications of cha nge of accounting policy
IAS B Accounting Policies, Chang es in Accounting Estimates and Errors only perm it s a change in
account ing policy if the change is: (i) required by a n IFRS or (ii) results in the financia l statements
providing reliable a nd more relevant information about the effects of transactions, other events or
conditions on t he entity's financial position, financial performance or cash flows. A retrospective
adjustment is required unless the change arises from a new accounting policy with transitional
arrangements to account for the c hange. It is possible to d epart from t he requirements of IFRS
but o nly in the extremely rare circumstances where compliance would be so misleading that it
would confl ict w it h the overall objectives of th e fina ncial statements. Practically this override is
rarely, if ever, invoked.

IAS 19 Employee Benefits requires all gains and losses on a defined benefit pension scheme to be
recognised in profit or loss except for the remeasurement component relating to the assets and
liabilities of the pion, wh ich must be recognised in other comprehensive income. So, current
service cost, post service cost and the net interest cost on the net defined benefit liobilit!:J must all
be recognised in profit or loss. There is no alternative t reat ment available to the direct ors, which,
under IAS 8, a change in accounting polic!:J might be applied to move Romsbur1:1 to. The d irectors'
proposals cannot be justified on the grounds of fair presentation. The directors hove on ethical
responsibilit1:1 to prepa re financial statements which ore a true representat ion of the entity 's
performance and compl!:J with all accounting standards.
There is a clear self-interest threat arising from the bonus scheme. The directors' change in policy
appears to be motivated b!:J on intention to overstate operating profit to maximise their b onus
potential. The amendment t o the pension scheme is a post service cost which must be expensed
t o profit or loss during the period the pion amendment hos occurred, ie immediotel!:J. This would
therefore be detrimental to t he operating p rofit s of Romsbur1:1 and depress on!:J pot ential bonus.
Additionoll!:J, it appears that the directors w ish to manipulate other aspects of the pension scheme
such as the cu rrent service cost and, since the scheme is in deficit, the net finance cost . The
directors ore deliberatel!:J manipulating t he presentation of these items b!:J recording them in
equity ra ther than in profit or loss. The financial statements would not be compliant with IFRS,
would not give a reliable picture of the t rue costs t o the compon1:1 of operating a pension scheme
and t his treatment would make the financial statements less comparable with other entities
correctl!:J applying IAS 19. Such treatment is against ACCA's Code of Ethics and Conduct
fundamental principles of objectivit!:J, integrit!:J and professional behaviour. The d irectors should
be reminded of their ethical responsibilities and must be dissuaded from implementing the
proposed change in policy.
The directors should be encouraged to utilise other tools within the fi nancial statements to explain
the company's results such as drawing users attention towards the cash flow where the cash
genera ted from operations measure w ill exclude the non-cash pension expense and if necessary
alternative performance measures such as EBITDA could be disclosed where non-cash items may
be consistentl!:J stripped out for comparison purposes.

IMlllA
Section B
3 Klancet
Workbook references. Segment reporting is covered in Chapter 18. Intangible asset s are covered
in Chapter 4. Financial instruments are covered in Chapter 8. IFRS Practice Statement 2 Making
Materiality Judgements is covered in Chapter 20.
Top tips. In Part (a)(i), on segment reporting, t he key was to argue that t he second laborat ory
met the definition of an operating segment, while the first one did not. In Part (a)(ii) you should
con sider w hy segmental information is useful to investors - why wou ld they want this
information? What makes t his information particularly useful to investors? Part (a)(iii) requires an
awareness of cu rrent issues in financial reporting, in this case IFRS Practice Stat ement 2 Making
Materiality Judgements. It is crucial that you read w idely while st udying SBR as questions on
current issues w ill definitely feature in you r exam.
In Part (b) the key issue was whet her the costs could be capitalised as development expenditure,
which was the case for t he latter, but not the former.
Easy marks. These are available for discussing the principles and quantitative thresholds of IFRS
8 in Part (a).
IHiM:i-iH:ii::iM
Marks
(a) (i) Requirements of IFRS 8 - 1 mark per point up to maximum 6

(ii) Usefulness of IFRS 8 - 1 mark per point up to maximum 5
(iii) Materialit y - 1 mark per point up to maximum 4
(b) Notes for presentation - 1 mark per point up to maximum 8

Professional marks (Part (a)) 2
25
(a) (i) Segment reporting

IFRS 8 Operating Segments states that an operating segment is a component of an
entity wh ich engages in business activities from w hich it may earn revenues and
incur costs. In addition, discrete financial information should be available for the
segment a nd these results should be regularly reviewed by the entity's chief
operating decision maker (CODM) when making decisions about resource allocation
to the segment and assessing its performance.
O ther factors should be taken into account, including the nature of the business
activities of each component , the exist ence of managers responsible for them, and
information presented to the board of directors.
According to IFRS 8, an operating segment is one which meets any of the following
quantitative thresholds:
(i) It s reported revenue is 10% or more of the combined revenue of all operating
segments.
(ii) The absolute amount of its reported prof it or loss is 10% or more of t he greater,
in absolute amount, of (1) the combined reported profit of a ll operating
seg ments which did not report a loss and (2) the combined reported loss of all
operating segments which reported a loss.
(iii) Its assets are 10% or more of the combined asset s of all operating segment s.
BPP
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As a result of the application of the above criteria, the first laboratory w ill not be
reported as a separate operating segment. The divisions have heads directly
accountable to, and maintaining regular contact w ith, the CODM to discuss all
aspect s of their d ivision's performance. The divisions seem to be consistent with the
care principle of IFRS 8 and should be reported as separate segments. The
laboratory does not have a separate segment manager and the existence of a
segment manager is normally an important factor in determining operating
segments. Instead, the laborator y is responsible to the divisions themselves, which
would seem to indicate that it is simply supporting the existing divisions and not a
separate segment. Additionally, there does not seem to be any discrete performance
information for the segment, which is reviewed by the CODM.
The second laboratory should be reported as a separate segment. It meets the

quantitative threshold for percentage of total revenues and it meets other criteria for
an operating segment. It engages in activities which earn revenues and incurs costs,
its operating results are reviewed by the CODM and discrete information is available
for the laboratory's activities. Finally, it has a separate segment manager.
(ii) Contrary to the managing director's views, IFRS 8 provides information that makes
the financial statements more relevant and more useful to investors. IFRS financial
statements are highly aggregated and may prevent investors from understanding
the many different business areas and activities that an entity is engaged in. IFRS 8
requires information to be disclosed that is not readily available elsewhere in the
financia l st atements, therefore it provides a dd itional information wh ich aids an
investor's understanding of how the business operat es and is managed.
IFRS 8 uses a 'management approach' to report information on an entity's segments

and results from the point of view of the decision makers of the entity . This allows
investors to examine an entity 'though t he eyes of management' - to see the
business in the way in which the managers who run the business on their behalf see
it. This provides investors w ith more discrete information on the business segments
allowing them to better assess t he return being earned from those business
segments, the risks that are associated with t hose segment s and how those risks are
managed. The more detailed information provides invest ors with more insight into an
entity's longer term performance.
The requirement to disclose information that is actually used by internal decision

makers is an important feature of IFRS 8, but is a lso one of its main crit icisms. The
fact that the reporting does not need to be based on IFRS makes it difficult to make
comparisons with information that was reported in prior periods and with other
companies in the sector. The flexibility in reporting can make it easier to manipulate
what is reported. IFRS 8 disclosures are often most useful if used in conjunction with
narrative disclosures prepared by t he d irectors of the company, such as the
Strategic Review in the UK.
(iii) The finance director' s opinion tha t 'not all the disclosure in IFRS 8 is necessary' could
be interpreted to mean that he believes he can pick and choose which disclosure
requirements he feels are necessary and which he believes are not.
This is not correct. IAS 1 Presentation of Financial Stat ements requires all standards
to be applied if fair presentation is t o be achieved. Directors cannot choose which
parts of standards t hey do or do not apply.
However, as confirmed by Practice Statement 2, if the information provided by a

disclosure is immaterial and it therefore cannot reasonably be expected to influence
the decisions of primary users of the financial statements, then that d isclosure does
not need to be made.
If the finance director is suggesting that the information provided about Klancet by
some of the disclosures required by IFRS 8 are not material, then assuming t hat the
information is indeed immaterial, he would be correct in stating that those
disclosures a re not necessary.

IMlllA
The directors should opply the principles given in Proctice Stotement 2 to review how
they have made materiality judgements in t heir financial reporting. It may be that
their current financial report is very lengthy because they include information that is
not material.
Tutoria l not e. Consideration of the ethical issues was part of the question
requirement , however, it is clear both directors appear reluctant to give the
disclosures requ ired by IFRS 8 which ra ises concern. If the finance director is not
aware that he cannot pick and choose requirements from IFRSs, then his
professional competence may be called into question. If he is aware of this, and an
assessment of whether the disclosures are material has not been done, or has been
done inappropriately, then it may be that the directors are trying to hide an issue
which should be considered in more detail.
(b) Develo pment of drugs
Not es for presentat ion t o the managing director
Crit eria for recognising a s an a sset
IAS 38 Intangible Assets requires an entity to recognise an intangible asset, whether

purchased or self-created (at cost) if, and only if, it is probable that the future
economic benefits which are attri butable to the asset will flow to the entity and the
cost of the asset can be measu red reliably.
2 Internally g enerated intangible a ssets
The recognition requi rements of IAS 38 apply whether an intangible asset is acquired
externally or generated interna lly . IAS 38 includes additional recognition criteria for
int ernally generated intangible assets.
Development costs are capitalised only after technical and commercial feasibility of
the asset for sale or use have been established. This means t hat the entity must
int end and be able to complete the intangible asset and either use it or sell it and be
able to demonstrate how the asset will generate future economic benefits, in keeping
with t he recognition criteria.
If an entity cannot distinguish the research phase from the development phase of an
internal project to create an intangible asset, the entity t reats t he expenditure for
that project as if it were incurred in the research phase only.
The price w hich an entity pays to acquire an intangible asset reflects its expectations
about the probability t hat the expected future economic benefits in the asset will
flow to the entity.
3 Projec t 1
Klancet owns the potential new d rug, a nd Retto is carrying out the development of
the drug on its behalf. The risks and rewards of ownership remain with Klancet.
By paying the initial fee and the subsequent payment to Retto, Kla ncet does not
acquire a separate intangible asset. The payments represent research and
development by a t hird party, which need to be expensed over the development
period provided that the recognition criteria for internally generated int angible
assets are not met.
Development costs are capitalised only after technical and commercial feasibility of
the asset for sale or use have been established. This means that the entity must
intend and be able to complete the intangible asset and either use it or sell it and be
able to demonstrate how the asset will generate f uture economic benefits. At
present, this criterion does not appear to have been met as regulatory authority for
the use of the drug has not been given and, in fact, approval has been refused in the
past.

4 Project 2
In the cose of the second project, the d rug hos already been discovered and
therefore the cost s are for the development and manufacture of the drug and its
slight modification. There is no indication that the agreed prices for the various
element s are not at fair value. In particu lar, the terms for product sup ply at cost plus
profit a re consistent with Klancet's other supply arrangements.
Therefore, Klancet should capitalise the upfront purchase of the drug and
subsequent payments as incurred, and consider impairment at each financial
reporting date. Regu latory approval has already been attained for t he existing drug
and therefore there is no reason to expect that this will not be given for the new drug.
Amortisation should begin once regulatory a pproval has been obtained. Costs for
the products have t o be accounted for as inventory using IAS 2 Inventories and then
expensed as costs of goods sold as incurred.
t+ Jayach
Workbook references. Fair value measurement under IFRS 13 is covered in Chapter 4. The
Conceptual Framework is covered in Chapter 1, IAS 8 in Chapter 2 and Practice Statement 2 in
Chapter 20.
Top t ips. Fair value measurement affect s many aspects of financial report ing. Part (a) requires
application of IFRS 13 to the valuat ion of assets and liabilities. Ensure that you provide
explanations to support your workings. Part (b) looks at an investment in cryptocurrency for
which there is no specific accounting standard. Don't panic if you see such a q uestion in your
exam. Sensible points which apply the principles of IAS 8 and the Conceptual Framework w ill gain
marks. Part (c) considers the topic of measurement from a wider perspective. Make sure you
relate your answer to the email given in the question. Remember that the examiner has
recomm ended that you read widely, including technical articles and real financial reports, to
support your learning.
Easy marks. Credit will be g iven for textbook knowledge in Part (a).
IHiai:i·ifoH::iM
Marks
(a) 1 mark per point up to maximum of 6

Calculations 5
11
(b) (i) 1 mark per point u p to maximum of 4
(ii) 1 mark per point u p to maximum of 4
8
(c) 1 mark per point up to maximum of 6
25
(a) Fair value of asset

YEAR TO 30 NOVEMBER 20X2 European Australasian
Asian market market market
Volume of market - units 4m 2m 1m
$ $ $
Price 19 16 22
Costs of entering the market _@ _@
Potential fair value 17 14 22
Transaction costs J9 _@ _@
Net profit 16 12 20

@BPP LEAIN NG
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Notes
Becouse Joyoch currently buys and sells the asset in the Au stralasian market, the
costs of entering that market are not incurred and therefore not relevant.
2 Fair value is not adjusted for transaction costs. Under IFRS 13, t hese are not a
feature of the asset or liability, but may be taken into account when determining the
most advantageous morket .
3 The Asian market is the principal market for the asset because it is t he market with
the greatest volume and level of activity for the asset. If informotion about the Asion
market is available and Jayach can access the market, then Jayach should base its
fair va lue on this market. Based on the Asian market, the fair value of the asset
would be $17, measured a s the price t hat would be received in that market ($19) less
costs of entering the market ($2) and ignoring transaction cost s.
4 If information about the Asian market is not available, or if Jayach cannot access
the market, Jayach must measure the fair value of t he asset using the price in the
most advantageous market. The most advantageous market is the market that
maximises t he amount that would be received to sell the asset, after taking int o
account bot h transaction cost s and usually also costs of entry, which is the net
amount that would be received in the respective markets. The most advantageous
market here is therefore the Australasian market. As explained above, costs of entry
are not relevant here, and so, based on this market, the fair value would be $22.
It is assumed that market participants are independent of each other and
knowledgeable, and able and willing to enter into transactions.
Fair value of decommissioning liability
Because this is a business com bination, Jayach must measure the liability at fair value in
accordance w it h IFRS 13, rather than using t he best estimate measurement required by IAS
37 Provisions, Contingent Liabilities and Contingent Assets. In most cases there w ill be no
observable market to provid e pricing information. If this is the case here, Jayach will use
the expected present value technique to measure the fa ir value of the decommissioning
liability. If Jayach were contractual ly committed to transfer its decommissioning liability to
a market participant, it would conclude that a market participant would use t he inputs as
follows, arriving at a fair value of $3,215,000.
Input Amount
$'000
Labour and material cost 2,000
Overhead: 30% x 2,000 600
Third party mark-up - industry average: 2,600 x 20% 520
3,120
Inflation adjusted total (5% compounded over three years):

3,120 X 1.053 3,612
Risk adjustment - uncertainty relating to cash flows: 3,612 x 6% 217
3,829
Discount a t risk- free rate plus entity's non- performance risk

(4% + 2% = 6%): 3,829/1.06 3 3,215
(b) (i) It isn't appropriate for Jayach t o c lassify the investment as a cash equiva lent purely
because it is unsure of how else to account for it. In the a bsence of an IFRS covering
investments in cryptocurrencies, the direct ors of Jayach should use judgement to
develop an a p propriate accounting policy .
In developing the policy, IAS 8 Accounting Policies, Accounting Estimates and Errors
requires that the d irectors consider:
(1) IFRSs dealing with similar issues. For example, t he specific facts and
circ umstances could lead Jayach to conclude that the investment is an
intangible asset accounted for under IAS 38 Intangible Assets.

(2) The Conceptual Framework. The investment appears to meet the definition of
an asset: a present economic resource controlled by the entity as a result of
past events. Consideration should be g iven to the recognition criteria and to
other issues such as the measurement basis to apply and how measurement
uncertainty may affect that choice given the volatility of cryptocurrencies.
(3) The most recent pronouncements of other national GAAPs based on a similar
conceptual framework and accepted industry practice. This is sparse. The
Austra lian Accounting Standards Board have concluded that standard setting
activity on cryptocurrencies should be undert aken by the IASB.
Fundamentally, the directors need to account for the investment in a way which
provides useful information to the primary users of its financial statements. This
means the information provided by t he accounting treatment should be relevant
and should faithfully rep resent the investment.
(ii) The finance director's decision t o not provide any furt her d isclosure about the
investment in iCoin is questionable.
The objective of Jayach's financial report is to provide financia l information wh ich is
useful to its primary users in making decisions about providing resources to Jayach.
Practice Statement 2 re-affirms the principle in IFRS that information that is not
material does not need to be d isclosed in the fina ncial statements. However, whether
this information is material should be properly assessed.
Practice Statement 2 recommends that assessment of materiality should be

performed with reference to both quantitative factors and qualitative factors. So far,
the finance d irector has only considered quantit ative fact ors, but qualitative factors
should be considered. For example, the fact that this invest ment not the usual type
of investment made by Jayach is a qualitative factor. The p resence of a qualit ative
fact or lowers the quant it ative threshold below what would otherwise be used - so in
this case, the investment could be material.
Furthermore, t he investment is risky because cryptocurrencies are highly volatile. If it

is Jayach's plan to invest in more cryptocurrencies in the fu ture, or even to accept
cryptocurrencies as payment, then this investors are likely to consider this important.
Depending on their risk appetite, investors moy consider the investment too risky and
therefore inappropriate, and may be concerned about the potential future impact
should Jayach decide t o invest more in such currencies.
Part of t he decision- making that p rimary users make on the basis of financial
statements involves assessing management's stewardship of Jayach's resou rces.
Some investors may consider this not to be good stewardship, given the risk involved.
(c) A 'mixed measurement' approach means that a company selects a different measurement
basis (eg historical cost or cu rrent value) for its various assets and liabilities, rather t han
using a single measurement basis for all items. The measurement basis selected should
reflect the type of entity and sector in which it operates and the business model that the
entity adopts.
Some investors have criticised the mixed measurement approach because they think that if
different measurement bases are used for asset s and liabilities, the resulting totals can
have little meaning or lack relevance.
However, a single measurement basis may not provide the most relevant information to
users. A particular measurement basis may be easier to understand, more verifiable and
less costly to implement. Therefore a mixed measurement approach is not 'inconsistent' but
can actually provide more relevant information for stakeholders.
The Conceptual Framework confirms that the IASB uses a mixed measurement approach in
developing standards. The measu rement methods included in standards are those which
the IASB believes provide t he most relevant information and which most faithfully represent
the underlying transaction or event. It seems that most investors feel that this approach is
consistent with how they analyse financia l statements. The problems of mixed
measurement appear to be outweighed by the greater relevance achieved.

