Examiner’s report

Strategic Business Reporting (SBR)

July 2020

The examining team share their observations from the marking process to highlight strengths and
weaknesses in candidates’ performance, and to offer constructive advice for future candidates.

Due to the COVID-19 pandemic, the June 2020 exam was postponed and sat in July 2020. This
report labelled July 2020 refers to this exam.

Format of exam

The SBR examination consisted of a three hour exam containing two sections with all 4 questions
being compulsory. The marking scheme includes four professional marks for the clarity and quality
of discussion. In Section A, the two professional marks were awarded for applying ethical
principles and recommending appropriate actions. In section B, the two professional marks were
awarded for appropriate discussion relating to the Conceptual Framework and its importance to
users of financial information (including investors).

General Approach to the SBR examination

The SBR examination requires candidates to demonstrate their ability to appraise, assess, critically
discuss, apply accounting concepts and principles to given scenarios and to explain the
appropriateness of a particular accounting treatment for a given transaction or event. This can
involve calculation as well as explanation of the relevant accounting standards. The SBR paper
also includes ethical aspects requiring candidates to demonstrate their understanding of the
professional and moral judgments that accountants must make in practice.

Many candidates failed to gain marks by not paying attention to or not following the requirements
of the question. This examination requires candidates to read a scenario and answer questions
using the application of their knowledge and, importantly, information contained within the
scenario. It is important that candidates read the question carefully and respond accordingly,
ensuring they contextualise their response if the question asks them to. In this exam, as in
previous diets, candidates failed to gain valuable marks by not answering the question asked in
relation to the scenario and by not answering as required by the command verb in the question.
For example, question 4b required candidates to ‘Explain to the investors (including all relevant
calculations)’. Many candidates simply gave a numerical response to the question with little or no
explanation. The verb used, as well as the number of marks allocated to the question, gives the
candidate an instruction about the nature and degree of detail required in the answer.

Question 1 requires candidates to outline, in an explanatory note, a number of accounting

principles and practices linked to a given scenario. Where an explanatory note is asked for, the
answer must necessarily contain narrative, to achieve the aim of the question. Where candidates
simply prepare a computational answer then marks will be lost. Similarly, a purely discursive
answer will lose marks if there are no computations. Answers to questions must be sufficient as it
is important that the candidate demonstrates knowledge in the particular area examined. The
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response must demonstrate deep knowledge (not just rote learned knowledge) in the syllabus
and/or knowledge of an examinable document.

The majority of candidates appeared to manage their time well and left themselves sufficient time
to consider the interrelationships between the issues and accounting principles. However, there
was some evidence of candidates with poor time management. These candidates failed to attempt
all of the questions with the result that relatively easy marks, particularly in the final part of question
4, were lost. Some candidates spent a disproportionate amount of time addressing the issues in
question 1 with the result that there was little time to answer question 4b. There were several
rushed and short responses to this question compared to question 1. Some candidates seem to
spend excessive time on the quantitative elements of the paper. Candidates are reminded that
there needs to be a balance between the time spent on all of the questions and that spending too
much time on any one question can affect performance on another question.

Candidates are advised to structure and present their answer in a way that assists the marking
process. For example, Question 4 part (a) comprised two sub-requirements and many candidates
merged these parts into one answer which does not help the marking process.

Some candidates failed to discuss relevant considerations because they did not perform a
situational analysis. If there is little reference to the scenario, there is a risk of missing key
elements of the question. Some candidates continue to list facts either from the question or from
an IFRS standard, without elaborating on why these facts are relevant to their discussion or
explaining the relationship to the point being argued. Simply repeating facts in a scenario or an
accounting standard without any further explanation is insufficient. The marking team is looking for
evidence of analysis and professional judgment which has been applied to a scenario. Superficial
and generic analysis of the issues and unsupported conclusions will not gain many marks. For
example, many candidates produced a generic answer to the ethics question with little reference to
the scenario. In this case, the lack of detailed analysis of the situation lost the candidate
professional marks in addition to the question marks.

SBR consciously includes contemporary questions which are challenging. Success in the SBR
exam requires a strong foundation of technical knowledge and the ability to apply the knowledge to
current situations. Knowledge is constantly changing, therefore it is important for candidates to be
able to draw on first principles, explore alternatives, and use their professional judgment to deal
with the issues presented. Candidates should appreciate the logical development of accounting
principles, based on the Conceptual Framework. The accounting profession requires a
combination of professional and ethical judgement in addition to specialist knowledge of generally
accepted accounting principles, conventions and procedures. Candidates should be aware of the
different perspectives of stakeholders and be prepared to provide advice from these perspectives.

Candidates should prepare for the examination using learning strategies that promote analysis,
synthesis, and evaluation of content. Strategies should be used that promote an understanding of
the principles behind an accounting procedure or practice. The required skills come through a
deeper understanding and application of the subject matter. Candidates should expand their

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reading to include wider sources such as articles published on the SBR pages of ACCA’s web site
where key syllabus areas are discussed in a contemporary context. Broader reading allows
candidates to more easily understand the concepts and principles relating to business reporting.
The ACCA website offers guidance from the examining team, including helpful articles on
recommended exam techniques, exam debriefs and a retake guide.

