ACM & OCi table -

STRATEGIC PROFESSIONAL
ESSENTIAL EXAMINATION
Paper SBR Strategic Business Reporting
ACADEMIC SESSION – MARCH 2023

MOCK EXAM FOR ACCA PAPER SBR

LECTURER: MS MENON, MS JEIN & MS BOR SHI

GROUP: SBR-G11, SBR-G12, SBR-G13 & SBR PART TIME

EXAM DATE: 22 MAY 2023

Time allowed: 3 hours 15 minutes

This question paper 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

Do NOT open this question paper until instructed by the supervisor.

This question paper must not be removed from the examination hall.
QUESTION 1
IAS 19 : EMPLOYEES BENEFIT
KostasIFRS
Co 9holds a controlling interest in Easton Co. It also operates a defined benefit pension scheme
: FINANCIAL INSTRUMENT
and holds financial assets. The Kostas directors are unsure how various matters will impact the
consolidated financial statements for the year ended 30 April 20X8.

Requirements (30 marks)

(a) Draft an explanatory note to the directors of Kostas Co, addressing the following issues relevant
to the consolidated financial statements:

(i) How the defined benefit scheme should be accounted for and how the change in the defined
benefit scheme should be treated in the financial statements of Kostas. IAS 19

(6 marks)

(ii) A calculation and explanation of the adjustment in equity arising from the disposal of the 10%
equity interest on 30 April 20X8.

(12 marks)

Note: Any workings can either be shown in the main body of the explanatory note or in an
appendix to the explanatory note.

(iii) How the bond should be classified and the accounting treatment of the potential impairment.

(6 marks)

You should ignore tax effects.

individual FS
(b) Explain how the initial 25% stake in Weston Co would be accounted for in both the financial
statements of Kostas Co and also the consolidated financial statements, and discuss how an
additional 50% stake would be accounted for in the consolidated financial statements IFRS 3 : BUSINESS
COMBINATION
PIECEMEAL ACQUISITION
initial 25% - in individual and consol FS
add 50% - in consol FS only (6 marks)
The following exhibits, available on the left-hand side of the screen, provide information relevant to
the question:

1. Defined benefit pension scheme

KostasCo operates a defined benefit scheme for its employees and the cost of remeasurements for
the current year in accordance with IAS 19 Employee Benefits is $14 million. This remeasurement cost
has been included in administrative expenses. In order to reduce the risks to which it is exposed,
Kostas Co’s directors are considering reducing the number of participants in the defined benefit
scheme. The company would pay compensation from plan assets to those participants who are
affected.

2. Controlling shareholding in Easton Co

On 1 May 20X6, Kostas Co acquired 70% of the equity interests of Easton Co. The purchase
consideration comprised cash of $150 million and the fair value of the identifiable net assets
of Easton Co was $160 million at that date. The fair value of the non-controlling interest (NCI) in
Easton Co at acquisition was $54 million. The share capital and retained earnings of Easton Co were
$55 million and $85 million respectively and other components of equity were $10 million at the date
of acquisition. The excess of the fair value of the identifiable net assets at acquisition over carrying
amount is due to plant, which is depreciated using the straight-line method and has a five-year
remaining life at the date of acquisition.

Kostas Co disposed of a 10% equity interest to the NCI of Easton Co on 30 April 20X8 for a cash
consideration of $34 million. The carrying amount of the net assets of Easton Co at 30 April 20X8 was
$210 million before any adjustments on consolidation. Goodwill has been impairment tested annually
and as at 30 April 20X7 had reduced in value by 15% and at 30 April 20X8 had lost a further
5% of its original value before the sale of the equity interest to the NCI.

3. Financial asset investment held by Kostas Co IFRS 9

On 1 May 20X5, Kostas Co purchased a $20 million five-year bond with semi-annual interest of 5%
payable on 31 October and 30 April. The purchase price of the bond was $21.62 million. The effective
annual interest rate is 8% or 4% on a semi-annual basis. The bond is classified as an amortised cost
financial asset in accordance with IFRS 9 Financial Instruments. During the preparation of the
consolidated financial statements at the start of June 20X8, the financial controller identified that the
interest due on the bond at 30 April 20X8 had not been received. She observed that the October 20X7
interest had been paid almost four weeks after the due date and is concerned that the asset may be
impaired. She is considering changing the classification of the asset to fair value through other
comprehensive income (FVTOCI) in order to avoid having to test for impairment.

4. Potential acquisition of shares in Weston Co

The directors of Kostas Co are considering the purchase of an equity stake in another company,
Weston Co, however they are concerned that the investment is of a risky nature. They are looking to
acquire a 25% holding initially and if the investment proves to be successful then they will look to
acquire a further 50% of the equity shares, to give a holding of 75%.
QUESTION 2

Heathcliff Co manufactures and distributes products throughout the world. It prepares its financial
statements in accordance with International Financial Reporting Standards (IFRS Standards). Heathcliff
Co has made a loss in the current financial year ended 31 December 20X9, as well as in the previous
two financial years.