IMlllA
Joyoch prepares its financial statements under IFRSs, and therefore applies the
measurement bases permitted in IFRSs. IFRSs adopt a m ixed measurement basis, which
includes cu rrent value (fair value, value in use, f ulfilment va lue and current cost) and
h istorico I cost.
When on IFRS a llows a choice of measurement basis, the directors of Joyoch must exercise
judgement as t o which basis will provide the most useful information for its primary users.
Furthermore when selecting a measurement basis, the direct ors should consider
measurement uncertainty. The Conceptual Framework st ates that for some estimates, a
high level of measurement uncertainty may outweigh other factors t o such on extent that
the resulting information ma y hove little use.

ACCA
Strategic Business
Reporting
(I nternationa I)
Mock Examination 2
Questions
This exam is divided into two sections
Section A BOTH questions are compulsory and MUST be attempted

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301
be attempted
1 Kutchen Co
Kutchen Co is a listed company which a cquired two subsidiaries, House Co and Mach Co, during
the year ended 31 December 20X6. Niche Co is a third subsidiary that was both acquired and
disposed of during the same period. Kutchen Co has also restructured one of its business
segments during the year ended 31 December 20X6.

Exhibit 1 - Acq uisit ion of House (70%)
On 1 June 20X6, Kutchen Co acquired 70% of t he equity interests of House Co. The purchase
consideration comprised 20 million shares of $1 of Kutchen Co at t he acquisition date and a
f urther 5 million shares on 31 December 20X7 if House Co's net profit after taxa tion was at least
$4 million.
The market price of Kutchen Co's shares on 1 June 20X6 was $2 per share and that of House Co's
shares was $ 4.20 per share. It is felt that there is a 20% chance of the profit target being met.
In accounting for the acquisition of House Co, the finance director did not take into account the
non-controlling interest (NCI) in the goodwill calculation. He determined that a gain on a bargain
purchase of $8 million arose on the acquisition of House Co, being the purchase consideration of
$40 millio n less t he fair value of t he identifiable net assets of House Co acquired on 1 June 20X6
of $48 million. This valuation was included in the group financial statements in Exhibit 6.
After the directors Kutchen Co discovered t he error, they decided to measure the NCI at fa ir value
at t he date of acquisition. The fair va lue of the NC I in House Co was to be based upon quoted
market prices at acquisition. House Co had issued share capital of $1 each, totaling $13 million at
1 June 20X6 and there has been no change in this amount since acquisition.
Exhibit 2 - Mach Co initial acquisition (80%)
On 1 January 20X6, Kutchen Co acquired 80% of the equity interests of Mach Co, a privately
owned entity, for a consideration of $57 million. The consideration com prised cash of $52 m illion
and t he transfer of non-depreciable land with a fair va lue of $5 million. The carrying amount of
the land at the acquisition date was $3 million and t he land has only recently been transferred to
the seller of the shares in Mach Co and is still carried at $3 million in the group financial
statements at 31 December 20X6.
At t he date of acquisition, the identifiable net assets of Mach Co had a fair va lue of $55 million.
Mach Co had made a profit for the year attributable to ordinary shareholders of $3.6 million for
the year to 31 December 20X5.
The directors of Kutchen Co w ish to measure the non-controlling int erest at fair va lue at the date
of acquisition but had again omitted NCI from the goodwill calculation. The NCI is t o be measured
at fair value using a public entity market multi ple method. The d irectors of Kutchen Co have
identified two companies which are comparable to Mach Co and wh ich are trading at a n average
price to earnings ratio (P/E ratio) of 21. The directors have adjusted the P/E ratio to 19 for
differences between the entities and Mac h Co, for the purpose of fair valuing t he NC I. The
finance director has determined that a bargain purchase of $3 million arose on the acquisition of
Mach Co being the cash consideration of $52 million less the fair value of t he net assets of Mach
Co of $55 million. Th is gain on the bargain purchase had been included in the group financial
statements in Exhibit 6.
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Exhibit 3 - Acquisition and disposal of Niche Co (80%)
Kutchen Co had purchased an 80% interest in Niche Co for $40 million on 1 January 20X6 when
the fair value of the identifiable net assets was $44 million. The partial goodwill method had been
used to calculate goodwill and an impairment of $2 million had arisen in the year ended
31 December 20X6. The hold ing in Nic he Co was sold for $50 million on 31 December 20X6. The
carrying amount of Niche Co's identifiable net assets other than goodwill was $60 m illion at the
date of sale. Kutchen Co had carried t he investment in Niche at cost. The finance director
calculated that a gain arose of $2 million on the sale of Nic he Co in t he group financia l
st atements being the sale proceeds of $50 m illion less $48 million being their share of the
identifiable net assets at the date of sale (80% of $60 m illion). This was credited to retained
earnings.
Exhibit 4 - Business segment restructure
Kutchen Co has decided to restructure one of its business segments. The plan was agreed by the
board of directors on 1 October 20X6 and affects employees in two locations. In the first location,
half of the factory units were closed on 1 December 20X6 and the affected employees' pension
benefits have been frozen . Any new employees w ill not be eligible to join t he defined benefit plan.
After the restructuring, the present value of the defined benefit obligation in this location is
$8 million. The following table relates to location 1.
Value before restructuring Location 1

Sm
Present value of d efined benefit obligation (10)
Fair value of plan assets 7
Net pension liability (3)
In the second location , all activities have been discontinued. It has been agreed that employees
wil l receive a payment of $4 million in exchange for the pension liability of $2. 4 million in the
unfunded pension scheme.
Kutchen Co estimat es that the costs of the above restructuring excluding pension costs will be
$6 million. Kutchen Co has not accounted for the effects of the restructuring in its financia l
statem ents because it is pla nning a rights issue and does not wish to depress the share p rice.
Therefore there has been no formal announcement of the restructuring.
Exhibit 5 - Mach Co subsequent acquisition of 20%
When Kutchen Co acquired the majority shareholding in Mach Co, t here was an option on the
remaining non-controlling interest (NCI), which could be exercised at any time up t o 31 March
20X7. On 31 January 20X7, Kutchen Co acquired t he remaining NC I in Mach Co. The payment
for the NCI was structured so that it contained a fixed initial payment and a series of contingent
amou nts payable over t he following two years.
The contingent payments were to be based on the future profits of Mach Co up to a maximum
amou nt. Kutchen Co felt that the fixed initial payment was an equity transaction . Additionally,
Kutchen Co was unsure as to whether the contingent payments were either equity, financial
liabilities or contingent liabilities.
After a board discussion which contained disagreement as to the accounting treatment, Kutchen
Co is preparing t o disclose the contingent payments in accordance with IAS 37 Provisions,
Contingent Liabilities and Contingent Assets. The disclosure will include the estimated timing of
the payments and the directors' estimate of the amounts to be settled.
301t St rategic Business Reporting (SBR) @BPP LEAR\,NC:

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Exhibit 6 - Group statement of financial positio n
Group statement of financ ial position a s at 31 December 20X6
Assets $
Non-current assets
Property, plant ond equipment 365
Goodwill
Intangible assets 23
388
Current assets 133
Tot al assets 521
Shore capitol of $1 each 63
Retained ea rnings 56
Other components of ent ity 26
148
Non-current liabilities 101
Current liabilities
Trade payables 272

373
Total liabilities 521
Required
(a) Explain to t he directors of Kutchen Co, with suitable workings, how goodwill should hove
been ca lculated on the acquisition of Hause Co and the initial acquisition of Mach Co
showing the adjustments which need to be mode t o the consolidated financia l st atements
to correct any errors by the finance d irector. (1 0 marks)
(b) Explain, with suitable calculations, how t he gain or loss on t he sale of Niche Co should have
been recorded in the group financia l statements. (5 marks)
(c) Discuss, w ith suitable workings, how the pension scheme should be dealt with after the
restructuring by Kutchen Co of its business segment and whether a provision for
restructuring should have been made in the financial statements for the year ended
(d) Advise Kutchen Co on the d ifference between equity and liabilities, and on t he proposed
accounting t reatment of the contingent payments on the subsequent acquisition of 20% of
Mach Co. (8 marks)
(Total = 3 0 marks)
Mock exam 2: Q uestions 305

2AbbyCo 39 mins
The accountant of Abby Co is concerned about the disclosure of trading that has occurred
between Abby Co and a company that a director of Abby Co is associated with. This director is
also attempting to influence how the accountant should account for two issues associated with
the consolidated financial statements. The following exhibits provide information relevant to Abby
Co.
Exhibit 1 - Related pa rty tra nsact ions
The accountant has discovered that the finance director of Abby Co has purchased goods from a
company, Arwight Co, which one of the director's jointly owns with his w ife and the accountant
believes that this purchase should be disclosed. However, the director refuses to disclose the
transaction as in his opinion it is an 'arm's length' transaction. He feels that if the transaction is
disclosed, it will be harmful to business and feels that the information asymmetry caused by such
non-disclosure is irrelevant as most entities undertake related party transactions without
disclosing them. Similarly, the director felt that competitive harm would occur if disclosure of
operating segment profit or loss was made. As a result, the entity only disclosed a measure of
total assets and total liabilities for each reportable segment.
When preparing the financial statements for the recent year end, the accountant noticed that
Arwight Co has not paid an invoice for several million dollars and it is significantly overdue for
payment. It appears that the entity has liquidity problems and it is unlikely that Arwight Co will
pay. The accountant believes that a loss allowance for trade receivables is required . The finance
director has refused to make such an allowance and has told the accountant that the issue must
not be discussed with anyone within the trade because of possible repercussions for the credit
worthiness of Arwight Co.
Exhibit 2 - Su bsidiary fa ir value adj ustme nts
Additionally, when completing the consolidated financial statements, the director has suggested
that there should be no positive fair va lue adjustments for a recently acquired subsidiary and has
stated that the accountant's current position is dependent upon following these instructions. The
fair value of the subsidiary is $50 million above the carrying amount in the financial records. The
reason given for not fair valuing the subsidiary's net assets is that goodwill is an arbitrary
calcu lation which is meaningless in the context of the performance evaluation of an entity.
Exhibit 3 - G oodwill impairment calc ulation
Finally, when preparing the annual impairment tests of goodwill arising on other subsidiaries, the
director has suggested that the account ant is flexible in the assumptions used in calculating
future expected cash flows, so that no impairment of goodwill arises. He has specifically
suggested that the accountant should use a discount rate w hich reflects risks for which future
cash flows have been adjusted. He has indicated that he w ill support a salary increase for the
accountant if he follows his suggestions.
Required
Discuss the ethical and accounting implications of the director's suggestions from the perspective
of the reporting accountant. (18 ma rks)
Professional marks will be awarded in question 2 for the application of ethical principles.
(2 marks)
(Total= 20 marks)

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be attempted
3 Africant Co '+9 mins

Africant Co owns several farms and also owns a division which sells agricultural veh icles. 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 opt ions
to value some farmland t hat the company owns. Finally, the directors are preparing for a
forthcoming meeting with shareholders and thinking about questions t hey might be asked
regarding a mixed measurement approach for assets and liabilities.
The following exhibits provide information relevant to the question.
Exhibit 1 - Vehicles
Three markets currently exist for the vehicles. Africant Co has transacted regularly in a ll 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:
Historical
volume - Total volume Transport
vehicles of vehicles Transaction cost to
Sales price sold by sold in the costs per market pe r
Market pe r vehicle Africant Co market vehicle vehicle
$ $ $
Europe 40,000 6,000 150,000 500 4 00
Asia 38,000 2,500 750,000 400 700
Africa 34,000 1,500 100,000 300 600
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.
Exhibit 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
purchase rs for the land but planning permission has not yet been granted for use of the land for
residential purposes. However, p reliminary enquiries with the regu latory authorities seem to
indicate that planning permission may be granted . Additionall y, 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 com mercial development at a higher
price than t hat for residential purposes and understands that fair value measurement of a non-
financial asset takes into account a market per spective. The directors of Africant Co are unclear
about w hat is meant by a 'market perspective' and how to measure t he fair value of the land in its
Exhibit 3 - Mixed measurement approach
Africant Co is about to hold its annual general meeting with shareholders and the directors wish
to prepare for any potential questions which may be raised at the meeting. There have been
discussions in the media over the fact that the most relevant measurement method should be
selected for each category of assets and liabilities. This 'mixed measurement approach' is used
by many entities when preparing financial statements. There have a lso been comments in the
media about the impact that measurement uncertainty and price volatility can have on the
quality of financial information.
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Mock exam 2 : Q uestions 30 7
Required
(a) Advise Africant Co on the appropriate accounting treatment of (i) its vehicles and (ii) its
land wit h reference to relevant International Financial Reporting Standards.
(i) Vehicles ( 8 m arks)

(ii) Land (7 marks)
(b) Discuss the impact which the mixed measurement approach may have on t he analysis of
financial statements by investors. (8 marks)
Professional marks w ill be awarded in Part (b) for clarity and quality of presentation.
(2 marks)
(Total = 25 m arks)

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'+ Rationale Co
The directors of Rationale Co ore reviewing t he published financial statements of the group which
include performance measures, such as 'underlying profit'. This information is additional to t hat
which is required by IFRS Standards.
The following exhibit provides information relevant to the question.

Exhibit 1 - Financial statement extract
The following is on extract of information to be found in the financial statements.
Year ended 31 31
December December
20X6 20X5
Sm Sm Sm
Net profit/(loss) before taxation and ofter the
items set out below (5) 38
Net interest expense 10 4

Depreciation 9 8
Amortisation of int angible assets 3 2
Impairment of property 10
Insurance recovery (7)
3
Debt issue costs 2
Shore-based payment 3
Restructuring charges 4
Impairment of acquired intangible assets 6 8
The directors use 'underlying profit' to comment on its financial performance. Underlying profit is
a measure normally based on earnings before interest, tax, depreciation and amortisation
(EBITDA). However, t he effects of events which o re not port of the usual business activity ore also
excluded when evaluating performance.
The following items were excluded from net profit to arrive a t 'underlying profit'. In 20X6,
Rationale Co hod to write off a property due to subsidence and the insurance recovery for this
property was recorded but not approved until 20X7, when t he company's insurer concluded t hat
the c laim was valid. In 20X6, Rationale Co considered issuing loon notes to finance on asset
purchase, however, the purchase did not go ahead. Rationale Co incurred costs associated with
the potential issue and so these costs were expensed as port of net profit before taxation. The
directors of Rationale Co felt t hat the shore-based payment was not a cash expense and that the
value of the options was subjective. Therefore, the d irectors wished to exclude the item from
'underlying profit'. Similarly, they wish to exclude restructuring charges incurred in the year, and
impairments of acquired intangible assets.
Required
(a) (i) Discuss the possible concerns where on entity may w ish to disclose information that
is in addition to that required by IFRS standards in its financia l statements and
whether t he Conceptual Framework for Financial Reporting (2018) helps in
determining the boundaries for disclosure. (8 marks)
(ii) Discuss the use and t he limitations of the proposed calculat ion of ' underlying profit'
by Rationale Co.
Note. Your answer should include a comparative calculation of underlying p rofit for
the years ended 31 December 20X5 and 20X6. (9 marks)
(b) The directors of Rationale Co ore confused over the nature of a reclassification adjustment
and understand that t he International Accounting Standards Boord hos issued
pronouncement s on the subject.
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Discuss, with examples, the nature of o reclassification adjustment and the arguments for
and against allowing reclassification of items to profit or loss.
Not e. A brief reference should be made in your answer to the Conceptual Framework for
Financial Reporting (2018). (8 marks)

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AnsYlers

• • • • •
• • •
• . . • • • •
• • • • •
• • •
• • • • •
• • • • •
• • . •
. . • . • •
Section A
1 Kutchen Co
H@ii:i·Hi:11:iiM
Marks

• Contingent consideration 2
• NCI 2
• Fair value of assets acquired 2
Goodwill calculations and corrections requ ired 4
10
(b) Application of the following discussion to the scenario:
• Proceeds 1
• Carrying amount of the assets disposed of 2
Calculation of the gain/loss on disposal of Niche Co Co 2
5
• Present value and past service cost 2
• Calculation of SOPL effect 3
• Consideration of a restructuring provision 2 7
(d) Application of the following discussion ta the scenario:

