SBR Specimen Exam Illustrative Answers PDF

ACCA SBR Exam Watch free ACCA SBR lectures 1
STRATEGIC BUSINESS REPORTING (SBR)
ILLUSTRATIVE SOLUTIONS –
SPECIMEN EXAM 1
NOTE: These illustrative solutions are not a substitute for the answers provided by the examiner and are to
be used as a guide on how a student’s written script can be structured and approached.
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QUESTION 1
(a) (i) Explanation - (6 marks)

Calculation - (4 marks)
1. House
Explanation
The shares issued on acquisition are valued at the fair value of a Kuthcen share, being the current $2 per
share at the acquisition date.
The contingent shares to be issued are valued at fair value, taking into consideration the likelihood of the
target being met.
The 30% NCI ownership in House is valued at the price of a House share, being $4.20 at the acquisition date.
Calculation
$m
FV of consideration
- Shares (20 million x $2 / share) 40
- Contingent shares (5 million x $2 / share x 20%) 2
NCI at acquisition (30% x 13 million x $4.20) 16.38
58.38
FV of net assets at acquisition (48)
Goodwill at acquisition (full) 10.38
Adjustment
The goodwill needs to be recorded – DR Goodwill $10.38 million
The bargain purchase of $8 million that has been incorrectly recorded, needs to be removed – CR Profit or
loss $8 million
The NCI needs to be recorded in the group financial statements on acquisition – CR NCI $16.38 million
The contingent shares to be issued need to be recorded through other components of equity – CR OCE $2
million
2. Mach
Explanation
The consideration is at fair value of $57 million and so therefore the land needs to be measured at its fair
value of $5 million. The PPE needs to be increased by $2m in the group accounts along with retained
earnings.
The NCI is calculated using the P/E ratio of 19 as this reflects the specifics of Mach’s operations
Calculation
$m
FV of consideration 57
NCI at acquisition (19 x $3.6 million x 20%) 13.68
70.68
FV of net assets at acquisition (W2) (55)
Goodwill at acquisition (full) 15.68
Adjustment
Record the increase in the value of the land – DR PPE $2 million CR Retained earnings $2 million
And,
Remove the gain on bargain purchase – DR Profit or loss $3 million
Record the goodwill – DR Goodwill $15.68 million
Record the NCI – CR NCI $13.68 million
Remove the land from the financial statements – CR PPE $5 million
(ii) Explanation - (6 marks)

Calculation - (4 marks)
Explanation
In the individual accounts of the parent the disposal will be accounted for based upon the legal form, so a
profit on disposal of $10 million will be recognised. This is the difference between the proceeds of $50
million and the carrying value of the investment at cost of $40 million.
In the group accounts the individual profit on disposal is removed and replace with a group profit/loss on
disposal that is based on the substance of the transaction.
The group profit/loss on disposal is calculates by comparing the total worth of the subsidiary to the value of
the assets and liabilities that the parent loses control of on disposal. The assets include the value of goodwill
in the subsidiary.
Calculation - Group profit/loss on disposal
$m
Proceeds 50
Add: non-controlling interest
12
(20% x 44 million) + 20% x (60 – 44)
Less: net assets at disposal (60)
Less: goodwill
(4.8)
(40 million - (80% x 44 million) – 2 million)
Group profit or loss on disposal (2.8)
(iii) (7 marks) – 1 mark per well explained point
Pension scheme – Location 1

