ACCA
SBR (INT/UK)
Strategic Business Reporting
June 2019
Mock B – Answers
To gain maximum benefit, do not refer to these answers
until you have completed the mock questions and
submitted them for marking.
SB R ( IN T & U K) : ST R A T E GI C B US IN E S S RE P OR T I N G
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2
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MO C K B AN SWE R S
1
STONE
Key answer tips
Part (a) of this question deals with some key aspects of group accounting. Stone lost control
of Chamber during the year. Chamber is therefore consolidated until the disposal date and
a profit or loss on disposal must be calculated. Fire is an overseas subsidiary whose financial
statements must be translated into the group’s presentation currency. Exchange
differences on the retranslation of Fire’s opening net assets, profit and goodwill are
recorded in other comprehensive income. Remember that each requirement asks you to
‘discuss’ the correct treatment – your answer must not consist of just a series of
calculations.
Part (b) of the question requires knowledge of an exposure draft. Current issues are an
important part of the SBR syllabus and must not be neglected.
(a)
(i)
Chamber
Stone controlled Chamber for the first 9 months of the year and so must
consolidate the income and expenses of Chamber up to this date.
(1 mark)
As a result, Stone will consolidate $66 million ($88m × 9/12) of Chamber’s
profits.
(1 mark)
Of this, $52.8 million (80% × $66m) is attributable to the equity owners of
Stone and $13.2 million (20% × $66m) is attributable to the non-controlling
interest.
(1 mark)
The share sale results in Stone losing control over Chamber. The goodwill, net
assets and NCI of Chamber are derecognised and a profit on disposal of
$35 million (W1) is recorded in the consolidated statement of profit or loss. In
accordance with IAS 1 Presentation of Financial Statements, separate
presentation on the face of profit or loss may be required if this is material.
(1 mark)
Stone retained a 30% holding in Chamber, exercising significant influence over
Chamber. This means that Chamber became an associate and its results for the
last three months of the period are accounted for using the equity method.
(1 mark)
The group’s share of the associate’s profit is $6.6 million ($88m × 3/12 × 30%).
The associate has recorded no other comprehensive income.
(1 mark)
KA PL AN P U BLI SH IN G
3
SB R ( IN T & U K) : ST R A T E GI C B US IN E S S RE P OR T I N G
(W1) Profit on disposal of Chamber
Proceeds from disposal
Fair value of interest retained
$m
300
160
–––––
$m
Marks
460
Goodwill at disposal ($40 – $10)
(30)
Net assets at disposal:
NCI at disposal:
NCI at acquisition
NCI % of post-acquisition net
assets
(20% × ($500 – $400))
NCI % of goodwill impairment
(20% × $10)
Profit on disposal
1.0
(500)
87
20
1.0
(2)
–––––
1.0
105
–––––
35
–––––
(Part (a) (i): 8 marks max)
(ii)
Fire
IFRS 3 Business Combinations
IFRS 3 requires that the identifiable net assets of a subsidiary are consolidated
at fair value at the acquisition date. This amounts to 260 million dinar.
(1 mark)
The fair value of the net assets exceeds the carrying amount by 60 million
dinar (260m dinar – (50m dinar + 150m dinar)). This is attributable to property,
plant and equipment. The extra depreciation charged to profit or loss in the
current period is 12 million dinar (60m dinar/5).
(1 mark)
IAS 21 The Effects of Changes in Foreign Exchange Rates
Before consolidation the assets, liabilities, incomes and expenses of Fire must
be translated into the group’s presentation currency. IAS 21 The Effects of
Changes in Foreign Exchange Rates requires that assets and liabilities are
translated at the closing rate of exchange. Incomes and expenses are
translated at the actual rate of exchange, but the average rate can be used as
an approximation.
(1 mark)
The profit of Fire is 29 million dinar (41m dinar profit per P/L – 12m dinar fair
value depreciation adjustment). This amounts to $14.5 million (29m dinar/2).
(1 mark)
Of this, $8.7 million ($14.5m × 60%) is attributable to the equity owners of
Stone and $5.8 million ($14.5m × 40%) is attributable to the non-controlling
interest.
(1 mark)
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KA PL AN P U BLI SH IN G
MO C K B AN SWE R S
Foreign exchange gains arise on the translation of the goodwill, opening net
assets and profit of Fire. These are recorded in other comprehensive income
and presented as an item that might be reclassified to profit or loss in the
future.
(1 mark)
The foreign exchange gain arising on goodwill is $3.3 million (W2). This must
be allocated between the equity owners of the parent company and the noncontrolling interest because the full goodwill method has been used.
(2 marks – see (W2))
The foreign exchange gain arising on the translation of Fire’s net assets and
profit is $27.9 million (W3).
(1 mark – see (W3))
The total foreign exchange gain recorded in other comprehensive income is
$31.2 million. Of this, $18.7 million (60% × $31.2m) is attributable to the equity
owners of Stone and $12.5 million (40% × $31.2m) is attributable to the noncontrolling interest.
