Strategic Business Reporting (SBR)

Progress Test 2 - Answers

For exams in September 2020, December 2020,
March 2021 and June 2021
 SBR: PROGRESS TEST 2

Progress Test 2 Solutions

1 D 45% of the work has been completed, therefore HH has satisfied 45% of its
performance obligation (IFRS 15). 45%  $200,000 = $90,000 of revenue should
therefore be recognised as HH is entitled to that amount of revenue for work
performed to date.
HH should set up an accrual for any outstanding costs relating to work performed to
date so that revenue and costs are matched. If the contract is expected to be
loss-making, a provision for an onerous contract would need to be recognised.
The incorrect answers are arrived at by recording the revenue for the full contract
($200,000), spreading it over the two year contract on a straight line basis ($100,000)
and only recognising the revenue up to the costs incurred so far ($81,000).
2 C As a director, the finance director shares the responsibility of preparing the financial
statements in an ethical manner. It would be wrong to classify convertible bonds in
their entirety as equity because they contain an obligation (to pay interest and repay
the principal) which should be recorded as a liability. The extra proceeds over and
above the liability amount should be recorded as equity representing the right for the
bondholder to have a share. In substance, the bonds have characteristics of both
debt and equity which is why split accounting is necessary.
3 C IAS 19 Employee Benefits requires an entity to recognise the expected cost of a
bonus payment when:
 The entity has a present legal or constructive obligation to make such
payments as a result of past events; and
 A reliable estimate of the obligation can be made.
Here, there a constructive obligation as a result of Vials' past behaviour of
consistently paying a bonus over the past ten years. This has created a valid
expectation in the employees that they will receive a bonus.
The bonus should be measured at the best estimate of the amount that will be paid. The
post-year-end payment of the bonus is considered to be an adjusting event after the
reporting period. Therefore, the expense and liability for the bonus should be measured
at the amount of cash paid rather than the estimate based on prior years of 3% of salary.
4 B This is a past service cost. IAS 19 Employee Benefits defines a past service cost as
'the increase or decrease in the present value of the defined benefit obligation for
employees service in prior periods resulting from a plan amendment or curtailment'
(para. 8).
Here there has been a curtailment ie a significant reduction in the number of
employees due to the division closing and the employees being made redundant.
This means that the final salary of these employees for the purpose of calculating
their annual pension will be when they cease employment as a result of being made
redundant rather than on their retirement date. This means that the final salary will be
much lower than anticipated required a reduction to the present value of the defined
benefit obligation. IAS 19 requires the other side of the double entry (income) to be
recognised in profit or loss not as a remeasurement gain in other comprehensive
income.

31
SBR: PROGRESS TEST 2

5 C 1 As the board decision had not been communicated to customers and

employees there is assumed to be no legal or constructive obligation therefore
no provision should be made.
2 As damage has always been rectified by the company in the past there is a
valid expectation that the entity will behave in the same way in the future and
therefore the amount should be provided for as a constructive obligation to
rectify the damage exists.
3 There is no present obligation to carry out the refurbishment therefore no
provision should be made under IAS 37.
6 D The deferred tax is calculated as:
$'000
Carrying amount: Liability element of convertible debt (750)
Tax base: Full par value of convertible debt 1,000
Temporary difference 250
Deferred tax liability (250  30%) (75)
It is a deferred tax liability because the liability element of the debt will be recorded at
amortised cost in future years with a corresponding finance cost at the market rate of
non-convertible debt (here: 8%). Given the tax authorities do not offer tax relief on the
interest, this deferred tax liability is created then released in future years to profit or
loss annually to show a tax credit against this interest cost. As no finance cost has yet
been recognised at 31 December 20X4, the deferred tax liability is recognised in
equity (against the $250,000 equity component of convertible debt) rather than profit
or loss.

