SBR
Strategic Business
Reporting
ACCA EXAMINATION
Thursday 27 June 2024
Instructions:
Answer all questions.
Time allowed: 1 hour 40 minutes
ACCA SBR-INT
PROGRESS
TEST 2
Question 1
Roma Co
You work in the finance department of Roma. Roma has recently appointed two new directors,
with limited finance experience, to its board. You have received an email from the finance
director, which is shown in Exhibit 1.
The following exhibits provide information relevant to the question.
Exhibit 1: Email from finance director – includes the content of an email received from the
finance director
Exhibit 2: Details of acquisition of Trent – provides information about the acquisition of Trent
on 1 June 20X5
Exhibit 3: Details of acquisition of Avon – provides information about the acquisition of Avon
on 1 March 20X6
Exhibit 4: Draft consolidated SOFP – provides the draft consolidated statement of financial
position for Roma at 31 May 20X7
Exhibit 5: Provisions – describes provisions that have been recognized in the financial
statements of Roma for the year ended 31 May 20X7
Required:
(a)
(i) Using exhibits 1 and 2, explain the financial reporting principles that underlie the
accounting for goodwill on the acquisition of Trent.
(4 marks)
(ii) Using exhibits 1 and 3, explain why Roma should account for the acquisition of Avon
as an associate and not a simple equity instrument under IFRS 9 and briefly explain
how the equity method would be applied in the consolidated financial statements of
Roma for the year ended 31 May 20X7.
(4 marks)
(iii) Using the prepopulated spreadsheet response option along with exhibits 1, 2 and
3, adjust the spreadsheet in order to prepare an updated consolidated statement of
financial position as at 31 May 20X7, taking into account the following:
•
•
The goodwill on the step-acquisition of Trent
The acquisition of Avon as an associate
Note: You do not need to adjust the pre-populated spreadsheet for the issue in exhibit
5.
(13 marks)
(b)
Using exhibit 5, comment on the accounting treatment of provisions recognized in the
financial statements of Roma for the year ended 31 May 20X7.
Note: You do not need to adjust the pre-populated spreadsheet for this issue.
(4 marks)
(Total: 25 marks)
Exhibit 1: Email from finance director
To: An accountant
From: Finance director
Subject: New directors – help required
Hi, our two new directors are keen to understand how Roma’s investments in other companies
are reflected in the group financial statements.
I would like your help in explaining how to account for the goodwill arising on the acquisition
of additional shareholding in Trent and how to account for our associate. Please use the
acquisition of Trent (Exhibit 2) to explain the financial reporting principles that underlie the
accounting for goodwill on step acquisition where control is achieved. You should use the
acquisition of Avon (Exhibit 3) to explain what an associate is and the equity method applied
for it in the consolidated financial statements.
The consolidated financial statements have not yet been prepared, but our accounting
software has added together the individual statements of financial position of Roma and
Trent (Exhibit 4) which you can use to show how the goodwill in Trent and the treatment for
associate (Avon) would be accounted for as at 31 May 20X7.
Exhibit 2: Details on the acquisitions of Trent
On 1 June 20X5, Roma acquired 25% equity interests of Trent for $6m and exercised significant
influence over the financial and operating policy decisions of Trent from that date. The fair
value of Trent’s identifiable assets and liabilities at that date was equivalent to their carrying
amounts, and Trent’s retained earnings stood at $5.8m. Trent does not have any other
reserves. Ordinary share capital of Trent was $80m. Since then, Trent has been stated at cost
in the financial statement of Roma.
A further 55% stake in Trent was acquired on 1 January 20X7 for an immediate cash
consideration of $50m and $24.2m payable on 1 January 20X9. Only the cash consideration
paid has been accounted for in Roma’s individual financial statements. On 1 January 20X7, the
carrying amounts of the net assets of Trent were $130m which was equal to their fair values
at that date and the retained earnings were $50m. The Trent’s share price at 1 January 20X7
was $2.00.
The notes to the financial statements of Trent disclosed a contingent liability. On 1 January
20X7, the fair value of this contingent liability was reliably measured at $2m. It is not expected
to be settled within the next 12 months. The non-controlling interest at fair value was $30m
on 1 January 20X7. An appropriate discount rate to use is 10% per annum. Roma measures
non-controlling interests at fair value at the date of acquisition and goodwill has been
impaired by $0.1m.
Exhibit 3: Details on the acquisition of Avon
Roma also has a 15% equity holding in Avon Co which it acquired at 1 March 20X6 for $4.1m
when the retained earnings of Avon were $6.2m. The retained earnings of Avon at 31 May
20X7 were $9.2m. Roma is able to appoint one of the five directors on the Board of Avon and
two of its managers are currently working as team operation leaders in Avon assisting the
entity in improving the new system acquired.
An impairment test conducted at the year-end revealed that the investment in Avon was
impaired by $0.5m. During the year, Avon sold goods to Roma for $3m at a profit margin of
20%. One-third of these goods remained in Roma’s inventories at the year-end. Roma has not
yet included any of the above events relating to Avon as an associate in the draft
consolidated SOFP.
Exhibit 4: Draft consolidated SOFP (in excel)
Exhibit 5: Provisions
The accountant of Roma has noticed that the provisions balance as at 31 May 20X7 is
significantly higher than in the prior year. She made enquiries of the finance director, who
explained that the increase was due to substantial changes in food safety and hygiene laws
which become effective during 20X6. As a result, Roma must retrain a large population of its
workforce. This retraining has yet to occur, so a provision has been recognized for the
estimated cost of $2m.