(1 mark)
(W2) Goodwill
Calculation of goodwill in functional currency:
Dinar m
180
112
(260)
–––––
32
–––––
Cost of acquisition
FV of NCI at acquisition
FV net assets at acquisition
Goodwill at acquisition/reporting date
Marks
–––––
1.0
–––––
FX gain on retranslation:
Goodwill at acquisition
Dinar m
32
FX gain on retranslation
Goodwill at rep date
KA PL AN P U BLI SH IN G
––––
32
––––
Rate
2.2
$m
14.5
Marks
Bal fig
3.3
–––––
17.8
–––––
1.0
1.8
5
SB R ( IN T & U K) : ST R A T E GI C B US IN E S S RE P OR T I N G
(W3) FX gain on opening net assets and profit of Fire
Tutorial note
Rounding differences would not be penalised.
Opening net assets
Profit
(D41m – D12m)
FX gain on retranslation
Rep date
(iii)
Dinar m
260
29
Rate
2.2
$m
118.2
Marks
2.0
14.5
1.0
Bal fig
––––
289
––––
27.9
–––––
1.8
160.6
–––––
(Part (a) (ii): 10 marks max)
Overseas property
IAS 40 Investment Property says that Investment property is held to earn
rentals or for capital appreciation.
(1 mark)
If ancillary services are offered to a tenant, the property will only be classified
as an investment property if the services constitute an insignificant part of the
overall arrangement.
(1 mark)
Investment properties are initially recognised at cost. Cost includes purchase
price and any directly attributable expenditure.
(1 mark)
When the fair value model is used, the investment property is revalued to fair
value at the reporting period. Gains and losses are recorded in profit or loss.
No depreciation is charged on investment properties measured at fair value.
(1 mark)
(IAS 40 knowledge: 2 marks max)
IAS 21 The Effects of Changes in Foreign Exchange Rates says that overseas
transactions are translated into functional currency using the historic (spot)
rate.
(1 mark)
At subsequent reporting dates, non-monetary assets and liabilities are not
retranslated unless measured at fair value. A fair value determined in an
overseas currency must be translated using the exchange rate on the date that
the value was determined.
(1 mark)
(IAS 21 knowledge: 1 marks max)
On 1 July 20X7, the property meets the definition of an investment property.
It should be initially recognised at 2.0 million dinar (1.5m dinar purchase price
+ 0.5m dinar legal fees). It is correct to expense the admin fees to profit or loss.
(1 mark)
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KA PL AN P U BLI SH IN G
MO C K B AN SWE R S
The investment property will be translated into Stone’s functional currency at
the historic rate to give an initial value of $0.9 million (2m dinar/2.2). The
correcting journal is:
Dr Investment property
$0.9m
Cr Profit or loss
$0.9m
(1 mark)
The fair value of 3 million dinar was determined at the reporting date so
should be translated at the exchange rate on that date. The property should be
remeasured to $1.7 million (D3m/1.8).
(1 mark)
The gain on remeasurement of $0.8 million ($1.7m – $0.9m) will be recorded
in the statement of profit or loss.
Dr Investment property
$0.8m
Cr Profit or loss
$0.8m
(1 mark)
Note that, for disclosure purposes, the gain would be split between a
‘revaluation gain’ and a ‘foreign exchange gain’.
(1 mark)
The property will then be reclassified as property, plant and equipment
because the level of ancillary services offered means that it is now ‘owner
occupied’. Per IAS 40, when transferring investment property measured at fair
value, the deemed cost of the property, plant and equipment is its fair value at
the date of the change of use – i.e. $1.7 million.
Dr Property, plant and equipment
$1.7m
Cr Investment property
$1.7m
(1 mark)
(Part (a) (iii): 7 marks max)
(b)
Other comprehensive income
Some IFRS and IAS Standards require or permit specific gains or losses to be excluded
from profit or loss and instead included in other comprehensive income.
(1 mark)
Components of other comprehensive income include:
•
changes in a revaluation surplus
•
remeasurement gains and losses on defined benefit plans
•
gains and losses arising from translating the financial statements and goodwill
of a foreign operation
•
gains and losses on financial instruments measured at fair value through other
comprehensive income
•
the effective portion of gains and losses on hedging instruments in a cash flow
hedge.
(1 mark per example)
An entity must present components of OCI based on whether they may be
reclassified to profit or loss in subsequent accounting periods.
(1 mark)
Tax associated with items presented on a before-tax basis is shown separately for
items in OCI which will be reclassified to profit or loss, and for those that will not be
reclassified to profit or loss.
(1 mark)
KA PL AN P U BLI SH IN G
7
SB R ( IN T & U K) : ST R A T E GI C B US IN E S S RE P OR T I N G
Exposure Draft (ED)
The ED emphasises that profit or loss is the primary source of information about an
entity’s financial performance.
