STRATEGIC PROFESSIONAL

ESSENTIAL EXAMINATION

Strategic Business Reporting

ACADEMIC SESSION – SEPTEMBER 2022

PROGRESS TEST FOR ACCA PAPER SBR

LECTURER: MS MENON, MS JEIN & MS BOR SHI

GROUP: SBR-G11, SBR-G12 & SBR-G13

EXAM DATE: 6 OCTOBER 2022

MARKING SCHEME

1
Question 1
(a) Share based payments
The share option plan should be accounted for under IFRS 2 Share-based Payment. As the share options vest in
the future, it is assumed that the equity instruments relate to future services and recognition is therefore spread
over that period. Therefore, the finance director is incorrect. The equity-settled share based payments for staff
must be expensed to profit or loss, as staff costs, over the three-year vesting period.

The measurement of these equity-settled payments (the options) should be based on their fair value at the grant
date. This is a subjective and complex valuation made by an actuary.

If the share price ($8) has fallen below the exercise price ($10), this will affect the subsequent value of the
options. However, for accounting purposes this is not relevant, as the fair value of equity instruments (the
options) used to measure a share-based payment transaction is not re-measured. The expense is based on the
fair value of the options at the grant date. Shareholders’ equity will be increased by an amount equal to the
charge in profit or loss.

(b) Accounting for intangible assets with an indefinite life

IAS 38 Intangible Assets can assign indefinite life only if the company cannot predict /uncertain reliably how long
the intangible asset will generate future cash flow. / no amortization / must conduct imp test minimum annually
(IAS 36 CV to RA).

However, every year end standard requires review of the possibility that indefinite life become def life. At that
point must conduct imp test /any change- prospective adjustments (IAS 8)/ material event (IAS 1) / appropriate
disclosure. As Corbel Co has acquired two other perfume brand names to prevent rival companies acquiring
them, there is a market transaction and hence it has to be recognised as other intangible in the CSOFP.

Locust PERFUME BRAND: As The first perfume (Locust) has been sold successfully for many years (it is likely to
generate future econ benefit for a long period that cannot be easily determined) and has an established market
(past history shows that the trend is likely to continue)/ it would be acceptable for the directors to assign
indefinite life.

Clara perfume brand names: The second is a new perfume which has been named after a famous actor (Clara)
who intends to promote the product. This implies that the intangible asset is likely to generate future economic
benefits as long as Clara remains popular and there is contract (with a definite life) to enable company to use
Clara for marketing purposes. As there is contract, with a definite life, it seems logical to assign a definite life
and amortise the intangible asset over that period. Hence, the directors to assign indefinite life will not be in
compliance with IAS 38.

c) Agency Co had correctly capitalised development costs for Headon at a carrying amount of $30 million. IAS 38
Intangible Assets states that an intangible asset, in this case a proportion of the development costs, may be
derecognised on disposal or when no future economic benefits are expected from its use or disposal. The gain
or loss arising on derecognition is the difference between the net proceeds and the carrying amount of the asset.
Gains are not classified as revenue. The amount of gain or loss arising from the derecognition will be affected by
the determination of the transaction price with reference to IFRS 15 Revenue from Contracts with Customers.

In assessing whether an entity’s promises to transfer goods or services to the customer are separately
identifiable, the objective of IFRS 15 is to determine whether the nature of the promise is to transfer each of
those goods or services individually or, instead, to transfer a combined item.

Kokila Co can benefit from the licence without Agency Co’s manufacturing service because there are other
entities which can provide the manufacturing service. Therefore, Agency Co’s promises to grant the licence and
to provide the manufacturing service are separately identifiable.

The consideration for the licence comprises the up-front payment of $15 million and a variable consideration of
$3 million. Initially, only the up-front payment will be recognised as proceeds together with the gain on the

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disposal of the South American development costs. The variable consideration will be recognised in SOPL when
it occurs, i.e. when South American sales exceed $35 million. The performance obligation needs to be satisfied
before the payment is recognised.