7 B Under IFRS 9 Financial Instruments a financial asset must be derecognised:

(i) If the contractual rights to the cash flows have expired
(ii) If the financial asset has been transfer, together with the risks and rewards
Condition (ii) has not been met, as Beth still bears the risks and rewards of ownership
given they have to reimburse the factor for any bad debt.
Therefore, the trade receivables must be reinstated in Beth's statement of financial
position in full since experience shows that customers are unlikely to default. The
$10 million written off to profit or loss must be reversed and given that Beth could
have to return the $45 million received if the debts went bad, this must be recorded as
a liability:
DEBIT Trade receivables $50m
CREDIT Profit or loss $5m
CREDIT Liability $45m

8 D The loan is a liability as PQ has an obligation to pay interest and to repay the
principal. Normally under IFRS 9 Financial Instruments, it would be measured at
amortised cost. However, as this is a fair value hedge, it must be measured at fair
value with the resulting gain or loss recognised in profit or loss. As the fair value of the
loan has increased at the year end, PQ has suffered a loss – PQ's obligation has
increased and PQ is losing out compared to current market rates by having to pay
interest at 6% when the market rate is only 4.5%. The loss of $280,900 is calculated

32
 SBR: PROGRESS TEST 2

as the fair value at the year end less the original transaction price of the loan
($10,280,900 – $10,000,000).
For a fair value hedge, IFRS 9 requires the hedging instrument to be measured at fair
value through profit or loss. The gain on the derivative is given and the year end gain
or loss represents the amount of the financial asset or liability to be recognised in the
statement of financial position. As the derivative is standing at a gain, a financial
asset must be recognised (had it stood at a loss, a financial liability would have been
recognised).

9 C As the asset is leased by Hill for its remaining useful life and title is transferred back to
Hill at the end of the lease, control of the asset (the ability to direct the use of, and
obtain substantially all of the remaining benefits from, the asset) is not transferred to the
buyer-lessor. Therefore, a performance obligation has not been satisfied per IFRS 15
Revenue from Contracts with Customers so, in substance, no sale has taken place.
Instead the arrangement is treated as a loan with the $15 million sales proceeds
being recorded as a financial liability. The asset is retained in the statement of
financial position as at its carrying amount, and will continue to be depreciated in 20X3.

10 D IAS 16 Property, Plant and Equipment requires that Denning should capitalise the
leasehold improvements of $10 million and depreciate them over the term of the
lease. The requirement in the lease to return the building in its original condition is an
obligation arising from past events so a provision of $2 million should be made for the
estimated costs with the other side of the double entry being recorded in property,
plant and equipment then depreciated over the lease term with the improvements of
$10 million.
In accordance with IFRS 16 Leases, the present value of lease payments not paid at the
lease commencement date (1 December 20X6) should be recognised as a
right-of-use asset and lease liability. The payment of $4 million made on the
commencement date is added to the right-of-use asset, which increases the depreciation
charge. Interest is applied to the lease liability and recognised as a finance cost.

11 D
DEBIT Bank $125,000
CREDIT NCI $80,000
CREDIT Group retained earnings $45,000
Adjustment to equity:
$'000
Consideration received 125
Increase in NCI on disposal (80  20%/20%) (80)
45
Before the disposal, S owned 80% of T (with a non-controlling interest of 20%).
On disposal, S sold a 20% stake in T, retaining a 60% holding in T. As T remains
a subsidiary, in substance there has not been a disposal – instead it is a
transaction between group shareholders with S selling a 20% stake to the
non-controlling interests (NCI). It is accounted for by increasing non-controlling
interest and recording an adjustment to the parent's equity. The increase in NCI is
calculated by multiplying NCI at the disposal date by the percentage sold (20%)
divided by the NCI percentage prior to the disposal (20%).

33
SBR: PROGRESS TEST 2

12 A EF is a related party of AB as it is an associate of AB. Therefore, the management fee

charged by AB should be disclosed.
However, two associates are not considered to be related parties under IAS 24.
Therefore even though the sales by EF to GH are at cost, they are not required to be
disclosed.
The question specifically asked about disclosure in EF's financial statements.
Therefore, transactions between other group entities (ie sale of goods by CD to AB
and management fee payable by CD and GH) are not relevant.

