ACCA

Strategic Business Reporting

(SBR)

Final Mock – September 2023

Time allowed 3 hours and 15 minutes

This mock 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

Instructions:
Take a few moments to review the notes on the inside of this page titled, 'Get into good exam habits now!' before
attempting this exam.

DO NOT OPEN THIS EXAM UNTIL YOU ARE READY TO START UNDER
EXAMINATION CONDITIONS

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 Get into good exam habits now!
Take a moment to focus on the right approach for this exam.

Effective time management

• Watch the clock and allow 1.95 minutes per mark. Work out how long you can spend on each
question and do not exceed that time.
• Take a few moments to think what the requirements are asking for and how you are going to
answer them.

Effective planning
• This mock is in exactly the same format as the real exam. You should read through the exam and
plan the order in which you will tackle the questions. Always start with the one you feel most
confident about.
• Read the requirements carefully: focus on mark allocation, question words (see below) and
potential overlap between requirements.
• Identify and make sure you pick up the easy marks available in each question.

Effective layout
• Present your numerical solutions using the standard layouts you have seen. Show and reference
your workings clearly.
• With written elements try and make a number of distinct points using headings and short
paragraphs. You should aim to make a separate point for each mark.
• Ensure that you explain the points you are making in order to score the one mark per point
available ie why is the point a strength, criticism or opportunity?
• Give yourself plenty of space to add extra lines as necessary; it will also make it easier for the
examining team to mark.

Common terminology
Question Actual meaning Key tips
requirement
Advise To offer guidance or some relevant expertise to a Counsel, inform or notify
recipient, allowing them to make a more informed
decision
Calculate To ascertain by computation, to make an estimate Provide description along with numerical
of; evaluate, to perform a mathematical process calculations
Discuss Consider and debate/argue about the pros and Write about any conflict, compare and
cons of an issue; examine in detail by using contrast
arguments in favour or against
Explain Make an idea clear; show logically how a concept Don't just provide a list of points, add in
is developed; give the reason for an event some explanation of the points you're
discussing

These definitions have been extracted from a longer list of common question verbs on the ACCA website:
www.accaglobal.com/uk/en/student/sa/study-skills/questions.html

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 Section A – Both questions are compulsory and MUST
be attempted
1 Allen Co
The Allen Co Group comprises Allen Co and Beaumont Co, which are public limited companies with a reporting
date of 30 June 20X7. The Allen Co Group reports under IFRS Accounting Standards.
The following exhibits provide information relevant to the question.
1. Acquisition of Beaumont Co - provides information about the acquisition of Beaumont Co.
2. Draft consolidated SOFP - a spreadsheet showing the draft consolidated statement of financial position
prepared by the finance director.
3. Share options - provides information about share options issued by Allen Co.
4. Equipment contract - provides information on a contract entered into by Allen Co.
This information should be used to answer the question requirements in your chosen response option(s).
Exhibit 1 – Acquisition of Beaumont Co
Allen Co acquired 40% of the equity interests in Beaumont Co for a cost of $100 million on 1 July 20X5,
achieving significant influence. On 1 July 20X6, Allen Co acquired a further 20% of the equity interests for $62
million and obtained control of Beaumont Co. The $62 million paid included $2 million of legal fees which were
capitalised as part of the cost of the investment.
The net assets of Beaumont Co had a carrying amount of $230 million and $250 million on 1 July 20X5 and
1 July 20X6 respectively. The increase in net assets was due to retained profits only. No fair value adjustments
were required to the net assets at either date.
The fair value of the original 40% equity interest at 1 July 20X6 is deemed to be $115 million. This amount is also
the fair value of the non-controlling interest at 1 July 20X6.
The finance director has prepared a spreadsheet showing the draft consolidated statement of financial position
(SOFP) as at 1 July 20X6 (exhibit 2). In the draft consolidated SOFP, the investment and further investment in
Beaumont Co have been stated at cost and the net assets of Beaumont Co have been consolidated at their
carrying amounts.
The finance director has calculated goodwill on the acquisition of Beaumont Co to be $27 million. In the goodwill
calculation, the finance director has included both the new 20% investment and the previously held 40%
investment at their respective costs of $62 million and $100 million.
The finance director thinks an adjustment to equity may be required in the group accounts in relation to the
increase in shareholding in Beaumont Co. She thinks this is calculated as the fair value of the 40% investment at
the date control is achieved less the original cost of the 40% investment. However, the finance director is
awaiting clarification on this and so to balance the draft consolidated SOFP, she has included a suspense
account with a balance of $277 million.
The directors of Allen Co elected to measure the non-controlling interest in Beaumont Co at fair value at
acquisition.