• Definition of a liability and IAS 32 (liability vs equity) 2
• Definition of equity 2
• Consideration of contingent payments of Mach Co 4
8
30
(a) Goodwill on the acquisition of House Co and Mach Co should have been ca lculated as
follows:
House Co
Sm Sm
Fair value of consideration for 70% interest 42.00
Fair value of non-controlling interest 16.38 58.38
Fair value of identifiable net assets acquired (48.00)
Goodwill 10.38
Contingent consideration should be va lued at fa ir value and w ill have to take into account
the various milestones set under the agreement. The expected value is (20% x 5 million
shares) 1 million shares x $2, ie $2 million. There will be no remeasurement of the fair value
in subsequent periods because the amount is settled in equity. If this were a liability, there
would be remeasurement. The contingent consideration will be shown in OCE. The fair
value of the consideration is therefore 20 million shares at $2 plus $2 million (above), ie
$42 million.
The fair value of the NCI is 30% x 13 million x $4.20 = $16.38 million.
The finance director has not taken into account the fair value of the NC I in the va luation of
goodwill or the contingent consideratio n. If the difference between the fair value of the
consideration, NCI and the identifiable net assets is negative, the resulting gain is a

bargain purchase in profit or loss, which may arise in circumstances such as a forced seller
acting under compulsion. However, before any bargain purchase gain is recognised in
profit or loss, and hence in retained earnings in the group statement of financial position,
the finance director should have undertaken a review to ensure the identification of assets
and liabilities is complete, and that measurements appropriately reflect consideration of all
available information.
The adjustment to the group financial statements would be as follows:
Debit Goodwill $10.38 million
Debit Profit or loss $8 million
C redit NCI $16.38 million
C redit OCE $2 million
Mach Co
Net profit of Mach Co for the year to 31 December 20X5 is $3.6 million. The P/E ratio
(adjusted) is 19. Therefore the fair value of Mach Co is 19 x $3.6 million, ie $68. 4 million. The
NCI has a 20% holding; t herefore the fair va lue of t he NCI is $13 .68 million.
Sm Sm
Fair value of consideration for 80% interest ($52m + $5m) 57.00
Fa ir value of non-controlling interest 13.68 70.68
Fa ir value of identifiable net assets acquired (55.00)
Goodwill 15.68
The land transferred as part of the purchase consideration should be va lued at its
acquisition date fair va lue of $5 million and included in the goodwill calculation. Therefore
the increase of $2 million over the carrying amount should be shown in retained earnings.
Debit PPE $2 million
Credit Retained earnings $2 million
The adjustment to the group financial statements would be as follows:
Debit Goodwill $15.68 million
Debit Retained earnings $3 million
C redit NCI $13.68 million
C redit PPE $5 million
Total goodwill is t herefore $(15.68 + 10.38) million, ie $26.06 million.
(b) Nic he Co
The finance director had calculated that a gain arose of $2 million on the sale of Niche Co
in the group f inancial statements being the sale proceeds of $50 million less $48 million
which is their share of the identifiable net assets at the date of sale (80% of $60 mi llion).
However, the calculation of the gain or loss on sale should have been the d ifference
between the carrying amount of the net assets (including any unimpaired goodwill)
disposed of and any proceeds received. The calculation of net assets will include the
appropriate portion of cumula tive exchange differences and any other amounts recognised
in other comprehensive income and accumulated in equity. Additionally, the loss on sale
should have been reported as a loss in profit or loss attributable to the parent.
The gain on the sale of Niche Co should have been recorded as follows:
Sm
Gain/(Loss) in g roup financial statements on sale of Niche Co
Sale proceeds 50.0
Less
Share of identifiable net assets at date of disposal (80% x $60 million) (48.0)
Goodwill $(40m - (80% of $44m) - impairment $2m) (2.8)
Loss on sale of Niche Co recognised in g roup profit or loss (0.8)
311+ Strategic Business Reporting (SBR) @BPPLEAR\IMG

MEDIA
(c) After restructuri ng, the present value of the pension liability in location 1 is reduced to
$8 million. Thus there will be o negative post service cost in this locotion of $(10 - 8) million,
ie $2 million. As regords locotion 2, there is a settlement and a curtailment as all liability will
be extinguished by the payment of $4 million. Therefore there is a loss of $(2.4 - 4) million,
ie $1.6 million. The changes to t he pension scheme in locations 1 and 2 will both affect profit
or loss as follows:
Location 1
Debit Pension obligation $2m

Credit Retained earnings $2m
Location 2
Debit Pension obligation $2.4m

Debit Ret ained earnings $ 1.6m
C redit C urrent liabilities $4m
IAS 37 Provisions, Contingent Liabilities and Contingent Assets states that a provision for
restructuring should be made only when a detailed formal plan is in place and the entity
has started to implement t he plan, or announced its main features to those affected. A
board decision is insufficient. Even though there has been no formal announcement of t he
restructuring, Kutchen Co has started implementing it and t herefore it must be accounted
for under IAS 37.
A provision of $6 million should a lso be made at the year end.
(d) The Conceptual Framework defines a liability as a present obligation, arising from past
events for which there is an expected outflow of economic benefits. IAS 32 Financial
Instruments: Presentation establishes principles for presenting financial instru ments as
liabilities or equity . IAS 32 does not classify a financial instrument as equity or financia l
liability on the basis of its legal form but on the substance of the transaction. The key
feature of a financial liability is that t he issuer is obliged to deliver either cash or another
financial asset to the holder. An obligation may arise from a requ irement to repay principal
or int erest or dividends.
In contrast, equity has a residual interest in the entity's assets after deducting all of its
liabilities. An equity instrument includes no obligation t o deliver cash or another financia l
a sset to another entity. A contract which wil l be settled by t he entity receiving or delivering
a fixed number of its own equity instrument s in exchange for a fixed amount of cash or
another financial asset is an equit y instrument. However, if there is any variability in the
amount of cash or own equity instruments which will be delivered or received, then such a
contract is a financial asset or liability as applicable.
The contingent payments should not be t reated as contingent liabilities but thel:J should be
recognised as financial liabilities and measured at fair value at initial recognition. IAS 37
Provisions, Contingent Liabilities and Contingent Assets excludes from its scope contracts
which are executory in nature, and therefore prevents t he recognition of a liability.
Additionally, there is no onerous contract in this scenario.
Contingent consideration for a business must be recognised at the time of acquisition, in
accordance w ith IFRS 3 Business Combinations. However, IFRSs do not contain any
guidance when accounting for contingent consideration for the acquisition of a NCI in a
subsidia ry. The contract for contingent payments does meet the definition of a financial
liabilitl) under IAS 32. Kutchen Co has an obligation to pay cash to the vendor of the NCI
under the terms of a contract. It is not within Kutchen Co's control to be able to avoid that
obligation. The amount of the contingent payments depends on the profitability of Mach
Co, which it self depends on a number of factors which a re uncontrollable. IAS 32 states
that a contingent o bligation t o pay cash which is out side the control of both parties to a
contract meets the definition of a financial liability which shall be initially measured at fair
value. Since the contingent payments relate to the acquisition of the NC I, the offsetting
entry would be recognised directly in equity.
Mock exam 2 : Answers 315

2AbbyCo
Marks
Application of the following discussion of accounting issues to the scenario:

• Related party transactions 2
• Competitive harm exemptions 2
• Impairment of financial assets 2
• Fair value adjustments 2
• Goodwill impairment review 2
Application of the following discussion of ethical issues to the scenario:
• Potential breaches 4
• Advice to accountant 4
18
Professional 2
20
Re lated pa rties
The objective of IAS 24 Related Party Disclosures is to ensure that an entity's financia l statement s
contain the disclosures necessary to draw attention to the possibility that its financial position
and profit or loss may have been affected by the existence of related parties and by transactions
and outstanding balances with such parties.
If t here have been transactions between related parties, there should be disclosure of the nature
of the related party relationship as well as information about the transactions and outstanding
ba lances necessary for an understanding of the potential effect of the relationship on the
financial statements. The director is a member of the key management personnel of the reporting
ent it y and the entity from whom the goods were purchased is jointly controlled by that director.
Therefore a related party relationship exists and should be disclosed.
O p erati ng segm ents
IFRS 8 Operating Segments requires an entit y to report financial and descriptive information
about its reportable segments. Reportable segments are operating segments or aggregations of
operating segments which meet specified criteria.
IFRS 8 does not contain a 'competitive harm' exemption and requires entities to d isclose the
financial information which is provided by the chief operating decision maker (CODM). The
management accounts reviewed by the CODM may contain commercially sensitive information,
and IFRS 8 m ight require that information t o be d isclosed externally.
Under IFRS 8, firms should provid e financial segment disclosures which enable investors to assess
the different sources of risk and income as management does. This sensitive information would
also be available for competitors. The potential competitive harm may encourage firms ta
withhold segment information.
However, this is contrary to IFRS 8 which requires information about the profit or loss for each
reportable segment, including certain specified revenues and expenses such as revenue from
external cust omers and from transactions w ith other segments, interest revenue and expense,
depreciation and amortisation, income tax expense or income and material non-cash items.
Impairme nt of financia l a sset s
Areas such as impairments of financial assets often involve the application of professional
judgement. The director may have received additional information, which has a llowed him to form
a different opinion to t hat of the accou ntant. The matter should be discussed with the director to
ascertain why no provision is required and to ask whether there is addit ional information
available.
316 Strategic Business Reporting (SBR) @BPP LEAR~lt C

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However, suspicion is roised by t he foct that the accountant has been told not to discuss the
matter. Whilst there may be valid reasons for this, it appears again that the related party
rela tionship is affecting the judgement of the director.
Fair value adjustments
Positive foir value adj ustments increase the assets of the acquired company and as such reduce
the goodwill recognised on consolidation. However, the majority of positive foir value adjustments
usually relate to items of property, plant and equipment.
As a result, extra depreciation based on the net foir value adjustment reduces the post-
acquisition profits of the subsidiary. This has a negative impact on important financial
performance measures such as EPS. Therefore, by reducing fair value adjustments it will improve
the apparent performance of new acquisitions and the consolidated financial statemen t s.
Accountant s should act ethically and ignore undue pressure to undertake creative accou nting in
preparing such adjustments. Guidance such as IFRS 3 Business Combinations and IFRS 13 Fair
Value Measurement should be used in preparing adjustments and prof essional valuers should be
engaged where necessary.
Impairment tests
In measuring va lue in use, the discount rate used should be the pre-tax rate which reflects current
market assessments of the time value of money and the risks specific to the asset.
The discount rate should not reflect risks for which future cash flows have been adjusted and
should equal the rate of return which investors would require if they were to choose an investment
which would generate cash flows equivalent to those expected from the asset.
By reducing the impairment , it would have a positive impact on the financial statements. The offer
of a salary increase is inappropriate and no action should be taken until the situation is clarified.
Inappropriate financial reporting raises issues and risks for those involved and others associated
with the company. Whilst financial reporting involves judgement, it wou ld appear that this
situation is not related to judgement .
Eth ical issues
There are several potential breaches of accounting standards and unethical practices being used
by the director. The d irector is trying to coerce t he accountant into acting unethically.
IAS 1 requires a ll lFRS standards to be applied if fair present ation is to be obtained. Directors
cannot choose which standards they do or do not apply.
It is important that accountants identify issues of unethical practice and act appropriately in
accordance wit h ACCA's Code of Ethics. The accountant should discuss the matt ers with the
director. The technical issues should be explained and the risks of non-compliance explained to
the director. If the director refuses to comply with accounting standards, then it would be
appropriate to discuss t he matter w ith others affected such as other directors and seek
professional advice from ACCA. Legal advice should be considered if necessary.
An accountant who comes under pressu re from senior colleagues to make inappropriate
valuations and disclosures should discuss the matter with t he person suggesting this. The
discussion should try to confirm the facts and the reporting guidance which needs to be followed.
Financial reporting does involve judgement but the cases above seem to be more than just
differences in opinion. The accountant should keep a record of conversations and actions and
discuss t he matters with others affected by the decision, such as directors. Additionally,
resignation should be considered if the matters cannot be satisfactorily resolved.

Section B
3 Africant Co
IHtmi:i·ifoh:hM
Marks
(a) (i) Discussion of the principles of IFRS 13 4

Application of the IFRS 13 principles to Africant Co 4
8
(ii) Market perspective and hig hest and best use 4
Application of highest and best use to Africant Co 3
7
(b) Single vs mixed measurement and investor issues 2
Examples 2
Investor issues re uncertainty 2
Investor issues re price volatility 2
8
Professional 2
25
(a) (i) IFRS 13 Fair Value Measurement says t hat fair value is a n exit price in the principal
market, which is the market with the highest volume and level of activity. It is not
determined based on the volume or level of activity of the reporting entity's
transactions in a particular market.
Once t he accessible markets are identified, market- based volume and activity
determines t he principal market. There is a presumption that the principal market is
the one in which the entity would normally enter into a transaction to sell the asset o r
transfer t he liability, unless there is evidence to the contrary .
In practice, an entity would first consider the markets it can access. In the absence
of a principal market, it is assumed t ha t the transaction would occur in the most
advantageous market. This is the market w hich would maximise the amount which
would be received to sell an asset or minimise t he amount which would be paid to
transfer a liability, taking into consideration transport and transaction costs.
In either case, the entity must have access t o the market on the measurement date.
Alt hough an entity must be able to access the market at the measurement date, IFRS
13 does not require an entity to be able to sell the particular asset or transfer the
particular liability on t hat date.
If t here is a principal market for the asset or liability, the fair value measurement
represents the price in that market at the measurement date regard less of whether
that price is directly observable or estimated using another valuation technique and
even if t he price in a different market is potentially more advantageous.
The principal (or most advantageous) market price for the same asset or liability
m ig ht be d ifferent for different entities and therefore, the principal (or most
advantageous) market is considered from the entity's perspective which may result
in d ifferent p rices for the same asset.
In Africant Co's case Asia is the principal market as this is the market in wh ich t he
majority of transactions for the vehicles occur. As such, the fair value of the 150
vehicles would be $5,595,000 ($38,000 - $700 = $37,300 x 150). Actual sales of the
318 Strategic Business Reporting ($BR) @BPP LEIIR~II C

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vehicles in either Europe or Africa would result in a gain or loss to Africant Ca when
compared with the fair value, ie $37,300. The most advantageous market would be
Europe where a net price of $39,100 (after all costs) would be gained by selling there
and the number of vehicles sold in this market is at its highest. Africant Co wou ld
therefore utilise the fair value calculated by reference to the Asian market as this is
the principal market.
The IASB decided to prioritise the price in the most liquid market (ie the principal
market) as this market provides the most reliable price to determine fair value and
also serves to increase consistency among reporting entities.
IFRS 13 makes it clear that the price used to measure fair value must not be adjusted
for transaction costs, but should consider transportation costs.
Africant Co has currently deducted transaction costs in its valuation of the vehicles.
Transaction costs are not deemed to be a characteristic of an asset or a liability but
they are specific to a transaction and w ill differ depending on how an entity enters
into a transaction.
Wh ile not deducted from fair value, an entity considers transaction costs in the
context of determining the most advantageous market because the entity is seeking
to determine the market which wou ld maximise the net amount which would be
received for the asset.
(ii) A fair value measurement of a non-financial asset takes 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.
The maximum value of a non-financial asset may arise from it s use in combination
with other assets or by itself.
IFRS 13 requires the entity to consider uses wh ich are physically possible, legally
permissible and financ ially feasible. The use must not be legally prohibited. For
example, if the land is protected in some way by law and a change of law is
required, then it cannot be the highest and best use of the land.
In this case, Africant Co's land for residential development would only require
approval from the regulatory authority and as that approval seems to be possible,
then this alternative use could be deemed to be legally permissible. Market
participants would consider the probability, extent and timing of the approval which
may be required in assessing whether a change in the legal use of the non- financial
asset could be obtained.
Africant Co wou ld need to have sufficient evidence to support its assumption about
the potential for an alternative use, particularly in light of IFRS 13's presumption t hat
the highest and best use is an asset's current use.
Africant Co's belief t hat planning permission was possible is unlikely to be sufficient
evidence t hat the change of use is legally permissible. However, the fact the
government has indicated t hat more agricultura l land should be released for
residentia l purposes may provide additional evidence as to the likelihood that the
land being measured should be based upon residential value. Africant Co would
need to prove that market part icipants would consider residential use of the land to
be legally permissible.
Provided there is sufficient evidence to support these assertions, alternative uses, for
example, commercial development which wou ld enable market participants to
maximise value, should be considered, but a search for potential alternative uses
need not be exhaustive.
In addition, any costs to t ransform the land, for example, obtaining planning
permission or converting the land to its alternative use, and profit expectations from
a market participant's perspective should also be considered in the fair value
measurement.

If there are multiple types of market participants who would use the asset differently,
these alternative scenarios must be considered before concluding on the asset's
highest and best use.
It appears that Africant Co is not certain about what constitutes the highest and
best use and therefore IFRS 13's presumption that the highest and best use is an
asset's current use appears to be valid at this stage.
(b) A measurement basis must be selected for each element recognised in the financial
statements. The Conceptual Framework describes the characteristics of historical cost and
current value (including fair value) measurement bases and when it may be appropriate to
use each basis.
Some investors may be in favour of a single measurement basis for all recognised assets
and liabilities a rguing that the resulting totals and subtotals can have little meaning if
different measurement methods are used.
Similarly, they may argue that profit or loss may lack relevance if it reflects a combination
of flows based on historical cost and of value changes for items measured on a current
value basis.
However, the majority of investors would tend to prefer that the most relevant
measurement method is selected for each category of assets and liabilities. This is known
as a mixed measurement approach and is consistent with how investors analyse financial
statements.
The Conceptual Framework requires selection of a measurement basis t hat provides the
most useful information to primary users, subject to the cost constraint. Therefore it
supports a mixed measurement basis as consideration of these factors is likely to result in
the selection of different measurement bases for different items.
The problems of mixed measurement are outweighed by the greater relevance achieved if
the most re levant measurement basis is used for each class of assets and liabilities . The
mixed measurement approach is reflected in the most recently issued standards. For
example IFRS 9 Financial Instruments requires the use of cost in some cases and fair value
in other cases. While IFRS 15 Revenue from Contracts with Customers essentially applies
cost allocation.
Most accounting measures of assets and liabilities are uncertain and require estimat ion.
While some measures of historical cost are straightforward as it is the amount paid or
received, there are many occasions when the measurement of cost can be uncertain. In
particular, recoverable cost, for which impairment and depreciation estimates are required.
In a similar vein, while some measures of fair value can be easily observed because of the
availability of prices in an actively traded market (o so-called 'Level 1' fair value), others
inevitably rely on management estimates and judgements ('Level 2' and 'Level 3') .
High measurement uncertainty may mean that the measurement basis selected does not
produce a faithful representation of the entity's financial position and financial
performance. In such cases, selecting a slightly less relevant measurement basis but with
less measurement uncertainty may provide more useful information to investors.
If a relevant measure of an asset or liability value is volatile, this should not be hidden from
investors. To conceal its volatility would decrease the usefulness of the financial
statements. Of course, such volatile gains and losses do need to be clearly presented and
disclosed, because their predictive value may differ from that provided by other
components of performance.