13 D The fair value adjustment on the plant is its fair value of $500,000 less its book value
of $300,000 giving an adjustment of $200,000. This is then depreciated over the
remaining useful life of the asset ie 10 years = $20,000 per annum. One year has
passed since acquisition so the remaining fair value adjustment at the year end is
$200,000 – $20,000 = $180,000.
The intangible asset should be recognised on acquisition as now it has been acquired
and can be measured reliably. It should then be amortised over its remaining useful
life of two years (X7 and X8). Therefore the carrying amount on 31 December 20X7 is
$150,000  ½ = $75,000.
Even though the contingent liability is not recognised in the subsidiary's individual
company financial statements, IFRS 3 requires it to be recognised on acquisition
providing there is an obligation and it can be measured reliably. Both apply here
meaning that the contingent liability should be recognised as consolidation adjustment.

14 A Increase the useful life of plant and machinery as TJF has consistently been
recognising large profits on disposal.
There is a self-interest risk here that the directors revise the accounting policies
deliberately to increase profits and maximise share price in order to maximise the
cash received on exercise of their share-appreciation rights.
IAS 8 only allows changes in accounting policies that result in relevant and
reliable information. The increase in useful life of plant and machinery is a valid
change in accounting policy because IAS 16 requires an annual review of the
useful life and past profits on disposal indicate that too much depreciation has
been charged in the past due to a too short useful life.
None of the other options are permitted by IFRS. IAS 37 only requires provisions
to be discounted where the effect of the time value of money is material ie
long-term provisions. Revenue from sale of goods should be recognised when
the risks and rewards have been transferred which is usually on delivery and not
on order of the goods. Finally, IAS 38 Intangible Assets specifically prohibits
capitalisation of advertising expenditure.

34
 SBR: PROGRESS TEST 2

15 D
$'000 $'000
Consideration received = 9,940
Less Yogi's share of consolidated carrying amount of Bear
when control lost Net assets = 10,350

Goodwill [3,690 + (4,500  20%) – 4,500]  1/3 = 30

Less NCI [(4,500  20%) + ((10,350 – 4,500)  20%)] (2,070)
(8,310)
1,630
This would be reported separately if material in the consolidated statement of profit or
loss and other comprehensive income (IAS 1: para. 29).

16 B
$m
40  20%  3/12 = 2
40  40%  9/12 = 12
14
Polymer was a subsidiary for the full year but the group holding reduced from 80% to
60% on 1 April 20X0. The non-controlling interests therefore need to be
time-apportioned.

17 A DEBIT Contract asset $40,000; CREDIT Revenue $40,000

Here, NM has transferred the Product A goods before the customer pays and the right
to consideration is conditional on something other than the passage of time; ie the
delivery of the Product B goods too. Therefore, under IFRS 15 Revenue from
Contracts with Customers, NM should recognise a contract asset for the $40,000
transaction price relating to Product A.
A trade receivable should not be recognised until the right to consideration is
unconditional which will be once NM has transferred the Product B goods to the
customer.
It would be incorrect to recognise revenue in relation to the Product B goods as at
31 December 20X8 because NM has not yet transferred these goods to the customer
so the performance obligation has not yet been satisfied.
It would be incorrect to recognise a contract liability in relation to the Product B goods
because a contract liability only arises if the customer pays consideration or the entity
has a right to an amount of consideration that is unconditional before the entity
transfers the goods or services to the customer. Neither is the case here because the
customer has not paid and the consideration for the Product B goods is conditional on
them being delivered to the customer.