Requirements (20 marks)

(a)(i) Discuss the proposed treatment of deferred tax asset by the trainee. IAS 12

(4 marks)

(ii) Discuss whether the inventory write down is a prior period adjustment. IAS 10

(4 marks)

(iii) Discuss how the loan notes should be accounted for by Heathcliff Co.

(4 marks)

(b) Discuss the ethical issues arising from the scenario which Ms Smeaton needs to consider and
what actions she should take as a consequence.

(6 marks)

Professional marks will be awarded in part (b) for the quality of the ethical discussion.

(2 marks)
The following exhibits, available on the left-hand side of the screen, provide information relevant to
the question:

1. Ethical issues

A trainee member of the accounting department has proposed to Ms Smeaton, the head accountant
and an ACCA member, a number of initiatives aimed at increasing Heathcliff Co’s profitability for the
current period. The trainee is the nephew of Heathcliff Co’s chairman, whose annual bonus is based
on reported profit. After the trainee accountant proposed the initiatives, an email was accidently
circulated around the company stating that if the initiatives were implemented the trainee would
receive 20% of any bonus paid to the chairman.

2. Deferred tax asset

The trainee has proposed to recognise a deferred tax asset in its statement of financial position, based
on losses incurred in the current and the previous two years. He has suggested this on the basis of a
business plan which forecasts significant improvement in its financial situation over the next three
years as a result of the launch of new products which are currently being developed.

3. Inventory write down

The trainee has proposed classifying a large write-down in inventories that occurred in the current
period as a prior period adjustment. The trainee argues that the inventories were probably impaired
over 12 months ago, in the year ended 31 December 20X8, and therefore it was a mistake of the
previous period not to write down the inventories.

4. Loan notes

The trainee suggests recognising a substantial discount on loan notes acquired in the year as income
in profit or loss. The loan notes were issued by one of Heathcliff Co's suppliers. The supplier had been
experiencing significant financial difficulty which explains the deep discount below nominal value
on issue of the loan notes.
QUESTION 3

Havanna owns a chain of health clubs and is seeking advice on transactions it has entered into in the
year ended 30 November 20X3.

Requirements (25 marks)

(a) Advise the directors, with reference to the underlying principles of IFRS 15 Revenue from
Contracts with Customers, how the revenue in relation to the contracts should be recognised.

(6 marks)

(b) Discuss, with calculations, how the disposal group should be accounted for in the financial
statements for the year ended 30 November 20X3.

(6 marks)

(c) Discuss, with suitable computations, how the lease transaction will impact on the accounting for
deferred tax under IAS 12 in the financial statements for the year ended 30 November 20X3.

(6 marks)

(d) Discuss the appropriate accounting treatment which Havanna should adopt for the preference
shares including any adjustment which is required to the capitalisation table and the effect on the
gearing and return on capital employed.

(7 marks)
The following exhibits, available on the left-hand side of the screen, provide information relevant to
the question:

1. Contracts with sports organisations

Havanna has entered into binding contracts with sports organisations, which earn income over given
periods. The services rendered in return for such income include access to Havanna’s database of
members and admission to health clubs, including the provision of coaching and other benefits. These
contracts are for periods of between 9 and 18 months. Havanna’s accounting policy for revenue
recognition is to recognise the contract income in full at the date when the contract is signed. The
rationale is that contracts are binding and at the point of signing the contract, the customer gains
access to Havanna’s services. The directors are reluctant to change their accounting policy.

2. Division held for sale

In May 20X3, Havanna decided to sell one of its regional business divisions through a mixed asset and
share deal. The decision to sell the division at a price of $40 million was made public in November
20X3 and gained shareholder approval in December 20X3. It was decided that the payment of any
agreed sale price could be deferred until 30 November 20X5. It is estimated that the cost of allowing
the deferred payment is $0.5 million and that legal and other professional fees associated with the
disposal will be around $1 million. The business division was identified correctly as ‘held for sale’ and
was presented as a disposal group in the statement of financial position as at 30 November 20X3. At
the initial classification of the division as held for sale, its net carrying amount was $90 million. In
writing down the disposal group’s carrying amount, Havanna accounted for an impairment loss of $30
million which represented the difference between the carrying amount and value of the assets
measured in accordance with applicable IFRS.

3. Leases and deferred tax

Havanna is leasing an equipment 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 December 20X2. 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 30 November 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 the 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.)
4. Preference shares
Havanna has issued two classes of preference shares. The first class was issued at a fair value of $50
million on 30 November 20X3. These shares give the holder the right to a fixed cumulative cash
dividend of 8% per annum of the issue price of each preferred share. The company may pay all, part
or none of the dividend in respect of each preferred share. If the company does not pay the dividend
after six months from the due date, then the unpaid amount carries interest at twice the prescribed
rate subject to approval of the management committee. The preference shares can be redeemed but
only on the approval of the management committee.

