Strategic Business
Reporting (SBR)
Sept/Dec 2021
Examiner’s report
The examining team share their observations from the
marking process to highlight strengths and
weaknesses in candidates’ performance, and to offer
constructive advice for those sitting the exam in the
future.
Contents
General comments .............................................................. 2
Question 1 (Q1) Chuckle Co ............................................... 2
Requirement (a)(i) – 4 marks ........................................... 3
Requirement (a)(ii) – 5 marks .......................................... 3
Requirement (a)(iii) – 5 marks ......................................... 4
Requirement (b)(i) – 8 marks ........................................... 4
Requirement (b)(ii) – 8 marks .......................................... 5
Question 2 – Agency Group ................................................ 6
Requirement (a)(i) – 3 marks ........................................... 6
Requirement (a)(ii) – 6 marks (plus 2 professional marks)
......................................................................................... 7
Requirement (b) – 5 marks .............................................. 8
Requirement (c) – 4 marks .............................................. 9
Question 3 – Stem Co ....................................................... 10
Requirement (a) – 13 marks .......................................... 10
Requirement (b)(i) – 4 marks ......................................... 13
Requirement (b)(ii) – 8 marks ........................................ 13
Question 4 – Symbal Co ................................................... 15
Requirement (a) – 6 marks (plus 2 professional marks) 16
Requirement (b) – 5 marks ............................................ 16
Requirement (c) – 6 marks ............................................ 17
Requirement
– 6 marks
Examiner’s(d)
report
– SBR............................................
September/December 202118
1
General comments
This examiner’s report should be used in conjunction with the published
September/December 2021 sample exam which can be found on the ACCA Practice
Platform.
In this report, the examining team provide constructive guidance on how to answer
the questions whilst sharing their observations from the marking process,
highlighting the strengths and weaknesses of candidates who attempted these
questions. Future candidates can use this examiner’s report as part of their exam
preparation, attempting question practice on the ACCA Practice Platform, reviewing
the published answers alongside this report.
Question 1 (Q1) Chuckle Co
Chuckle Co was a 30-mark question which translates (using 1.8 minutes per mark)
into 54 minutes of the SBR exam. It is important to allow yourself time for planning as
well as writing your answer within these 54 minutes, and use the same weightings
within each requirement of the question, to ensure you have the opportunity to gain
the maximum marks across the question. You should avoid the temptation to expand
your answer for a single requirement beyond the allotted time as it is important to
answer all requirements for each question. Candidates invariably spend too long on
Q1 as it has more marks than any other question. However, there may be easier marks
in other parts of the exam paper which are not achieved because of the excess time
spent on Q1. The SBR exam states that all questions are compulsory and the
consequences from not answering all questions are that it makes it much more difficult
to pass the exam.
Examiner’s report – SBR September/December 2021
2
Requirement (a)(i) – 4 marks
Draft an explanatory note to the directors of Chuckle Co to address the
following issues:
(a)(i) why it was correct to initially classify Grin Co as an associate, as
opposed to a subsidiary, on 1 April 20X2;
(4 marks)
Candidates generally could define significant influence as the ability to participate in
the financial and operating policy decisions of the investee but not have control or joint
control over these policies. In addition, many candidates expanded their answer to
discuss control with the result that half marks (2 marks) were readily gained by many
candidates. The difficulty came when candidates attempted to apply these principles
to the scenario. Candidates needed to consider whether voting rights alone or whether
a combination of factors was sufficient to obtain power. As Chuckle Co only held 30%
of the equity and no additional voting rights, many candidates concluded that the
correct classification was that of an associate. However, those candidates that
concentrated on simply discussing why significant influence was demonstrated whilst
ignoring why control was not indicated, did not perform as well on the question.
Ensuring you have addressed all aspects of a requirement before moving on is
important – candidates were directed to discuss ‘as opposed to a subsidiary’.
