ACCA

Strategic Business
Reporting
(International)

Mock Examination 2
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.

Do NOT record any of your answers on the question paper.

This question paper must not be removed from the examination hall.

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 Mock exam 2: questions

Section A – BOTH questions are compulsory and MUST be attempted

1 Robby
You work in the finance department of Robby, an entity which has two subsidiaries, Hail and Zinc.
Robby has recently appointed two new directors, with limited finance experience, to its board. You
have received the following email from the finance director.

To: An accountant
From: Finance director
Subject: New directors – help required
Hi, our two new directors are keen to understand our group financial statements. In particular, they
want to understand the effect of acquisitions and joint operations on the consolidated accounts.
I am putting together a briefing document for them and would like you to prepare sections for
inclusion in the document on goodwill and on joint operations. Please use the acquisitions of Hail
and Zinc (Attachment 1) to explain the how the goodwill on acquisition of subsidiaries is
accounted for in the group financial statements at 31 May 20X3. Use the gas station joint operation
(Attachment 2) to explain what a joint operation is and how we account for it in the group
financial statements. Make sure you explain the financial reporting principles that underlie both of
these.

Attachment 1 – details of acquisitions of Hail and Zinc

Accounting policy: measure non-controlling interests at acquisition at fair value.
(1) Hail acquisition. On 1 June 20X2, acquisition of 80% of the equity interests of Hail. The
purchase consideration comprised cash of $50 million payable on 1 June 20X2 and
$24.2 million payable on 31 May 20X4. A further amount is payable on 31 August 20X6 if
the cumulative profits of Hail for the four-year period from 1 June 20X2 to 31 May 20X6
exceed $150 million. On 1 June 20X2, the fair value of the contingent consideration was
measured at $40 million. On 31 May 20X3, this fair value was remeasured at $42 million.
On the acquisition date, the fair value of the identifiable net assets of Hail was $130 million.
The notes to the financial statements of Hail at acquisition disclosed a contingent liability. On
1 June 20X2, the fair value of this contingent liability was reliably measured at $2 million. The
non-controlling interest at fair value was $30 million on 1 June 20X2. An appropriate discount
rate to use is 10% per annum.
(2) Zinc acquisition. On 1 June 20X0, acquisition of 5% of the ordinary shares of Zinc. Robby
had treated this investment at fair value through profit or loss.
On 1 December 20X2, acquisition of a further 55% of the ordinary shares of Zinc, obtaining
control.
Consideration:
Shareholding Consideration
% $m
1 June 20X0 5 2
1 December 20X2 55 16
60 18

At 1 December 20X2, the fair value of the equity interest in Zinc before the business
combination was $5 million.

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 The non-controlling interest at fair value was $9 million on 1 December 20X2.
The fair value of the identifiable net assets at 1 December 20X2 of Zinc was $26 million, and
the retained earnings were $15 million. The excess of the fair value of the net assets was due
to an increase in the value of property, plant and equipment (PPE), which was provisional
pending receipt of the final valuations. These valuations were received on 1 March 20X3 and
resulted in an additional increase of $3 million in the fair value of PPE at the date of
acquisition. This increase does not affect the fair value of the non-controlling interest at
acquisition.
At 31 May 20X2 the carrying amount of the investment in Zinc in Robby's separate financial
statements was $19 million.

Attachment 2 – details of joint operation

Joint operation – 40% share of a natural gas station. No separate entity was set up under the
joint operation. Assets, liabilities, revenue and costs are apportioned on the basis of shareholding.
(i) The natural gas station cost $15 million to construct, was completed on 1 June 20X2 and is to
be dismantled at the end of its life of ten years. The present value of this dismantling cost to the
joint operation at 1 June 20X2, using a discount rate of 5%, was $2 million.
(ii) In the year, gas with a direct cost of $16 million was sold for $20 million. Additionally, the
joint operation incurred operating costs of $0.5 million during the year.
The revenue and costs are receivable and payable by the other joint operator who settles amounts
outstanding with Robby after the year end.