IMlllA
'+ Rationale Co
HMMi:i·iH:M::iM
Marks
(a) (i) Discussion of additional disclosure issues 4

Conceptual Framework and general financial statements 4
8
(ii) The potential use, misuse and manipulation of EBITDA 3
Application of use/misuse of EBITDA by Rationale 2
Calculation of underlying profit of Rationale 4
9
(b) The nature of a reclassification adjustment 1
Examples 2
Arguments for and against reclassification 5
8
25
(a) (i) There is no specific guidance on the disclosure of information which is not
specifically required by an IFRS Standard. IFRS Standards require an entity to
disclose additional information which is relevant to an understanding of the entity 's
financial position and financial performance.
A company may disclose additional information where it is felt that its performance
may not be apparent from its financial statements prepared under IFRS Standards.
A single standardised set of financial statements can never provide sufficient
information to understand an entity's position or performance. Additional
information can help users understand management's view of what is important to
the entity and the nature of management's decisions.
However, there are concerns relating to the disclosure of additional information:

• Such information may not readily be derived or reconciled back to the
• There may be difficulty compa ring information across periods and between
entities because of the lack of a standardised approach .
• The presentation of additional information may be inconsistent with that

defined or specified in IFRS Standards and the entity may present an
excessively optimistic pictu re of an entity 's financial performance.
• Non-lFRS information may make it difficult to identify the complete set of

financial statements, including whether the informat ion is a udited or not.
• Non- lFRS information may be given undue prominence or credibility merely

because of it s location with in the financial st atements.
Disclosure boundaries are not specifically defined in IFRS Standards, but they do
derive from the objective of financial statements. According to the Conceptual
Framework, the objective of financial statements is to provide financia l information
about a n entity's assets, liabilities, equity, income and expenses which is useful to
users of financial statements in assessing t he prospects for future net cash inflows to
the entity and in assessing management's stewardship of the entity's resources. As a
result, financial statements provide information about an entity's assets, liabilities
and equity which existed at the end of the reporting period and about income and
expenses w hich arose during t he reporting period. It is d irected at users who provide

resources t o the reporting entity but lack the ability to compel the entity to provide
them with the information which they need. The revised Conceptual Framework
limit s the range of addressees of general-purpose financial statements to existing
or potential investors, lenders and other c reditors. The Conceptual Framework
acknowledges that general-purpose financial statements may not provide
information which serves a ll users' needs.
(ii) The directors of Rationale Co are utilising an controversial figure for evaluating the
company 's performance. Depreciation and amortisation are non-cash expenses
related to assets which have already been purchased and they are expenses which
are subject to judgement or estimates based on experience and projections. The
company, by using EBITDA, is attempting to show operating cash flow since the non-
cash expenses are added back.
EBITDA can often be misused and manipulated. It can be argued that because the
estimation of depreciation, amortisation and other non-cash items is vulnerable t o
judgement error, the profit figure can be distorted but by focusing on profits before
these elements are deducted, a truer estimation of cash flow can be given. However,
the substitution of EBITDA for conventiona l profit fails to take into account the need
for investment in fixed capital items.
There can be an argument for excluding non-recurring items from the net profit
figure. Therefore, it is understandable that the deductions for the impairment of
property, the insurance recovery and the debt issue costs are made to arrive at
'underlying profit'. However, IAS 1 Presentation of Financial Statements states that
'an entity shall present additional line items, headings and subtotals in the
statements presenting profit and loss and other comprehensive income w hen such
presentation is relevant to an understanding of the entity's financial performance'
(para. 55). This paragraph should not be used to justify presentation of underlying,
adjusted and pre-exceptional measures of performance on the face of the statement
of profit or loss. The measures proposed are entity specific and could obscure
performance and poor management.
Stock-based compensation may not represent cash but if an entit y chooses to pay
equity to an employee that affects the value of equity, no matter what form that
payment is in and therefore it should be charged as employee compensation. It is an
outlay in the form of equity. There is therefore little justification in excluding this
expense from net profit. Restructuring charges are a feature of an entity's business
and they can be volatile. They should not be excluded from net profit because they
are part of co rporate life. Severance cost s and legal fees are not non-cash items.
Impairments of acquired intangible assets usually reflect a weaker outlook for an

acquired business than was expected at the time of the acquisition, and could be
considered to be non- recurring. However, the impairment charges are a useful way
of holding management accountable for its acquisitions. In this case, it seems as
though Rationale Co has not purchased wisely in 20X6.
It appears as though Rationale Co wishes to disguise a weak performance in 20X6
by adding back a series of expense items. EBITDA, although reduced significantly
from 20X5, is now a positive figure and there is an underlying profit created as
opposed to a loss. However, users will still be faced with a significant decline in profit
whichever measure is disclosed by Rationale Co. The logic for the increase in profit is
flawed in many cases but there is a lack of authoritative guidance in the area. Many
companies adopt non- financia l measures without articulating the relationship
between the measures and the financial statements.

IMlllA
Year ended 31 December 31 December
20X6 20X5
Sm Sm
Net profit/(loss) before taxation and after the
items set out below (5) 38
Net interest expense 10 4
Depreciation 9 8
Amortisation of intangible asset s 3 2
EBITDA 17 52
Impairment of property 10
Insurance recovery (7)
Debt issue costs 2
EBITDA after non-recurring it ems 22 52
Share-based payment 3
Restructuring charges 4
Impairment of acquired intangible assets 6 8
Underlying profit 35 61
(b) Reclassification adjustments are amounts recycled to profit or loss in the current p eriod
which were recognised in OCI in the current or previous period s. An example of items
recognised in OCI which may be reclassified to profit or loss are foreign currency gains on
the disposal of a foreign operation and realised gains or losses on cash flow hedges. Those
items which may not be reclassified are changes in a revaluation surplus under IAS 16
Property, Plant and Equipment, and actuarial gains and losses on a defined benefit plan
under IAS 19 Employee Benefits. However, t here is a general lack of agreement about w hich
items should be presented in profit or loss and in OCI. The interaction between profit or loss
and OCI is unclear, especially the notion of reclassification and w hen o r which OC I items
should be reclassified. A common misunderstanding is that the distinction is based upon
realised versus unrealised gains.
There are several arguments for and against reclassification. If rec lassification ceased,
then there would be no need to define profit or loss, or any other total or subtotal in profit
or loss, and any presentation decisions can be left to specific IFRS Standards. It is argued
that reclassification protects the integrity of profit or loss and provides users with relevant
information about a transaction which occurred in the period. Additionall y, it can improve
compa rability where IFRS Sta ndards permits similar items to be recognised in either profit
or loss or OCI.
Those against reclassification argue that the recycled amounts add to the complexity of
financial reporting, may lead to earnings management and the reclassification
adjustments may not meet the d efinitions of income or expense in the period as the change
in the asset or liability may have occurred in a previous period.
The lack of a consistent basis for determining how items should be presented has led to an
inconsistent use of OCI in IFRS. Opinions vary but there is a feeling that OCI has become a
home for anything co ntroversial because of a lack of clear definition of w hat should be
included in the statement. Many users are thought to ignore OCI, as the changes reported
are not caused by t he operating flows used for predictive purposes.
C hapter 7 of the Conceptual Framework for Financial Reporting contains guidance on

reclassification. There is a presumption that if income and expenses are included in OCI in
one period, that they will be reclassified in some futu re period when doing so enhances the
relevance of the information or provides more fa ithful representation in that period. The
presumption c an be rebutted if there is no clear basis for identifying the period in which the
reclassification would enhance the relevance of the information in the statement of profit or
loss. This may indicat e that the income or expense should not have been inc luded in OCI
originally. It can be argued that reclassification adjustments do not meet the definition of
income and expenses in the period they occur and, therefore, those adjustments should be
acknowledged as items which do not f ulfil the definition of income and expense.
O BPP
LE/,lfl W
11.-111.
ACCA
Strategic Business
Reporting
(I nternationa I)
Mock Examination 3
Questions

0 BPP
LEAUll,-.G
tA'Ol"
325
be attempted
1 Hummings Co
Background
Hummings Co is the parent company of a multinational listed group of companies. Hummings Co

uses the dollar($) as its functional currency . Hummings Co acquired 80% of the equity shares of
Crotchet Co on 1 January 20X4 and 100% of Quaver Co on t he same date. The group's current
financial year end is 31 December 20X4.
Crot chet Co: Fu nct iona l c urrency
The head office of Crotchet Co is located in a country which uses the dinar as its main currency.
However, its staff are located in a variety of other locations. Consequently, half of their employees
are paid in d inars and the other half are paid in the currency of grommits. Crotchet Co has a high
degree of autonomy and is not reliant on finance from Hummings Co, nor do sales to Hummings Co
make up a significant proportion of their income. All of its sales and purchases are invoiced in
grommits and therefore Crotchet Co raises most of its finance in grommit s. Cash receipts are
retained in both grommits and dinars. Crotchet Co does not own a dollar($) bank account.
Crotchet Co is required by law to pay tax on it s profits in dinars.
The ac quisit ion of Crot chet 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 fa ir 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 dina rs at 1 January 20X4 was 50 million dinars.
Excluded from these fair values are several contracts with the customers of Crotchet Co. These
contractual relationsh ips 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%.

The following is a summary of the exchange rates between the dollar, grommits and dinars at
1 January 20X4 and 31 December 20X4:
1 Janua ry 20X4 31 December 20X4

$1:8 grommits $1:7 grommits
$1:4 dinar $1:3.5 dinar
1 dinar:2 grommits 1 dinar:2 grommits
The acquisition of Q uaver 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 d ispute 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 pa r

value. The bonds are repayable on 31 December 20X6 and the effective rate of interest is 8%.
Hummings Co's business model is to col lect the contractual cash flows over the life of the asset.
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At 31 December 20X3, the bonds were considered to be low risk and as a resu lt the 12-month
expected credit losses ore expected to be $10,000.
On 31 December 20X4 , Stove Co paid the coupon interest, however, at that dote the risks
associated with the bonds were deemed to hove increased significantly. The present va lue of the
repayments for the yea r ended 31 December 20X5 were estimated to be $462,963 and the
probability of default is 3%. At 31 December 20X4, it is a lso anticipated that no further coupon
payments would be received during the year ended 31 December 20X6 and only a portion of the
nominal value of the bonds would be repaid . The present value of these cash shortfalls was
assessed to be $6,858,710 with a 5% likelihood of default in the year ended 31 December 20X6.
Required
Dra ft on explanatory not e 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 st atements of Hummings Co, which a re presented in dollars ($), for the
year ended 31 December 20X4; ( 4 m arks)
(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 calcu lation of how the impairment and exchange difference on goodwill will
impact on the consolidated financial stat ements; (6 marks)
(c) How Quaver Co should be accounted for in the consolidated financial statements at
31 December 20X4 ; ond (4 marks)
(d) A calculation and discussion of how the bonds should be accounted for in the financial
statements of Hummings Coos at 31 December 20X3 ond for the year ended 31 December
20X4, including any impairment losses. (11 marks)
(Total= 30 marks)
2 BagshotCo
Background
Bagshot Co has a controlling interest in a number of entities. Group resu lts have been
disappointing in recent years and the directors of Bagshot Co have been discussing various
strategies to improve group performance. The cu rrent financial yea r end is 31 December 20X5.
The following personnel are relevant to the scenario:
Mr Shaw Head account ant of Bagshot Co

Mrs Dawes Chief executive of Bagshot Co
Mike Storr Nephew of Mr Shaw
Mrs Shaw W ife of Mr Shaw
G ro up rest ructure
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 on ACCA member.
During December 20X5, Mrs Dawes revealed p lans to Mr Shaw of a potential restructure of the
Bagshot group which had been discussed at board meetings. The restructu ring plans included a
general analysis of expected costs which would be incurred should the restructure take p lace.
These include legal fees, relocation costs for staff and also redundancy costs for a number of
employees. One such employee t o 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 Bag shot 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 ore likely to be incurred on alternative strategies. It would therefore be
prudent to include a restructuring provision for a ll expenditure. None of t he staff other than

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Mr Shaw have been notified of the plans although Mrs Dawes hos informed Mr Show that she
expects o final decision ond public announcement to be made prior to the authorisation af the
f inancial statements.
Mrs Shaw
Mrs Shaw is the wife of Mr Shaw, the head accountant of Bags hot Co. She is not an employee of
Bagshot Co and does not know about the proposed restructure. However, Mrs Shaw recent ly
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 va lue would be enhanced.
Required
(a) (i) Discuss the appropriate accounting t reatment of the restructuring costs in t he
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)
(b) 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 w ill be awarded in part (b) for t he clarity of discussion. (2 marks)
(Total = 20 m arks)
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Moc k exam 3: Questions 329
be attempted
3 Leria Co
Backgrou nd
Leria Co is an internationally successful football club. Leria Co is preparing the financia l

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 w ish to classify the
stadium as a non-current asset 'held for sale' in its financia l statements for the year ended
31 October 20X5 as t hey 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 t o 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
c hanged in several years and is unlikely to change in the near future. The stadium is being
depreciated by 5% per annum using the redu cing 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 t o improve the crowd barriers. Leri□ Co has
incorrectly t reated 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

Leri □ Co has its own subscription-based television station. As a result, it has material intangible
assets which relate to t he content rights associated with the television programmes. The
budgeted costs of product ion are based on the estimated future revenues for the television
programme. These cost s of production are then capitalised as an intangible asset and called
'contents rights'. The directors of Leri□ Co believe that the intellectual property in the content
rights is consumed as customers view the television programmes. Consequently, Leri □ 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 t otal 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 cost s

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 ore 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 cost s.
For impairment purposes, Leri□ 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 threaten ing injury and
cannot play in the team. Players only generate direct cash flows when they are sold to another
football club.
Required
(a) Discuss with reference to International Financial Reporting Standards (IFRS):
(i) Whether the directors can classify the stadium as held for sale at 31 October 20X5;

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(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 sa le and leaseback of the stad ium
at 30 November 20X6. (13 marks)
(b) Discuss:
(i) Whether the amortisation of the intang ible assets relating t o television program me
c o ntent rights by Leria Co and by the industry are acceptable policies in
accordance with IFRS standard s; and
(ii) How to account for the players' contract costs (including t he contingent performance
conditions), any impairment which might be required to these non-current asset s and
whether a player can be considered a single cash generating unit. (12 marks)
(Total= 25 marks)
lt Ecoma Co
(a) The current developments in sustainability reporting show that there is a global trend
t owards more extensive and more meaningful narrative reporting. The improvement s in the
quality and scope of reporting are d riven by both regulatory demands and market
demands for t ransparency. 'Sustainable investing' describes an approach to investment
w here environmental, social or governance (ESG) factors, in combinat ion w ith fina ncial
considerat ions, guide the selection and management of investments.
Required
Discuss why the disclosure of sustainable information has become an important and
influential consideration for invest ors. (8 marks)
(b) Background
The directors of Ecoma Co consider environmental, social and g overnance issues to be

extremely important in a w ide range of area s, including new product development ,
reputation building and overall corporate strategy. The company is taking a proactive
approach to managing sustainability a nd is actively seeking opportunities to invest in
sustainable projects and embed them in their business practices. The compa ny's financial
year end is 30 September 20X5.
Head office
Ecoma Co is comm itted t o a p lan to move its head office to a building which has an
energ y efficient green roof that acts as a natural temperature controller. The move
from the current head office, which is leased, w ill 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.
The d irectors of Ecoma Co believe t hat the g reen roof build ing will save the company
$2 million per annum over t he useful life of the building. However, over the next two
years, it a nticipates that the d isruption of the move w ill cause the compa ny to make a
loss of $10 million per annum. The company wishes to make a provision of $16 million
w hich com prises the loss t o be incurred over the next two years net of the saving c reated
by the g reen roof.
Meanwhile, t he compa ny will have to vacate its c urrently leased head office building . At
30 Sept ember 20X5, the lease has two years to run at a rental of $600,000 per an num
payable in advance on 1 October each year. If the lease is cancelled, the full rental is
payable on cancellation. The head- lease permits sub- letting and Ecoma Co has sub-let the
building for one year from 1 October 20X5 a t a rental of $400,000 per annum payable in
advance. Ecoma Co estimates that there is a 40% probability that it will be able to extend
the sub-lease at the same rental for a second year.
The costs of moving to the g reen building are estimat ed at $1 million and the costs of
t erminating the lease in two years' t ime a re negligible. The pre-tax discount rate is 5%.
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Defined benefit pension scheme
Ecomo Co is worried that t he poor remuneration package offered to employees is putting

the company at risk of reputotionol damage. Consequently, Ecomo Co changed its pension
scheme on 30 September 20X5 to include all of its staff. The benefits accrue from the dote of
their employment but only vest ofter two years additional service from 30 September 20X5.
The net pension obligation at 30 September 20X5 of $78 million hos been updated to include
this change. During the year, benefits of $6 million were paid under the scheme and Ecomo
Co contributed $10 million to the scheme. These payments hod been recorded in the financial
statements. The following information relates to the pension scheme:
Sm
Net pension obligation at 30 September 20X5 78
Service cost for year 18
Post service cost relating to scheme amendment at 30 September 20X5 9
Discount rote at 30 September 20X4 5.5%
Discount rote at 30 September 20X5 5.9%
Required
(i) Discuss how the $16 million provision associated with Ecomo Co's move to a new
head office and the sub-let of its old head office should be accounted for in
accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
(6 marks)
(ii) Advise Ecomo Co on the principles of accounting for the pension scheme, including
ca lculations, for the year to 30 September 20X5. (7 marks)
(iii) Calculate the impact which t he above adjustments in (b)(i) and (ii) will hove on profit
before tax of $25 m illion for the year ended 30 September 20X5. Ignore any
potential tax implications. (2 marks)
Professional marks will be awarded in port (a) for clarity and q uality of discussion. (2 marks)
(Total = 25 marks)