(1 mark)
The ED proposes a rebuttable presumption that incomes and expenses are recorded
in profit or loss rather than OCI.
(1 mark)
The ED proposes that this can be rebutted if:
•
the entity holds assets or liabilities at current value and components of the
value change would not arise if the asset or liability was held at historical cost,
and
•
excluding the item from profit or loss enhances the relevance of financial
information.
(2 marks)
The ED proposes a rebuttable assumption that all items recognised in other
comprehensive income would be reclassified to profit or loss in the future. (1 mark)
Reclassification would occur when it enhances the relevance of profit or loss in
measuring an entity’s performance in that particular period.
(1 mark)
When implemented, this approach to conceptualising other comprehensive income
should ensure that new IFRS Standards (or amended IFRS Standards) have a
consistent theoretical base with regards the types of income and expenses
recognised in other comprehensive income and whether reclassification to profit or
loss occurs.
(1 mark)
However, some have criticised the Board’s proposals for being too vague; particularly
with regards to its refusal to actually define ‘profit or loss’.
(1 mark)
Moreover, the Board have not identified when excluding an item profit or loss (or
reclassifying OCI to profit or loss) would increase the relevance of financial
statements. Such decisions will be made when developing standards and the Board
will justify the conclusions that it reaches. Nonetheless, the Board’s thinking could
develop over time leading to further inconsistencies between IFRS Standards.
(1 mark)
(Part b: 8 marks max)
Marking scheme
(a)
(b)
Total
8
(i)
Discussion – 1 mark per point
Calculations
(ii)
Discussion – 1 mark per point
Calculations
(iii) Investment property – 1 mark per point
OCI discussion – 1 mark per point
Marks
5
3
––––
8
––––
7
3
––––
10
––––
7
8
––––
33
––––
KA PL AN P U BLI SH IN G
MO C K B AN SWE R S
2
MASH
Key answer tips
Discuss each of the accounting issues in turn. Use subheadings to structure your answer.
Remember to discuss key principles from the relevant accounting standard before applying
these to the scenario. Definitions do not have to be word-perfect!
Make sure that you discuss the specific ethical issues raised in the question. Generic
discussions of ethics will not score well, and are unlikely to receive the two professional
marks available.
Cash and cash equivalents
IAS 7 Statement of Cash Flows defines ‘cash equivalents’ as ‘short-term, highly liquid
investments that are readily convertible to known amounts of cash and which are subject
to an insignificant risk of a change in value’ (IAS 7 para 6).
(1 mark)
The equity shares do not meet the definition of a cash equivalent.
(1 mark)
‘Cash equivalents’ are held to meet short-term cash needs, whereas these shares are held
for investment purposes.
(1 mark)
Also there is a substantial risk that the value of the ordinary shares will go up or down and
so they are not convertible into known amounts of cash.
(1 mark)
The cash spent on the shares during the year should be shown as a cash outflow under
‘cash flows from investing activities’. In accordance with IFRS 9 Financial Instruments the
shares are classified as a financial asset and should be carried in the statement of financial
position at their fair value of $20 million as at the reporting date.
(1 mark)
(Cash and cash equivalents: 3 marks max)
Preference shares
IAS 32 Financial Instruments: Presentation says that a financial liability is a contractual
obligation to deliver cash or another financial asset.
(1 mark)
Mash must redeem the preference shares in cash in the future and so the preference
shares must be removed from equity and classified as a financial liability.
(1 mark)
According to IFRS 9, financial liabilities are measured at amortised cost (unless held for
trading, or a designation is made to measure at fair value in order to reduce an accounting
mismatch). If measured at amortised cost they are initially measured at fair value less any
transaction costs. Interest should be recognised in profit or loss at the effective rate.
(1 mark)
An interest charge of $7.5 million ($50m × 15%) should be recorded in profit or loss. The
carrying amount of the financial liability at the reporting date is $57.5 million ($50m +
$7.5m).
(1 mark)
(Preference shares: 3 marks max)
Mower
In accordance with IAS 24 Related Party Disclosures, Mash and Mower are related parties.
This is because the finance director is a member of Mash’s key management personnel, and
Mower is a company controlled by the finance director’s close family.
(1 mark)
KA PL AN P U BLI SH IN G
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SB R ( IN T & U K) : ST R A T E GI C B US IN E S S RE P OR T I N G
The nature of the relationship between Mash and Mower must be disclosed, as well as the
aggregate value of the transactions and any outstanding balances.
(1 mark)
The disclosure note cannot say that the transactions have taken place on terms equivalent
to those in arm’s length transactions because that would be misleading.
(1 mark)
(Mower: 2 marks max)
Ethics
Mash’s financial statements will be used by a range of user groups to inform their economic
decisions.
(1 mark)
Mash’s financial reporting errors, whether intentional or not, may mislead the new
customer into concluding that Mash is more secure and stable than it really is.