35
SBR: PROGRESS TEST 2

18 B
$'000 $'000
Consideration transferred 940
Non-controlling interests 380
Fair value of acquirer's previously held investment 195
Less net fair value of identifiable assets acquired and
liabilities assumed
Share capital 1,000
Retained earnings 380
(1,380)
135

19 C This is a subsidiary (75%) to subsidiary (65%) disposal ie the parent retains a

controlling interest. In substance, there has not been a disposal. Instead it is treated
as a transaction between group shareholders ie the parent (DVS) is selling shares to
the non-controlling interests of EWT which increases from 25% to 35%. The
difference between the consideration received and the increase in NCI is treated as
an adjustment to equity rather than a profit on disposal.
$'000
NCI at disposal:
NCI at acquisition 500
NCI share of post acquisition reserves
[(3,700 – 800)  25%] 725
NCI at disposal date 1,225
Adjustment to equity:
$'000
Consideration received 600
Increase in NCI (1,225  10%/25%) (490)
Adjustment to equity 110

20 C To be held for sale, IFRS 5 requires the asset to be available for sale in its present
condition. However, as this property requires repairs before it can be sold, this
condition has not been met and the property should continue to be classified as
'property, plant and equipment'.
As the actual sale is not due to take place until after the year end, the disposal cannot
yet been recorded. Therefore, it would be incorrect to recognise a profit on disposal or
the selling costs. And the costs of repairs should be not recognised until they are
incurred in the following accounting period.

21 C The investment in CD qualifies under IFRS 5 as held for sale as it is available for sale
in its present condition and the sale is highly probable. Therefore, instead of
consolidating the assets and liabilities on a line by line basis, the assets must be
aggregated within current assets as 'held for sale' and the liabilities within current
liabilities as 'held for sale'.
CD also qualifies as a discontinued operation as it was acquired exclusively for
resale. Therefore, the minimum disclosure required in the consolidated statement of
profit or loss is CD's post-tax profit in one line. Then a breakdown is either required on
the face or in a note to the accounts of the revenue, expenses, pre-tax profit and

36
 SBR: PROGRESS TEST 2

income tax expense. Note that as this was a mid-year acquisition, only 6/12 of CD's
figures should be included in the consolidated statement of profit or loss.

22 B IFRS 5 specifies that non-current assets to be abandoned are not classified as held
for sale as their carrying value will be recovered principally through continuing use
rather than sale (para. 13). Therefore, these assets should be continued to be
recognised within non-current assets as 'property, plant and equipment' until they are
scrapped in the next accounting period.
However, the review has identified that there is a potential impairment given that they
are old and inefficient. The assets should then be written down to the higher of their
fair value less costs to sell and value in use. The fair value less costs to sell is likely to
be negligible as they only have a remaining life of three months but they will have a
value in use to Penn so the value in use is likely to be the recoverable amount. The
assets should be written down to their recoverable amount.
Discontinued operations are not relevant here as the assets have neither been
disposed or nor are they held for sale.
23 A
Newts Rate $
Consideration transferred (136  0.8) 108,800
Non-controlling interests (128  30%) 38,400

Less net assets at acquisition (128,000)

Goodwill at acquisition 19,200 0.8 24,000
Impairment losses 20X5 (7,000) 0.7 (10,000)
Exchange gain/(loss) (cumulative) – β (445)
Goodwill at year end 12,200 0.9 13,555

24 A IAS 21 defines the functional currency as the currency of the primary economic
environment of the entity (para. 8). IAS 21 identifies the following factors to consider
in identifying the functional currency:
"The currency:
(a) (i) That mainly influences sales prices for goods and services (often the
currency in which sales prices for its goods and services are
denominated and settled); and
(ii) Of the country whose competitive forces and regulations mainly
determine the sales prices of its goods and services.
(b) The currency that mainly influences labour, material and other costs of
providing goods or services (this will often be the currency in which such costs
are denominated and settled)." (Para. 9)
The currency an entity uses to raise finance and the currency in which an entity
usually retains receipts also provide further evidence of an entity's functional
currency.

