Advanced Business Reporting (SL1)
December 2022
Examiner’s Comments
The overall standard of the question paper was similar to previous examinations. It was
observed that some candidates who had attempted question 3 first had experienced
excessive time over run resulting in not being able to spend adequate time to answer the
other two questions properly. These candidates could not benefit from the opportunity to
collect easy marks on Q 1 & Q 2.
Errors in the application of principles, lack of sound technical knowledge and not properly
understanding the requirements of the examiner has led to a majority of candidates being
unsuccessful in securing the required pass mark. Examples of these instances have been
highlighted below under observations made on performance of the individual questions.
Question 1 (25 marks)
Part (a) carrying 12 marks was based on SLFRS 16. A lease agreement, initially drawn for
a period of 5 years had subsequently been modified at the end of the 2nd year, increasing the
total agreement period to 8 years with an increase in the annual payment. Candidates were
required to advise the management on the accounting treatment for the lease together with
necessary calculations.
Almost all the candidates attempted this question. A majority of the candidates correctly
identified that the lease modification is a remeasurement and not a new lease. However, the
opportunity to earn easy marks and to obtain a high score was lost by many candidates due
to the following errors made in the calculation of Right of use assets and lease liability.
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Some candidates performed only the calculations. Thus, the marks allocated for
advising the management of the accounting treatment could not be scored. In some
instances, the explanations were incomplete. ( eg: discount rate to be used in
computing the lease liability, components of Right of use asset etc not described.)
Incorrect identification of cash flow pattern – Per the question, annual payments
were made in advance, but a majority of the candidates had done the calculations
considering the installment payment in arrears and that the amortisation was done
for 5 years instead of 4 years.
Rs. 1 million for maintenance included in the annual payment was also considered as
part of the lease component by a fair number of candidates.
A majority of the candidates did not consider the rent advance payment in the initial
recognition of the Right of use asset.
Incorrect calculation of the lease liability (i.e. added preliminary expenses to this
figure, has taken initial Right of use asset value as initial lease liability)
Incorrect depreciation of the Right of use asset (taking the asset’s useful life as the
depreciable period before and after the lease modification)
Due to the reasons mentioned above, only about 25% -27% of the candidates were
able to obtain 50% of the allocated marks.
SL1 Examiner's Comments- December 2022
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Part (b) based on SLFRS 9 this question offered 6 marks. Candidates were required to
advise the management on all possible accounting treatments per SLFRS 9 where Omron
PLC has purchased 50 million voting shares of Harris (PLC) with the intention of acquiring
the control stake during the next 2 years. Candidates were expected to discuss both options
FVTPL and the FVTOCI irrevocable option. However, except for a very low percentage of
candidates, all other candidates produced answers based on one accounting treatment.
Hence a majority missed out on approximately 35% of the marks. The other shortcomings
noted were;
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Few candidates presented only computations without providing a classification of the
given financial assets with justifications.
When giving the FVTOCI as one option, though mentioned as an irrevocable election,
missed out mentioning that the election has to be done at the initial recognition point.
A few candidates made errors on how the transaction cost is treated in the relevant
classification. Under the FVTOCI option, although at initial recognition the
transaction cost had been capitalised, the FV gain at year end had been computed
ignoring the transaction cost.
Part (c) carried another easily obtainable 7 marks. Requirement was to comment
whether each party mentioned in the given scenario were ‘related parties’ to Omron PLC or
not. A majority of the candidates scored well on this question. Areas where marks were lost
were;
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Not identifying the directors as KMPs.
Just mentioning as a related party or not without any reasons as to how it was
decided. Some others just quoted the para reference in LKAS 24 as a blanket sentence,
without reasoning with the given information for each party.
A considerable number of candidates who attempted parts (b) and (c ) were able to obtain
an average score.
Question 2 (25 marks)
Part (a) for 6 marks was based on LKAS 1, where it was required to make a going concern
assessment and explain its impact on the preparation of financial statements in the given
scenario. The requirement in Part (b) for 3 marks was to prepare a note to the Financial
statements on going concern based on this assessment.
Both these parts were answered well and a majority of the candidates were able to collect
over 70% of the marks.
Some candidates misread the question and wrote the implications to the audit opinion
instead of the disclosure note to the financial statements. Few candidates referred to SLFRS
5 or operating segments instead of LKAS 1. Thus lost some easy marks.
SL1 Examiner's Comments- December 2022
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Part (c) with 10 marks- the requirement was to explain with calculations, how the
information in the given scenario would be considered in an impairment testing.
Candidates were weak in the following areas.