Judgement is required to determine the portion of the carrying amount of the intangible asset to derecognise,
relative to the amount retained. Therefore, a gain is recognised on disposal of the South American development
costs of $9 million ($15m – ($30m x 20%)).

(d) Billings Co

IFRS 13 Fair Value Measurement states that the fair value of an asset is the price which would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date.

However, IFRS 13 also uses the concept of the highest and best use which is the use of a non-financial asset by
market participants which would maximise the value of the asset or the group of assets and liabilities within
which the asset would be used.

The fair values of the two assets would be determined based on the use of the assets within the buyer group
which operates in the industry. The fair value of the asset group of $230 million is higher than the asset group
for the financial investor of $200 million. The use of the assets in the industry buyer group does not maximise
the fair value of the assets individually but it maximises the fair value of the asset group.

Thus, even though Qbooks would be worth $50 million to the financial investors, its fair value for financial
reporting purposes is $30 million as this is the value placed upon Qbooks by the industry buyer group.

e) Franchise licence
Bobcat has entered into a contract with a customer, Grantly Co; IFRS 15 Revenue from Contracts with Customers
therefore applies. Bobcat has promised to grant a licence to Grantly and provide additional activities including
advertising and market analysis. As these additional activities are not distinct and are part of Bobcat’s promise
to grant a licence, there is a single performance obligation within the contract.

The total transaction price over the eight years of the franchise agreement is $600,000 with payments made
annually, in advance. Depending on when the performance obligation is satisfied, the contract price may include
a significant financing component.

The performance obligation may be satisfied at a point in time or over time:

 It is satisfied at a point in time if the licence provides a right to access intellectual property as it exists
at the time when the licence is granted;
 It is satisfied over time if the licence provides a right to access intellectual property as it exists
throughout the licence period.

Bobcat is required to perform market analysis, develop products accordingly and engage in advertising and
marketing activities. These activities significantly affect the intellectual property that Grantly has rights to
throughout the eight years and, as a result, Grantly is exposed to any positive or negative effects of these
activities. Even though Grantly may benefit from the activities, these activities do not transfer a good or service
to Grantly.

Therefore, the nature of the performance obligation is to provide access to intellectual property as it exists
throughout the franchise period and Bobcat should recognise revenue over time.

A time-based method is likely to be the most appropriate to determine performance because the contract
provides Grantly with unlimited access to the Bobcat brand and intellectual property over a fixed period.

As equal payments are made annually it is unlikely that a significant financing component exists in the contract.
Therefore, revenue is based on a contract price of $600,000. For the year ended 30 November 20X8, Bobcat
should recognise revenue of $25,000 (600,000 ÷ 8 years × 4/12 months). Then, as Grantly’s payment of $75,000
has been received in advance, Bobcat reports a contract liability of $50,000 at 30 November 20X8.

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Transaction with Grantly
Discussion and conclusion on:
– Single performance obligations (IFRS 15) 2
– Financing component 2
– Recognition over time 2
Calculation of:
– Revenue (4 months)_ 1
– Contract liability 1
──
Maximum 6

(f) Fair Valuation

IFRS 13 Fair Value Measurement says that fair value is an exit price in the principal market, which is the market
with the highest volume and level of activity. It is not determined based on the volume or level of activity of
the reporting entity’s transactions in a particular market. Once the accessible markets are identified, market-
based volume and activity determines the principal market.

There is a presumption that the principal market is the one in which the entity would normally enter into a
transaction to sell the asset or transfer the liability, unless there is evidence to the contrary.

In practice, an entity would first consider the markets it can access. In the absence of a principal market, it is
assumed that the transaction would occur in the most advantageous market. This is the market which would
maximise the amount which would be received to sell an asset or minimise the amount which would be paid
to transfer a liability, taking into consideration transport and transaction costs. In either case, the entity must
have access to the market on the measurement date.