37
SBR: PROGRESS TEST 2

IAS 21 states that the following factors should also be considered in determining the
functional currency of a foreign subsidiary, and whether its functional currency is the
same as that of its parent (para. 11):
(a) Whether the activities of the foreign subsidiary are carried out as an extension
of the parent, rather than being carried out with a significant degree of
autonomy
(b) Whether transactions with the parent are a high or a low proportion of the
foreign subsidiary's activities
(c) Whether cash flows from the activities of the foreign subsidiary directly
affect the cash flows of the parent and are readily available for remittance to it
(d) Whether cash flows from the activities of the foreign subsidiary are
sufficient to service existing and normally expected debt obligations without
funds being made available by the parent
If the foreign operation is financed principally by bank loads in the territory in which it
operates, this is a sign that it is dependent on its own economic environment and its
functional currency will be its own local currency rather than the parent's.
All of the other statements in the question indicate that the foreign operation is
dependent on the parent's economic environment, making their functional currency
the parent's.

25 A Translation of Mole's SOFP:

Unit '000 Rate $'000
Other assets 1,260 2.5 504

Share capital 500 2.0 250

Pre-acquisition reserves 220 2.0 110
Post-acquisition
reserves (460 – 220) 240 Bal. 24
384
Liabilities 300 2.5 120
504
Consolidated reserves:
Rat Mole
$'000 $'000
Per question/translation working (110 + 24) 1,900 134
Less pre-acquisition (110)
24
Share of Mole's post acquisition reserves (24  75%) 18
Exchange losses arising on goodwill (given) (16)
1,902

Note. 100% of the exchange losses on goodwill have been deducted as it is the
partial goodwill method (NCI is measured at the proportionate share of net assets)
meaning that all of the goodwill and all of the associated exchange differences belong
to the group.

38
 SBR: PROGRESS TEST 2

26 C
$
Cash received from sale of shares 500,000
Cash deconsolidated (15,000)
Overdraft deconsolidated 50,000
535,000
Note that the bank loan does not qualify as cash and cash equivalents so is excluded.

27 A Impairment of goodwill is a non-cash expense (Dr Expenses, Cr Goodwill) which has

reduced the profit before tax figure. Therefore, it needs to be removed from profit
before tax in the 'operating activities' section of the cash flow by adding it back.
The calculation is as follows:
Goodwill working:
$'000
b/d 6,300
Acquisition of subsidiary (see below) 800
7,100
Impairment (balancing figure) (200)
c/d 6,900
Goodwill on acquisition of AB:
$'000
Consideration transferred (300 + [1,000  $2.15]) 2,450
Non-controlling interests (25%  2,200) 550
Less fair value of net assets at acquisition (2,200)
800

28 C The corrected extract from the statement of cash flows is shown below:
$'000
Cash flows from operating activities
Profit before taxation 6,290
Adjustment for
Depreciation 3,100
Impairment of goodwill 570
Investment income (320)
Finance costs 1,350
Share of associate's profit (1,500)
Decrease in inventories 4,800
Decrease in trade receivables 200
Decrease in trade payables (2,300)
Cash generated from operations 12,190
Depreciation and impairment should have been added back not deducted. This is
because they are non-cash expenses which have reduced profit before tax so need to
be added back to remove them.
Investment income must be removed as it is related to an 'investing activity' not an
operating one. As it made profit increase in the first place, it must be deducted to
remove it (not added back).

39
SBR: PROGRESS TEST 2

The profit or loss expense for finance costs is not necessarily the same as the interest
paid figure as for financial instruments, the profit or loss figure is the effective interest
and the cash paid is the coupon.
Furthermore, the actual interest paid cash figure needs to be shown below the 'cash
generated from operations' line. Therefore, the finance costs P/L figure must be
removed and as it made profit smaller in the first place, it must be added back to
remove it.
The trainee accountant added the decrease in payables whereas they should have
deducted it because if payables have decreased, the entity must have paid them
meaning this is a cash outflow not inflow.

29 C
$'000
b/d 44,400
Depreciation (3,100)
Disposal of PPE (1,000)
Disposal of subsidiary (2,500)
37,800
Purchases of PPE (balancing figure) (13,300)
c/d (900 + 1,800) 51,100

30 C
$'000
b/d (600 + 2,700) 3,300
SPLOCI (P/L) 1,800
SPLOCI (OCI) 250
Acquisition of subsidiary 500
5,850
Tax paid (balancing figure) (3,150)
c/d (900 + 1,800) 2,700

40