(1 mark)
The finance director therefore has an incentive to manipulate Mash’s financial statements
in order to win the contract with the new customer.
(1 mark)
The errors made overstate cash equivalents, understate liabilities, and overstate profits.
This is likely to improve the perception of Mash’s performance, position and cash flows.
(1 mark)
Moreover, Mash purchases goods from Mower at a substantial discount. Its profits will be
higher than if it bought the goods from an unconnected company. The absence of
disclosures conceals this from the users.
(1 mark)
It is vital that accountants do not prioritise their own self-interests above those of the
financial statement users. As such, accountants should adhere to the ACCA’s Code of Ethics
and Conduct.
(1 mark)
Intentional misstatement of financial statements contravenes the ethical principles of
integrity and objectivity.
(1 mark)
If the finance director does not normally prepare the financial statements then there is a
risk that their technical knowledge could be out of date. This would represent a lack of
competence and due care.
(1 mark)
The financial controller should query the current treatments with the finance director and
request explanations and justifications.
(1 mark)
If errors have been made then the financial controller should persuade the finance director
to correct the financial statements. Discussions should be documented.
(1 mark)
The financial controller may need to speak to other directors, the audit committee, or seek
advice from legal experts or the ACCA.
(1 mark)
(Ethics: 7 marks max + 2 professional marks)
Marking scheme
Cash equivalents – 1 mark per point
Preference shares – 1 mark per point
Mower – 1 mark per point
Ethical implications – 1 mark per point
Professional marks
Total
10
Marks
3
3
2
7
2
–––
17
–––
KA PL AN P U BLI SH IN G
MO C K B AN SWE R S
3
GLAZE (INTERNATIONAL SYLLABUS)
Key answer tips
In part (a) it is important that you obtain the easy marks in each section for stating the
relevant principles from the appropriate accounting standards. You should then apply these
rules to the information given.
Start your answer to part (b) with the definitions of ‘leases’ from IFRS 16 and ‘assets’ and
‘liabilities’ from the Conceptual Framework. Apply these to reach an explicit conclusion
about whether this standard and the Conceptual Framework are consistent.
(a)
(i)
Property, plant and equipment
Tutorial note
Glaze is a lessor. It hires out the vessels on short-term operating leases, and so
accounts for the vessels in accordance with IAS 16 Property, Plant and
Equipment. If the leases were finance leases then the vessels would be
derecognised and a lease receivable would be recognised instead.
IAS 16 Property, plant and equipment says that depreciation should be charged
on a systematic basis over the asset’s useful economic life.
(1 mark)
The depreciation method should be based on expectations of how the entity
will consume the asset’s future economic benefits.
(1 mark)
Depreciation should reflect the expected use of the asset, wear and tear,
obsolescence, and limitations on use.
(1 mark)
Methods of depreciation include the straight-line method, the diminishing
balance method, and the units of production method.
(1 mark)
Depreciation commences when an asset is ready for use. Depreciation stops if
the asset is held for sale or derecognised. Depreciation does not stop if the
asset is idle, unless using the units of production method.
(1 mark)
(IAS 16 knowledge: 2 marks max)
Depreciation should still be charged on the inactive vessels in order to reflect
the consumption of future economic benefits during the period.
(1 mark)
Inactive vessels are still likely to suffer from wear and tear, thus reducing their
future economic benefits.
(1 mark)
Maintenance will not extend the useful life of inactive vessels indefinitely,
because it will eventually become uneconomic.
(1 mark)
Regulatory changes require that modifications are made to the vessels,
meaning that they are exposed to technological and regulatory obsolescence.
(1 mark)
KA PL AN P U BLI SH IN G
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SB R ( IN T & U K) : ST R A T E GI C B US IN E S S RE P OR T I N G
Under the units of production depreciation method, it can be acceptable to
charge zero depreciation when production halts, but this requires precision in
estimating the future production potential of the asset.
(1 mark)
This is not possible in an era of reducing contract duration and tighter contract
negotiations because of difficulties estimating the number of days a vessel will
operate for.
(1 mark)
It should be noted that vessel inactivity is an indicator of impairment,
particularly if levels and periods of inactivity are increasing. In accordance with
IAS 36 Impairment of Assets, an impairment review should be performed.
(1 mark)
(IAS 16 application: 6 marks max)
(Part (a) (i): 8 marks max)
(ii)
Allocation
Tutorial note
Entities can, if they prefer, choose to account for a lease and non-lease
component as a single lease. This decision must be made for each class of rightof-use asset. This choice would increase the lease liability recorded at the
inception of the lease, which may negatively impact perception of the entity's
financial position.
IFRS 16 Leases says that the payments should be allocated to the lease and
non-lease components based on their standalone selling prices.