Candidates may be awarded marks for discussion of issues which do not appear in the suggested
solution but are relevant to the scenario. Additionally, extra marks may be gained if a candidate
discusses a point particularly well.

Generally, whilst the overall performance of this examination was good, the main issue was often
the fact that candidates spent too long on question 1 and ran out of time on question 4.

Comment on individual questions

Question 1

Part a(i) required candidates to draft an explanatory note to the directors setting out how goodwill
should be measured and re-measured following additional information received in the next
accounting period. The principle that fair values of the net assets acquired may only be
provisionally determined, particularly where the acquisition is near to the financial year end, was
well known to candidates as was the fact that the company can adjust the provisional amounts
recognised for the business combination. Similarly, candidates recognised that goodwill is
recalculated with the benefit of new information such that the identifiable net assets at acquisition
should be increased.

However, the treatment of the additional information concerning the contingent consideration was
different as this should only be treated as a measurement period adjustment where the additional
information related to facts and circumstances which existed at the acquisition date. In this case,
the increase in the contingent consideration could be disclosed as a non-adjusting event and not
as a measurement period adjustment. Many candidates however adjusted goodwill for the increase
in the contingent consideration and therefore could not obtain full marks for the question.

Part a (ii) of the question required candidates to discuss the principles of the accounting treatment
for the part disposal of an investment in a subsidiary. This question was generally well answered
with candidates recognising that the subsidiary can no longer be consolidated but should instead
be treated as an associate and the net assets of the subsidiary, including goodwill and the non-
controlling interest (NCI), will not be included in the consolidated statement of financial position.
The main issue was the calculation of the NCI at disposal as most candidates failed to realise that
the NCI was calculated as ‘NCI at acquisition plus their share of the increase in net assets from
acquisition less the impairment of goodwill’. However, generally this part of the question was well
answered.

Part a(iii) required candidates to discuss how loan notes received as consideration should be
measured in the financial statements .The main issue here was the misclassification of the loan

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notes with candidates not realising that they should be measured at amortised cost. Also, very few
candidates surprisingly calculated the correct amount of interest to be deducted from the carrying
amount of the loan notes.

Part a(iv) required candidates to discuss how a share-based payment scheme should be
accounted for in the consolidated financial statements. This question was poorly answered. Where
employees have the choice as to whether they receive share options or cash, the scheme should
be split into debt and equity and valued at the grant date with both the equity and liability
component of the scheme being adjusted for non-market based vesting conditions. There was little
understanding of the principles behind the calculations but marks were awarded for an attempt at
the calculation of the fair value of the equity per employee, the charge to profit or loss, and the
credit to equity and liabilities.

Part 1(b) required candidates to use the recent amendment to International Accounting Standard
(IAS®) 19: Plan Amendment, Curtailment or Settlement, to provide a brief explanation and
calculation of how a pension scheme should be accounted for in the consolidated financial
statements. Some candidates performed well on this question but many failed to apply the
amendment at all. The current service cost and the net interest for the period are determined using
the actuarial assumptions at the time of the amendment, curtailment or settlement rather than as at
the start of the reporting period. This means that candidates had to use time apportionment in their
calculations. Candidates did get some credit if they did not time apportion the pension scheme
adjustments and simply showed a full year’s calculations.

Question 2

Part (a) required a discussion of the validity of accounting policies used by the finance director with
reference to IAS 16 Property, Plant and Equipment and IFRS 9 Financial Instruments.

Candidates were expected to discuss the IAS 16 requirements to separately depreciate each part
of an item of PPE with a cost which is significant in relation to the total cost of the item. This policy
helps reflect the pattern in which the asset’s future economic benefits are expected to be produced
by the entity. Identified parts can be grouped together if they have the same useful life and they
then form a component of their own for depreciation purposes. The question required candidates to
apply these principles to a scenario.

In addition, candidates had to distinguish between two types of maintenance costs. Maintenance
which does not prolong the useful life of an asset is charged in profit or loss, whereas core-
performance restoration is capitalised and expensed over the asset’s useful life.

In addition, candidates were required to discuss how the factoring of trade receivables affects their
classification and measurement. It was expected that candidates would discuss the company’s
business model and whether its contractual cash flows meet are solely payments of principal and
interest (also known as the SPPI test). In the case of the company in question, one of two business
models might have been appropriate to their classification i.e. the ‘hold to collect and sell’ and ‘hold

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to sell’ business models. Finally, candidates had to discuss whether the trade receivables which
were factored should result in an accounting derecognition.

This part of the question was well answered by candidates. However, if candidates simply quoted
the principles of the standards without application to the scenario then, the marks allocated to the
answer were limited.

Part b of the question required candidates to discuss the ethical dilemmas faced by an accountant
who is employed part-time, setting out the fundamental principles of professional conduct which
should be applied together with the identification of any actions which should be taken to resolve
the issues.

