ACCA Strategic Business Reporting (SBR) Mock Exam 2 Specimen exam 1 Questions Time allowed | 3 hours 15 minutes This exam 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 EXAM UNTIL YOU ARE READY TO START UNDER EXAMINATION CONDITIONS, sep a322, svotegc Business Reprtng (ER) Q serSection A BOTH questions are compulsory ond MUST be attempted Chuckle Co ‘Chuckle Co has equity interests in several companies including Grin Co. The directors of Chuckle (Co have prepared an incertact spreadsheet of tha consolidated statement of financial position ot 1 April 20X6 (exhibit 4). All goodwil other thon that relating to Grin Co has been impaired. The financial year end is 31 March each year. ‘The following exhibits provide information relevant tothe question. (1) tnitiol acquisition of Grin Co initial purchase of 30% of Grin Co on 1 Apel 20K, (@) Subsequent acquisition of Gin Co ~ subsequent 18% purchase of Grin Co and the purchase (of share options on 1 April 20X6. @ Foirvolue of net ossets of Grin Co ~ at 1 April 20X8, () Draft consolidated SOFP ~ Draft consolidated statement of financial position (SOFP) at 1 April 0x6. ‘This information should be used to answer the question requirements within your chosen response ‘option(). Required (©) @ Using exhibit t only, discuss why Grin Co should be classified as an associate, and nota subsidiary, on 1 Apsil 20X'. (C+ marks) (Using exhibit only, exploin how Grin Co should be accounted for as an associate using the equity methad in the consolidated statement of financial postion of Chuckle Co at 31 March 20X6. marks) (©) Using exhibit 2, exploin briefly why the classification of Chuckle Co's investment in Grin Co should change on 1 Apri 20X6 to that of @ subsidiary. (marks) (© © Using exhibit 2, explain briefly how the adeitional purchase of the 18% equity in Grin Co should be accounted for inthe consolidated financial statements of Chuckle Co. (@ mors) (Using exhibit 2, explon how the far value ofthe non-current and current assets of Grin Coat | April 20X6 (inelucing any deferred tax adjustments) should be coleulated. (mons) (Using the pre-populated spreadsheet response option with exhibit 3 and your previous ‘onswers, dojust the spreadsheet prepared by the directors of Chuckle Co in order to prepare o corrected consolidated stotement of financial priton at | April 20Xé.The Spreadsheet should tole into account the following: + accounting forthe associate using the equity method: + the change in clssification from associate to subsidiary: + the fair value adjustments on acquisition; and + goodwill using the proportionate share of net assets method to calculate non ontroling interest (12 marks) (Total = 30 marks) Exhibit t: Initial acquisition of Grin Co (On 1 April 20%, Chuckle Co acquired 30% of the equity shares of Grin Co. The consideration ‘consisted of $100 millon cash. The carrying amount of the net assets of Grin Co on 1 Apr 20x ©ser Ouesions 28 Bon‘808 $286 milion which was the some as the fair value. Since then, Grin Ce has been stated at Cost inthe consolidated financial statements of Chuckle Co The remaining 70% ofthe equity of Grin Co at 1 April 20X' was owned by a few other investors, one of which owned more than TO% of the equity of Grin Co. Analysis shows that all shareholders hove vated independently in the past. There has been no clear past voting pattern suggesting that Chuckle Cos unable to directly influence the economic decisions of the other Investors. Chuckle Co ond Grin Co share some key management personnel “The carrying amount of the net assets of Grin Co on 31 March 20X6 wos S348 milion. The Increase in the net assets of Grin Co since acquisition wos solely due to profits. Grin Co has poid ro dividends since 1 April 20%, Exhibit 2: Subsequent acquisition of Grin Co (Chuckle Co acquired « further 18% of Grin Co's equity on 1 Apri 20x6. The remaining 52% ofthe equity of Grin Co at 1 April 20X6 is owned by o few other investors, none cof which own more than 10% ofthe equity of Grn Co. (On 1 April 20%6, Chuckle Co also acquired some share options in Grin Co exercisable any time Lntil31 March 20X7. The exercise price of the options at 1 April 20X6 was just above the market price of Grin Cos shares. Grin Co has been profitable for @ number of years and the share price has been on an upwards trend which is expocted to continue. Chuckle Co would increase its ‘ownership t 60% should it exercise its rights It is believed that there would be additional cost savings should the addtional shares be acquired a8 decisions ot bord level could be made more cticenty, Exhibit 3: Fair value of net assets of Grin Co ‘Te directors of Chuckle Co have prepared a spreadsheet of the consolidated statement of financial postion (SOFP) os at 1 Apel 20X6 (Exhibit). The investments in Grin Co have been sated at cost ($100 milion and $66 milion) and the net assets of Grin Co hws boon included at theie carrying amounts. The equity of Grin Co has also been included as @ balancing figure. Goodwil has not been calculated: The consideration forthe further 18% of the equity shares of Grin Co on 1 April 20X6 is included in the SOFP ot the cash amount of 866 millon. The fair voive ofthe original 30% equity interest wos $127 milion at April 206, The carrying amounts ofthe net assets of Grin Co om 1 April 20X8 were as fallows: Smilions Non-curtent assets 295 Current assets 2 Deferred tox 00) (theres 205) Total ae Included within the non-current sets is some land. The carrying amount af this land at 1 April 20Xé is $50 milion but its fir value is assessed to be S60 milion at this date. Current assets Include finished goods witha cost of $84 milion. The foir value of these goods is S131 milion, (On 1 April 20%6, the directors of Chuckle Co als identified that Grin Co had an internally (generated dotabase of customers who were likely to be interested In purchasing thelr products. ‘though there were no contractual or legal ights associated with this database, a professional expert has estimated that competitors of Grin Co would be prepared to poy $5 milion for this, database, Grin Co has not recognised the database os on asset within the individual financial The current rate of taxis 20%. This rote should be opplied to any fair value adjustments deemed necessary 224 Soto uns Reporting SA) Qe(Chuckle Co measures the non-controlng interest os @ proportionate share ofthe net assets at the date of acquisition. Exhibit 4: Draft consolidated SOFP st fort Bl slam go] jm wip sa a ae = 2 ol) x| a a 8 is Assets Sm Non-current assets Property, plant and equipment 2,021 Investment in associate 100 Further investment in associate 6 Goodwat (Other non-current assets 186 2ara ‘Current essets 542 Total assets 2918 Equity attributable to equity holders ofthe company ‘Shore copitl 150 (ther components of equity Retained earnings Total equity Non-contrling interest Geis equity 348 [Non-current liabilities Deferred income tox bilities ay (Current bites 5% Total lobities 1238 Total equity and tiabiltios e|nle als/e|el2/s|s|s a|z\a)s|=/) o[«|~[>/+ -/+|»|-[ @srp Question 9982 Abby Co (39 mins) ‘The accountant of Abby Co ls concerned about the dsclosur of rong that has occurred between Abby Co ond a company that a director of Abby Co is associoted with, This directors ‘to attempting to influence how the accountant should aecount fr two Issues associated with the coneoldated financial statements, The foloning exhibits provide information rlevont to the question. (©) Reloted party transactions - this describes a transaction that occurs between Abby Co.ond Arwight Co @) Subsidy for value adjustments © Goodwilimpoiement calculation ‘You should se this information to answer the question requirements within your chosen response option). Required Discuss the ethical ond accounting implications ofthe director’ suggestions from the perspective (of the reporting accountant. (18 marks) Professional marks wil be awarded in question 2 for the application of ethical principles. (2 morks) (Total = 20 marks) Exhibit 1: Related porty transactions ‘The accountant hos discovered thatthe finance director of Abby Co has purchosed goods from o ‘company, Arwight Co, hich one ofthe directors jointly owns with hie wife ond the oceountont ‘believes thot this purchase should be disclosed. However, the director refuses to disclose t ‘ansaction 8 in his opinion its an ‘arm's length’ transaction. He feels that i the transaction Is ecloced, it willbe harmful to business and feels that the information asymmetry caused by such ‘non Eo e = 5 FM aren cm a aah © EEE 7 site fon2 Abby Co a Application of the following discussion of occounting esues to the scenario: Related porty transactions Compattve harm exemptions Impoirment of financial ossots Foie value adjustments Good impairment review Application of the following discussion of ethical esues to the scenario: Potential breaches Advice to occountont rofessionel marke - up to Tota! WB insta Reloted ports The objective of IAS 24 Related Party Disclosures i to ensure that on entity's financial statements contain the disclosures necessary to draw attention to the possibility thats Financial position tnd profit or los may have been affacted by the existence of elated partes and by transactions cond outstanding bolances with such port lf there have bean transactions between related partis, there should be dsclosure ofthe nature ofthe reloted party relationship as wel s information about the transactions and outstanding boionces necessory for an understanding ofthe potential effect of the relationship onthe financial statements. The directors @ member ofthe key management personnel ofthe reporting entity and the entity from whom the goods were purchased is jointly contaied by that director. ‘Therefore, o related party relationship exits ond shouldbe disclosed. ‘Operating segments IFRS 8 Operating Segments requires an entity to report financiol ond descriptive information ‘bout its reportable