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Most of the candidates have not recognised that the flavor change does not fall within
the concept of restructuring activities. Thus, the improved cashflows due to a ‘change
in flavor’ should have been taken to the ‘value in use calculations’.
Poor Knowledge on the method of computation of the terminal value.
Part (d) carrying 6 marks based on LKAS 37 required the candidate to explain the financial
reporting implications arising from a onerous contract.
Performance was very poor on this question. A majority of the candidates failed to identify
that the given contract falls within the definition of an onerous contract. Approximately 5%
- 7% of the candidates identified the scenario presented an onerous contract.
Question 3 ( 50 marks based on common pre seen)
Part (a) carrying 12 marks and (b) carrying 8 marks was based on Business
combinations and complex group financial statements. Majority of candidates were unable
to score good marks for this question. Main reasons were as follows.
• Inability to identify the group structure properly- (both direct and indirect holding).
In the given scenario, SWH PLC acquired Sunway Group ( consisting of SunWay (Pvt)
Ltd & MoonWay (Pvt) Ltd ) through one of its subsidiary SWFM (Pvt) Ltd.
(i)
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SWH PLC had only a 80% stake in SWFM. This information, which was given
in the pre seen was not considered in the calculation of the holding % of
SunWay.
(ii)
More than 50% of the candidates did not calculate the crossholding of
MoonWay (Pvt) Ltd at all. Those who did the calculation did not arrive at the
correct holding due to the reason mentioned in (i) above.
(iii) As a result they lost the opportunity to score the marks allocated for the cross
holding, for computation of goodwill and NCI on acquisition of MoonWay, and
the marks allocated for incorporating the MoonWay adjustments into the SWH
PLC’s Consolidated SOFP.
Examiner has requested the candidates to advise the management of SWH PLC on
how the acquisition of Sunway Group should be accounted for in the consolidated
financial statements of SWH PLC together with necessary calculations. Most
candidates had advised on the control establishment without paying much attention
to the calculations.
Lack of knowledge with regard to the “concept of control” per SLFRS 10 was noted.
Even though SWH PLC’s holding of MoonWay was less than 50%, it clearly controls
Moonway through SWFM. However, a considerable number of candidates concluded
that the Moonway acquisition was as an investment in associate and suggested the
equity accounting treatment.
SL1 Examiner's Comments- December 2022
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Moonway became part of the SWH group only from the date Sunway was acquired by
SWFM. Some candidates though they correctly identified Moonway as a subsidiary,
calculated the goodwill on the original acquisition date.
Most candidates have adjusted the fair value increase of the land of Moonway in
calculating the goodwill of Sunway.
Considerable number of candidates made a mistake in identifying the contingent
liability under SLFRS 03.
Errors made in the treatment of the acquisition cost in a business combination
(should be charged to P&L and not to retained earnings). Some considered the
acquisition cost as a part of the goodwill calculation.
The question clearly stated that a provision for additional income tax and penalties
was not made in the financial statements, but some candidates had assumed that a
provision was already made, thus no adjustments was made to net assets on
acquisition in the goodwill computation.
Due to the mistakes mentioned above approximately 35% of the candidates only were able
to achieve an average score of 50% of the allocated 20 marks.
Part (C ) with 15 marks was based on the Code of Best Practice on Corporate Governance.
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Even though it was requested to comment on the composition of the board and board
sub committees, some candidates had either commented on the functions of the
committees only or commented on the main board only.
Board composition requirements are different from the general requirement when
the Chairman and CEO are same person. Quite a number of candidates did not
recognise this distinction and analysed the scenario based on the general
requirement.
Some failed to check on the status of independence of the Non-executive Director. As
such failed to identify that although stated as independent directors, some did not
meet the relevant criteria.
In Part (d) with 10 marks, the requirement of the question was to evaluate 10 risk factors
from the facts given in the paper or in the pre seen explaining how those factors could
increase the risk of frauds, error or both.
Considerable number of candidates have only list down the points in the question without
explaining how those could lead to errors or frauds or both. Thus, the answers were
incomplete.
Part (e) for 5 marks was based on Code of Ethics. Required was to analyses the ethical
responsibility of group finance director, based on the given scenario. Majority scored 3- 4
marks on this question.
Some were unable to score average marks due to; just quoting ethical principles without any
application to the scenario. Some others discussed at length the requirements of the relevant
SLFRS, and missed out to add weight on discussion of the ethical responsibility of the
accountant.
Performance on parts (b), (c ) and (d) were much better than that of part (a ) and (b).
SL1 Examiner's Comments- December 2022
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