Requirement (a)(ii) – 5 marks
(ii) how Grin Co should be accounted for as an associate using equity method
in the consolidated statement of financial position of Chuckle Co at 31 March
20X6. Your answer should also explain how the revaluation of the land at 1
April 20X5 was accounted for (exhibit 2) and include all relevant calculations;
and
(5 marks)
Many candidates explained that the initial investment is measured at cost and the
carrying amount is increased to recognise the investors’ share of the profits and
other comprehensive income after the date of acquisition. However, candidates often
could not apply the principle to the scenario. The application of the equity method of
accounting is a basic requirement of the SBR exam and candidates could have
scored at least half marks for its correct application in this question. It was surprising
how many candidates did not provide a basic explanation of the equity method of
accounting or make a reasonable attempt at the calculation.
The revaluation gain on land and the deferred tax should have been netted off within
equity in the individual financial statements of the associate. In the consolidated
financial statements Chuckle Co would include 30% of this net gain within other
components of equity. The remaining increase in net assets was due to trading profits
which should have been included within consolidated retained earnings. The
revaluation element was answered well by some and those that considered the
treatment in the individual financial statements scored high marks. Several candidates
incorrectly dealt with the revaluation via profit or loss. The treatment of revaluation
gains and losses is again fundamental to this examination and is assumed knowledge.
Candidates are losing relatively easy marks if they do not understand nor apply basic
assumed knowledge of financial reporting principles. SBR is based around the
Examiner’s report – SBR September/December 2021
3
application of principles and candidates should be able to take advantage of the
application of basic principles as there are much more difficult areas of the SBR
syllabus which candidates have to deal with.
Requirement (a)(iii) – 5 marks
(iii) whether the classification of Chuckle Co's investment in Grin Co should
change on 1 April 20X6.
(5 marks)
The acquisition of the extra 18% of the equity on 1 April 20X6 made Chuckle Co a
significant minority investor as they now held 48% of the equity shares. As no other
investor owned more than 10% of the equity, it would appear that power has been
obtained if there were a large number of unconnected, dispersed holders. However,
the other shares were owned by just a few other investors so it was not clear that
power was obtained. Many candidates concentrated on the ownership of 48% and
concluded that this was not enough to control and therefore, incorrectly concluded that
the status should not change.
To gain a good mark, candidates not only needed to consider the purchase of the
additional holding but also the potential voting rights. For these to be included in the
assessment, the rights should be substantive. In this case, candidates should have
discussed and concluded that the share options were deemed to be substantive and
since exercising these options would enable Chuckle Co to obtain a 60%
shareholding, it was concluded that Chuckle Co is able to exercise power over the
associate from 1 April 20X6. Thus, candidates should have concluded that the
associate should have been reclassified to a subsidiary at this date.
Requirement (b)(i) – 8 marks
(b) On the assumption that Chuckle Co obtains control on 1 April 20X6,
explain:
(i) how the fair value of the non-current and current assets at acquisition
(including any deferred tax adjustments) should be calculated; and
(8 marks)
This requirement carried 8 marks and therefore a substantial answer was expected
from a candidate. As soon as fair value is mentioned in a requirement, the principles
of IFRS 13 Fair Value Measurement should be used. This does not mean that
definitions of level 1, 2 and 3 are required every time but it does mean that the
relevant sections of the IFRS standard should be quoted in the answer. In this case,
the valuation of non-current assets should have been representative of the amount
which market participants would be willing to sell the asset or transfer the liability in
an orderly transaction under current market conditions.
The question required a discussion of the fair value of land, finished goods and an
internally generated database. The increase in value of land in the question created
an additional taxable temporary difference such that an additional deferred tax
liability arose at the acquisition date.
Examiner’s report – SBR September/December 2021
4
Some candidates confused the fair value of finished goods with the net realisable
value principle. Net realisable value refers to the net amount that an entity expects to
realise from the sale of inventory in the ordinary course of business. Fair value
reflects the price at which an orderly transaction to sell the same inventory in the
principal or most advantageous market for that inventory would take place between
market participants at the measurement date. The former is an entity-specific value;
the latter is not. Net realisable value for inventories may not equal fair value less
costs to sell. The fair valuation of finished goods created a further taxable temporary
difference in the consolidated financial statements of Chuckle Co with a
corresponding deferred tax liability at 20%.
As regards the database, many candidates realised that it would not be recognised
in the individual financial statements of the subsidiary but would be recognised as a
separate intangible asset from goodwill in the consolidated financial statements as
the database appeared to be identifiable. Again, this valuation would result in a
further increase in the deferred tax liability.