segments. Rportable segments are operating segments or aggregations of ‘operating segments which meet specified criteria IFRS 8 doos not contain o ‘competitive orm’ exemption and requires entities to disclose the financial information which ie provided by the chief operating decision maker (CODM). The management accounts reviewed by the CODM may contain commercially sonsitive information, ‘ond IFRS 8 might requie tha information to be disclosed externally. Under IFRS 8, firms should provide financial segment disclosures which enable imestors to assess the different sources of rik and income as management docs. This senithe information would dso be avaiable for competitors. The potential compatve harm moy encourage firms to ‘withhold segment information. However, this is controry to IFRS 8 which require information about the profit or loss for each reportable segment, including certain specified revenues ond expenses such os revenue from eternal customers Gnd from ronsactions with other sagments, interest revenue and expense, depreciation and amortisation, income tax expense or income ond material non-cash items. Impairment of financial assets 21208 such as impairments of financial ossets often invoke the application of professional judgement. The director may have received addtional information, which has allowee him to form ‘different opinion to that ofthe accountant. The matter should be dscussed withthe director to Coscertoin why no provision is required ond to ask whether theres addtional information ovailoble. 298 Srotse Bines Ropring (5M) srrHowever, suspicion Is raised by the foct thot the accountant hos been told not to discuss the ‘matter. Whilst there may be valid reasons for this, it oppears again that the related party relationship i affecting the judgement ofthe director. Fair value adjustments Positive flr value adjustments increase the assets of the acquired company and as such reduce the goodwill recognised on consolidation. However, the mojority of positive foirvolue adjustments usualy relate to items of property, plant and equipment. ‘Aso reult, extra depreciation based on the net far valve adjustment reduces the post-acquisition profit ofthe subsidiary. This hat @ negative impact on important financial performance measures such as EPS. Therefore, by reducing fair value adjustments it wll improve the apparent performance of new acquisitions and the consolidated financial statements. ‘Accountants should act ethically ond ignore undue pressure to undertake creative accounting in preporing such adjustments, Guidance such of IFRS 3 Business Combinations ond IFRS 13 Foir Volue Measurement should be used in preporing adjustments and professional valuers should be ‘engaged where necessary Impoiement tests In measuring value in use, the discount rate used should be the pre-tax rate which reflects current market assessments ofthe time valve of money and the risks specific tothe asset, ‘The diacount rate should not reflec risks for which future cash flows have been adjusted ond should equal the rate of return which investors would require if they were to choose an investment wich would generate cashflows equivalent to those expected from the asset. By reducing the impoirment, it would have @ postive impact on the financial statements. The offer ‘of a salary increase is inappropriate and no action should be taken until the situation is clarified, Inappropriate financial reporting roses issues ond isk fr those inalved and others ossocicted with the company. Whilst financial reporting imoves judgement, it would appear that this Stuation is not related to judgement, Ethical sues ‘There are several potential breaches of accounting standards and unethical proctices being used by the director. The director i trying to coerce the accountant into acting unethical. 18S 1 require al IFRS Accounting Standards to be applied if fair presentation is to be obtained, Directors cannot choose which standards thay do oF do not apply Itis important that accountants identify issues of unethical practice and oct appropriately in ‘accordance with ACCA's Code of Ethic. The accountant should discuss the matters withthe director. The technical issues should be explained and the risks of non-compliance explained to the director. f the director refuses to comply with accounting standards, then it would be ‘appropriate to dscuss the matter wth others affected such as other directors and sack professional advice from ACCA. Legal advice should be considered if necessary, ‘An accountant who comes undar pressure from senior colleagues to make inappropriate volvotions ond disclosures should discuss the matter with the person suggesting ths. The ‘dicussion should try to confirm the facts and the reporting guidance which needs to be followed. Financial reporting dows involve judgement but the coses above seem to be moce than just differences in opinion. The accountant should keep @ record of conversations and actions and