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 Exhibit 2 – Draft consolidated SOFP
$m
Assets
Non-current Assets
Property, Plant and equipment 2,586
Investment in Beaumont Co 100
Further investment in Beaumont Co 62
Goodwill 27
2,775

Current Assets 542

Total Assets 3,317

Equity
Equity attributable to equity holders of the company
Share capital 125
Other components of equity 430
Retained earnings 1,350
Total Equity 1,905

Non-controlling Interest
Suspense account 277
Liabilities 1,135
Total equity and Liabilities 3,317
Exhibit 3 – Share options
Allen Co granted 100 options to each of its 4,000 employees on 1 July 20X4. The fair value of each option at that
date was $10. The options vest upon the company's share price reaching $15, providing the employee has
remained in the company's service until that time. The terms and conditions of the options are that the market
condition can be met in either year 3, 4 or 5 of the employee's service.
At the grant date, Allen Co estimated that the expected vesting period would be four years, which is consistent
with the assumptions used in measuring the fair value of the options granted, and maintained this estimate at
30 June 20X5 and 30 June 20X6. None of the 4,000 employees entitled to the options were anticipated to leave
and none of them had left by 30 June 20X7.
The company's share price reached $15 on 30 June 20X7. The share options were accounted for correctly in the
years ended 30 June 20X5 and 20X6. However, the finance director is unsure how to account for the share
options in the year ended 30 June 20X7.
Exhibit 4 – Equipment contract
On 1 February 20X7, Allen Co entered into a contract with a customer to supply specialised equipment. Allen Co
has developed the equipment in conjunction with the customer but has contracted with a supplier for its
manufacture. The supplier will deliver the equipment directly to the customer. Allen Co will pay the supplier
directly and will invoice the customer with the agreed selling price which is cost plus 25%. Any equipment defects
are the responsibility of Allen Co.
Required
(a) Using exhibit 1, explain, with suitable workings, how the goodwill in Beaumont Co should be calculated
and discuss, with suitable workings, whether the finance director is correct that an adjustment to equity is
required in relation to the increase in shareholding in the consolidated financial statements for the year
ended 30 June 20X7. (9 marks)

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 (b) Using the information in the spreadsheet in exhibit 2 along with the information in exhibit 1 and your
answer to part (a), adjust the spreadsheet prepared by the finance director in order to prepare a corrected
consolidated statement of financial position at 1 July 20X6. The spreadsheet should take into account:
• The correct accounting treatment for Beaumont Co
• Goodwill using fair value to calculate non-controlling interest
• The correction of any errors made by the finance director
Note. The information in exhibit 2 will be repeated in the CBE in the pre-populated spreadsheet response
option. (10 marks)
(c) Using exhibit 3, discuss, with suitable workings, how the share options should be accounted for in Allen
Co's individual company financial statements for the year ended 30 June 20X7. (7 marks)
(d) Using exhibit 4, discuss whether Allen Co is acting as a principal or agent in the equipment contract in
accordance IFRS 15 Revenue from Contracts with Customers. (4 marks)
Note. Marks will be allocated in (a), (c) and (d) for a suitable discussion of the principles involved as well as the
accounting treatment.
(Total = 30 marks)