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Ans\Yers

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33'+ Strategic Business Reporting (SBR)
Section A
Note: In each question, some marks are allocated for RELEVANT knowledge. Marks will not be
awarded for the reproduction of irrelevant knowledge or irrelevant parts of IFRS Standards. Full
marks cannot be gained unless relevant knowledge has been applied. Candidates may also discuss
issues which do not appear in the suggested solution. Providing that the arguments made are
logical and the conclusions derived are substantiated, then marks will be awarded accordingly.
1 Hummings Co
Work book references. Foreign operations and functional currency ore covered in Chapter 16.
Financial instruments are covered in Chapter 8.
To p t ips. In part (a) you were required to explain how the functional currency of a subsidiary
should be determined. As with all questions in SBR, you must make sure your answer is applied
to the scenario given. In part (b)(i), your discussion should have covered both the recognit ion of
the contracts as intangible assets as well as the covering the translation of the assets into the
group's presentation currency. In part (b)(ii), make sure you do as t he requirement asks - you
onl!:J need to explain calculations where the requirement asks !:JOU to do so. Here the requirement
asks you to explain the impact on the group accounts of the impairment and exchange difference
on goodwill. It does not ask !:JOU to explain the calculation of goodwill, therefore don't waste your
time doing this. Part (c) covered the accounting treatment of a subsidiary acquired for resa le.
With this type of question, a good approach is to explain the relevant requirements of the
standard first, then apply those requirements to the scenario to reach a conclusion. Part (d)
covered impairment of financial assets. This question was difficult, and the calculation of the loss
allowance was particularly hard. In your real exam, you should not overrun on your allocated
time for questions which are d ifficult such as this, ensure you answer as best you can in the time
available, and then move on to the next question.
H@ii:i·ifoh:ii◄
Marks

Autonomy from parent 2
Determination of functional currenc!:J 3
5
(b) (i) Application of the following discussion to the scenario:
Identifiable criteria and recognition 3
Need to amortise
4
(ii) Goodwill calculation 4
Discussion of correct treatment of impairment and
exchange difference
Recognition of split between shareholders
6
(c) Discussion of asset held for sale criteria 2
Application of the above discussion to Quaver Co 2
4
(d) Amortised cost identification 1
12- month credit loss - discussion 2
- calculation 1
Amortised cost ca lculation 1
Explanation lifetime credit losses 3
Calculation of lifetime credit losses 3
11
30
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(a) 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 ta 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 shou ld not
be their func tional currency.
In determining its functional currency, Crotchet Co should consider the currency which
mainly influences its sales price of goods and the currency wh ich mainl y 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 run ning 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 soles and purchases are invoiced in grommits as
well as a pproximately half of their staff being paid in grommits. Funds for finance are
raised in g rommits which fu rther suggests that grommits should be chosen as the
functional currency of C rotchet Ca.
(b) (i) IFRS 3 Business Combinations requires the investor to identify all of the investee's
identifiable net assets a t acquisition. 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 recog nised within the
individual financial statements of Crotchet Co or not.
The contracts provide Crotchet Co with a legal right to prevent their customers from
obtaining goods and services from their competit ors and a reliable estimate of fair
value appears to be obtainable. The contracts should be recognised as a separate
inta ngible asset at on initial value of 15 million grommit s. Th is would initially 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. The contracts
would need to be examined to determine t he average unexpired useful life of the
contracts and amortised over this period. This would be translated at the overage
rote of exchange and expensed to consolidated 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 ($2.143 million) with a corresponding exchange gain recognised
within equity.
(ii) Goodwill at 31 December 20X4 would be $8.2 million calculated as follows:
Grommits Ex rate $
(millions) $:grommits (millions)
Consideration ($24m x 8) 192
NCI at acquisition ($6m x 8) 48
Net assets at acquisition* (158)
Goodwill at 1 January 20X4 82 8 10.25
Impairment (30%) (24.6) 7 (3.51)
Exchange gain 1.46
57.4 7 8.2
* Net assets at acquisition are 43 million grommits plus 15 million grommits for the
contractual relationships plus 100 million g rommits far the dinar assets t ranslated at
1 dinar to 2 grommits (50m x 2).
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
against consolidated profit or loss. Goodwill w ill be retranslated using the closing
rate of exchange of $1:7 grommits with the exchange gain of $1.46 million included
within other comprehensive income. Since non-controlling interest is valued 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) It appears as if the acquisition of Quaver Co should be t reated as a subsidiary acquired
exclusively with o view for resale. The usual criteria for an asset to be classified as held for
sale as per IFRS 5 Non-current Assets Held for Sale and Discontinued Operations include:
• The sale must be hig hly 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 t he 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 t o 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.
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
should therefore be t reated as a subsidiary acquired exclusively w ith a view to resale. It
should not be consolidated into the Hummings group financial stat ements. Quaver Co
should initially be valued at fair value less cost s to sell with any subsequent decreases in
fa ir value less costs to sell taken to consolidated profit or loss. As a subsid iary acquired
exclusively for resale, Quaver Co would be classified as a d iscontinued activity and
earnings for t he year disclosed separately in the consolidated statement of profit or loss of
the Hummings group.
(d) Since the business model of Hummings Co is to collect the contractual cash flows of the
bonds over the life of t he asset, the bonds should be measured at amortised cost. All
financial assets including amortised cost assets should initially be recognised at fa ir va lue.
This would be equal to the $10 ,000,000 paid on acquisition of the bonds.
IFRS 9 Financial Instruments requires entities to adopt an expected value approach to
the consideration of impairment losses on financia l assets. On acquisition, the bonds
a re considered low risk and are not credit impaired. The bonds would be c lassified as a
stage one financial asset as at 31 December 20X3. This means that Hummings Co should
create an expected credit loss equal to 12 months expected credit losses. It is important
to appreciate that the 12- month expected credit loss is not the lifetime expected cred it
loss wh ich an entit y will incur which it predicts w ill default in the next 12 months. The
12- month expected credit loss is defined as a portion of the lifetime expected credit
losses which represent the expected credit losses which result from a default within the
next 12 months. In effect, the proportion of the lifetime expected credit losses which are
expected should a default occur within 12 months are weighted by the probability of a
default occurring. Hummings Co should therefore recognise a default a llowance of
$10,000 as at 31 December 20X3. This will be expensed to profit or loss and a sepa rate
a llowance created rather than offset against t he $10,000,000 bonds. The allowance is,
however, 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 th e bonds in the statement
of financ ial position at 31 December 20X3 will be $9.99 million ($10 million - $10,000).
As the bonds are to be measured at amortised cost, the effective rate of int erest of 8%
will be included in profit or loss and added to the bonds. This is calculated on the initial
$10,000,000 and is not affected by the loss allowance of $10 ,000. The coupon interest of
$500,000 ($10,000,000 x 5%) is deducted from the carrying amount of the bonds. This
means that the bonds would have a carrying amount of $10,300,000 at 31 December 20X4
before considering the impairment allowance.
B/fwd Interest 8% Coupon 5% C/fwd
$ PL
10 ,000,000 800,000 (500,000) 10,300,000

At 31 December 20X4, there has been a significant increase in credit risk. As na actual
default has yet occurred, the bonds should be classified as a stage two financial asset. This
means that Hummings Co should make an allowance to recogn ise 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 t he bonds. An allowance is required
equal to the present va lue of the expected loss in contractua l 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 Cash flow loss working PV of default
$
31 December 20X5 3% X $462,963 13,889
31 December 20X6 5% X $6,858,710 342,936
356,825
The expected loss a llowance should be increased to $356,825 with an expense recorded in
profit or loss of $346,825 ($356,825 - $10,000). The loss allowance is deducted directly
from the bonds with future interest income recorded on the gross position. The carrying
amount of the bonds at 31 December 20X4 would be $9,953,175 ($10,300,000 - $346,825).
2 Bagshot Co
Workbook references. Ethics and related parties are covered in Chapter 2. Restructuring
provisions are covered in Chapter 6.
Top tips. In part (a)(i), you were asked to discuss the required accounting treatment of some
restructuring costs. Make sure you read the question carefully to address a ll t he points g iven in
the scenario - eg the different types of cost s mentioned and the timing of t he announcement.
Part (a)(ii) was best answered as two sub-requirements: a discussion of w hat good stewardship
means, and then w hether the proposed restructuring and accounting for the restructure
constitut ed good stewardship. In part (a)(iii), a good approach would have been t o identify the
requirements of IAS 24 Related Party Disclosures as to the definition of a relat ed party, t hen
apply that definition to the facts of the scenario before reaching your conclusion.
In part (b), as well as d iscussing the ethical issues, you also needed to discuss the actions Mr Shaw
should take. Make sure you cover both of these requirements in your answer. Question 2 of the
exam will a lways feature ethical issues. Two professional marks are available for the application of
ethical principles to t he scenario given . Quoting ethical guidance will not be enough, you must
apply that guidance to the scenario.
H@il:i·ifoii::\M
Marks
(a) (i) Discussion of IAS 37 criteria and restructuring expenditure 2

Application of t he above to t he scenario 3
Identification of non-adjusting event 1
6
(ii) Application of t he following discussion to the scenario:
What is meant by good stewardship 2
Examples of good stewardship 2
4
(iii) Application of t he following discussion to the scenario:
Control/significant influence criteria 2
Recognition of close family member
3
338 Strategic Business Reporting (SBR) 0 BPP

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Marks
(b) Application of the following discussion to the scenario:
Intimidation t hreat 1
Insider trading 2
Confidentiality 2
5
20
(a) (i) A p rovision for restructuring costs should only be recognised in the financial
statements of Bagshot Co where all of the following criteria are met:
• A rel iable estimate can be made of the amount of the obligation;
• It is probable that an outflow of resources embodying economic benefits will

be required t o 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. 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 w ith ongoing activities. Hence the relocation cost s would not be
included as, although they relate directly to the restructuring, the costs would be
classified as an ongoing activity.
An obligation is regarded as probable where the event is more likely than not to
occur. It is not clear that the restructuring is probable. Mrs Dawes has indicated that
alternative strategies are possible and further clarification would be required to
ascertain whether these activities would constitute a restructuring as per IAS 37.
Only then may it be determined that a restructuring is indeed probable.
A constructive obligation for restructuring only arises where a detailed formal plan
exists and a valid expectation to those affected by t he restructuring that it wi ll take
place has occurred. A plan is in place but management does not yet appear
committed as a lternative strat egies 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.
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 t he 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 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 t herefore assume responsibilities to protect the entity's
resources from unfavourable effects of economic factors such as price and
technologica l 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 a rgued,
therefore, t hat the restructure is acting in good faith and reflecting good principles
of stewardship. It is anticipat ed that long-term shareholder value will be enhanced
from the proposals.
A second factor of good stewardship is that it is important that investors, both

existing and potential, and lenders have reliable and accurate informat ion about
the entity's resources so that they can assess how efficiently and effectively the
e ntity 's management and governing board have d ischarged t heir responsibilities.
It is important therefore that the financia l statements are transparent, objective
and comply fu lly with International Financial Reporting Standards. Mrs Dawes
wants Bagshot Co to include a restructuring provision as at 31 December 20X5
even thoug h no obligation arises. Whi lst prudence is a g uiding pri nciple when
dealing w ith 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.
(iii) 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. A 5% ownership wou ld not g ive Mrs Shaw control over the
operating decisions of Bagshot Co and it is clear she would not be able to control the
entity. Significant influence is the power to participate in the financial and operating
decisions of the entity. It is presumed t hat a holding of less t han 20% of the voting
power is insufficient for significan t influence unless this can be clearly demonstrated.
Mrs Show is unaware of the proposed restructu re which would suggest t hat she does
not have a board position. It can be concluded that she does not have control nor
significant influence.
Mrs Shaw would be deemed to be a close family member of Mr Shaw. She would
therefore be deemed to be a related party if it was concluded that Mr Shaw is a
member of key management personnel of Bagshot Co. Mr Shaw is the head
accounta nt of Bagshot Co but it seems highly unlikely that he wou ld be deemed
to be key management personnel. There is no evidence that he has authority or
responsibility for planning, d irecting and controlling the activities of Bagshot Co.
Nor does he appear to be a direct or of the entity. It can be concluded that
Mrs Shaw's acquisition of the 5% of the equity in Bagshot Co wou ld not be a
related part y transaction.
(b) 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 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 w ith 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 International Financial Reporting Standards. He must not comply with M rs
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
objectivit y. Assuming that Mrs Dawes is aware of t he error, her integrity would also be
questionable.
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 t he 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 d ifferent decisions should t hey 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.
31+0 St rategic Business Reporting (SBR) @BPP LEAR\,NC:

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Mr Shaw has became privy ta confidential information regarding Bagshat Ca. One af
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 t hey do not use confidential information far 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 ar his nephew.
Mock exam 3: Answers 31t1

Section B
3 Leria Co
Workbook references. Non-current assets held for sale are covered in Chapter 14. Sale and
leaseback is covered in C hapter 9. Intangible assets are covered in Chapter 4.
Top tips. This question was set in the context of a football club, however industry-specific
knowledge was not required. Part (a) contained three separate sub-requirements, all related to
the t reatment of the football stadium. Part (a)(i) required careful applicat ion to t he scenario of
the requirements of IFRS 5 for assets held for sale relating to the date of the sale agreement. In
part (a)(ii), you were told in the scenario that the compa ny's accounting treatment for the crowd
barriers was incorrect, so that gave you a starting point for the discussion. Part (a)(iii) covered the
sale a nd leaseback. This is where you should have spent most of your time in part (a) as there
was lots to d iscuss. Part (b)(i) was t ricky if you wer e not aware of the rebuttable presumption in
IAS 38 that t hat basing amortisat ion on revenue, for which the intangible is used, is inappropriate,
unless both use and revenue a re highly correlated. However, if you were not aware of th is, you
could have described the principles underlying amortisation a nd developed your answer from
there. Part b(ii) required a discussion of the accounting treatment of the players' contract costs,
including contingent performance conditions, the possible need for impairment and whether a
player can be considered a single cash generating unit (CGU).
H®ii:l·lfoii::iS
Marks
(a) Discussion and a pplication of the following to the scenario:

(i) Held for sale guidance under IFRS 5 3
(ii) Accounting treatment barrier improvements 3
(iii) Sale and leaseback principles 4
Accounting treatment sale and leaseback 3
13
(b) Discussion and application of the following to the scenario:
Potential amortisation of t he intangible asset 5
Performance conditions and contract costs 5
Value-in- use of an individ ual plal:Jer/CGU 2
12
25
(a) (i) IFRS 5 Non-current Assets Held for Sale and Discontinued Operations addresses
the accounting for assets which are classified as held for sale. IFRS 5 requires a
non- current asset to be classified a s held for sale if its carrl:J ing amount will be
recovered principally through a sale transaction rather than through its continuing
use. It must be available for immediate sale in its present condition, and its sale
must be highly probable within 12 months of classification as held for sale. The
standard only foresees an exemption to th is rule if the sale is delayed by events or
circumstances which are beyond the ent ity' s control, which is unlikely to be the
case in this instance. Leria Co has entered into a firm sales commitment but the
sale will occur after the 12-month threshold. Therefore, the stadium cannot be
classified as held for sale. Add itionally, a sale and leaseback transaction is outside
the scope of IFRS 5 and is covered by IFRS 16 Leases.
31+2 Strategic Business Reporting (SBR) @BPP LEl\ll'IINC

fCOh\
(ii) The $2 million to be spent on crowd barrier improvements to the stadium should not
be treated as an impairment of the asset's carrying amount at 31 October 20X5.
There is no present obligation (legal or constructive) as a result of a post event
and there is no probable payment. Leria Co mo!:J decide not to corr!:J out the
improvements, especioll!:J as the stadium is going to be sold and then subsequentl!:J
leased bock. Therefore the $2 m illion should be added bock to the corr!:Jing amount
of the stadium and a corresponding credit mode to profit or loss.
(iii) A sole and leaseback transaction occurs where an entit!:J transfers on asset to
another entit!:J and leases that asset bock from the bu!:Jer/lessor. The first required
criteria of IFRS standards is to determine whether a sole hos occurred. Under IFRS 16,
on entity must apply the IFRS 15 Revenue from Contracts with Customers
requirements to determine when a performance obligation is satisfied. If it is
concluded that the transfer of an asset is not a sale, then the seller/lessee will
continue to recognise the transferred asset. In this event, a financial liobilit!:J and
financial asset will be recognised under IFRS 9 Financial Instruments. In this case, it
seems that a sole will occur on 30 November 20X6 because of the binding sole
commitment. If the fair value of the sole consideration equals the asset's fair value,
and the lease payments ore at market rotes, there is no need to adjust the sales
proceeds under IFRS 16.
Lerio Co should follow IFRS 15 to account for the sole and then oppl!:J IFRS 16 to
account for the lease. Thus, Lerio Co should account for t he sole and leaseback as
follows:
• Derecognise the underl!:Jing asset.
• Recognise the sole at fair va lue.