(1 mark)
Annual payments of $427,500 ($475,000 × $900,000/($100,000 + $900,000))
and $47,500 ($475,000 – $427,500) should be allocated to the machinery lease
and the maintenance services respectively.
(1 mark)
Maintenance
The $47,500 allocated to the maintenance services will be recognised as an
expense in the year ended 31 March 20X8.
(1 mark)
Tutorial note
No entries are made in respect of the payment due in the year ended 31 March
20X9.
Lease
The lease liability will be recognised at the present value of the payments to be
made. The right-of-use asset will be recognised at the same amount, plus any
initial direct costs and obligations to dismantle the asset at the end of the lease
term.
(1 mark)
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KA PL AN P U BLI SH IN G
MO C K B AN SWE R S
The present value of the lease payments is calculated as follows:
31/3/20X8: $427,500 × 1/1.05
31/3/20X9: $427,500 × 1/1.052
$
407,143
387,755
–––––––
794,898
–––––––
(1 mark)
A lease liability and right-of-use asset should be recognised at lease inception
for $794,898.
(1 mark)
Right-of-use asset
Depreciation of $397,449 ($794,898/2) will be charged to profit or loss in the
current year. The carrying amount of the asset at the reporting date is
$397,449 ($794,898 – $397,449).
(1 mark)
Lease liability
Interest of $39,745 ($794,898 × 5%) will be charged to profit or loss in the
current year.
(1 mark)
The cash payment of $427,500 will reduce the carrying amount of the liability
to $407,143 ($794,898 + $39,745 – $427,500).
(1 mark)
The liability will be repaid in 12 months so should be classified as a current
liability.
(1 mark)
Deferred tax
A taxable temporary difference arises in relation to the accounting and tax
treatment of the right-of-use asset because the tax base of the asset is nil.
A deferred tax liability will be recognised at $119,235 ($397,449 × 30%). The
tax expense in profit or loss will be increased by the same amount.
(1 mark)
(Part (a) (ii): 9 marks max)
(b)
Lease definition
According to IFRS 16 Leases, a lease is a contract that grants an entity, in exchange
for consideration, the right to control the use of a specific asset over a period of time.
(1 mark)
Control only exists if the customer has the right to substantially all of the asset’s
economic benefits over the contract term, and the right to direct the identified
asset’s use.
(1 mark)
Right-of-use asset
The Conceptual Framework defines an asset as a resource, controlled by an entity
from a past event, which is expected to lead to an inflow of economic benefits.
(1 mark)
Lessees control the right-of-use asset during the lease term because the lessor is
unable to use the asset during the lease term. As such, it is the lessee who benefits
from the asset’s use.
(1 mark)
KA PL AN P U BLI SH IN G
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Lessees determine how and when to use the right-of-use asset during the lease term,
and therefore can determine how economic benefits are generated.
(1 mark)
Lessees control the right-of-use asset as a result of past events – signing the lease
agreement, and the lessor making the asset available for the lessee to use. (1 mark)
Some leases restrict the use of an asset by the lessee, but this does not necessarily
impact the ability of the lessee to control the asset. Instead, this impacts the
economic benefits that will flow to the lessee, and is often compensated through a
reduction in lease rentals.
(1 mark)
Lease liabilities
The Conceptual Framework defines a liability as a present obligation, resulting from a
past event, which is expected to result in an outflow of economic benefits. (1 mark)
The lessee has an obligation to make lease payments as a result of entering into the
lease agreement and the asset being made available for their use.
(1 mark)
The obligation will result in the lessee transferring assets, normally cash, to the
lessor.
(1 mark)
Conclusion
Based on the above, right-of-use assets and lease liabilities appear to be consistent
with the definitions of assets and liabilities in the Conceptual Framework. (1 mark)
(Part b: 8 marks max)
Marking scheme
(a)
(b)
Total
14
(i)
PPE – 1 mark per point
(ii)
Lease – 1 mark per point
Framework – 1 mark per point
Marks
8
9
8
–––
25
–––
KA PL AN P U BLI SH IN G
MO C K B AN SWE R S
3
GLAZE (UK SYLLABUS)
Key answer tips
In part (a) make sure that you state relevant principles from the appropriate accounting
standard. You should then apply these rules to the information given.
In the SBR UK paper, one of the Section B questions will test UK specific content for 15–20
marks. Make sure that you are comfortable with the UK GAAP Chapter in the Study Text.
(a)
Property, plant and equipment
Tutorial note
Glaze is a lessor. It hires out the vessels on short-term operating leases, and so
accounts for the vessels in accordance with IAS 16 Property, Plant and Equipment. If
the leases were finance leases then the vessels would be derecognised and a lease
receivable would be recognised instead.
IAS 16 Property, plant and equipment says that depreciation should be charged on a
systematic basis over the asset’s useful economic life.
(1 mark)
The depreciation method should be based on expectations of how the entity will
consume the asset’s future economic benefits.
(1 mark)
Depreciation should reflect the expected use of the asset, wear and tear,
obsolescence, and limitations on use.