The second class of preference shares was issued at a fair value of $25 million and is a non-redeemable
preference share. The share has a discretionary annual dividend which is capped at a maximum
amount. If the dividend is not paid, then no dividend is payable to the ordinary shareholders.

Havanna is currently showing both classes of preference shares as liabilities.

The capitalisation table of Havanna is set out below:

$m
Long-term liabilities 186
Total equity 160
Total capitalisation 346
QUESTION 4

Icony Co is the parent of a multinational group specialising in cement production using limestone and
chalk as raw materials. Cement production accounts for a significant amount of global carbon
emissions. Recent reports have found that cement companies need to increase their efforts to reduce
emissions to meet international climate goals. As a result, the company has revised its incentive
scheme so that the Chief Executive Officer’s (CEO) performance share rewards are based on progress
in carbon emissions and waste recycling.

The financial year end of the company is 31 December 20X8.

Requirements (25 marks)

(a) Stakeholders have specifically identified the use of climate-related risks in their decision making.
However, these risks are not being adequately addressed/reported in annual reports. Investors,
regulators, insurers and the public need a clear picture of how companies are managing sustainability-
related risks.

Discuss how climate-related risks could affect stakeholders’ decisions to invest in a company and
whether such risks should be considered material in the context of financial statements which are
compliant with IFRS Standards.

Note: There is no need to refer to any exhibit when answering part (a).
(6 marks)

Professional marks will be awarded in part (a) for clarity and quality of discussion
(2 marks)

(b) Discuss how the business and climate-related risks of Icony Co may affect the reporting and
disclosure of non-current assets, contingent liabilities and provisions for the year ended 31
December 20X8.

(11 marks)

(c) With reference to the principles in IFRS 2 Share-based Payment, discuss how the share options
would be accounted for in the financial statements of Icony Co from 1 January 20X5 to 31
December 20X8.

(6 marks)
 The following exhibits, available on the left-hand side of the screen, provide information relevant to
the question:

1. Business and climate related risks

In January 20X8, Icony Co introduced its first fully carbon-neutral cement demonstrating the
company’s move towards building a portfolio of carbon-neutral products. Icony Co’s progress in
developing carbon-neutral products has been quite slow. As a result, Icony Co is under increasing
pressure from governments who are demanding the adoption of production methods which reduce
carbon emissions. Icony Co is also subject to changes in technology and market pressures as well as
legal risks and changes in government policies.

These are three of the issues facing Icony Co:

- As a result of the adoption of carbon-neutral production, 30% of the group’s existing

manufacturing capacity may no longer be required. Cement plant is normally expected to last
around 30–50 years. In its financial statements for the year ended 31 December 20X8, Icony
Co has different categories of property, plant and equipment which are measured correctly
using either the cost or the revaluation models.

- During the year to 31 December 20X8, several lawsuits have been filed against Icony Co for
exposing the population to the harmful effects of cement manufacture without providing
warnings to the community as required by local legislation. The major argument used against
Icony Co in legal cases is that the mass production of cement continues to affect global
warming with the related impact on communities.

- Icony Co also contracts with suppliers of limestone and chalk to purchase raw material. These
contracts are based upon a ‘material demand profile’ which determines the volume of
material needed over a five-year period. Typically, Icony Co contracts with the suppliers of
raw material for this five-year period and they are non-cancellable. Several of these contracts
are in place as at 31 December 20X8.

2. CEO’s share-based payment

On 1 January 20X5, Icony Co granted 15,000 share options at grant date fair value of $4 per option to
its CEO. The options will vest if both:
(i) the CEO remains in employment; and service
(ii) there is a 50% reduction in carbon dioxide emissions and this is achieved within four years. performance

The share options are exercisable on 31 December 20X8 or, if earlier, the date that the 50% target is
met. On 1 January 20X5, the CEO estimates that the reduction in carbon dioxide emissions will be met
by 31 December 20X6 but, on 31 December 20X6, it is clear that this target may not be met until 31
December 20X8.

On 31 December 20X8, the target of 50% reduction in carbon dioxide emissions was still not met. The
CEO was still employed at 31 December 20X8.

Equity settled - measure using direct method @ FV of G/S received at the date of it obtain
if cannot measure reliably , use indirect method ( FV of EI @ grant date )
rebuttable presumption , the FV of GS received can be mearued reliably ,hence direct method is used.
there is vesting condition , therefore the expense should be spread over the vesting period.
service and performance condition must be satisfied to entiled for the payment under share based payment agreement
if the performance consition are met before the vesting period, EQ need to be accrued over the period based on the most likely outcome .
but since the conditon not met , there is aneed for reversal entry . ( Dr Eq , Cr SOPL )