Candidates’ knowledge of IFRS 13 was surprisingly limited. However, most candidates
could apply the information given in the question and made a good attempt at
calculating the fair values of the net assets acquired. A significant number of
candidates did not consider the deferred tax implications, despite being specifically
asked to, and as a result, could not gain full marks for the question.
Requirement (b)(ii) – 8 marks
(ii) how goodwill/gain on bargain purchase should be calculated at 1 April
20X6. Your discussion should include a brief description of the accounting
treatment arising from the additional purchase of the 18% equity in Grin Co.
(8 marks)
The discussion needed to include a brief description of the accounting treatment
arising from the additional purchase of the 18% equity in the associate. The
additional purchase of the 18% equity constituted a piecemeal or step acquisition
which means that the previously held equity interest should be remeasured at its
acquisition fair value with any resulting gain or loss going to profit or loss. Where the
step acquisition was recognised by candidates, the accounting treatment was
generally well documented. However, many candidates did not realise that the
purchase of shares was a step acquisition. The revaluation gain on land (net of
deferred tax) would also be transferred from the revaluation surplus of the group to
retained earnings on 1 April 20X6. Very few candidates mentioned this point.
The calculation of non-controlling interest (NCI) was dependent upon the correct
calculation of the fair value of the net assets at acquisition and therefore the own figure
rule was used to award marks on this part of the question. However, some candidates
used incorrect NCI percentages. The NCI held 52% of the equity and this confused
many candidates as they assumed that the NCI could not hold more than 50%. Many
also failed to consider the deferred tax implications. Overall, the calculation of goodwill
was generally well answered. Answers on how to treat the additional purchase of 18%
could have been improved as it was often too brief. Only the strongest candidates
discussed the step acquisition and the fair value of the original consideration. Not
many stated the gain would be recognised in profit or loss.
Examiner’s report – SBR September/December 2021
5
Question 2 – Agency Group
The scenario for this 20 mark question describes a group which manufactures
pharmaceutical products with research and development activities. Under increasing
competition, the group sold a licence to distribute an existing product and developed
a new product which was hoped to enhance their reputation in the market. The
scenario also included ethical issues relating to the employment of an ACCA student
and the accounting for foreign exchange gains arising from the re-translation of a
foreign subsidiary.
Requirement (a)(i) – 3 marks
(a)(i) Discuss the appropriateness of Mr Raavi’s accounting treatment of the
foreign exchange gains on the re-translation of the foreign subsidiary which is
held for sale.
(3 marks)
Requirement (a) was conveniently split into two parts, so providing a helpful guide as
to how long to spend on each aspect. For three marks, requirement (a)(i) asked you
to discuss whether including the gains from foreign currency translation of the held for
sale subsidiary in profit or loss was appropriate. Three marks equates to just over five
minutes, so your answer should be brief. Begin by explaining how IAS 21 The Effects
of Changes in Foreign Exchange Rates requires the translation of a foreign
subsidiary’s goodwill and net assets, with a resulting exchange difference recognised
in other comprehensive income (accumulating over time in other components of
equity). On disposal of the subsidiary, the related net exchange differences are
reclassified from equity to the statement of profit or loss. So, had the subsidiary been
disposed, the accounting treatment would have been appropriate; however, it was not
a disposal – it was reclassified as held for sale. Your answer could have explained
how the subsidiary should be accounted for under IFRS 5 Non-current Assets Held for
Sale and Discontinued Operations and credit would be available for this. However,
given the brevity of the requirement, and the focus on the exchange differences in the
question, better (time-managed) answers explained that since no sale had yet been
made, transfer of the accumulated foreign exchange gains from the other components
of equity was not appropriate.
Examiner’s report – SBR September/December 2021
6
Requirement (a)(ii) – 6 marks (plus 2 professional marks)
(a)(ii) Discuss any ethical issues raised by Ms Malgun’s actions regarding her
management of Mr Raavi.