Although an entity must be able to access the market at the measurement date, IFRS 13 does not require an
entity to be able to sell the particular asset or transfer the particular liability on that date.

If there is a principal market for the asset or liability, the fair value measurement represents the price in that
market at the measurement date regardless of whether that price is directly observable or estimated using
another valuation technique and even if the price in a different market is potentially more advantageous. The
principal (or most advantageous) market price for the same asset or liability might be different for different
entities.

In Africant’s case, Asia would be the principal market as this is the market in which the majority of transactions
for the vehicles occur. As such, the fair value of the 150 vehicles would be $5,595,000 ($38,000 – $700 = $37,300
x 150).

Actual sales of the vehicles in either Europe or Africa would result in a gain or loss to Africant when compared
with the fair value, i.e. $37,300. The most advantageous market would be Europe where a net price of $39,100
(after all costs) would be gained by selling there and the number of vehicles sold in this market is at its highest.
Africant would therefore utilise the fair value calculated by reference to the Asian market as this is the principal
market.

The IASB decided to prioritise the price in the most liquid market (i.e. the principal market) as this market
provides the most reliable price to determine fair value and also serves to increase consistency among reporting
entities.

IFRS 13 makes it clear that the price used to measure fair value must not be adjusted for transaction costs, but
should consider transportation costs. Africant has currently deducted transaction costs in its valuation of the
vehicles. Transaction costs are not deemed to be a characteristic of an asset or a liability but they are specific to
a transaction and will differ depending on how an entity enters into a transaction. While not deducted from fair
value, an entity considers transaction costs in the context of determining the most advantageous market
because the entity is seeking to determine the market which would maximise the net amount which would be
received for the asset.

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Question 2

2 GDANSK

(a) Accounting issues

Non-current assets – potential investment property
An investment property is a property that is held for its investment potential, meaning capital growth or rental
income. Land and buildings classified as an investment property cannot be used in the production or supply of
goods or services, or used for administration purposes, or held for sale in the ordinary course of business.

Therefore, in Lagos’ separate financial statements it is correct to classify the property as an investment property.
In the separate financial statements of both Lagos and Kingston, the arrangement should also be disclosed as a
related party transaction; both Lagos and Kingston are fellow subsidiaries of Gdansk and therefore subject to
common control.

Investment properties can either be measured using the cost model or fair value model. When the fair value
model is applied, no deprecation is charged and the property is remeasured to fair value with gains or losses
reported in profit or loss. This differs from the treatment suggested by the directors.
From the perspective of the Gdansk group the property is not an investment property. This is because the
property is an operating asset that is both owned and occupied by the group.

In a group context the property will be classified as PPE. In such circumstances if the revaluation model is
selected gains are normally recognised in other comprehensive income and only in profit or loss if they represent
a reversal of a loss previously recognised in the profit or loss.

In the consolidated financial statements, the rental income and rental expense will be eliminated as intra group
transactions.

Non-current assets – extension of life and repair costs

Although the useful life of plant and equipment should be kept under review, there seems no reasonable ground
for this revision. Such a revision would require evidence that significant benefits will flow from the assets over
10 years, rather than the previously estimated four years.

Repair costs are revenue expenditure and it is incorrect to capitalise such costs. Both these suggestions, if
implemented would result in reported profits being overstated. Repairs do not improve an asset; they simply
return the asset to its anticipated operational capability.

Intangible assets
In general impairment losses can be reversed providing that there has been a change in the estimates used to
determine recoverable amount. However, IAS 36 Impairment of Assets prohibits the reversal of impairment
losses related to goodwill.

The advertising and marketing costs incurred in brand creation must be expensed to profit or loss. They are
revenue expenditure. IAS 38 Intangible Assets specifically prohibits the recognition of internally generated
brands as an intangible asset.