The defined benefit obligation will be recorded at $8 million and this will reduce the liability by $2 million.
The reduction in the liability is treated as a past service cost
Pension scheme – Location 2
There has been a significant change in the number of employees to the scheme following the
discontinuance of the operations, which per IAS 19 is a curtailment.
The scheme is remeasured and any changes go through profit or loss as a current service cost.
Therefore the liability is increased from $2.4 million to $4 million, giving an expense of $1.6 million through
profit or loss.
As the payment of $4 million has been agreed the pension liability is transferred to current liabilities.
Restructuring
A restructuring provision can be recognised if there is a detailed formal plan and the plan has been
implemented or communicated to those involved by the reporting date.
Therefore even though no formal announcement has taken place the plan has been implemented and
therefore a provision of $6 million is recognised.
(b) (8 marks) – 1 mark per well explained point
Equity
Equity is the residual interest in the assets of the entity after deducting the liabilities.
Liabilities
A liability is a present obligation, as a result of a past event that gives rise to an outflow of economic benefit.
Difference
The key difference between equity and a liability is the contractual obligation to deliver cash under the
liability.
Example
An example is with preference shares, where legally they are a share but in substance any contractual
obligation to deliver cash, will mean that it is treated as a liability, as is the case with a redeemable
preference share.
Contingent payments
Disclosure of the contingent payments is incorrect because the payment is part of a business combination
and should be dealt with under IFRS 3 Business Combinations and not IAS 37 Provisions, Contingent Liabilities
and Contingent Assets.
The contingent payments are treated as a financial liability as there is a contractual obligation to pay cash to
the NCI shareholders of Mach.
The correct treatment would be to recognise the contingent payments based upon their fair value, which is
calculated using the likelihood of the payment being made.
The acquisition of the remaining shares in Mach would be treated as a change in ownership in the group
accounts, with a reduction in the NCI, and any differences in the value of the payments going through
reserves.
QUESTION 2
Accounting implications (10 marks) – 1 mark per well explained point
The financial statements will provide a fair presentation of the results of Abby on compliance with
International Reporting Standards (IFRSs). The finance director is trying to coerce the accountant to behave
unethically by not following the rules in the IFRSs.
1. Purchase of goods
Accounting implications – related parties
A related party is where there is control of influence between the two parties. The finance director is a
related party of Abby as he is key management personnel.
The finance director’s ownership of Arwright will constitute a related party as that gives him the ability to
controls Arwright alongside his wife.
The transactions between related parties will need to be disclosed in the accounts, even if they are at arm’s
length. The disclosure will require the nature of the relationship, the amount of the transactions during the
year and any outstanding balances at the reporting date.
Accounting implications – operating segments
Abby will need to follow the rules of IFRS 8 Operating segments if it is a listed entity or has public
accountability. If it is then it will need to disclose the operating segment profit or loss as well as the total
assets and liabilities of each segment.
The rules within IFRS 8 cannot be ignored if the finance director feels that by making the disclosures it will
give rise to ‘competitive harm’.
2. Unpaid invoice
Accounting implications – impairment of financial assets
A receivable is a financial asset and any expected credit losses on the receivable should be dealt with as an
impairment of a financial asset.
The accountant will need to investigate the outstanding balance and determine if it is recoverable. Abby
will need to provide for 12-month expected credit losses as a loss allowance if it is deemed that the balance
is not recoverable.
3. Group accounts
Accounting implications – fair value adjustment
The acquisition of the subsidiary is a business combination and IFRS 3 requires that the assets and liabilities
on acquisition of the subsidiary be measured at fair value in the group accounts. No adjustment is required
within the individual accounts of the subsidiary.
The net assets will need to be increased by $50 million, which will reduce the goodwill be $50 million.
Goodwill is not an arbitrary figure but is included within the accounts to reflect the excess amounts paid by
Abby to obtain control of the net assets of the subsidiary.
Accounting implications – impairment of goodwill
The impairment test will consider the value in use, which is the present value of the future cash flows.
The cash flows will need to be based on the most recent forecasts/budgets approved by management and
should cover a maximum period of five years.
The discount rate will need to be a pre-tax rate that reflects the risks faced specifically by the entity in
generating the cash flows.
Ethical implications (8 marks) – 1 mark per well explained point
The accountant is obliged to advise the finance director about the rules surrounding related party
transactions (IAS 24) and that the transactions require disclosure.
The accountant should contact Arwright to discuss the recoverability of the debt and determine if any future
cash will be received.
The intimidation threat from the finance director with regards the accountants job and it being dependent
upon not processing the fair value adjustments should lead to the accountant considering their position.
The proposed salary increase on being flexible with regards to the potential impairment is a bribe and
should not be accepted.
The finance director may not be a qualified accountant, so is not bound by the ACCA’s Code of Ethics,
therefore the accountant should speak to the other directors of Abby and inform them of the finance
directors actions.
The accountant is bound by the ACCA Code of Ethics and should act with professionalism and integrity at all
times. The threats and disregard of IFRSs by the finance director should make the accountant consider their
position and resign from the post if a suitable conclusion cannot be sought.
If the accountant is unsure of the actions that they should take then they should take legal advice and
consult the ACCA for advice.
Professional– 2 marks
QUESTION 3
(a) (i) (8 marks) – 1 mark per well explained point
Fair value of an asset is the amount that will be exchanged between market participants in an orderly
transaction at the measurement date.
The fair value will also consider the largest market and the highest and best use of an asset.
It appears that there is an active market in all three continents as there are regular transactions in each
during the year.
The market with the highest volume of transactions in is Asia, and even though Africant trades mainly with
Europe, the price of the vehicles in the Asian market is reflective of the fair value.
The vehicles should therefore be measured using the net proceeds figure of $33,300, being the $38,000
selling price, less the $700 transport cots.
The transaction costs are not included within the fair value calculation because the transaction costs are
assumed to vary for each specific transaction and so cannot be measured in a fair manner.
(ii). (7 marks) – 1 mark per well explained point
The definition of fair value is geared towards the ‘market perspective’ in that it uses the basis of what the
market is prepared to pay to purchase the asset as the best estimate of the fair value.
If there is no active market for the asset then a similar asset in an active market maybe used to reflect the fair
value.
If there is no active market then an unobservable inputs valuation method is used, which can involve various
valuation techniques such as discounted cash flows.
The fair value of the land should be based upon its best use, and although it is currently used for farming the
motions put forward by the government indicate that the land can be used for commercial development.
As the land can be used for commercial development, the fair value should be based upon the amount the
land could be sold to a property developer for.
Although land is sold regularly on the property market, there is no active market as each plot of land sold is
not identical.
To value the land, similar plots of land that have been sold nearby, for similar commercial purposes would
be used to estimate the fair value.
(b) (8 marks) – 1 mark per well explained
Mixed measurement approach