Required
(a) Prepare for inclusion in the briefing note to the new directors:
(i) An explanation, with suitable calculations, of how the goodwill on acquisition of Hail
and Zinc should be accounted for in the consolidated financial statements at 31 May
20X3. (16 marks)
(ii) An explanation as to the nature of a joint operation and, showing suitable calculations,
of how the joint operation should be accounted for in Robby's separate and
consolidated statements of financial position at 31 May 20X3. (Ignore retained
earnings in your answer.) (7 marks)
Note. Marks will be allocated in (a) for a suitable discussion of the principles
involved as well as the accounting treatment.
(b) Robby held a portfolio of trade receivables with a carrying amount of $4 million at 31 May
20X3. At that date, the entity entered into a factoring agreement with a bank, whereby it
transferred the receivables in exchange for $3.6 million in cash. Robby has agreed to
reimburse the bank for any shortfall between the amount collected and $3.6 million. Once the
receivables have been collected, any amounts above $3.6 million, less interest on this amount,
will be repaid to Robby. The directors of Robby believe that these trade receivables should be
derecognised.
Required
Explain the appropriate accounting treatment of this transaction in the financial statements for
the year ended 31 May 20X3, and evaluate this treatment in the context of the Conceptual
Framework for Financial Reporting and related Exposure Draft. (7 marks)
(Total = 30 marks)

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 Mock exam 2: questions

2 Ramsbury
The directors of Ramsbury, a public limited company which manufactures industrial cleaning
products, are preparing the consolidated financial statements for the year ended 30 June 20X7. In
your capacity as advisor to the company, you become aware of the following issues.
In the draft consolidated statement of financial position, the directors have included in cash and cash
equivalents a loan provided to a director of $1 million. The loan has no specific repayment date on it
but is repayable on demand. The directors feel that there is no problem with this presentation as
International Financial Reporting Standards (IFRS) allow companies to make accounting policy
choices, and that showing the loan as a cash equivalent is their choice of accounting policy.
On 1 July 20X6, there was an amendment to Ramsbury's defined benefit pension scheme whereby
the promised pension entitlement was increased from 10% of final salary to 15%. A bonus is paid to
the directors each year which is based upon the operating profit margin of Ramsbury. The directors
of Ramsbury are unhappy that there is inconsistency on the presentation of gains and losses in
relation to pension scheme within the consolidated financial statements. Additionally, they believe
that as the pension scheme is not an integral part of the operating activities of Ramsbury, it is
misleading to include the gains and losses in profit or loss. They therefore propose to change their
accounting policy so that all gains and losses on the pension scheme are recognised in other
comprehensive income. They believe that this will make the financial statements more consistent,
more understandable and can be justified on the grounds of fair presentation. Ramsbury's pension
scheme is currently in deficit.
Required
Discuss the ethical and accounting implications of the above situations, with reference where
appropriate, to International Financial Reporting Standards. (18 marks)
Professional marks will be awarded in this question for the application of ethical principles.(2 marks)
(Total = 20 marks)

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Section B – BOTH questions are compulsory and MUST be attempted