• Recognise onl!:J the gain/loss which relat es to the rights transferred to
buyer/lessor.
• Recognise a right-of-use asset as a proportion of the previous carrying

amount of the underlying asset.
• Recognise a lease liability.
Lerio Co should account for the sole and leaseback at 30 November 20X6 as follows :
Carrying amount of stadium is $(18 + 2) million = $20 million

Less Depreciation for !:Jeor to 31 October 20X6 $(20 x .05) million ($1 million)
Depreciation for November 20X6 $(20 - 1) x .05)/ 12) million ($0.08 million)
$18.92 million
Present value of lease/ fair value of asset = $26m/$30 x 100% = 86.67%

The right-of- use asset recorded will be 86.67% x $18.92 = $16.4 million.
Tutorial not e:
The following will be the entries in the financial records:
Dr Cr
(Sm) (Sm)
Cash 30
ROU asset 16.4
Stadium 18.92
Lease liobilit!:J 26
Goin on disposal (balance) 1.48
46.4 46.4
The gain on disposal is limited to the gain on the portion of the asset sold recognising
that Lerio hos retained on interest in the a sset. It will be reported in the statement of
profit or loss.
Mock exam 3: Answers 31+3

(b) (i) Leria Co's accounting policy to base the amortisation of t he intangible asset for
content rights on revenue stemming from the rights seems reasonable and systematic.
However, IAS 38 Intangible Assets sets out a rebuttable presumption that amortisation
based on revenue generated by an activity which includes the use of an intangible
asset is not appropriate. This presumption can be overcome when it can be
demonstrated that revenue and the consumption of the economic benefits of the
inta ngible asset are highly correlated. The intellectual property embodied in the
television programmes will generate cash flows throug h the television channel
subscriptions and the estimated revenues for a television programme determine t he
amount to be spent on producing the television programme. Therefore, revenue
reflects a proxy for the pattern of consumption of the benefits received. Revenue and
consumption of the economic benefits of t he intangible asset seem highly correlated
and therefore a revenue-based amortisation method seems appropriate.
The industry practice method is a lso acceptable and conceptually sound as it is

based on an analysis of the remaining useful life of t he programme and the
recoverable amount. Such an approach does not contradict IAS 38 's prohibit ion on
revenue- based amortisation because it is not based on direct matching of revenue
and amortisation. The useful life of an asset is required to be reassessed in
accordance with IFRS Standards at least at each financial year end. Where this
results in a change in estimate, this is will be accounted for prospectively from the
date of reassessment.
IAS 38 also states that if a pattern of amortisation cannot be measured reliably, the
straight-line method must be used.
(ii) When a player's contract is signed, management should make an assessment of

the likely outcome of performance condit ions. Contingent consideration will be
recognised in the players' initial registration costs if management believes the
performance conditions will be met in line with the contractual terms. Periodic
reassessment s of t he contingent consideration should be made. Any contingent
amounts which the directors of Leria Co believe w ill be payable should be included
in the players' contract costs from the date management believes th at the
performance conditions will be met. Any additional amounts of contingent
consideration not included in the costs of players' registrations w ill be disclosed
separately as a commitment. Amortisation of the costs of the contract will be based
upon the length of the player's contract.
The costs associated with the renegotiation of a playing contract should be added
to the residual balance of the players' contract costs at the date of signing the
contract extension. The revised ca rrying amount should be amortised over the
remaining r enegotiated contract length. Where a player sustains a career
threatening injury and is removed from the playing team, the carrying amount of
the individual would be assessed against the best estimate of t he individual's fair
value less any cost s ta sell and an impairment charge made in operating expenses
reflecting any loss arising.
It is unlikely that any individual player can be a separate single cash generating unit
(CGU) as this is likely to be the playing squad. Also, it is difficult to determine the
value- in- use of an individual pla!Jer in isolation as pla!Jers cannot generate cash
flows on their own unless via a sale.
31tlt Strategic Business Reporting (SBR) @BPP LEAR\,NC:

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It Ecoma Co
Workbook references. Sustainability reporting is covered in Chapter 18. Provisions are covered in
Chapter 6. Pensions are covered in Chapter 5. Leases are covered in Chapter 8.
Top t ips. Part (a) required discussion on the disclosure of sustainability and environment, social
and governance (ESG) issues and its importance to investors. The examiner's report pointed out
that reading t he ACCA article on the sustainable development goals (available in the stud1:1 support
resources section of t he ACCA website) would have provided good background information for this
question. Part (b) looked at the accounting treatment of management responses to sustainability
issues. Part (b)(i) included a lease that was onerous. The ACCA suggested solution give n
below discusses t he accounting treatment of t his lease as an onerous contract under IAS 37.
However, this accounting treatment only arises on initial application of IFRS 16. This treatment is
covered in an ACCA article 'Revising for your SBR exam - Part 4' (available in the study support
resources section of the ACCA website). It is unlikely that you would have been aware of this
specific point, but, as with all questions in the SBR exam, marks would have been awarded for
sensib le d iscussion of the issues, applying appropriate principles, even if that is different to the
suggested solution. The usual treatment of an onerous lease, once IFRS 16 has been applied, is to
test the right-of-use asset for impairment under IAS 36 and marks would have been awarded for a
discussion of this treatment.
H@ii:i·iH:ii::iM
Marks
(a) Discussion of why it is important to investors that

companies disclose sustainable information
Relevance 2
Opportunities 1
Va luation models 2
Risks 2
Screening strategies
8
(b) (i) Discussion and application of the following to the scenario:
IAS 37 onerous contract 3
Future losses 1
Provision 2
6
(ii) Discussion and application to scenario of the principles and
practice of accounting for the pension scheme 4
Calculation of net pension obligation 3
7
(iii) Calculation of the general impac t on earnings 2
25
(a) There is increasing interest by investors in understanding how businesses are developing
environmental, social o r governance (ESG) goals. The positioning of t he ESGs in relation to
the overall corporate strategies is information which investors feel is very relevant to the
investment decision which in turn will lead to capital being channelled to responsible
businesses.
Sustainability practices will not a ll be equally relevant to all companies and investors'
expectations are likely to focus on companies realising their core business activities with
financial sustainability as a prerequisite for attracting investment. Because institut ional
BPP
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Mock exam 3: Answers 31+5
investors have a fiduciary duty to act in the best interests of their beneficiaries, such
institutions have to take into account sustainability practices. Companies utilising more
sustainable business practices provide new investment opportunities. Investors realise that
environmental events can create costs for their portfolio in the form of insurance premiums,
taxes and the physical cost related with disasters. Social issues can lead to unrest and
instability, which carries business risks which may reduce future cash flows and financia l
returns.
Investors screen t he sustainable policies of companies and factor the information into their
valuation models. Investors may select a company for investment based on specific policy
criteria such as education and health. Investors may evaluate how successful a company
has been in a particular area, for example, the reduction of ed ucational inequality. This
approach can help optimise financial returns and demonstrate their contribution to
sustainability. Investors increasingly promote sustainable economies and markets t o
improve their long- term financial performance. However, the disclosure of information
should be in line with widely-accepted recommendations such as the G lobal Reporting
Initiative (GRI) and the UN Global Compact. Integrated reporting incorporates appropriate
material sustainability information equally alongside financial information, thus providing
reporting organisations with a broad perspective on risk.
Investors often require an understanding of how the d irectors feel about the relevance of
sustainability to t he overall corporate strategy, and t his will include a discussion of any
risks and opportunities identified and changes which have occurred in the business model
as a result.
Investors employ screening strategies, wh ich may involve eliminating companies which
have a specific feature, for example, low pay rates or eliminating them on a ranking basis.
The latter may be on the basis of companies which are contributing or not to sustainability.
Investors will use relat ed disclosures to identify risks and opportunities on which they w ish
to engage with companies. Investors will see potential business opportunities in those
companies which address the risks to people and the environment and those companies
which develop new beneficial products, services and invest ments which mitigate the
business risks related to sustainability. Investors are increasingly seeking investment
opportunities which can make a credible contribution to the realisation of the ESGs.
(b) (i) Ecoma Co cannot make a provision of $16 million as the company cannot make a
provision for the future operating losses of $20 million (these are specifically not
allowed by IAS 37 Provisions, Contingent liabilities and Contingent Assets), nor take
account of the saving of $2 million per annum as no obligation exists. However, the
lease represents an onerous contract and an appropriate provision should be made.
IAS 37 defines an onerous contract as 'a contract in which the unavoidable costs of
meeting the obligations under the contract exceed the economic benefits expected
to be received under it.' There are no explicit requirements for entities to 'search' for
onerous contracts but it is implicit in the onerous contract principles that reasonable
steps should be taken to identify them. If an onerous contract is identified, a
provision must be recognised for the best suitable estimate of the unavoidable cost.
IAS 37 defines the unavoidable costs under a contract as the least net cost of exiting
from the contract, which is the lower of the cost of fulfilling it and any compensation
and penalties arising from failure to fulfil it. Before a separate provision for an
onerous contract is recognised, an entity recognises any impairment loss which has
occurred on assets dedicated to t hat contract.
The onerous contract should be measured by determining the present value of the
unavoidable costs, net of the expected benefits under the contract. The discount
rate should be a pre- tax rate wh ich reflects current market assessments of the time
value of money and the risks specific to the liability.
In this case, the requirements of the onerous contract must be considered along with
the prohibition in IAS 37 of providing for future operating losses. It is important to
distinguish between unavoidable costs under an onerous contract , and future
operating losses. Future operating losses are not independent of the entity's future
actions and do not normally stem from an obligation arising from a past event. A
provision for onerous contracts is recognised if the unavoidable costs of meeting t he

IMlllA
obligotions under t he contract, or exiting from it, exceed the economic benefits
expected to be received under it.
Therefore, the unavoidable cost of t he onerous contract should be discounted to
30 September 20X5 is ($600,000 + $600,000/1.0 5), ie $1,171,429.
The expect ed benefit of sub-letting the building arising at 30 September 20X5 will be
($400,000 + (40% X 400,000)/1.05), ie $552,381.
A provision of $(1,171,429 - 552,381) $1,619,048 can therefore be made. In addition,
a provision of $1 million can be made for the costs of moving t o the new head office if
it is felt t hat the cost is unavoidable. This gives a total provision of $1,619,048.
Tutoria l note:
IFRS 16 Leases says that the right-of-use asset at t he date of initial application is
adjusted by the amount of any provision for onerous leases recognised in the
statement of financ ial position.
(ii) At each financial year end, the plan assets and the defined benefit obligation are
remeasured. Remeasurement gains and losses are recognised in other
comprehensive income.
The statement of profit or loss records the change in the surplus or deficit except for
contributions to the plan and benefits paid by the plan and remeasurement gains
and losses.
The amount of pension expense t o be recognised in profit or loss is comprised of
service costs and net interest costs. Service costs are the current service costs, w hich
is the increase in t he present value of the defined benefit ob ligation resu lting from
employee services in the current period, and ' past-service costs'. Ecoma Co's past-
service costs are t he changes in the present value of the defined benefit obligation
for employee services in prior periods w hich have resulted from the plan amendment
and should be recognised as a n expense. IAS 19 Employee Benefits requires all past
service costs to be recognised as an expense at the earlier of the following dates:
(a) When the plan amendment or curtailment occurs, and

(b) When t he entity recognises related restructuring costs or termination benefits.
These costs should be recognised regardless of vesting requirement s. Thus, the past
service cost of $9 million w ill be recognised at 30 September 20X5.
Net interest on the net defined benefit liability is calculated by multiplying the
opening net defined benefit liability by t he discount rate at t he start of the annual
reporting period. Net interest on the net defined benefit liability can be viewed as
effectively including t heoretical interest income on plan assets.
The ta ble below reflects the change in the net pension obligation for t he period.
The profit or loss w ill be charged with the net interest component of $3.2 m illion
and the service cost of $27 million ($18 million + $9 million). OCI will be credited with
$1.2 million and this gain ca nnot be reclassified to profit or loss. Benefits paid have
no effect on the net obligation as both plan assets and obligations are reduced by
$6 million.
$m C harge to
Net interest component (5.5% x 59m) 3.2 Profit or loss
Service cost for yea r 18 Profit or loss
Past service cost relating to plan amendment 9 Profit or loss
at 30 September 20X5
Contributions (10) Already credited to cash
Remeasurement _j!g) ToOCI
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BPP
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Mock exam 3: Answers 31t7
(iii) Thus profit before tax of $25 million will suffer as the profit available to the ordinary
shareholders wi ll be reduced by:
Sm
Onerous cont ract provision (part (i)) 1.6
Net interest component 3.2
Past and current service cost 27
31.8
Thus a loss of $6.8 million ($25 million - $31.8 million) will now be reported.
31+8 Strategic Business Reporting (SBR) @BPP

LEAR~IMG
IAEDIA
ACCA
Strategic Business
Reporting
(I nternationa I)
Mock Examination It
Questions

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1 Sugar Co
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
consol idated statement of cash flows for the year ended 30 June 20X8.
Acquisition of Flour Co
A 40% shareholding in Flour Co was purchased severa l years ago at a cost of $10 million. This
investment gave Sugar Co significant influence in Flour Co. The consideration to acquire an
additional three million shares (30% shareholding) in Flour Co on 1 July 20X7 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:
$'000
Intangible assets (licences and patents) 6,781
Propert y , plant and equipment 18,076
Cash and cash equivalents 1,234
Other net current assets 9,650
Total net assets carrying amount 35,741
The carrying amounts of the net assets at 1 July 20X7 were equal to t he fair values except for
land wh ich had a fair value $600,000 above t he carrying amount. The Sugar group values
non-controlling int erests (NCI) at fair value and the shore price of Flour Co at 1 July 20X7 was
$3.80. Th is share price should be used to value NCI a t that date and to value the initial 40%
equity interest in Flour Co.
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.
Asset acquisitions and disposals
Including its purchase of the additional investment in Flour Co wh ich it correctly consolidated
from 1 July 20X7, the Sugar group also purchased various assets during the yea r.
There were no d isposals 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 t he
acquisition of Flour Co. The group disposed of some plant and machinery at a loss on disposal of
$2 m illion. Depreciation deducted from t he profit from operations was $10 million.
Sugar Co purchased a 25% equit y interest in Butter Co on 1 October 20X7 for $5 million cash
which gave significant influence. Butter Co paid a dividend in the post-acquisition period and
Sugar Co a lso received dividends from other associates during the year ended 30 June 20X8.
Sugar Co did not pay any dividends during the year.
There were no acquisitions of investments measured at fair value through profit or loss (FVTPL)
during the year but there were d isposals which had a carrying amount of $4 million. These were
sold at a profit of $500,000 which was included, alongside fair value gains, in investment income
in t he consolidated statement of profit or loss. The investment income figu re a lso includes
dividends received from these investments and any fair value gains or losses recognised o n the
initial investment in Flour Co.
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In addition to the shores issued to purchase Flour Co, Sugar Co issued some ordinary $1 shares
for cash during the year ended 30 June 20X8.
Group financial statement extracts
The group's consolidated financial statements have been calcu lated correctly. Extracts, together
with relevant comparative figures at 30 June are provided below:
Consolidated statement of financial position as at 30 June (extracts):
20X8 20X7
$'000 $'000
Non-c urrent a ssets
Intangible assets 33,456 15,865
Property, Plant and Equipment 55,124 52,818
Investment in Associates 26,328 23,194
Financial assets (measured at FVTPL) 3,000 6,000
Equity
O rdina ry share capit al ($1 shares) 23,000 20,000
Other Components of equity (all share premium) 33,600 18,000
Non-controlling interest 30,152 12,914
Consolidated statement of profit or loss for the year ended 30 June 20X8 (extract):
$'000
Investment income 3,891
Share of profit from associate companies 15,187
Profit att ributable to the non-controlling interest 9,162
Pension scheme
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 componen t and a lso
the remeasurement component for t he 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 t he 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.
Required
(a) Draft an explanatory note to the directors of Sugar Co, addressing how t he initial 40%
investment in Flour Co and the additional purchase of t he equity shares on 1 July 20X7
should be accounted for in the consolidated financial statements (including the statemen t
of cash flows). Using the goodwill figure of $2,259,000, ca lculate the cash paid to acquire
control of Flour Co and include a brief explanation as to how that cash should be
accounted for in t he consolidated statement of cash flows. (10 marks)
(b) Prepare extracts of the cash flows generated from
(i) investing activities; and
(ii) financing activities in the consolidated statement of cash flows for t he Sugar group
for t he year ended 30 June 20X8.
No explanations are required in part (b) . (16 marks)
(c) Describe the impact, if any, that the defined benefit pension scheme w ill have on the
consolidated statement of cash flows for t he Sugar group for the year ended 30 June 20X8
assuming that cash flows from operat ing act ivities a re calculated by the indirect m ethod.
( 4 m arks)
(Total= 30 marks)