IFRSs adopt a mixed measurement approach across different accounting standards in order to fairly present
the financial statements, so by adopting the approach Africant is not in breach of any rules.
The basis of measurement in the financial statements is fair value in order to give the financial statements
more relevance. This is why IFRS 13 Fair value measurement was introduced so that the mixed measurement
approach is based upon more reliable information to determine the fair value.
Examples of where the approach is used is within property, plant and equipment and financial instruments,
amongst various other standards.
Property, plant and equipment allows the cost or revaluation model, however when the policy is chosen it
must apply to the entire class of assets so that the entity avoids cherry picking its assets to revalue.
Financial instruments values financial asset investments in equity at fair value but with the option of
recognising gains/losses through profit or loss or other comprehensive income.
Measurement uncertainty and price volatility
The uncertainty around measurement is reduced through the use of IFRS 13 Fair value measurement,
however this does not then rule out price volatility.
If fair value is based upon an active market, then the price is likely to change on a regular basis but
shareholders will need this information available to them within the financial statements in order to assess
the performance of the entity.
If the entity has significant levels of financial instruments then there is both quantitative and qualitative
disclosures required in order to aid the shareholder to understand the nature and extent of the risks.
Professional – 2 marks
QUESTION 4
(a) (i) (8 marks) – 1 mark per well explained point
Additional information disclosure

Information disclosed within the financial statements needs to be useful to the users of the accounts so as to
aid them in their decision making. To aid the users of the accounts disclosure notes form part of the
financial statements and give more detail behind the numbers on the face of the financial statements and
also a narrative behind some of the important numbers.
The importance of the disclosure notes is shown in that recent IFRSs have focused on disclosure within the
notes to the accounts. Examples being IFRS 8 Operating segments, IFRS 7 Financial instrument disclosure
and IFRS 12 Disclosure of interests in other entities.
IFRS 8 gives the detail behind the numbers of the face of the financial statements with regards to how each
segment that is reviewed by the chief operating decision maker has performed. Thus allowing the user to
make better decisions with regards to the risk faced by each segment and the potential future returns.
IFRS 7 aids the users of the accounts with additional disclosure surrounding the risk attached to the financial
instruments and was developed following the global financial crisis of 2008 where it was felt that insufficient
information had been given on highly risky financial instruments.
Annual reports will contain not just the financial statements and notes to the accounts, it will also include
other commentaries in the Chairman’s Report and Director’s Report, alongside more recent additions such
as those on CSR.
These additional disclosure on top of the financial statements may be considered to be excessive and
provide too much information that then becomes difficult for the reader to digest. It may also not support
the information that is reflected in the financial statements.
The additional disclosure may also not be linked to an IFRS and therefore may not be based upon rules/facts
and therefore becomes very subjective in nature, this can therefore impact the decisions taken by the users
of the accounts.
Exposure draft
The Exposure Draft on the Conceptual Framework for Financial Reporting helps determine the boundaries
for disclosure as it specifically sets a framework for disclosure by stating what information is included within
the financial statements and how it should be presented and disclosed.
(ii) (9 marks) – 1 mark per well explained point
Use of ‘underlying profit’