(6 marks)
This second requirement asks for a discussion of the ethical issues relating to the
management by the finance director (Ms Malgun) of an ACCA student accountant (Mr
Raavi) employed on a temporary contract. Part (a)(ii) has a total of eight marks (6
marks plus the two professional marks for the quality of your discussion). This equates
to about 14 minutes of time. You should use some of this to plan your answer. A wellplanned answer that covers all the key areas and meets all the requirements is more
likely to gain both professional marks. A discussion of ethical issues will include the
identification of threats to impartiality, for example. You may want to begin by
summarising the key issues from the scenario, and then link these with concerns you
may identify. This list can then provide a sound structure to your answer. Add and link
items in your list to give it a logical flow. The list need take only a few minutes but is
not wasted time as you can always present it first headed as a “plan” and then copy
and paste it into your answer to then expand upon each heading. Hardly any answers
included a plan, despite its advantages in gaining your professional marks. The
following plan covers most of the key issues (FD = Finance Director; FS = Financial
Statements; T&F = true and fair):







Student accountant: bound by same ethical codes as FD – less experienced:
should get support. Responsibility? Management accountable, not student (since
not accountable, student may be more open to behave unethically - not
responsible for actions).
Temporary contract with termination without reason: employer more likely to
terminate under circumstances – is this ethical? Does it undermine goals?
Student accountant’s termination fears: risks of self-interest? follow instructions
without questioning?
Pressure of meeting FD’s profitability targets: impacts wellbeing, motivation and
behaviour.
Pressures come from board onto FD, then from FD onto student accountant:
pressure on FD too.
FD: knowingly overlooked error: self-interest: target is part of profit-related pay
calc. Didn’t assist in FS prep: dishonest/unprofessional. Both Student and FD
must present T&F financial information
Competition within organisation to meet targets: less severe disciplinary
measures. Inappropriate action: if anything, FD rewarding student’s action with
full time contract.
The above list has seven good points that can be expanded into a well-constructed
answer in which ethical issues and threats are discussed. Note that these issues don’t
just stem from what the finance director has done, but also the pressures placed on
the student, and the systemic pressures placed on the finance director by the board.
Remember that the requirement has six marks, so seven separate issues should have
a very good chance of gaining a high score.
Examiner’s report – SBR September/December 2021
7
Whilst this requirement was generally well-answered, some candidates failed to
identify all the key threats (e.g. profit-related pay, termination without reason, lack of
accountability) which are key to the answer.
Requirement (b) – 5 marks
(b) Discuss how the granting (sale) of the licence to Kokila Co should be
accounted for by Agency Co on 1 January 20X7.
(5 marks)
The question required candidates to explain the accounting treatment of a licence,
initially controlled in full by Agency Co, which was in part granted to another business
(Kokila Co). Candidates should have identified from the question that Agency Co had
capitalised the development costs relating to this headache product, in accordance
with IAS 38 Intangible Assets. The carrying amount of these development costs was
$30m at the time. The scenario invited candidates to consider whether granting use of
the licence was a derecognition on disposal under IAS 38 Intangible Assets. Given
no future economic benefits are expected from the part which is transferred, a relative
proportion of the development costs should be derecognised. Candidates should also
determine a transaction price, based on IFRS 15 Revenue from Contracts with
Customers, to then arrive at a gain or loss from the derecognition. The scenario
describes how Agency Co is also charging for the manufacture of the product, which
leads candidates on to consider whether these are separate performance obligations.
Since the question explains that the licence can be used without the need to use
Agency Co’s manufacturing services (the process is described as “not specialised”
and available for purchase from other manufacturers), candidates should identify the
granting of the licence and manufacturing the product for Kokila Co as separate
performance obligations. The question then provides two forms of consideration: an
up-front payment and a conditional payment (payable once sales reach a set target).
A good answer would describe the conditional payment as not recognised until the
performance obligation has been met; whilst the up-front payment can be used in the
calculation on disposal of the part of the development costs (which the candidates
should calculate using the relative proportions from the question).
For five marks, the question offers candidates a lot to describe: principles of
derecognition under IAS 38 Intangible Assets, and principles of IFRS 15 Revenue from
Contracts with Customers. Good answers would cover each aspect of the question in
turn, leading to a short calculation of the gain on disposal of the development costs.
Candidates who misread the requirement described the accounting requirements for
Kokila Co; with some answers describing lease accounting (wrongly assuming Agency
Co retained control of the entire rights).
Examiner’s report – SBR September/December 2021
8
Requirement (c) – 4 marks
(c) Discuss the accounting treatment of the costs incurred to date in
developing the biosimilar drug.