Although the directors’ apparent desire for improved transparency and accountability in the way that goodwill
and other intangibles are accounted for may appear to be motivated by good intentions, it is not appropriate.
Adherence to IFRS Standards for material items is not law, but it is best practice. All other entities will be
complying with these standards. Divergence from the standards would create confusion for users of the financial
statements and hinder comparability.

Rather than not adhering to relevant standards, the directors should ensure that meaningful information
relating to Gdansk brands that are not recognised as assets is provided in other ways. For example, narrative
disclosure could be provided in an integrated report or management commentary.

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Share issues
Franchise right
The franchise right should be recognised using the principles in IFRS 2 Share-based Payment. The asset should
be recognised at the fair value of the rights acquired and the existence of exchange transactions and prices for
similar franchise rights means that a fair value can be established. The franchise right should therefore be
recorded at $2.3 million.

If the fair value had not been reliably measurable then the franchise right would have been recorded at the fair
value of the equity instruments issued (i.e. $2.5 million).

(b) Ethical issues

The circumstances are that the group may not report sufficient profits to trigger the profit related bonuses due
to directors. This creates an environment in which there is an increased risk of accounting treatments and
judgments being manipulated to boost profits.

Sunil is an ACCA member and therefore is bound by the code of ethics. As a professional he is required to act in
the public interest. One of the key pillars of ethical behaviour is to be competent and not make mistakes.

As an ethical accountant Sunil will recognise that there has been a series of accounting errors suggested by the
directors (e.g. in the attempt to classify the property as investment property and to capitalise repair
expenditure).

These errors though appear not to have been innocent errors of ignorance; rather they represent a pattern
whereby profits are trying to be increased at every turn. This attempt at creative accounting must be resisted
by Sunil as to go along with attempted deceit would be breach of his integrity (another fundamental ethical
pillar).

It is a concern that the directors appear to be willingly and knowingly suggesting a breach of current IFRS
Standards. Their justification is not credible. Stakeholders require, and deserve to be provided with, information
which is useful and comparable.

It is noted that Sunil has been offered a non-contractual bonus if he goes along with the directors’ suggestions.
In essence, this represents a bribe and is unethical behaviour on behalf of the directors and a threat to Sunil’s
integrity, objectivity and independence.

It is recommended that Sunil explains, in a professional manner, the correct accounting treatments and why he
must insist that they are applied.

If Sunil’s reasonable discussions are rebuffed, he should take legal advice. As a last resort, he should consider
resignation, rather than be a party to financial statements that he knows to be misleading.

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Question 3

a) Most liabilities are ignored when calculating recoverable amounts in impairment testing. However, certain
liabilities, such as decommissioning liabilities, cannot be separated from the related assets.

IAS 36 Impairment of Assets requires the carrying amount of a recognised liability to be deducted from both the
carrying amount of a cash generating unit (CGU) and the amount determined using the value-in-use (VIU). The
recoverable amount of the asset should be determined using the VIU model in IAS 36.

The amount of the decommissioning provision is used to calculate the net recoverable amount by deducting it
from the VIU amount. The net recoverable amount is then compared to the carrying amount of the CGU which
should be adjusted to include the decommissioning provision in accordance with IAS 37 Provisions, Contingent
Liabilities and Contingent Assets.

Cash flow projections should be based on reasonable and supportable assumptions, the most recent budgets
and forecasts, and extrapolation for periods beyond budgeted projections. IAS 36 presumes that budgets and
forecasts should not go beyond five years; for periods after five years, extrapolation should be used from the
earlier budgets. In this case, the mines have a useful life of five years or less and, therefore, the cash flow
projections can be used in the impairment testing.