EBITDA is not a measure of underlying profitability but a crude approximation to the cash flow from
operations, as it takes the earnings figure and adds back items such as depreciation and amortisation that
do not impact cash, but do impact profitability.
Limitations of calculation
The calculation can still be subject to manipulation of the figures, particularly with the depreciation and
amortisation figures which are both estimates and are subjective figures based upon judgement.
Property subsidence – A one-off figure that should still be included within the profitability of the entity as it
has arisen as part of the entity’s operations
Debt issue costs – The entity cannot exclude these costs as the loan was not ultimately taken out, so they
should be adjusted out of the calculation.
Share based payments – The expense related to the share based payment cannot be added back as it is part
of the employee costs of running the business.
Restructuring costs – Although this is a one-off expense it is still part of the operations of the entity and
should be included within the profits for the year.
Impairments – Another one-off expense that has arisen out of the operating activities of the entity and
should be included within the profits of the business for the year.
Calculation
20X6 20X5
$m $m
Profit/(loss)before tax (5) 38
Interest 10 4
Depreciation 9 8
Amortisation 3 2
EBITDA 17 52
Non-recurring items:
Impairment of property 10
Insurance proceeds (7)
Debt issue costs 2
22 52
Share based payments 3 1
Restructuring charges 4
Impairment 6 8
Underlying profit 35 61
The proposals made by the directors to make the above adjustment to reflect the ‘underlying profit’ appear
to have been done so as to hide the poor performance that the entity has made in 20X6.
(b) (8 marks) – 1 mark per well explained point
Reclassification adjustment
Changes in the value of an asset or liability can be recognised through other comprehensive income as
opposed to profit or loss.
Examples include the gain on property revaluations or gains/losses on the remeasurement of a defined
benefit pension scheme.
The gains/losses are recognised through other comprehensive income as the gains/losses have not yet been
realised and the asset and pension scheme value will continue to be used within the business for the
foreseeable future and their value change.
The key difference in the treatment is that the gain on property revaluation cannot be reclassified through
profit or loss, as on its subsequent disposal that stored up gains are recognised as a reserve transfer to
retained earnings in the statement of comprehensive income.
The gains/losses on the remeasurement of the defined benefit pension scheme are reclassified through
profit or loss.
Arguments - against
The argument against this reclassification adjustment is that once the gain has been recognised it should
then not be recognised again in a different section of the same financial statement, as this could cause the
users to misinterpret the gain as being made twice.
Arguments – for
The argument for the reclassification adjustment is that the user have a reasonable knowledge of financial
reporting and will understand that the gain is not being recognised twice but is now being shown through
profit or loss as it has now been recognised as the asset has been sold/derecognised.
Exposure draft
The exposure draft proposes that the statement of comprehensive income be referred to as the statement
of performance but it does not define what should appear in other comprehensive income and what is
recognised as income or expense through profit or loss.

SBR Specimen Exam Illustrative Answers PDF

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ACCA SBR Exam Watch free ACCA SBR lectures 1

STRATEGIC BUSINESS REPORTING (SBR)

(a) (i) Explanation - (6 marks)

(ii) Explanation - (6 marks)

(iii) (7 marks) – 1 mark per well explained point

Pension scheme – Location 1

(b) (8 marks) – 1 mark per well explained point

Accounting implications (10 marks) – 1 mark per well explained point

Ethical implications (8 marks) – 1 mark per well explained point

(a) (i) (8 marks) – 1 mark per well explained point

(ii). (7 marks) – 1 mark per well explained point

(b) (8 marks) – 1 mark per well explained

Mixed measurement approach

(a) (i) (8 marks) – 1 mark per well explained point

Additional information disclosure

(ii) (9 marks) – 1 mark per well explained point

Use of ‘underlying profit’

(b) (8 marks) – 1 mark per well explained point

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