IMlllA
2 Calibra Co
Calibra Co operat es in the propert!:J sector and has invested in new technolog!:J, distributed
ledgers/blockchain, to trade and to support propert!:J transactions. The financial !:Jear end of
Calibra Co is 31 December 20X8.
Apartment blocks
Calibra Co builds apartment blocks which normall!:J take two !:Jears to complete from the date of
signing the contract. The title and possession, and therefore control, of the apartment blocks
pass t o t he customer upon completion of construction. The price which is pa!:Jable on completion
of each apartment block is $9.55 million. Alternativel!:J, customers can pa!:J $8.5 million cash on
the da!:J that the contract is signed. The chief accountant has calculated that this represents an
appropriate borrowing rate of 6% for Calibra Co. Cali bra Co immediatel!:J recognises $8. 5 million
as revenue if customers pa!:J when the!:J sign the contract.
Chief a ccountant and Badoni Co
The chief accountant does not hold a permanent emplo!:Jment contract with Calibra Co. He has
applied for the position on a permanent basis and is to be interviewed in the near future. Badoni
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
Badoni Co to pa!:J $8.5 million and to dela!:J pa!:Jment until one month after the contract was
signed. In return, Badoni Co has agreed to provide a good emplo!:Jment reference. The chief
accountant of Calibra Co was afraid that he might lose Sodini Co as a customer and referee if he
did not agree to the dela!:J in pa!:Jment.
Distributed ledger technolog!:J
Calibra Co has recentl!:J used d istributed ledger technolog!:J/blockchain to sell shares in a
propert!:J t o investors. These digitised transactions are onl!:J visible to the authorised parties. The
c hief accountant publicl!:J supports this t echnolog!:J and is to manage the new S!:JStem. However,
he has private concerns over the reliabilit!:J of the due diligence carried out on the sale of propert!:J
shares and the potential violation of local regulations. The directors of Calibra Co want to
increase the number of transactions on the d istributed ledger b!:J offering digital shares in the
whole of the entit!:J'S propert!:J portfolio. Although the chief accountant has ver!:J basic knowledge
of distributed ledgers, he has assured the directors that he can facilitate this move. The project
has been approved b!:J the board despite the c hief accountant's private reservations. The chief
accountant has onl!:J recentl!:J qualified as an accountant and wishes to be emplo!:Jed with Calibra
Co on a permanent basis.
Required
(a) Discuss how Calibra Co should have accounted for the sale of t he 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 t he contractual sale of an
apartment block on 1 Januar!:J 20X8 at the discounted amount over t he two-!:Jear
constru ction 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 qualit!:J of the ethical discussion.
(2 marks)
(Total= 20 marks)
0 BPP
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1r111
be attempted
3 Corbel Co
Corbel Co trades in t he perf ume sector. It has recently acquired a company for its brand 'Jengi',
purchased two additional brand names, and has a nnounced plans to close its Italian stores.
Corbel Co also opened a new st ore on a prime site in Paris. The current financial year end is 31
Decem ber 20X7.
Acquisition of Jengi Co
On 1 January 20X7, Corbel Co acquired 100% of Jengi Co. Both companies operate in the
perfume sect or. Corbel Co intends to merge the manufacture of Jengi Co's products into it s 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 af ter 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 t he 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 perfu me (Locust) has been sold
successfully for many years and has an established market. The second is a new perfume wh ich
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 forma l plan for the closu re of t he six stores and has
also started an active search for a single buyer for their assets. The stores a re being closed
because of the increased demand generated by Corbel Co's internet sales.
A local newspaper has writ ten 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 p rimary 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 fo r such a new and expensive store and management believes t hat
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 wou ld 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. Int ernet sales are eit her
delivered to the customer's home or collected by the customer from the store supplying the
goods.

IMlllA
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 standards:
(i) Whether the Jengi Co brand name w ill be accounted for separately from goodwill on
acquisition and whether it should be accounted for os o separate cash generating
unit ofter the integration of the manufacturing units; (4 marks)
(ii) How to account for intangible assets with on indefinite life and whether the Locust
and Clora perfume brand names con be regarded os having on indefinite life;
(6 marks)
(iii) How to account for the proposed closure of the six stores and the suggested c losure
of the remaining stores; and (6 marks)
(iv) Whether the primary store should be test ed for impairment ot 31 December 20X7
and whether the internet soles con be attributed to this store. (4 marks)
(Total = 25 marks)
'+ Handfood Co
Hondfood Co is o small and medium-sized enterprise (SM E) which hos introduced o benefit to
encourage employees to remain with t he entity. The company's financial year end is 31 December
and it prepares its financial statements using IFRS for SMEs.
Employee benefit
On 1 January 20X2, Hondfood Co introduced o benefit to encourage employees to remain in its

employment for ot least five years. Hondfood Co hos promised its employees o lump-sum benefit,
payable on 1 January 20X7, which is equal to 1% of their salary ot 31 December 20X6, provided
they remain employed until that dote.
The current salaries of employees on 1 January 20X2 ore $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 o 75% probability that all employees will still be employed by Hondfood Co ot
31 December 20X6.
The discount rote 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 defined benefit obligation which means that the current service cost is the
increase in the present value of the future defined benefit liabilities. The benefit will be payable
from the balance on Handfood Co's business bank account at 1 January 20X7.
Present val ue factors 5%

Pe riod s (y ears)
4 0.823
5 0. 784
0 BPP
LE/Pl 11,u
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Required
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 IFRS for SM Es
decreases information asymmetry between the entity and investors.
Where SMEs lead in product and service innovation, they can also lead in innovation for
integrated reporting. There is a clear, concise and persuasive case for why SMEs and t heir
stakeholders stand to benefit greatly by using integrated reporting.
(a) (i) Discuss the nature of IFRS for SM Es and the principal differences between IFRS for
SMEs and full lFRS standards. (4 marks)
(ii) Discuss the effect that information asymmetry can have on the decision to invest in
SMEs. (4 marks)
(iii) Discuss how integrated reporting could help SMEs better understand and better
communicate how they create value to investors. (5 marks)
Professional marks will be awarded in part (a) for clarity and quality of discussion.
(2 marks)
(b) (i) Discuss, w ith suitable calculations, the principles of how Handfood Co should
account for the current service cost of its employee benefit for the year ended
(ii) Discuss the impact on t he defined benefit liability 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)

LEAR\, NC:
IMlllA
Ans\Yers

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LCAl\ ti(;
IMllJA
Section A
1 Sugar Co
H@ii:i-Hi:11:iiM
Marks

• Treatment as an associate (including FV 40% and share
exchange at 1 July 20X7) 5
• FV NCI and identifiable net assets at 1 July 20X7 3
Goodwill Calculation and treatment of cash consideration 2
10
(b) Marks for calculations as follows:
Acquisition of Intangib les 3
Proceeds on disposal of PPE 3
Cash paid for Butt er Co 1
Dividends received from associates 2
Investment income received 3
Issue of ord inary shares 2
Non-controlling interest dividend 2
16
• Cash flows t o include/exclude 2
• Ot her elements of defined benefit scheme 2
4
30
(a) C ash paid to acquire Flour Co
The acquisition of Flour Co is a step acquisition. This means t he original 40% equity interest
is treated as if it is disposed and then reacquired at fair value. The d ifference between the
carrying amount of t he original 40% equity interest and its fair value would be included as
a gain within profit or loss. As an associate, the investment would have been accounted for
using the equity method and would be valued at $14.8 million as at 1 July 20X7:
$'000
Cost 10,000
Share of increase in net assets between acquisition dates ($12m x 40%) 4 ,800
Investment in associate as at 1 July 20X7 14,800
The fair value of the original 40% interest would be $15.2 million (10m x 40% x $3.80) and
so gain of $400,000 would be included within profit or loss.
Goodwill will be calcu lated at 1 July 20X7, the date t hat control is gained, as the difference
between the fair va lue of the consideration and non-controlling interest and the fair va lue
of the identifiable net assets a t acquisition. The consideration must include the fair value of
the original 40% equity interest as well as t he fair value of the additional consideration.
The fair value of the non- controlling interest at 1 July 20X7 will be $11.4 million (10m x 30% x
$3.80).
The fair value of the share exchange will be $9 million (3 million shares acquired x ½ x $6).

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:
$'000
Fair value of original 40% equity interest 15,200
Fa ir value of share exchange 9,000
Fa ir value of non-controlling interest at acquisition 11,400
Fair value of identifiable net assets at acquisition including FV uplift
($35,741 + $600) (36,341)
Cash Consideration (balancing figure) 3,000
Goodwill on acquisition per question 2,259
Cash paid to acquire Flour Co will be included within the investing activities of the
conso lidated statement of cash flows. However, the cash held by Flour Co will now be
conso lidated so a net outflow arises of $1,766,000 ($3m - $1.234m).
(b) Extracts from the consolidated statement of cash flows for the Sugar Group year ended
30 June 20X8
Cas h flows from investing activities
$'000
Net cash paid o n acquisition of Flour Co (part (a)) (1,766)
Cash paid to acquire intangible assets (W1) (12,051)
Proceeds from disposal of property plant and equipment (W2) 4 ,370
Cash paid on acquisition of Butter Co (given in question) (5,000)
Dividends received from associates (W3) 2,253
Proceeds from disposal of FVTPL investment ($4m + $0.5m) 4,500
Investment income received (W4) 1,991
Cas h flows from financing activities
$'000
Issue of ordinary shares during the year (W5) 9,600
Dividends paid to the non- controlling interest (W6) (3,324)
Workings
Intangibles
$ '000
Intangibles b/f 15,865
Goodwill on acquisition of Sugar Co 2,259
Licences and patents on acquisition of Sugar Co 6,781
Amortisation (3,500)
Cash purchases of Intangibles (balancing figure) 12,051
Intangibles c/f 33,456
2 Property, plant and equipment
$ '000
Property, plant and equipment b/f 52,818
Acquisition of Flour Co (at fair value) 18,676
Depreciation (10,000)
Carrying value of disposal (balancing figure) (6,370)
Property, plant and equipment c/f 55,124
360 Strategic Business Reporting (SBR) @BPP LE/\R'IING

MaDIA
3 Dividends received from associates
$'000
Investment in associates b/f 23,194
Associate profit for the year 15,187
Acquisition of Butter Co 5,000
Step acquisition Sugar Co (part (a)) (14,800)
Dividends received (ba lancing figure) (2,253)
Investment in associate elf 26,328
4 FV gains recognised in investment income

$ '000
FVTPL asset b/f 6,000
Carrying amount of disposal (4,000)
Fair value gains included in investment income (balancing figure) 1,000
FVTPL asset c/f 3,000
$'000
Investment income per PL 3,891
FV gains on FVTPL investments (1,000)
Fair value gains on step acquisition (400)
Profit on disposal of FVTPL (500)
Investment income received 1,991
Proceeds from the disposal of the FVTPL asset are $4.5 million ($4m + $0.5m)
I Tutorial note.
The fair value gain is included within investment income but is not a cash flow and so
will be excluded from the consolidated statement of cash flows. In addition there is a
$400,000 gain arising upon the step acquisition of Flour Co included within the
investment income but isn't a cash flow. The profit on disposal of $0.5 million is also
not a cash flow but forms part of the proceeds from the disposal of FVTPL assets
l within investing activities. Cash proceeds included within the investment income of
the group are therefore $1 ,991,000.
5 Issue of ordinary shares during the year

$ '000
Share capita l and share premium b/f ($20m + $18m) 38,000
Share for share exchange (part (a)) 9,000
Cash proceeds from issue of shares during the year (balance) 9,600
Sha re capita l and share premium c/f ($23m + $33.6m) 56,600
6 Dividends paid to non-controlling interest

$ '000
Non-controlling interest b/f 12,914
Added on acquisition of Flour Co (part (a)) 11,400
Non-controlling interest profit for t he year 9 ,162
Dividends paid to non-controlling interest (balancing figure) (3,32 4)
Non-controlling interest c/f 30,152
(c) The onl y cash flow that should be recorded in the consolidated statement of cash flows in
relation to defined benefit pension schemes are the contributions paid into t he scheme.
These are typicall y included w ithin 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 a cash outflow but t hey
are an outflow of cash from t he pension scheme itself, a separate entity, rather than a
cash outflow of Sugar Co.
O BPP
LEI !ti NG
r,,-n.
This does not meon thot the pension scheme will not hove ony impoct upon the
conso lidated stat ement of cosh flows of the Sugor group. Since operating activities ore
being calculated using the indirect method it is necessary to adjust for any items that
effect operating profit but ore not cash flows. This would include the service cost
component which would need to be added bock to group profits. Core would also need to
be token in calculating the interest paid in the year. The finance cost charge in the profit
and loss would include the net interest charge from unwinding the opening value of the
liabilities and the estimated return on the assets. Neit her of these ore cash flows and so
would require adjusting. The remeasurement component is included as port of other
comprehensive impact and w ill not impact on the group statement of cash flows since it is
not a cash flow, nor does it impact upon operating profit.
2 Calibre Co
H®ii:i·ifoM:iiM
Marks

• Revenue IFRS 15 3
• Borrowing costs IAS 23 2
5
(b) Journal entries 3
(b) Discussion and application of ethical principles to scenario 10
20
(a) The performance obligation will be satisfied upon the completion of construction which is
also when the title, possession and control of the apartment block poss to the customer.
The advanced payment represents a significant financing component and IFRS 15 Revenue
from Contracts with Customers states that where this is the case then revenue is
recognised at on amount that reflects the price that a customer would hove paid if the
customer hod paid cash when they transfer the goods to the customer. IFRS 15 a lso stotes
that the interest rote used should reflect the credit characteristics of the party receiving
financing but may be t he rote that discounts t he nominal amount of the promised
consideration to the price that the customer would pay in cash. In this case, the interest
rote would be 6%. Using this rote, the cash soles price of $9.55 million con be discounted to
$8.5 million. Colibro Co should recognise a liability of $8.5 million and should subsequently
accrue interest on this liability balance for two years until it reaches $9.55 million when the
performance obligation is satisfied.
The interest should be accounted for in accordance with IAS 23 Borrowing Cost s as port of
the cost of constructing the apartment block. As Colibro Co's business model is based on
construction, IAS 23 states that borrowing costs that ore directly attributable to the
acquisition, construction or production of a qualifying asset form port of the cost of that
asset and, therefore, in this case should be included in the cost of inventory production.
Other borrowing costs ore recognised as on expense.
(b) Journa l entries
Dr (Sm) Cr (Sm)
Cash 8.5
Liability 8.5
Records liability on receipt of cash (1/1/X8)
Inventory: Interest accruing to 31/12/X8 0.51

Liability 0.51

Dr (Sm) Cr (Sm)
Interest accruing on liability to 31/12/X8 (6% x 8.5m) included in the

costs of inventory
Inventory: Interest accruing to 31/12/X9 0.54

Liability 0.54
Interest accruing on liability to 31/12/X9 (6% x (8.5 + 0.51)) included

in the costs of inventory
Liability 9.55
Revenue 9.55
Revenue arising on sale of apartment block (per question)

The balance on the contract liability at 31/12/X8 would be $9.55 million (8.5 + 0.51 + 0.54).
When control passes to the customer, Calibra Co recognises revenue of $9.55 million.
(c) The c hief accountant should not hold himself out as having 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 them
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 t hey
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 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 t itle ownership cou ld be costly and time consuming to resolve. The chief
accountant must also exercise independence of mind and not bow to polit ical 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.
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 vulnerab le group, as they may be more
easily influenced due to a perceived lac k 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
one 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
objectivit y which stems from a self-interest threat from the fear of losing Badoni Ca as a
client which in turn would affect the accountant's chances of securing his position on a
permanent basis.

Section B
3 Corbel Co
H@ii:i-iH:h:i\M
Marks
(a) Listing of major c hallenges

(b) Discussion and application of the following to the scenario:

(i) Treatment of brand on acquisition 2
Allocation of brand to CGU 2
4
(ii) Intangible assets with indefinite life principles (IAS 38) 2
Application to scenario 4
6
(iii) NCA held for sale-principles 3
Application to scenario 3
6
(iv) Impairment principles 2
Impairment of primary store 2
4
25
(a) There are many challenges in recognising and measuring intangible assets such as brands
in the statement of financial position.
Many intang ible assets are not frequently traded on a stand-alone basis and therefore
very often there is no active market for them which makes arriving at a valuation more
difficult. Add itionally, many intangible assets are unique and therefore it is not easy to
identif y a nd assess their value. Valuation methods are often com p lex and subjective and
the measurement is more subjective when the in t angible assets are not based on legally
enforceable rights. In some cases, the acquirer does not intend to use t he intangible assets
(for example, Corbel has acquired the b rands for defensive reasons) and this raises issues
with regards to arriving at a value. Finally , determining the useful life of intangible assets
can be subjective.
Generally, the reason for the omission from t he financial statements of intangible assets
has been due to a perceived lack of a link between their costs and estimating future
revenue. In addition, the difficulties in ascertaining cost or valuation figures for intangibles
and a focus on reliability over relevance when disclosing asset information have meant that
internally generated intangibles have not usually been recogn ised. However, the
importance of intangibles is reflected in the increasing proportion of o company's market
value being attributable to the existence of intangibles.
Intangible assets are not physical assets that can be easily recognised. In some cases,
perceptions may clash and what may seem like an intangible asset to one party may
appear not so to another.
(b) (i) The Jengi brand will generate future economic benefits by increasing sales volumes
and by the potential of premium prices. Cont rol over these potential future benefits
is achieved by the registration of the brand. The registration also satisfies the
requirement to identify the intangible asset separately from goodwill and estimate its
fair va lue.
361t Strategic Business Reporting (SBR) @BPP LEIIR~II C

Mfl'llA
IAS 36 Impairment af Assets defines a cash generating unit (CGU) as the smallest
identifiable group of assets that generates cash inflows that are largely independent
of the cash inflows from other assets or other groups of assets. However, brands are
typica lly not a separate CGU under IFRS. The brand would be tested for impairment
together with the associated manufacturing facilit ies. The brand would be
separately identified and valued, and should be a llocated to each of Corbel Co's
cash generating units that are expected to benefit from the synergies of the
combination. IAS 36 recognises that sometimes there is no basis for allocating the
brand to an individual CGU that is not arbitrary, so it permits it to be allocated to a
group of CGUs. However, each CGU must represent the lowest level within the entity
that is monitored for internal management purposes and not be larger than an
operating segment.
(ii) Int angible assets have an indefinite useful life when there is no foreseeable limit to
the period over which, based on on analysis of all relevant factors, the asset is
expected to generate net cash inflows for the entity (IAS 38 Intangible Assets). An
intangible asset with an indefinite useful life should not be amortised. IAS 36
Impairment of Assets, requires an entity to test an intangible asset with an indefinite
useful life for impairment by comparing its recoverable amount with its carrying
amount:
(a) annually, and