(1 mark)
Methods of depreciation include the straight-line method, the diminishing balance
method, and the units of production method.
(1 mark)
Depreciation commences when an asset is ready for use. Depreciation stops if the
asset is held for sale or derecognised. Depreciation does not stop if the asset is idle,
unless using the units of production method.
(1 mark)
(IAS 16 knowledge: 2 marks max)
Depreciation should still be charged on the inactive vessels in order to reflect the
consumption of future economic benefits during the period.
(1 mark)
Inactive vessels are still likely to suffer from wear and tear, thus reducing their future
economic benefits.
(1 mark)
Maintenance will not extend the useful life of inactive vessels indefinitely, because it
will eventually become uneconomic.
(1 mark)
Regulatory changes require that modifications are made to the vessels, meaning that
they are exposed to technological and regulatory obsolescence.
(1 mark)
Under the units of production depreciation method, it can be acceptable to charge
zero depreciation when production halts, but this requires precision in estimating the
future production potential of the asset.
(1 mark)
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This is not possible in an era of reducing contract duration and tighter contract
negotiations because of difficulties estimating the number of days a vessel will
operate for.
(1 mark)
It should be noted that vessel inactivity is an indicator of impairment, particularly if
levels and periods of inactivity are increasing. In accordance with IAS 36 Impairment
of Assets, an impairment review should be performed.
(1 mark)
(IAS 16 application: 6 marks max)
(Part (a): 8 marks max)
(b)
(i)
IFRS 16 Leases
IFRS 16 Leases requires that lessees recognise a lease liability and a right-ofuse asset at the inception of a lease (unless the lease is short-term or of low
value).
(1 mark)
Interest is charged on the lease liability using the rate implicit in the lease or
the lessee’s rate of borrowing if this is not available. The right-of-use asset is
depreciated over the shorter of the lease term and the useful economic life.
(1 mark)
FRS 102
FRS 102 requires lessees to classify leases at inception as either an operating
lease or a finance lease.
(1 mark)
A finance lease is a lease under which substantially all the risks and rewards
associated with ownership of the asset transfer to the lessee.
(1 mark)
For finance leases, the lessee will recognise a lease liability and an asset.
(1 mark)
For operating leases, the lessee will charge lease rentals to profit or loss on a
straight line basis.
(1 mark)
Impact
Under FRS 102, Tots’ leases are likely to constitute operating leases because
the lease term of 10-15 years is substantially less than the useful life of a
building. Moreover the payments due over this period are likely to be below
the total fair value of the building.
(1 mark)
Tots will not recognise a lease liability or a right-of-use asset. This is sometimes
referred to as a form of ‘off balance sheet’ finance. An entity applying IFRS 16
would recognise these balances, because buildings are not a low value item
and the leases are not less than 12 months duration.
(1 mark)
An entity applying IFRS 16 will have higher liabilities than Tots. This will have a
negative impact on the gearing ratio and increase stakeholders’ assessments of
risk.
(1 mark)
Higher levels of reported assets might be viewed positively by stakeholders, as
the entity may appear more asset rich.
(1 mark)
However, higher reported assets will have a negative impact on certain ratios,
such as asset turnover, making the entity appear less efficient at generating
returns.
(1 mark)
The total profit or loss charge over the lease term will most likely be the same
under IFRS 16 and FRS 102.
(1 mark)
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Moreover, under FRS 102, the operating lease expense would be recognised
against operating profit. In accordance with IFRS 16, the expense is likely to be
split between operating expenses (depreciation) and finance costs (liability
interest). Operating profits may therefore be higher under IFRS 16.
(1 mark)
IFRS 16 will result in higher interest charges in the initial years of a lease
because the liability outstanding declines as the lease term progresses. In
contrast, operating lease expenses in accordance with FRS 102 are recognised
on a straight line basis.
(1 mark)
(Part (b) (i): 10 marks max)
(ii)
Reasons for applying FRS 102
Tutorial note
In recent years all UK unlisted companies have had to transition to new UK
GAAP. FRS 102 is based on the IFRS for SMEs Standard. As such, transitioning to
full IFRS Standards would prove less troublesome than it would have been
under old UK GAAP.
Comparability
If competitors prepare financial statements in accordance with FRS 102 then it
will be easier to compare and benchmark performance against them than if
International Financial Reporting Standards were applied. Most unlisted UK
companies do not use IFRS Standards.
(1 mark)
Concise
The guidance in FRS 102 is concise, compact and easy to use which will save
time when preparing financial statements. In contrast, IFRS Standards are
much longer and so are time consuming to implement and may require expert
input.
(1 mark)
Policy choices
Under FRS 102, some accounting treatments are optional – such as the
capitalisation of borrowing costs, and the capitalisation of development
expenditure. Under IFRS Standards, these treatments are mandatory. (1 mark)
Writing expenditure off to profit or loss is less time consuming than
capitalisation, and requires less detailed record keeping and fewer complex
calculations.