Additionally, in April 20X7, the board of directors discussed a potential restructure of Roma.
The restructuring plans included an analysis of long-term cost savings, but should the
restructure take place, there will be significant short-term costs which would be necessary.
These include professional fees, penalties for cancelling leases and also redundancy costs for
a number of employees. Even if the restructuring did not take place exactly as planned,
alternative plans will need to be explored to ensure the expansion of Roma. The finance
director has therefore included a restructuring provision, arguing that this is prudent. A final
decision and announcements to staff and lessors are likely to be made prior to the
authorization of the financial statements which is expected in September 20X7.
Question 2
DK Co is a public limited company with a reporting date of 31 December 20X7. The following
exhibits provide information relevant to the question:
(1) Deferred tax – provides information on leases of asset and intragroup transaction
(2) Tax losses – provide information on tax losses
(3) Share-based payment – provide information related to DK Co’s share-based payment
transactions.
(4) Provision – provide information on environmental damages
Required:
(a) Without referring to any exhibit, discuss the valuation technique should be used when
determining the fair value of a non-financial asset.
(3 marks)
(b) Discuss, with suitable calculations, the impact of the transaction in exhibit 1 to DK Co’s
financial statements for the year 31 December 20X7. Your answer must also include
deferred tax implications.
(8 marks)
(c) Using exhibit 2, explain the accounting treatment of deferred tax on DK Co’s financial
statement for the year 31 December 20X8.
(3 marks)
(d) Explain the accounting adjustment of the share-based payment scheme on DK Co’s
financial statements on 31 December 20X7 and 31 December 20X8. Your answer
should include calculation.
(8 marks)
(e) Using exhibit 4, explain whether a provision should be recognised.
(3 marks)
(Total: 25 marks)
Exhibit 1
The directors of DK Co request for further explanation on how the provision for deferred
taxation should be calculated for the year ended 31 December 20X7 in the following situation
under IAS 12 income taxes:
DK Co is leasing plant over a five-year period. A right-of-use asset was recorded at the present
value of future lease payments of $12 million at the commencement of the lease which was
1 January 20X7. The right-of-use asset is depreciated on a straight-line basis over the five
years. The annual lease payments are $3 million payable in arrears on 31 December and the
effective interest rate is 8% per annum. The directors have not leased an asset before and are
unsure as to the treatment of leases for deferred taxation. The company can claim a tax
deduction for the annual lease payments. (You should assume that the IAS 12 recognition
exemption for assets and liabilities does not apply in this situation.)
A wholly owned overseas subsidiary, DNO Co, a limited liability company, sold goods costing
$7 million to DK Co on 1 January 20X7, and these goods had not been sold by DK Co before
the year end. DK Co had paid $9 million for these goods. The directors do not understand how
this transaction should be dealt with in the financial statements of the subsidiary and the
group for taxation purposes. DNO Co pays tax locally at 30%.
Assume a tax rate of 30%.
Exhibit 2
As at 31 December 20X8, DK Co has tax adjusted losses of $4 million which arose from a oneoff restructuring exercise. Under tax law, these losses may be carried forward to relieve taxable
profits in the future. DK Co has produced forecasts that predict total future taxable profits
over the next three years of $2.5 million. However, the accountant of DK CO is not able to
reliably forecast profits beyond that date. At the year end, the government passed legislation
during the reporting period that lowered the tax rate to 28% from 1 January 20X9.
Assume a tax rate of 30%.
Exhibit 3
On 1 January 20X7 DK CO granted share options to each of its 200 employees, subject to a
three-year vesting period, provided that the volume of sales increases by a minimum of 5%
per annum throughout the vesting period. A maximum of 300 share options per employee
will vest, dependent upon the increase in the volume of sales throughout each year of the
vesting period as follows:
• If the volume of sales increases by an average of between 5% and 10% per year, each eligible
employee will receive 100 share options.
• If the volume of sales increases by an average of between 10% and 15% per year, each
eligible employee will receive 200 share options.
• If the volume of sales increases by an average of over 15% per year, each eligible employee
will receive 300 share options
At the grant date, DK Co estimated that the fair value of each option was $10 and that the
increase in the volume of sales each year would be between 10% and 15%. It was also
estimated that a total of 22% of employees would leave prior to the end of the vesting period.
At each reporting date within the vesting period, the situation was as follows:
Reporting
date
Employee
leaving in
year
Expected
employee
leave prior
to vesting
period
Annual sales
volume
31
December
20X7
31
December
20X8
31
December
20X9
8
18
6
4
2
Average
annual
increase in
sales volume
to date
Increase
14%
Expected
sales volume
over the
remaining
vesting
period
Increase
14%
Increase
18%
Increase
16%
16%
Increase
16%
14%
16%
Exhibit 4
DK Co has a policy of only carrying out work to rectify damage caused to the environment
when it is required to do so by local law. For several years the DK CO has been operating an
overseas oil rig which causes environmental damage. The country in which the oil rig is
located has not had legislation in place that required this damage to be rectified. A new
government has recently been elected in the country. At the reporting date, it is virtually
certain that legislation will be enacted that will require damage rectification. This legislation
will have retrospective effect.
The End of Question Booklet