(b) whenever there is on indication that the intangible asset may be impaired.
The useful life of on intangible asset that is not being amortised should be reviewed
each period to determine whether events and circumstances continue to support an
indefinite useful life assessment for that asset. If they do not, the change in the
useful life assessment from indefinite to finite should be accounted for as a change
in an accounting estimate in accordance w ith IAS 8 Account Policies, Changes in
Estimates and Errors.
Corbel Co should consider various factors to determine whether the brand names
can be considered to have a useful life. These will include the extent to which Corbel
Co is prepared to support the brand and the extent to which the brand has long-
term potential and has had proven success. Perfume is often subject to market and
fashion trends and therefore, an assessment of how resistant the brands are to
change should be made. Also Corbel Co has purchased the brands as a defensive
measure to prevent rival companies acquiring them. Therefore, there may be a doubt
as to the support that Corbel Co may be prepared to give to the brands.
The Locust perfume has been sold successfully in the market for many years and
could be deemed to have an indefinite life. The Claro perf ume is linked to the
popularity of the actor and therefore, it is difficult to assess whether the brand has
an indefinite life as it is likely to be d ependent upon the longevity of the popularity of
the actor. In the case of the Claro perfume, it is difficult to state that the brand will
have an indefinite life. Thus C laro is likely to have a finite life.
(iii) IFRS 5 Non-current Assets Held for Sale and Discontinued Operations states that
immediately before classifying a disposal g roup as held for sale, the carrying
amounts of the assets and liabilities within the group are measured in accordance
with t he applicable IFRS standards. After cla ssification as held for sale, disposal
groups are measured at the lower of carrying amount and fair value less costs to
sell. Impairment must be considered both at the time of classification as held for sale
a nd subsequently after classification. The six stores should be accounted for as a
discontinued operation as they represent a component of Corbel Co and are a
separate geographical area of op erations. The approval and announcement of a
plan to close the six Italian stores is an indication that the assets attributable to the
discontinuing operation may be impaired. In addition, the six stores would be
classified as a 'disposal group' which is a group of assets t hat, an entity intends t o
dispose of in a single transaction. The measurement basis required for non-current
assets classified as held for sale is applied to the g roup as a whole, and any resulting
impairment loss reduces the carrying amount of the non- current asset s in the

disposal group in the order of allocation required by IAS 36. Additionall y, there may
be a need to provide for the additional costs of closure such as redundancy costs,
under IAS 37 Provisions, Contingent liabilities and Contingent Assets.
At t he end of each reporting period, an entity is required to assess whether there is

any indication that an asset may be impaired, ie its carrying amount may be 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. Whenever there is an indication of
impairment, the entity estimates the recoverable amount of the asset and records an
impairment if the recoverable amount is lower than the carrying amount.
Although there has been a local newspaper article that Corbel Co is to shut 30 stores
with a loss of 500 jobs across the world over the next five years, there has been no
formal announcement by Corbel Co and therefore, until there has been formal plans
drawn up to close the additional stores there should be no provisions made for the
stores potential closure and loss of jobs. It is feasible that the closure of the
additional 24 stores will not take place, and there is no constructive obligation unless
there is at least a detailed formal plan. The d irectors have denied the fact that the
additional stores will be closed.
(iv) As stated in (a)(ii), an entit y needs to assess at the end of each reporting period
whether t here is any indication that an asset may be impaired. An indication of
impairment is whether the performance of the asset is worse than expected. As the
primary store is performing in line with expectations, it would appear that at present,
there is no indication of impairment and therefore no impairment test is required.
Additionally, if Corbel Co feels that the primary store benefits all the other stores
from a brand perspective, it may be appropriate to treat the store as a corporate
asset and a llocate its cost to the other stores for impairment testing. The amount of
internet sales included in any impairment assessment of the primary store will
depend on the quantity of sales that are sourced directly from it. Where Internet
sales are sourced from a central warehouse or another store, the cash inflows should
be excluded from the primary store's impairment assessment and included in the
appropriate CGU.

IMlllA
'+ Handfood Co
H@ii:i·ifoh::i◄
Marks
(a) (i) Discussion of IFRS for SMEs:

Simplifications and omissions 2
Disclosure
Recognised concepts
4
(ii) Discussion of:
Information asymmetry issues and investors knowledge 4
(iii) Discussion of Integrated Reporting:

Better understanding 2
Better communication 1
Nature of IR 2
5
(b) (i) Discussion of principles of accounting for defined benefit
liability/current service cost 4
Calculation of current service cost 20X2 2
6
(ii) Discussion of effect of change in assumptions 4
25
(a) (i) The principal aim when developing IFRS for SM Es was to provide a framework that
generated relevant, reliable and useful information and the provision of a high
quality and understandable accounting standard suitable for SMEs. The Standard
itself is self-contained, and incorporates accounting principles based on full IFRS
standards. It comprises a single standard divided into simplified sections for each
relevant IFRS standard but which have also omitted certain IFRS standards such as
earnings per share and segmental reporting. In addition, there are certain
accounting treatments that are not allowable under the SMEs Standard. For
example, there is no separate guidance for non-current assets held for sale.
To this end, the SMEs Standard makes numerous simplifications to the recognition,
measurement and disclosure requirements in full lFRS standards. Examples of these
simplifications are:
• Intangible assets must be amortised over their useful lives. If the useful life is
not determinable then it is presumed to be 10 years.
• The cost model (investment is measured at cost less any accumulated
impairment losses) can be used for investments in associates. Th is model may
not be used for investments for which there is a published price quotation, in
which case the fair value model must be applied.
The disclosure requirements in the SMEs Standard are also substantiall y reduced
when compared with those in full IFRS standards partly because they are not
considered appropriate for users' needs and for cost- benefit considerations. Many
disclosures in full lFRS standards are more relevant to investment d ecisions in ca pital
markets than to the transactions undertaken by SMEs. The SME Standard is
naturally a modified version of full lFRS standards, and not an independently
developed standard. They are based on recognised concepts and pervasive
principles and they will allow easier transition to full lFRS Standards if the SME
decides to become a public listed entity.

(ii) IFRS for SMEs decreases information asymmetry between the firm and the users,
because of its recognition, measurement and disclosure requ irements. However,
there are certain facts and information in companies which is not disclosed by them
to investors under any accounting standards. SM Es have access to all relevant
information, while investors lack much of the relevant information. Unfort unately,
lack of relevant information will have an adverse effect on the decision-making of the
investor. Information related to the SME's credit, project risk and benefits are known
more by the SME than by the investor giving the SME an information advantage.
Therefore, invest ors are in a relat ively d isadvantaged position, and if t hey, for
example, are financia l institutions, they wil l raise lending rat es to reduce potent ial
risk of credit losses or may not invest at all. The more incomplete and the less
transparent the information from the SME, the higher will be the risk related to the
investment and t he higher will be t he return t hat the investor requires. The access to
investment by SM Es could be determined by the quality of financial statements,
informat ion asymmetry and perceived risk. Quality financial statements reduce the
level of information asymmetry which reduces perceived risk.
(iii) Int egrated reporting could help SM Es better understand and better communicate
how they create value. It can provide a roadma p for SMEs to consider the multiple
capitals that make up its value creation. An int egrat ed report represents a more
complete corporate report which w ill help SMEs understand their business so t hey
can implement a business model that will help them grow. SMEs use a range of
resources and relationships to create va lue. An integrated reporting approach helps
SMEs build a better understanding of the factors that determine its ability to create
value over time. Integrated thinking helps SM Es gain a deeper understanding of t he
mechanics of their business. This w ill help t hem assess the streng t hs of their business
model and spot any deficiencies. These will create a forward-looking approach and
sound strategic decision making.
Some SMEs have few tangible asset s and operat e in a virtua l world. As such,
conventional accounting wil l fail to provide a complete picture as to its ability to
create value. Capitals, such as employee expertise, customer loyalty, and
int ellectual property, will not be accounted for in the financial statement s which are
only one aspect of an SME's va lue creation. As a result, SME stakeholders can be left
with insufficient information to make an informed decision.
Int egrated reporting wil l include key financial information but that information is
alongside significant non-financial measures and narrative information. Integrated
reporting can help fulfil the communication needs of financial capital and other
stakeholders and can optimize reporting.
(b) (i) Handfood Co should recognise a liability for its obligations as a result of the
employee benefit net of plan assets. The treatment for t hese payment s is similar to a
defined benefit pension scheme, but the d ifference is t hat any actuarial gains or
losses are recognised immediately and not in other comprehensive income as
Handfood Co does at present. Any service costs, net interest and remeasurements
should all be recognised in profit or loss. In t his case, Handfood Co is going to pay
the benefit out of cash and therefore there will be no plan assets. Handfood Co w ill
recognise the net annual change in that liability during the five year period as the
current service cost. The company will measure a defined benefit liability at the
present value of its obligations at the reporting date. This amount is the estimated
amount of benefit that employees have earned in retu rn for their service in the
current and prior periods, including benefits that are not yet vested. The benefit is
based on future salaries, and t herefore the projected unit credit method requires an
entity to measure its defined benefit obliga tions on a basis that reflects estimated
future salary increases. The components of the cost of the additional benefit will be
recognised in profit or loss which includes the cu rrent service cost.

IMlllA
For the year ended 31 December 20X2
Handfood Co recogn ises a current service cost expense of $7,700 in profit or loss as
set out below:
$ '000
Expected final salary $1.1 million x (1.03)4 1,238
Benefit for t he current year (1% x $1.238 million) 12.4
Adjusted benefit for the current year (75% x $12,400) 9.3
Current service cost (($9 ,300 x 0.823) discounted at 5% over 4 years) 7.7
This figure will be unwound each year and the movement recorded as the current
service cost (in so far as no other changes to the assumptions are made).
(ii) An increase in employees' salaries above 3% per annum and a decrease in the
probability of employees leaving the company wou ld have t he same effect on t he
defined benefit liability. The changes in t he assumptions wou ld both increase the
defined benefit liability (discounted) at 31 December 20X3. This wou ld in turn
increase the current service cost for the year in profit or loss as the benefit payable
on 1 January 20X7 will have increased as will the number of employees to whom the
benefit will be payable.
Interest, which is calculated on the opening balance of the defined benefit
obligation, will not be affected by t he changes in assumptions. It will be charged to
profit or loss at $385 ($7,700 x 5%). Actuarial gains or losses arise when the
assumptions change. In this case because of the changes in assumptions, an
actuarial loss w ill arise because of the increase in benefits payable and the
obligation and this will be charged to profit or loss.

370 Strategic Busin ess Reporting (SBR)
Mathematical Tables
• • • • •
• • •
• • • • • • •
• • • • •
• • •
• • • • •
• • • • •
• • • •
. . . . . .
Present value table
Present va lue of 1 = (1+r)·" where r = discount rate, n = number of periods until payment.
This table shows t he present val ue of £1 per an num, receiva ble or pa yable at t he e nd of n years.
Periods Discount rates (r)
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0 .990 0 .980 0 .971 0 .962 0.952 0.943 0 .935 0.926 0 .917 0.909
2 0.980 0 .961 0 .943 0 .925 0.907 0.890 0 .873 0.857 0 .842 0 .826
3 0 .971 0 .942 0 .915 0 .889 0.864 0 .840 0 .816 0.794 0.772 0.751
4 0.961 0 .924 0 .888 0 .855 0 .823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0 .822 0.784 0.747 0 .713 0.681 0.650 0.621
6 0.942 0 .888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564
7 0.933 0 .871 0.813 0.760 0.711 0.665 0.623 0.583 0 .547 0.513
8 0.923 0 .853 0.789 0 .731 0.677 0 .627 0 .582 0.540 0 .502 0.467
9 0 .914 0 .837 0 .766 0 .703 0.64 5 0.592 0 .544 0.500 0 .460 0 .424
10 0.905 0 .8 20 0.744 0.676 0.614 0.558 0.508 0 .463 0.422 0.386
11 0 .896 0.804 0.722 0.6 50 0 .585 0.527 0 .475 0 .429 0.388 0.3 50
12 0.887 0.788 0.701 0.625 0 .557 0 .497 0.444 0.397 0 .356 0.319
13 0.879 0.773 0 .681 0.601 0.530 0.469 0 .41 5 0.368 0 .326 0.290
14 0.870 0.758 0 .661 0 .577 0.505 0.442 0 .388 0.340 0 .299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0 .458 0.394 0 .339 0.292 0 .252 0.218
17 0.844 0.714 0 .605 0 .513 0.436 0 .371 0.317 0 .270 0 .231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0 .570 0 .475 0.396 0.331 0.277 0 .232 0.194 0 .16 4
20 0 .820 0 .673 0 .554 0.456 0 .377 0 .312 0 .258 0.215 0 .178 0 .149
Periods Discount rat es (r)

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0 .877 0 .870 0 .862 0.855 0.847 0 .840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0 .694
3 0.731 0.712 0.693 0 .675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0 .572 0.552 0 .534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0 .456 0.437 0 .419 0.402
6 0 .535 0.507 0 .480 0 .456 0 .432 0 .410 0 .390 0 .370 0 .352 0 .335
7 0 .482 0 .452 0 .425 0 .400 0 .376 0 .354 0 .333 0 .314 0 .296 0 .279
8 0 .434 0 .404 0 .376 0 .351 0 .327 0 .305 0 .285 0 .266 0 .249 0 .233
9 0.391 0.361 0.333 0.308 0.284 0.263 0 .243 0 .225 0 .209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0 .178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0 .163 0.145 0 .130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.1 41 0.125 0 .111 0 .099 0.088 0.078
15 0 .209 0.183 0 .160 0 .140 0 .123 0 .108 0 .095 0 .084 0 .074 0 .065
16 0.188 0.163 0.141 0.123 0.107 0 .093 0 .081 0.071 0.062 0.054
17 0 .170 0.146 0.125 0.108 0 .093 0 .080 0 .069 0 .060 0 .052 0 .045
18 0.153 0.130 0.111 0.095 0 .081 0 .069 0 .059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0 .070 0.060 0.051 0 .043 0.037 0.031
20 0.124 0.10 4 0.087 0.073 0.061 0.051 0.043 0 .037 0.031 0.026
BPP
© L[Sl\,/1~
t/ifOIA.
Mathematical tables 373
Cumulative present value table
This table shows t he present val ue of £1 pe r annum, receiva ble or pa yable at the end of e a ch year
for n years.
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0 .990 0 .980 0.971 0 .962 0.952 0 .943 0 .935 0 .926 0.917 0 .909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3 .630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3 .791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6 .002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.80 2 6.515 6.247 5.995 5 .759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6 .418 6 .145
11 10.37 9.787 9.253 8.760 8.30 6 7.887 7.499 7.139 6.805 6.495
12 11 .26 10 .58 9.954 9.385 8 .863 8.384 7.943 7.536 7.161 6.81 4
13 12.13 11.35 10.63 9 .986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.00 12.11 11.30 10.56 9.899 9.295 8.745 8.244 7.786 7.367
15 13.87 12.85 11.94 11.12 10.38 9.712 9.108 8 .559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8 .022
18 16.398 14.992 13.754 12.659 11 .690 10 .828 10.059 9.372 8 .756 8.201
19 17.226 15.678 14.324 13 .134 12.085 11.1 58 10 .336 9.604 8 .950 8 .365
20 18.0 46 16.351 14.877 13.590 12.462 11 .470 10.594 9.818 9 .129 8 .514

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0 .901 0 .893 0 .885 0.877 0 .870 0 .862 0 .855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3 .812 3.706 3 .605
8 5.1 46 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3 .954 3 .837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4. 494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6 .194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439
13 6.750 6 .424 6 .122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6 .811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6 .974 6 .604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6 .0 47 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6 .623 6.259 5.929 5.628 5.353 5.101 4.870
3 71t Strategic Business Reporting (SBR) @BPP LEAR\,NC:

IMlllA
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Topic index vii

Helping you w ith your revision xvi

Essential skill areas xviii

Section 1: Preparation questions

Section 3: Mock exams

Mock exam 3 (March 2020 exam)

Mathematical tables 373

Cont ents iii

Marks Mins Question Answer

Section 1: Preparation questions

• Consolidated statement of cash flows 20 39 13 106

Section 2: Exam- standard questions

Marks Mins Question Answer

Section 2: Exam-standard questions

@BPP lE.\l'ING Finding questions V

Marks Mins Question Answer

Section 2: Exam-standard questions

Mock exam 2 (ACCA Specimen exam 1, amended)

Mock exam 3 (March 2020 exam)

Mock exam L+ (September/December 2020 exam)

Syllabus topic Question numbers Workbook

@BPPLEAR\ING Topic index vii

viii Topic index @BPPlEAR~lt C

ACCA CBE practice platform

Important note for UK students who are sitting the UK variant of

Approach to examining the syllabus

• Demonstrate professional competences within the business reporting environment . You

• Adopt either a stakeholder or an external focus in answering questions and demonstrate

Section A Two compulsory scenorio-based questions, tota lling 50 marks 50

• Also likely to require consideration of some financial reporting

Section B Two compulsory 25-mark questions 50

Mar/ I Sept/ I Sept/

2 Professio nal and A A A A A A A A

The applicat ions, A, B A 8 A,B 8 A, B A

4,8 Fair value 8 A

xii The Exam 0 BPP

11, Group accounting A A A A A A,B A A

12, 13 Changes in group A A A A A A A

18 Analysis and A,B B B B B B B B

20 Discussion of A,B B A,B A,B B B B

Syllabus and Study Guide

International Accounting Standards (IASs)/lnternational

IAS 7 Statement of Cash Flows

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

IAS 10 Events After t he Reporting Period

IAS 12 Income Taxes

IAS 16 Property, Plant and Equi pment

IAS 19 Employee Benefits

IAS 20 Accounting for Government Grants and Disclosure of Government