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ACCA
Strategic Business Reporting
(SBR)
Final Mock – September 2020
3 hours and 15 minutes
Time allowed
This mock exam is divided into two sections:
Section A
Both questions are compulsory and MUST be attempted
Section B
Both questions are compulsory and MUST be attempted
Instructions:
Take a few moments to review the notes on the inside of this page titled, 'Get into good exam habits now!' before
attempting this exam.
DO NOT OPEN THIS EXAM UNTIL YOU ARE READY TO START UNDER
EXAMINATION CONDITIONS
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Get into good exam habits now!
Take a moment to focus on the right approach for this exam.
Effective time management

Watch the clock and allow 1.95 minutes per mark. Work out how long you can spend on each
question and do not exceed that time.

Take a few moments to think what the requirements are asking for and how you are going to
answer them.
Effective planning

This mock is in exactly the same format as the real exam. You should read through the exam and
plan the order in which you will tackle the questions. Always start with the one you feel most
confident about.

Read the requirements carefully: focus on mark allocation, question words (see below) and
potential overlap between requirements.

Identify and make sure you pick up the easy marks available in each question.
Effective layout

Present your numerical solutions using the standard layouts you have seen. Show and reference
your workings clearly.

With written elements try and make a number of distinct points using headings and short
paragraphs. You should aim to make a separate point for each mark.

Ensure that you explain the points you are making in order to score the one mark per point
available ie why is the point a strength, criticism or opportunity?