(4 marks)
This four-mark requirement asked for a discussion of the accounting treatment for the
development of a drug which is very similar to one, whose patent is expiring soon, and
for which regulatory approval has been granted. The scenario describes a number of
situations which should be familiar to candidates from their assumed knowledge of
IAS 38 Intangible Assets. Candidates should be expected to apply their knowledge of
the recognition requirements relating to development costs to the information provided
in the scenario, and not merely list out the requirements. In this case what is key to
the treatment as research or development is whether regulatory approval of the drug
is achieved: without this, technical feasibility is not assured. Better answers considered
the effectiveness of the asset in generating future economic benefit where the product
is aimed at a small group of people who will only pay a notional amount. This last point
was overlooked by quite a few candidates.
Examiner’s report – SBR September/December 2021
9
Question 3 – Stem Co
This question was set around a company which, at the start of the year, is considering
providing cars for its senior management, and had also entered into an agreement
with two other companies to develop a new technology through a separate legal entity.
The question had three requirements, one relating to the first issue (cars for
management) and two relating to the second issue new entity). Part (a) required
explanations, with calculations, of the accounting treatment of three alternative
company car options and the impact on aspects of financial statements, applying
knowledge of IFRS 16 Leases. Part (b)(i) asked for a brief discussion of the equity
method of accounting and whether it provides a more relevant measurement basis
than cost or fair value for an investment in an associate company. No reference to the
scenario was required for this part. Part (b)(ii) required a discussion on whether the
investment in the separate legal entity was a joint venture, and how it should be
accounted for by Stem Co (including relevant accounting entries).
Requirement (a) – 13 marks
(a) Explain, with suitable calculations, the impact of the three alternative
company car options on: earnings before interest, tax, depreciation and
amortisation (EBITDA); profit before tax; and the statement of financial
position for the year ended 31 December 20X7.
Note: Candidates should refer to IFRS 16 Leases where appropriate.
(13 marks)
Part (a) appeared surprisingly challenging for candidates, which is concerning given
13 marks were available for this, and the area of leases is examined relatively often.
Much of it was assumed knowledge from Financial Reporting and we would have
expected strong application of this knowledge. Candidates should always set some
time aside to plan their answer as this time is often invaluable: try to avoid the
temptation to start answering straight away and take some time to make notes on how
the three options that are described differ. Some candidates incorrectly treated the
transactions as if the company were leasing cars to managers rather than leasing cars
Examiner’s report – SBR September/December 2021
10
for the managers’ use; but even with this misinterpretation, a good description of the
principles and underlying treatment of each option would still earn marks.
A good attempt would begin with identifying the differences between the three options
available to Stem Co (referring to IFRS 16 principles) which describe the right-of-use
asset and lease liability (a four-year agreement), the outright purchase (financed by a
loan repayable in four years, with a stated residual value and monthly service costs),
and a 12-month lease rental with no purchase option (exempt under IFRS 16). The
question provides sufficient detail for candidates to use the spreadsheet function to
calculate the accounting treatments for options 1 and 2, and then summarise the
impact of all three options on the three aspects (EBITDA, profit before tax and the
statement of financial position). Present values were provided, so in the case of option
1, candidates needed only to calculate the unwinding of the lease liability and
depreciation of the right of use asset for the first year. No implicit interest rate is
provided, nor required. Instead, the question tells us the correct amount of interest for
the year. The monthly payments and service charge element within this amount are
also provided, so the closing lease liability can be calculated once annual amounts are
worked out. A suitable format for the spreadsheet, combining both asset and liability
workings would be:
Option 1
Lease liability
Lease: Repay Interest
Right of Use asset / Liability at 1-Jan:
50,803 (14,016) 2,274
Depn (50803/4)
(12,701)
Carrying Amount of Right of Use asset (31-Dec) 38,102
Total Payment (per month)
Service charge included (operating expense)
Repayment of liability (net of service charge)
1,403
(235)
1,168
At 31Dec
39,061
Annual
payment
s
x 12 = 2,820
x 12 = 14,016
For option 2, the calculations were simpler since the cars’ fair value and residual value,
and the implicit interest rate of the loan are all provided. Candidates needed only to
work out the depreciation charge, using the stated residual value and interest charge,
given no repayment was made until the first day of the following year. This is FR level
knowledge and should have been straightforward. For option 3, the annual cost is the
only calculation.