The ethical issues often involve concerns beyond accounting errors and malpractice; for example,
the scenario could involve personal relationships and pressures in a contemporary environment.
The quoting of ethical guidance without application to the scenario restricts the candidate’s marks
for both the question and professional marks. In addition, it is important that actions should be
identified in order to attempt to resolve any ethical issues. Professional marks are awarded both for
application and discussion of actions to resolve the ethical conflict.

In this case there was misuse of information and incorrect accounting treatment by the finance
director. There were threats to compliance with fundamental ethical principles, as the accountant
felt pressured to become associated with misleading information. The accountant had to consider
escalating his concerns, obtaining advice and guidance or considering whether to resign.

Candidates’ answers were generally good, with a clear identification of the ethical issues by
reference to the scenario and practical suggestions to resolve them. In these cases, candidates
would gain two professional marks

Question 3

Part (a) of question 3 required candidates to discuss whether two properties should be classified
as owner occupied property or investment property in accordance with IAS 16 Property, Plant and
Equipment or IAS 40 Investment Properties.

Candidates needed to know the definition of an investment property and what would distinguish it
from owner occupied property. In addition, candidates had to discuss the classification of the asset
as an operating lease so that it could be concluded that property A was an investment property
using the fair value model. Property B was used for administrative purposes and was also rented to
the company’s staff. Candidates found the classification of this property quite a difficult exercise.
As a proportion of the property was deemed to be owner occupied, it would be classified as
property, plant and equipment. The other part let to company staff would be classified as
investment property. Candidates answered the question quite well. The main issue was that
candidates did not split the second property into two parts but simply classified the property as
either owner occupied or investment property.

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Part (b) of the question required advice on the classification and measurement of acquired land
and the impact on its classification if it was developed. Many candidates realised that it should be
classified as investment property but the discussion of its fair valuation was a little limited. The
principle that fair value measurement takes into consideration a market participant’s ability to
generate economic benefits by using the asset in its highest and best use or by selling it to another
market participant who would use the asset in its highest and best use, was well known by
candidates. However, candidates found its application to the scenario quite difficult. A number of
candidates realised that if the land was developed then the land would need to be reclassified from
investment property to inventory. This was very pleasing.

Part (c) required a discussion of how a property should be reclassified in the financial statements if
the directors were or were not committed to sell the property. The classification as investment
property and then subsequently as asset held for sale was discussed very well by candidates as
were the conditions set out in IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations. However, very few marks are given for purely rote-learned knowledge of IFRS 5. The
marks in the question were mainly allocated for application of knowledge and the accounting
treatment of the property when classified as held for sale.

Overall the question was quite well answered.

Question 4

Question 4 (a) focussed on the Conceptual Framework and its usefulness to investors. Candidates
were asked in a(i) to discuss the objectives of the Framework. Then candidates were asked to
discuss in a(ii) the usefulness of the Conceptual Framework to users of financial information
including investors. Many candidates simply merged the two parts of the question and provided a
single answer. This practice makes it difficult for markers to differentiate between the two parts of
the question and therefore is not a recommended practice.

There were many different opinions as to the usefulness of the Framework to users and there were
many suggestions, which were outside of the model answer, which were allocated marks. The key
to answering this question well was the referral to the different elements of the Framework and
their usefulness to users. For example, neutrality, prudence, measurement reliability, going
concern, the key characteristics of useful financial information etc.

A surprising number of candidates did not attempt this part of the question and yet those that did
invariably scored high marks. If candidates did not answer the question, then they also lost two
professional marks.

Part b of the question required candidates to explain to the investors with calculations the
principles of accounting for a forward purchase of foreign currency and whether it could be
classified as cash flow hedge.

The question was not well answered even though many candidates recognised that the contract
could be recognised as cash flow hedge. Often, the discussion was very brief and ended with an

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attempt at recording the hedge in the financial statements. Some candidates mentioned the
importance of hedge effectiveness but few realised that the hedge may cease to qualify for hedge
accounting as a result of the natural disaster described in the scenario. As mentioned above, the
accounting entries were seldom correct but marks were allocated for a reasonable understanding
of cash flow hedge accounting.

Part b(ii) dealt with the destruction of a property in a disaster, the pending insurance compensation
and the environmental recovery costs. A significant number of candidates did not attempt this part
of the question. This seems to indicate that these candidates had run out of time as the technical
aspects of this question were not difficult. It cannot be stressed enough that candidates must
answer all parts of all of the questions as it can make the difference between a pass and fail mark.
Those candidates that answered this part of the question did quite well but often assumed that the
insurance compensation should be recognised even though it is only appropriate when its
realisation is virtually certain.

Conclusion

Candidates should possess a high level of critical thinking and strong written communication skills.
A candidate should be able to identify and explain accounting principles and apply them to current
business scenarios including digital business. This requires a deep, as opposed to a superficial,
understanding of conceptual and practical issues. There is still evidence of rote learning but in
recent examinations, it is apparent that there has been a shift in the nature of candidates’ learning.
There is still a requirement to demonstrate technical accounting skills so it is important that
candidates do not simply discuss issues where there is a numerical requirement. The results of this
examination have shown improvement in the ability of candidates to apply their technical
knowledge and use judgement particularly in an ethical context.

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