Give yourself plenty of space to add extra lines as necessary; it will also make it easier for the
examining team to mark.
Common terminology
Question
requirement
Actual meaning
Key tips
Advise
To offer guidance or some relevant expertise to a
recipient, allowing them to make a more informed
decision
Counsel, inform or notify
Calculate
To ascertain by computation, to make an estimate
of; evaluate, to perform a mathematical process
Provide description along with numerical
calculations
Discuss
Consider and debate/argue about the pros and
cons of an issue; examine in detail by using
arguments in favour or against
Write about any conflict, compare and
contrast
Explain
Make an idea clear; show logically how a concept
is developed; give the reason for an event
Don't just provide a list of points, add in
some explanation of the points you're
discussing
These definitions have been extracted from a longer list of common question verbs on the ACCA website:
www.accaglobal.com/uk/en/student/sa/study-skills/questions.html
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Section A – Both questions are compulsory and MUST
be attempted
1
Allen
The following information relates to the Allen Group which comprises Allen, Beaumont and Edwards, all public
limited companies.
(i)
Allen acquired 40% of the equity interests in Beaumont for a cost of $100 million on 1 July 20X5,
achieving significant influence. On 1 July 20X6, Allen acquired a further 20% of the equity interests for
$62 million and obtained control of Beaumont. The $62 million paid included $2 million of legal fees which
were capitalised as part of the cost of the investment.
The net assets of Beaumont had a carrying amount of $230 million and $250 million on 1 July 20X5 and
1 July 20X6 respectively. The increase in net assets was due to retained profits only. No fair value
adjustments were required to the net assets at either date.
The fair value of the original 40% equity interest at 1 July 20X6 is deemed to be $115 million. This
amount is also the fair value of the non-controlling interest at 1 July 20X6.
In calculating goodwill related to Beaumont for the Allen Group financial statements, the finance director
included both the new 20% investment and the previously held 40% investment at their respective costs
of $62 million and $100 million. The accounting entries relating to this goodwill have not yet been made.
The finance director believes an adjustment to equity may be required in the group accounts in relation to
the increase in shareholding. She thinks this is calculated as the fair value of the 40% investment at the
date control is achieved less the original cost of the 40% investment. The finance director is awaiting
clarification before accounting for any such adjustment.
(ii)
Allen acquired 100% of the equity interests in Edwards for a cost of dinar 990 million on 1 July 20X6. The
fair value of the net assets at acquisition were dinar 870 million. The finance director has used the spot
rate at the acquisition date to translate the goodwill in Edwards for inclusion in the Allen Group
consolidated financial statements at 30 June 20X7. The accounting entries relating to this goodwill have
been made.
(iii)
The Allen Group elects to measure non-controlling interests in all subsidiaries at fair value at acquisition.
(iv)
Goodwill was reviewed for impairment on 30 June 20X7 and it was determined that the carrying amount
of the goodwill in Edwards was impaired by 25%. This is the first time that the investment has been
impaired. The finance director has translated the impairment on the goodwill at the spot rate at the
acquisition date and recorded this amount in the draft consolidated financial statements. Goodwill in
Beaumont is not impaired.
(v)
The Allen Group has a presentation currency of the dollar ($). Exchange rates between the dollar and
dinar are as follows:
$: dinar
1$: 3.5 dinar
1$: 4 dinar
1$: 5 dinar
1 July 20X6
Average for the year ended 30 June 20X7
30 June 20X7
(vi)
Allen granted 100 options to each of its 4,000 employees on 1 July 20X4. The fair value of each option at
that date was $10. The options vest upon the company's share price reaching $15, providing the
employee has remained in the company's service until that time. The terms and conditions of the options
are that the market condition can be met in either year 3, 4 or 5 of the employee's service.
At the grant date, Allen estimated that the expected vesting period would be four years, which is
consistent with the assumptions used in measuring the fair value of the options granted, and maintained
this estimate at 30 June 20X5 and 30 June 20X6. None of the 4,000 employees entitled to the options
were anticipated to leave and none of them had left by 30 June 20X7.
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The company's share price reached $15 on 30 June 20X7. The share options were accounted for
correctly in the years ended 30 June 20X5 and 20X6. However, the finance director is unsure how to
account for the share options in the year ended 30 June 20X7.
Required
(a)
(i)
Explain, with suitable workings, how the goodwill in Beaumont should have been calculated and
discuss whether an adjustment to equity is required in relation to the increase in shareholding in
the consolidated financial statements for the year ended 30 June 20X7.
(9 marks)
(ii)
Explain, with suitable workings, how the goodwill in Edwards should have been calculated,
showing any adjustments which need to be made in the consolidated financial statements for the
year ended 30 June 20X7.
(5 marks)
(iii)
Discuss, with suitable workings, how the share options should be accounted for in Allen's
individual company financial statements for the year ended 30 June 20X7.
(7 marks)
Note. Marks will be allocated in (a) for a suitable discussion of the principles involved as well as the
accounting treatment.
(b)
Edwards is the Allen Group's first overseas subsidiary. However, the Allen Group operates globally,
selling to customers in many different countries as well as purchasing inventory from overseas suppliers.
The directors of Allen are aware that IAS 21 The Effects of Changes in Foreign Exchange Rates was
revised in 2003 but may now be somewhat out of date and inconsistent with more recent standards such
as IFRS 7 Financial Instruments: Disclosures. The directors are concerned that there is a danger that it
may result in the consolidated financial statements being misleading to the Allen Group's stakeholders
and feel that perhaps it might be better not to follow IAS 21. The directors would therefore like your
advice.
Required
Advise the directors regarding their suggestion not to follow IAS 21 and discuss the main weaknesses in
IAS 21, including any inconsistencies in conceptual bases between IAS 21 and IFRS 7 in respect of
currency risk. You should refer to the IASB's Conceptual Framework for Financial Reporting (revised
2018) where appropriate.
(9 marks)
(Total = 30 marks)
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2 Nash
Nash is a listed entity which reports its group financial statements to 31 March each year. The directors of Nash
work in a pressurised environment and are rewarded with large bonuses provided targets relating to growth in
revenue and growth in return on capital employed are met. The reporting accountant of Nash is new to her
position as the previous accountant left suddenly earlier this year.
Nash makes use of different corporate entities in order to finance its business. These entities were set up by
Nash with the sole purpose of raising finance. Nash owns 5% of the equity of these entities, the remaining equity
is owned by Northern Bank. Under the terms of the contractual arrangement between Nash and Northern Bank,
senior members of Nash's finance team have been appointed as the only directors of each entity. Northern Bank
has provided the entities with debt finance of $40 million. Nash has then borrowed $40 million from the entities
and subsequently deposited $35 million with the same entities. The finance director has told the reporting
accountant that the entities are not under the control of Nash and that there is no need to disclose the
relationship in the group financial statements. He has instructed the reporting accountant to show the net balance
of $5 million as a current liability in Nash's group financial statements. He stated that this treatment had been
agreed by Nash's board of directors and should not be challenged.
Nash has entered into a contract with a customer to supply specialised equipment. Nash has developed the
equipment in conjunction with the customer but has contracted with a supplier for its manufacture. The supplier
delivers the equipment directly to the customer. Nash pays the supplier directly and invoices the customer with
the agreed selling price which is cost plus 25%. Any equipment defects are the responsibility of Nash. The
finance director has said that Nash hardly ever acts as an 'agent' in sales transactions and therefore on that
basis has instructed the reporting accountant to record the full amount of revenue in Nash's accounts. He further
stated that the boost to revenue would help to achieve management bonuses, which would be looked on
favourably when the reporting accountant's bonus was considered.
Required
Discuss the ethical and accounting implications of the above situations from the perspective of the reporting
accountant.
(18 marks)
Note. Professional marks will be awarded for the application of ethical principles.
(2 marks)
(Total = 20 marks)
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Section B – Both questions are compulsory and MUST
be attempted
3 Ratcliffe
(a)
Ratcliffe is a listed company which is looking to issue the following financial instruments:
(i)
100,000 options to purchase 100 ordinary shares in Ratcliffe for $350 in 1 year’s time. The options
will be settled net in shares.
(ii)
A special class of $1 ordinary shares that only directors will hold. Dividend payments on the
shares will be discretionary and ratified at the Annual General Meeting of the company. When a
director's service contract expires, Ratcliffe will be required to repurchase the shares at their
nominal value.
The directors are seeking advice on the accounting treatment of these financial instruments. The directors
are aware that the IASB has issued a discussion paper about financial instruments with characteristics of
equity and want to understand any potential effects of the discussion paper on the accounting treatment.
Required
Explain to the directors how the financial instruments should be presented in the financial statements of
Ratcliffe under IAS 32 Financial Instruments: Presentation and discuss any potential impact on the
classification of Discussion Paper 2018/1 Financial Instruments with Characteristics of Equity. (8 marks)
(b)
The directors are aware that classification of financial instruments as liabilities or equity can have a
significant effect on the financial statements. Guidance is provided in IAS 32 Financial Instruments:
Presentation (and other standards for items outside the scope of IAS 32). However, many financial
instruments have features of both debt and equity which can result in inconsistency of reporting and
confusion amongst investors. To aid investors in their analysis of Ratcliffe's financial statements, the
directors have decided to disclose 'adjusted gearing' and 'adjusted interest cover' and emphasise these
figures in their management commentary. For the purposes of calculating this information, the directors
have based the classification of financial instruments on their legal form. This has resulted in some
financial instruments classified as debt under IAS 32 being treated as equity in the 'adjusted gearing' and
'adjusted interest cover' calculations.
Required
(i)
Discuss whether the classification of a financial instrument as debt or equity under IAS 32 is
relevant to investors in making economic decisions and give examples of further disclosures
about financial capital in an annual report that may be useful to investors.
(10 marks)
(ii)
Discuss, from the perspective of investors in Ratcliffe, the usefulness of disclosing 'adjusted
gearing' and 'adjusted interest cover'.
(5 marks)
Note. Professional marks will be awarded in part (b) for clarity and quality of presentation.
(2 marks)
(Total = 25 marks)
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4 Genovate
(a)
The directors of Genovate, a listed company, are seeking advice on how fair value should be determined
for the following items.
(1)
Halfway through the year ended 31 December 20X3, Genovate acquired a property situated in the
business district of a large city which it subsequently leased under operating leases to several
small businesses. At the time of purchase, the local government zoning rules stipulated that the
property must be used for commercial rather than residential purposes. However, on
1 December 20X3 this restriction was removed. The directors have established that were the
property to be sold at 31 December 20X3, it would raise $29 million if sold as a residential
apartment block or $25 million if sold as offices. In either case, legal fees of 1% of the sale price
would be incurred. The directors are unsure which measure is appropriate given their intention to
continue to lease the property to small businesses.
(2)
Genovate acquired a subsidiary, Creogen, on 31 December 20X3. As part of the acquisition,
Genovate assumed a decommissioning liability and is required to fair value it. Creogen has to
decommission a generating plant at the end of its useful life, which is in three years' time.
The directors are unsure how the liability should be measured, but have determined that a
valuation technique will be required. They have provided the following information on the
assumption that Genovate is allowed to transfer the liability to another market participant.
(3)