Examiner’s report – SBR September/December 2021
11
The weakest part of most answers was the description of the impact of each option on
EBITDA, profit before tax and the statement of financial position. A good answer would
use a table approach, in which the impact on each aspect could be shown succinctly
– for example:
Option Option Option
1
2
3
Profit before accounting for cars 100,000 100,000 100,000
Service cost
(2,820) (2,820)
Operating expense
(22,800)
EBITDA
97,180 97,180 77,200
Depreciation
(12,701) (11,380)
Interest
(2,274) (3,764)
Profit before tax
82,205 82,037 77,200
SOFP
PPE
38,102 63,894
Lease/Loan Liability
(39,061) (79,038)
Note how this presentation separates EBITDA, which is not impacted by depreciation
or interest, from profit before tax. Candidates should link the figures included in the
above table to their previous workings, to save time and avoid errors. Once complete,
a description of the impact of each option on each aspect of the financial statements
is a much simpler task.
Unfortunately, too many answers did not make sufficient use of the spreadsheet
functions available. In a surprisingly high number of cases the spreadsheet was not
used at all. Presentation in these cases was very weak; with answers limited to note
form or without any structure, and with little attempt to present workings in a way that
could be understood. In some cases, candidates did not seem to know what EBITDA
was despite it being written out in full in the requirements; and a number of answers
excluded any calculations or explanation of the impacts on EBITDA, profit before tax
and SOFP. Whilst calculations were not explicitly required in the question (which
asked for an explanation), these aided the explanation of the impact, and most
answers provided calculations.
Candidates who did not achieve high marks in this question need to be much more
familiar with the advantages of answering it using the spreadsheet function. The
accounting profession expects the use of spreadsheets at a high level, and candidates
need to consider not only the use of formulae to save time, but also an appropriate
layout of a spreadsheet working. A worrying number of answers did not use the
formula function at all or presented their workings poorly, making it hard for the marker
to follow, or impossible to mark without suitable workings and explanation. It is vital for
candidates to avoid treating the spreadsheet as a word processor.
Examiner’s report – SBR September/December 2021
12
Requirement (b)(i) – 4 marks
(b)(i) Discuss briefly principles of the equity method of accounting and
whether it is a more relevant measurement basis than cost or fair value for an
investment in an associate company.
Note: There is no need to refer to any exhibit when answering part (b)(i).
(4 marks)
This part had only four marks and required no reference to the scenario. As such, it
provides an opportunity for candidates to show their knowledge of the equity
accounting measurement method, and to compare this with the cost or fair value
measurement bases. Good answers would describe the need for significant influence
(as opposed to control) and the principles that apply where such an influence exists.
To gain good marks, candidates should ensure they have met all the requirements of
the question. Whilst most candidates described the equity method and the underlying
accounting principles, fewer then contrasted this sufficiently to the cost and fair value
measurements and where these may be more useful to the users. Those that did not
provide answers to both limited their opportunity for marks.
Requirement (b)(ii) – 8 marks
(b)(ii) Discuss why Stem Co’s investment in Emphasis Co should be classified
as a joint venture and how Stem Co should account for its interest at 1
January 20X7 in accordance with IAS 28 Investments in Associates and Joint
Ventures.
Note: Candidates should show any relevant entries required in the accounting
records of Stem Co.
(8 marks)
This requirement continues the theme of part (b)(i) by requiring a discussion as to
whether the newly-formed legal entity (Emphasis Co) should be classified as a joint
venture, and how it should be accounted for at the date of formation. You are told that
Stem Co holds a 40% interest with the other two parties holding 40% and 20%. Holders
of the 40% interest can appoint three (of seven) directors, and significant decisions
need unanimous board consent. The 20% interest has one board member and only
participates in significant decisions via the board. Whilst it may be tempting to begin
your answer by applying this information, it is wiser to start by outlining the
characteristics that define a joint venture. In short, a joint venture is usually a legally
separate vehicle in which all venturers must be able to exercise joint control (requiring
unanimous consent on decisions). Application to the scenario then justifies Emphasis
Co as a joint venture. The majority of candidates scored well in explaining the
characteristics of a joint venture; and then discussed why this applied to Emphasis Co.