(1 mark)
Simplified treatments
In many ways, FRS 102 is simpler to apply than International Financial
Reporting Standards. This should reduce the time and cost required to produce
financial statements.
(1 mark)
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Examples include:
•
The FRS 102 treatment of financial instruments is much simpler than
IFRS 9 Financial Instruments.
(1 mark)
•
FRS 102 requires the amortisation of goodwill, rather than annual
impairment reviews.
(1 mark)
•
FRS 102 only requires the useful lives of property, plant and equipment
to be reviewed if evidence exists that they have changed. IAS 16
Property, Plant and Equipment requires an annual review.
(1 mark)
•
FRS 102 permits a simplified ‘performance model’ when accounting for
government grants (i.e. grants are recognised in profit when all
conditions are attached).
(1 mark)
•
The disclosure requirements of FRS 102 are less extensive than
International Financial Reporting Standards.
(1 mark)
•
Issues that normally apply to listed entities, such as earnings per share
and operating segments, are excluded from FRS 102.
(1 mark)
Training and systems
Entities may have to invest in training, and system updates or replacements in
order to capture the data required when applying International Financial
Reporting Standards.
(1 mark)
International Financial Reporting Standards are more regularly updated and
amended than FRS 102. This will require additional time and training, and also
increases the likelihood of error.
(1 mark)
Profits
Applying FRS 102 rather than International Financial Reporting Standards will
have an impact on recorded profits in any given year.
(1 mark)
This may have positive repercussions in terms of tax payments due, or
distributable reserves.
(1 mark)
(Part (b) (ii): 7 marks max)
Marking scheme
(a)
(b)
Total
18
PPE – 1 mark per point
(i)
FRS 102 vs IFRS 16 – 1 mark per point
(ii)
Benefits of FRS 102 – 1 mark per point
Marks
8
10
7
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25
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4
SLICK
Key answer tips
This question involves no calculations. The SBR exam will be less numerical than Financial
Accounting and Financial Reporting so it is essential that you practice and hone your ability
to apply accounting standards to new situations.
Don’t be disheartened if you find this question difficult. You can score solid marks even if
your answer is incorrect as long as you state the relevant rules from the accounting
standards and apply these to the scenario in sensible ways.
(a)
(i)
Fresh fruit bunches
IAS 41 Agriculture says that ‘a biological asset is a living plant or animal’
(IAS 41, para 5).
(1 mark)
Agricultural produce is ‘the harvested product of an entity’s biological assets’
(IAS 41, para 5). The FFB are agricultural produce (they have been harvested
from the oil palms).
(1 mark)
Agricultural produce is initially recognised at fair value less costs to sell. IFRS 13
Fair Value Measurement defines fair value as ‘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’ (IFRS 13, para 9).
(1 mark)
A level 1 input to fair value measurement is a quoted price for an identical
asset in an active market. IFRS 13 says this provides the most reliable evidence
of fair value and should be used without adjustment to measure fair value
whenever available.
(1 mark)
The quoted price used relates to the palm oil rather than the FFB. Slick is
making large and judgemental adjustments to the quoted price of palm oil in
order to compute a fair value for the FFB. This is not a level 1 input when
measuring the fair value of the FFB.
(1 mark)
The level of judgement involved would most likely make this a level 3 input in
the fair value hierarchy. Level three inputs are unobservable.
(1 mark)
There is an active market for FFB and therefore Slick should instead use these
quoted prices to determine fair value.
(1 mark)
Once picked, the FFB are measured at fair value less costs to sell. They are then
reclassified to inventories with fair value less costs to sell becoming the
deemed cost. Per IAS 2 Inventories they would then be valued at the lower of
cost and net realisable value.
(1 mark)
The FFB harvested several days previously will have a net realisable value of
nil. Therefore, they should be written off with an expense recognised in profit
or loss.
(1 mark)
(Part (a) (i): 8 marks max)
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(ii)
IAS 36 Impairment of Assets says that a cash generating unit is ‘the smallest
identifiable group of assets that generates cash inflows that are largely
independent of the cash inflows from other assets or groups of assets’
(IAS 36, para 6).
(1 mark)
When identifying whether cash inflows from an asset (or group of assets) are
largely independent of other cash inflows, IAS 36 says that consideration
should be given to how management monitors the entity’s operations (by
product lines, businesses, individual locations etc).
(1 mark)
All Slick’s stores are in different cities and probably have different customer
bases. Although the stores are managed at a corporate level, each store is
likely to generate cash flows independently of the other stores.
(1 mark)
The directors are therefore incorrect in aggregating all of the stores into a
single cash generating unit. Instead, each store should be considered a
separate cash generating unit for the purpose of impairment testing. (1 mark)
Goodwill should be allocated to each of the cash generating units on a
reasonable and consistent basis. This means that the cash generating units
must be tested annually for impairment.