At 31 December 20X7 $ million

Present value of future cash inflows from the sale of components for re-use 20
Present value of future cash inflows from sale of mining output 203
Present value of future cash outflows from operating the mines (48 )
Carrying amount of decommissioning provision (85 )
––––
Recoverable amount (NPV of cash flows) 90
––––
Carrying amount of mines 250
Carrying amount of decommissioning provision (85 )
––––
Net carrying amount of mines 165
––––
The recoverable amount is less than the carrying amount and, hence, there is an impairment charge of $75
million ($165 million – $90 million).

b) IAS 37 does not permit the recognition of contingent assets. Accordingly, an insurance recovery asset can only
be recognised if it is determined that the entity has a valid insurance policy which includes cover for the incident
and a claim will be settled by the insurer. The recognition of the insurance recovery will only be appropriate
when its realisation is virtually certain, in which case the insurance recovery is no longer a contingent asset.
Decisions about the recognition and measurement of losses are made independently of those relating to the
recognition of any compensation which might be receivable. It is not appropriate to take potential proceeds into
account when accounting for the losses. The potential receipt of compensation should be assessed continually
to ensure that it is appropriately reflected in the financial statements. The asset and the related income are
recognised in the period in which it is determined that a compensation will be received which means reviewing
the situation after the end of the reporting period and before the date of approval of the financial statements.

In this case, as it appears probable that the insurance claim for the loss of the non-current assets would be paid
and as this information was received before the financial statements were approved, the potential proceeds
($280 million) should be disclosed in the financial statements for the year ended 31 December 20X7. There
would be no disclosure of the insurance recovery related to the relocation costs or the lost revenue as the
recovery is not virtually certain. The insurance policy does not cover environmental damage which is the
responsibility of the government.

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b) Closure of overseas branch and onerous contract

A provision under IAS 37 Provisions, Contingent Liabilities and Contingent Assets can only be made in relation to
an entity’s restructuring plans where there is both a detailed formal plan in place and the plan has been
announced to those affected or the plan has commenced. The plan should identify areas of the business
affected, the effects on employees and the likely cost of the restructuring and the timescale for implementation.
The restructuring should begin as soon as possible and be completed in a timeframe that makes significant
changes to the plan unlikely.

As a formal and detailed plan has been made by the board of Wader and letters outlining the plan have been
sent to customers, suppliers and employees before the year end, the criteria of IAS 37 have been met and a
restructuring provision should be recognised at 31 March 20X8.

The provision should only include direct expenditure arising from the restructuring. It should not include costs
associated with on-going business operations. Costs of retraining staff or relocating continuing staff or marketing
or investment in new systems and distribution networks, should also be excluded. A breakdown of the $8 million
is required to assess which costs can be included in the provision and which must be excluded.

The supply contract is an example of an executory contract. These contracts are outside the scope of IAS 37,
unless the contract is onerous. An onerous contract is one where the unavoidable costs of performing the
contract exceed the benefits expected to be earned from the contract. Wader has taken legal advice and
identified this contract as onerous.

Wader has the option to pay an immediate cancelation fee of $2.4 million or to continue to pay the supplier $1.5
million each year for the next two years. The payments should be discounted to present value using the relevant
discount rate of 5%. The calculation gives a present value of the two payments of approximately $2.8 million
((1.5 ÷ 1.05) + (1.5 ÷ 1.052)).

A provision of $2.4 million, as the least cost option, should be recognised for the onerous contract.

(c) Defined Benefit Scheme

At each financial year end, the plan assets and the defined benefit obligation are remeasured. Any related
remeasurement gains and losses are recognized in other comprehensive income and cumulated in retained
earnings in Equity.

The statement of profit or loss records the change in the surplus or deficit except for contributions to the plan
and benefits paid by the plan and remeasurement gains and losses.

The amount of pension expense to be recognized in profit or loss is comprised of service costs and net interest
costs. Service costs are the current service costs, which is the increase in the present value of the defined benefit
obligation resulting from employee services in the current period, and ‘past-service costs. Marty’s past-service
costs are the changes in the present value of the defined benefit obligation for employee services in prior periods
which have resulted from the plan amendment and should be recognized as an expense.