Good answers would have identified that whilst the 20% holding only appointed one
board member, this member was key as it can prevent the other two parties from
making significant decisions; without that member’s consent decisions are not
unanimous. Weaker answers incorrectly identified Emphasis Co as an associate,
focusing on the 40% holding rather than the other characteristics of the agreement.
The accounting method was therefore to apply the equity method under IAS 28
Investments in Associates and Joint Ventures. To maximise marks, candidates should
then consider the figures in the scenario: cash paid was $150,000 for a 40% share in
the entity (with net assets recorded at carrying amounts of $310,000 and fair values
Examiner’s report – SBR September/December 2021
13
of $470,000). Under IAS 28, where there is a difference between the investment in the
joint venture and the share of the fair value of its net assets, this is accounted for like
goodwill (in accordance with IFRS 3 Business Combinations). In this case, there is a
bargain purchase since the payment ($150,000) is less than the share of fair value of
net assets ($188,000 [40% x $470,000]). This should be recorded as a bargain
purchase gain in earnings on the investment date. Few candidates identified this
bargain purchase; and hence also made no comments relating to the need to reassess
whether all identifiable assets and liabilities are identified (since bargain purchases
are rare). A simple calculation of the gain would have maximised potential for marks.
Generally, if given figures in a scenario, candidates are expected to use them in their
answer.
Examiner’s report – SBR September/December 2021
14
Question 4 – Symbal Co
This question scenario was based around a contemporary issue in financial reporting
and referred to in the SBR syllabus under current issues as broadly ‘accounting for
digital assets’. This area of the syllabus has been specifically created in response to
employers wanting to employ candidates who understand new concepts in this digital
age. However, much of the question was not specifically about digital assets or indeed
the Initial Coin Offering (ICO) but examined wider issues, like the principles of good
disclosure, the recognition criteria of IAS 38 Intangible Assets and IAS 19 Employee
Benefits. It was disappointing that so many candidates could not apply their financial
reporting knowledge to the given scenario but appeared to focus exclusively on crypto
currency and their answers often contained everything they knew about crypto
currencies which gained few, if any marks, as their answers did not address the
requirements.
It is also worth stating that the scenario provided a diagram that illustrated in simple
terms the relationship between the investors in an Initial Coin Offering (ICO) and
Symbal Co who issued the tokens and managed the trading platform. This was
designed to assist candidates and sat alongside the narrative description of the
relationships shown in the diagram. There are also recent technical articles written by
the SBR examining team specifically covering Initial Coin Offerings here and crypto
currencies here so candidates should have been prepared to see them in an SBR
exam. We have always stressed to learning providers and candidates that it is vital
that candidates read the articles produced by the examining team. However, we would
reiterate that although the scenario was deliberately relevant and current, as
candidates should expect, it was examining other core syllabus areas and not just
digital assets.
Examiner’s report – SBR September/December 2021
15
Requirement (a) – 6 marks (plus 2 professional marks)
(a) Explain the principles of good disclosure which should be used to inform
investors regarding the company’s holding of crypto assets.
(6 marks)
Note: there is no need to refer to any exhibit when answering part (a).
This part of the question required candidates to simply explain the principles of good
disclosure and apply them to crypto assets. The candidates were told they did not
need to refer to any exhibit as it was a high level discussion that was expected and
required. It was uncomplicated and marks were awarded for basic principles –
examples include discussion of disclosures that are entity specific, simple, clear and
direct (understandable), structured in an appropriate order, not adding unnecessary
volumes of disclosure, discussion of cost v benefit, relevance, comparability and
materiality. These are concepts that should be familiar to all SBR candidates. Good
candidates were able to match these basic principles behind appropriate disclosures
with the challenges brought by crypto assets and their relatively recent rise to
prominence. There were encouragingly many candidates who advised treating them
as intangible assets as opposed to cash or investments. Marks were awarded for
this despite not being specifically asked for as it was relevant. The published answer
does not cover all the points that could be awarded marks, but credit was given for
appropriate discussion of the principles of good disclosure, which may have been
IFRS standard specific.