3 Calcula
Calcula is a listed company that operates through several subsidiaries. The company develops
specialist software for use by accountancy professionals.
(a) In its annual financial statements for both 20X2 and 20X3 Calcula classified a subsidiary as
held for sale and presented it as a discontinued operation. On 1 January 20X2, the
shareholders had, at a general meeting of the company, authorised management to sell all of
its holding of shares in the subsidiary within the year. In the year to 31 May 20X2,
management made the decision public but did not actively try to sell the subsidiary as it was
still operational within the group.
Calcula had made certain organisational changes during the year to 31 May 20X3, which
resulted in additional activities being transferred to the subsidiary. Also during the year to
31 May 20X3, there had been draft agreements and some correspondence with investment
bankers, which showed in principle only that the subsidiary was still for sale.
Required
Discuss whether the classification of the subsidiary as held for sale and its presentation as a
discontinued operation is appropriate, making reference to the principles of relevant IFRSs and
evaluating the treatment in the context of the Conceptual Framework for Financial Reporting
and related Exposure Draft. (9 marks)
(b) Asha Alexander has recently been appointed as the chief executive officer (CEO) of Calcula.
During the last three years, there have been significant senior management changes and
organisational restructuring which resulted in confusion among shareholders and employees
as to the strategic direction of the company. One investor complained that the annual report
made it hard to know where the company was headed.
The specialist software market in which Calcula operates is particularly dynamic and fast
changing. It is common for competitors to drop out of the market place. The most successful
companies have been particularly focused on enhancing their offering to customers through
creating innovative products and investing heavily in training and development for their
employees.
The last CEO introduced an aggressive cost-cutting programme aimed at improving
profitability. At the beginning of the financial year there were redundancies and the annual
staff training and development budget was significantly reduced and has not been reviewed
since the change in management.
In response to the confusion surrounding the company's strategic direction, Asha and the
board published a new mission, which centres on making Calcula the market leader of
specialist accountancy software. In her previous role Asha oversaw the introduction of an
integrated approach to reporting performance. This is something she is particularly keen to
introduce at Calcula.
During the company's last board meeting, Asha was dismayed by the finance director's
reaction when she proposed introducing integrated reporting at Calcula. The finance director
made it clear that he was not convinced of the need for such a change, arguing that 'all this
talk of integrated reporting in the business press is just a fad, requiring a lot more work, simply
to report on things people do not care about. Shareholders are only interested in the bottom
line'.

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 Mock exam 2: questions

Required
(i) Discuss how integrated reporting may help Calcula to communicate its strategy to
investors and other stakeholders, and improve the company's strategic performance.
Your answer should briefly discuss the principles of integrated reporting and make
reference to the concerns raised by the finance director. (12 marks)
(ii) Briefly discuss why the previous CEO's aggressive cost-cutting programme might have
led to ethical challenges for Calcula's management team. (2 marks)
Professional marks will be awarded in part (b)(i) for clarity and quality of presentation.
(2 marks)
(Total = 25 marks)

4 Janne
Janne is a listed real estate company, which specialises mainly in industrial property. Investment
properties constitute more than 60% of its total assets.
(a) Janne measures its industrial investment property using the fair value method, which is
measured using the 'new-build value less obsolescence'. Valuations are conducted by a
member of the board of directors. In order to determine the obsolescence, the board member
takes account of the age of the property and the nature of its use. According to the board, this
method of calculation is complex but gives a very precise result, which is accepted by the
industry. There are sales values for similar properties in similar locations available as well as
market rent data per square metre for similar industrial buildings.
Required
Discuss whether the above valuation technique is appropriate under IFRSs, making reference
to the principles of relevant IFRSs and evaluating the treatment in the context of the Conceptual
Framework for Financial Reporting and related Exposure Draft. (9 marks)
(b) Janne has received criticism that its annual report is too detailed, and therefore it is difficult to
understand and analyse. In response to the criticism, the managing director has proposed a
reduction in disclosures provided in the annual report. This includes, but is not limited to,
reducing the accounting policies note, and removing the related party transactions note, which
he does not consider important as all transactions are at arm's length. The managing director
has recommended that all disclosures that appear irrelevant should be removed.
The finance director has vigorously defended the report, stating that all disclosures made are
required by IFRSs, even if some of them appear unnecessary. He has confirmed this by using a
'disclosure checklist' provided by a reputable accountancy firm. He is extremely nervous that
the changes proposed risk non-compliance with standards and would not improve the
relevance or usefulness of the report for investors.
Required
Discuss the implications of the above in relation to Janne's annual report and its usefulness to
investors, with reference to the IASB's Discussion Paper Disclosure Initiative ---- Principles of
Disclosure. (8 marks)

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(c) The managing director has also proposed to report a new performance measure 'adjusted net
asset value per share', which is defined as net assets calculated in accordance with IFRS,
adjusted for various items and then divided by the total number of shares. This would be
presented instead of earnings per share as the managing director believes it is more relevant
to investors. This performance measure is disclosed by several companies in the same industry
as Janne.
Required
Discuss the benefits and drawbacks to investors of Janne's plan to disclose 'adjusted net asset
value per share' instead of earnings per share. (8 marks)
(Total = 25 marks)

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