IAS 19 Employee Benefits requires all past service costs to be recognized as an expense at the earlier of the
following dates:

(a) when the plan amendment or curtailment occurs, and

(b) when the entity recognizes related restructuring costs or termination benefits.

With effect from 1 October 20X0, the company amended the plan to increase pension entitlement for employees
and the present value of the improvement in benefits was calculated by the actuary to be approximately
$100,000 at 1 October 20X0. Thus, the past service cost of $100000 will be recognized at 30 September 20X1 as
an expense to SOPL and an increase in the PV of DBO.

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Net interest on the net defined benefit liability is calculated by multiplying the opening net defined benefit
liability by the discount rate at the start of the annual reporting period. Net interest on the net defined benefit
liability can be viewed as effectively including theoretical interest income on plan assets.

The profit or loss will be charged with an expense of $185000. OCI will be debited with a net remeasurement
loss of $23000 and cumulated in retained earnings in equity. Benefits paid have no effect on the net obligation
as both plan assets and obligations are reduced by $60000.

The SOFP as at 30 September 20x1 will show a Non-current liability (net DBO) of $40000 and as at 30 September
20x0 a Non-current asset of (net PA) $100000.

Workings: Defined benefit plan: amounts recognised in the statement of financial position

30 September 30 September
20X1 20X0
$'000 $'000
Present value of defined benefit obligation 2,410 2,400
Fair value of plan assets (2,370) (2,300)
40 (100)

Defined benefit expense recognised in profit or loss for the year ended 30 September 20X1
$'000
Current service cost 90
Net interest on the net defined benefit asset (115 – 115) 10
Past service cost 100
200
Other comprehensive income
Actuarial gain on defined benefit obligation (245)
Return on plan assets (excluding amounts in net interest) 53
Net remeasurement loss (192)

Changes in the present value of the defined benefit obligation

$'000
Opening defined benefit obligation at 1 October 20X0 2,400
Past service cost 100
Interest on obligation ((2,200+100) x 5%) 125
Current service cost 90
Benefits paid (60)

Remeasurement gain through OCI (balancing figure) (245)

Closing defined benefit obligation at 30 September 20X1 2,410

Changes in the fair value of plan assets

$'000
Opening fair value of plan assets at 1 October 20X0 2,300
Interest on plan assets (2,300 5%) 115
Contributions 68
Benefits paid (60)
Remeasurement loss through OCI (balancing figure) (53)

Closing fair value of plan assets at 30 September 20X1 2,370

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Question 4
(a) IFRS 3 Business Combinations states that an acquirer should recognised separately from goodwill, the
identifiable intangible assets acquired in a business combination. An asset is identifiable if it meets either the
separability or contractual-legal criteria in IAS 38 Intangible Assets.

Customer relationship intangible assets may be either contractual or non-contractual. Contractual customer
relationships are normally recognised separately from goodwill as they meet the contractual-legal criterion.
However, non-contractual customer relationships are recognised separately from goodwill only if they meet
the separable criterion.

Consequently, determining whether a relationship is contractual is critical to identifying and measuring both
separately recognised customer relationship intangible assets and goodwill, and different conclusions could lead
to substantially different accounting outcomes.

In the case of accounting for the acquisition of Binlory, the order backlog should be treated as an intangible
asset on the acquisition. The fair value of the order backlog is estimated based on the expected revenue to be
received, less the costs to deliver the product or service.

Canto has acquired water acquisition rights as part of a business combination.

The rights are valuable, as Binlory cannot manufacture vehicles without them. The rights were acquired at no
cost and renewal is certain at little or no cost. The rights cannot be sold other than as part of the sale of a
business as a whole, so there exists no secondary market in the rights. If Binlory does not use the water, then
it will lose the rights.