Labour, material and overhead costs to decommission the plant are $3.75 million.

Third party contractors in the industry typically add a 30% mark-up and expect a premium
of 5% of the expected cash flows (after including the effect of inflation) to take into account
risk that cash flows may be more than expected.

Inflation is expected to be on average 4% annually over the three years.

The risk-free interest rate for a three-year maturity is 3%. An appropriate adjustment to the
risk-free rate for Genovate's non-performance risk is 2%.
During the year Genovate acquired a small start-up company in order to gain access to the
company's development project relating to the next generation of a specialised microchip. The
directors of Genovate do not intend to complete the project, but instead acquired the project to
prevent competitors from accessing the technology. If the project was completed, it would
compete with one of Genovate's own projects. The directors believe that if Genovate's
competitors had acquired this project, they would strive to complete the development as none of
Genovate's competitors have similar technology in development. As the directors are planning not
to complete the project, they consider the fair value of the related intangible asset to be nil.
Required
Explain to the directors of Genovate how the fair value of the above items should be determined in
accordance with International Financial Reporting Standards, with reference to the principles of
IFRS 13 Fair Value Measurement.
(16 marks)
(b)
Genovate's directors have heard that an exposure draft relating to accounting for changes in accounting
policies has been issued by the IASB. They have heard that the aim of the exposure draft is to make
accounting for voluntary changes in accounting policies more straightforward. The directors would like to
know if this is the case and the possible impact that the exposure draft could have.
Required
Prepare a briefing note for the directors which explains the amendments in ED/2018/1 Accounting Policy
Changes and discusses potential issues with the proposals.
(9 marks)
(Total = 25 marks)
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