Weaker candidates tended to list out everything they knew about crypto assets
without actually addressing the requirements. Some candidates simply regurgitated
the article on crypto currency without any application at all and certainly no mention
of what constituted good disclosure. This type of rote learned knowledge will never
be sufficient to score well in an SBR exam and will always severely restrict any
marks that can be awarded. As the 2 professional marks were awarded to this
requirement those who did not address the required disclosure aspect also lost these
marks.
Requirement (b) – 5 marks
(b) Advise whether the various development and promotional costs related to
the ICO can be accounted for as an intangible asset at 31 March 20X7.
(5 marks)
This part of the question required candidates to discuss the basic principles of IAS
38 Intangible Assets and apply them to the costs of setting up an ICO. The candidate
did not therefore need to understand an ICO, although the diagram and description
should have assisted with this, to be able to apply basic knowledge and principles of
IAS 38, much of which is assumed knowledge from Financial Reporting level. The
principles are the same whatever the context and scenario. There were some very
good answers which separated out the development and promotional costs and their
differing treatment, namely that the development costs may be capitalised if the IAS
38 criteria are met but promotional costs must always be expensed to profit or loss.
Weaker answers often treated all the elements identically or just listed out the
definition of intangibles from IAS 38.
Examiner’s report – SBR September/December 2021
16
Requirement (c) – 6 marks
(c) Discuss how the receipt of $1 million cash in the pre-sale agreement should
be accounted for in the financial statements for the year ended 31 March 20X7
and how the $10 million raised in the ICO should be accounted for in the
financial statements for the year ended 31 March 20X8.
(6 marks)
This part of the question was answered poorly by many candidates. The question
required candidates to deal with an advanced payment for tokens to be issued in an
ICO and then how to treat the receipt of monies received from an ICO. This recent
technical article may have helped some candidates however application of basic
principles to the scenario should have been sufficient to score well.
The exhibit describes a pre-sale agreement for $1million of tokens which will become
refundable should the ICO not raise $9million by a certain date. The exhibit clearly
described the rights of the token holders and how Symbal Co will use the funds
raised by the ICO. It further described a commitment by Symbal Co to pay the
holders of the tokens 10% of any annual profits, but that this does not entitle the
holders to any redemption rights or residual interest in the assets of Symbal Co.
Therefore, the candidates did not have to have any in-depth understanding of an
ICO, just apply basic principles to discuss how the proceeds should be recognised,
i.e income, liability or equity. This is becoming an increasing issue with the SBR
exam, in that candidates cannot apply principles to a scenario, familiar or otherwise.
There were many signposts provided in the scenario for example ‘no other rights
such as redemption or any residual interest’. This should have been a clear steer
that the tokens and monies raised are neither a financial liability or equity but instead
would be recognised as income. Further discussion on the financial obligation to
repay the $1million received credit as did discussion of the principles of a contingent
liability and financial liabilities with regards the payment of 10% profit to token
holders.
Many candidates treated the initial $1m receipt as a sale and then ignored the
remaining element of the transaction or treated it as equity. Candidates have
problems generally with dealing with the difference between revenue and equity.
Better candidates applied the principles of IAS 37 Provisions, Contingent Liabilities
and Contingent Assets and realised that there was a contingent liability. A few
candidates did mention how the transaction should be treated in the second year
(20X8) too and they earned higher marks.
Examiner’s report – SBR September/December 2021
17
Requirement (d) – 6 marks
(d) Discuss why the granting of the tokens to the five directors should be
accounted for in accordance with IAS 19 Employee Benefits rather than IFRS
2 Share-based Payment in the financial statements for the year ended 31
March 20X7.
(6 marks)
Despite the question specifically stating that the tokens would be treated as part of
IAS 19, many candidates described the different types of share-based payments and
then just added either no comment or a single line in relation to employee benefits.
This part of the question generated very poor answers overall despite the fact that
the requirement told candidates that the tokens given to the directors were employee
benefits and that therefore they just had to apply the requirements of IAS 19. The
SBR exam increasingly details specifically the IFRS standards that require to be
applied to the scenario and choosing to ignore this will mean any marks awarded
must be restricted. It would be useful for both candidates and tutors to be mindful of
this.
Examiner’s report – SBR September/December 2021
18