In this case, the legal rights cannot be measured separately from the business as a whole and therefore from
goodwill. Binlory would not be able to manufacture without the rights. Therefore, the legal rights should not be
accounted for as a separate intangible asset acquired in the business combination because the fair value cannot
be measured reliably as the legal rights cannot be separated from goodwill.

(b) ii) In accordance to IAS 23, capitalization of borrowing costs should be suspended during periods in which
active development is interrupted. In this scenario, all active development of the construction is put to a halt
when the natural disaster strikes, and hence, the capitalization of the borrowing costs should also be suspended
accordingly.

The recognition of government grants is covered by IAS20 ‘Accounting for government grants and disclosure
of government assistance’. The accruals concept is used by the standard to match the grant received with the
related costs. The relationship between the grant and the related expenditure is the

key to establishing the accounting treatment. Grants should not be recognised until there is reasonable
assurance that the company can comply with the conditions relating to their receipt and the grant will be
received. Provision should be made if it appears that the grant may have to be repaid.

There may be difficulties of matching costs and revenues when the terms of the grant do not specify precisely
the expense towards which the grant contributes. In this case the grant appears to relate to both the
construction of the hotel and retention of employees.

However, if the grant was related to revenue expenditure, then the terms would have been related to payroll or
a fixed amount per job retained. However, should the grant be capital based, it should be matched against the
depreciation of the hotels by using a deferred income approach or deducting the grant from the carrying value
of the asset (IAS20).

Additionally, the grant is only to be repaid if retention of employees is below 250 employees which itself would
seem to indicate that the grant is revenue based. If Norman feels that he is unable to retain 250 employees for
the next two years, a provision should be made for the estimated liability if the grant has been recognised.

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c) Investment property portfolio
There are two concerns: whether it is appropriate to include all start-up and transaction costs as part of the
initial measurement of the investment properties and how the fall in value is recognised. IAS 40 Investment
Property is clear that investment property is initially measured at cost, being purchase price plus directly
attributable costs. It specifies that start-up costs are not part of cost. The $2.5million start-up costs are therefore
capitalised incorrectly; it may also be the case that some transaction costs should not have been capitalised,
although legal costs, property taxes and similar costs should be. The nature of these costs should be investigated
in the light of the incorrect application of the standard to the start-up costs.

The concern is that management may have treated these start-up costs as an asset in order to avoid the expense
hitting the statement of profit or loss and therefore driving down net income and earnings.

Using the fair value model to measure investment properties is an accounting policy choice, but changes in value
should be recognised in profit or loss rather than other comprehensive income (OCI). Banken had a loss of $1.8
million on two of its buildings, and the concern here is also that keeping these losses of $1.8 million off out of
earnings will overinflate both net income and earnings per share. A higher earnings per share, in particular for
this company and this industry, can lead to higher share prices. It is unethical for expenses and losses to be
include in OCI for the sole purpose of overinflating bottom line net income and earnings.

Application of the following discussion to the scenario

Investment property portfolio
– Appropriate treatment of initial costs 2
– Impact of financial statements/earnings 1
– Appropriate treatment of fair value remeasurements 2
– Impact of financial statements/earnings 1

d) Pension fund surplus; asset ceiling test

Since there is a surplus on a defined benefit pension fund, Manding can potentially recognise an asset. However,
this is subject to the asset ceiling test. As defined in the Conceptual Framework for Financial Reporting, an asset
is a resource controlled by the entity as a result of past events and from which future economic benefits are
expected to flow to the entity. The ceiling or maximum amount to be recognised is the present value of any
economic benefits.

There are two ways that the company can gain potential economic benefits from a pension fund surplus; one is
by refund and the other by reducing future payments.

The asset that the company can recognise relating to the pension fund surplus is the higher of the amount that
can be refunded at present value (nil) and the present value of the reductions in future contributions ($250
million).

Accordingly, the asset of $300 million should be written down by $50 million to recognise an asset of $250
million; the maximum future economic benefit.

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