(1 mark)
Any corporate assets, such as the central head office assets, should be
allocated to each of the cash generating units on a reasonable and consistent
basis.
(1 mark)
Any impairment loss of a cash generating unit should be firstly allocated to its
goodwill and then to the other assets of the group in proportion to their
carrying amounts. However, an asset cannot be written down below the higher
of its recoverable amount and nil.
(1 mark)
(Part (a) (ii): 5 marks max)
(b)
Operating segments
IFRS 8 Operating Segments describes an operating segment as a component of an
entity:
•
which engages in business activities from which it may earn revenues and incur
expenses
•
whose operating results are regularly reviewed by the entity’s chief operating
decision maker
•
for which discrete financial information is available.
(1 mark)
Operating segments can be aggregated if they exhibit similar long-term financial
performance and similar economic characteristics. For aggregation to apply, the
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.
(1 mark)
Once aggregated, an operating segment is disclosed if it exceeds one of the
quantitative thresholds identified in IFRS 8.
(1 mark)
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These are as follows:
1
Its reported revenue is 10% or more of the revenue, internal and external, of
all operating segments.
2
Its reported profit or loss is 10% or more of the greater of (i) the total profit of
all profit making segments and (ii) the total loss of all loss making segments.
3
Its assets are 10% or more of the total assets of all operating segments.
(2 marks for full description, 1 if partial)
It may be that Tybull cannot be aggregated with other similar operating segments.
It is the only overseas subsidiary and so the regulatory environment may differ from
the rest of the business.
(1 mark)
Moreover, aggregation of Tybull with other segments would most likely limit the
usefulness of the disclosure for the users of the financial statements.
(1 mark)
Since Tybull is the only overseas subsidiary, it is likely that separate disclosure is
required to meet the objectives of IFRS 8, thus enabling users to assess the
performance and its significance of this segment to the group.
(1 mark)
If aggregated with other segments, it would no longer be possible to assess the gross
margins and return on capital employed for Tybull on an individual basis, without
referring to its individual financial statements.
(1 mark)
As an overseas subsidiary, these financial statements might not be readily available
or understandable, to the shareholders of the parent entity.
(1 mark)
Investors may benefit from separate disclosure because the political and economic
risks impacting the overseas subsidiary might be different from those that impact the
other subsidiaries.
(1 mark)
Growth rates overseas may be different from those in the rest of the business, and
separate disclosure will highlight this to the users and enable them to more
accurately consider the impact on future cash flows.
(1 mark)
(Part (b): 10 max + 2 professional marks)
Marking scheme
(a)
(b)
(i)
FFB – 1 mark per point
(ii)
Impairment – 1 mark per point
Operating segments – 1 mark per point
Professional marks
Total
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Marks
8
5
10
2
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25
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REFERENCES
This document references IFRS® Standards and IAS® Standards, which are authored by the
International Accounting Standards Board (the Board), and published in the 2018 IFRS Standards
Red Book.
The Board (2018) Conceptual Framework for Financial Reporting. London: IFRS Foundation.
The Board (2015) ED/2015/3: Conceptual Framework for Financial Reporting. London: IFRS
Foundation.
The Board (2018) IAS 1 Presentation of Financial Statements. London: IFRS Foundation.
The Board (2018) IAS 2 Inventories. London: IFRS Foundation.
The Board (2018) IAS 7 Statement of Cash Flows. London: IFRS Foundation.
The Board (2018) IAS 12 Income Taxes. London: IFRS Foundation.
The Board (2018) IAS 16 Property, Plant and Equipment. London: IFRS Foundation.
The Board (2018) IAS 21 The Effects of Changes in Foreign Exchange Rates. London: IFRS
Foundation.
The Board (2018) IAS 24 Related Party Disclosures. London: IFRS Foundation.
The Board (2018) IAS 28 Investments in Associates and Joint Ventures. London: IFRS Foundation.
The Board (2018) IAS 32 Financial Instruments: Presentation. London: IFRS Foundation.
The Board (2018) IAS 36 Impairment of Assets. London: IFRS Foundation.
The Board (2018) IAS 40 Investment Property. London: IFRS Foundation.
The Board (2018) IAS 41 Agriculture. London: IFRS Foundation.
The Board (2018) IFRS 2 Share-based Payment. London: IFRS Foundation.
The Board (2018) IFRS 3 Business Combinations. London: IFRS Foundation.
The Board (2018) IFRS 8 Operating Segments. London: IFRS Foundation.
The Board (2018) IFRS 9 Financial Instruments. London: IFRS Foundation.
The Board (2018) IFRS 10 Consolidated Financial Statements. London: IFRS Foundation.
The Board (2018) IFRS 13 Fair Value Measurement. London: IFRS Foundation.
The Board (2018) IFRS 16 Leases. London: IFRS Foundation.
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