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 2 Farham
Farham manufactures white goods such as washing machines, tumble dryers and dishwashers. The industry is
highly competitive with a large number of products on the market. Brand loyalty is consequently an important
feature in the industry. Farham operates a profit-related bonus scheme for its senior management team based
upon the consolidated financial statements but recent results have been poor and bonus targets have rarely
been achieved. As a consequence, the company is looking to restructure and sell its 80% owned subsidiary
Newall which has been making substantial losses. The current year end is 30 June 20X8.
The following exhibits provide information relevant to the question.
1. Factory subsidence - provides information about a factory belonging to Farham that requires repair.
2. Sale of Newall - provides information on Farham’s plan to sell its subsidiary, Newall.
This information should be used to answer the question requirements within your chosen response option(s).
Exhibit 1 - Factory subsidence
Farham has a production facility which started to show signs of subsidence since January 20X8. It is probable
that Farham will have to undertake a major repair sometime during 20X9 to correct the problem. Farham does
have an insurance policy but it is unlikely to cover subsidence. The chief operating officer (COO) refuses to
disclose the issue at 30 June 20X8 since no repair costs have yet been undertaken although she is aware that
this is contrary to IFRS Accounting Standards. The COO does not think that the subsidence is an indicator of
impairment. He argues that no provision for the repair to the factory should be made because there is no legal or
constructive obligation to repair the factory.
Farham has a revaluation policy for property, plant and equipment and there is a balance on the revaluation
surplus of $10 million in the financial statements for the year ended 30 June 20X8. None of this balance relates
to the production facility but the COO is of the opinion that this surplus can be used for any future loss arising
from the subsidence of the production facility.
Exhibit 2 - Sale of Newall
At 30 June 20X8 Farham had a plan to sell its 80% subsidiary Newall. This plan has been approved by the board
and reported in the media. It is expected that Oldcastle, an entity which currently owns the other 20% of Newall,
will acquire the 80% equity interest. The sale is expected to be complete by December 20X8. Newall is expected
to have substantial trading losses in the period up to the sale. The accountant of Farham wishes to show Newall
as held for sale in the consolidated financial statements and to create a restructuring provision to include the
expected costs of disposal and future trading losses. The COO does not wish Newall to be disclosed as held for
sale nor to provide for the expected losses. The COO is concerned as to how this may affect the sales price and
would almost certainly mean bonus targets would not be met. The COO has argued that they have a duty to
secure a high sales price to maximise the return for shareholders of Farham. He has also implied that the
accountant may lose his job if he were to put such a provision in the financial statements. The expected costs
from the sale are as follows:

Future trading losses $30 million

Various legal costs of sale $2 million
Redundancy costs for Newall employees $5 million
Impairment losses on owned assets $8 million
Included within the future trading losses is an early payment penalty of $6 million for a leased asset which is
deemed surplus to requirements.
Required
(a) (i) Discuss the accounting treatment which Farham should adopt in the consolidated financial
statements to address the issues in exhibit 1. (5 marks)
(ii) Discuss the accounting treatment which Farham should adopt in the consolidated financial
statements to address the issues in exhibit 2. (6 marks)

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 (b) Using exhibits 1 and 2, discuss the ethical issues arising from the scenario, including any actions which
Farham and the accountant should undertake. (7 marks)
Professional marks will be awarded in part (b) of this question for the application of ethical principles and for
identifying appropriate actions. (2 marks)
(Total = 20 marks)

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 Section B – Both questions are compulsory and MUST
be attempted
3 Ratcliffe Co
Background
Ratcliffe Co is a listed company which is seeking to grow. In order to fund this expansion, Ratcliffe Co is looking
to raise new long-term finance but is concerned about breaching its existing loan covenants which are based on
gearing and interest cover.
The following exhibits provide information relevant to the question.
1. Financial instruments - provides information on financial instruments Ratcliffe Co is proposing to issue.
2. Alternative performance measures - provides information about alternative performance measures
Ratcliffe Co has decided to disclose.
This information should be used to answer the question requirements within your chosen response option(s).
Exhibit 1 – Financial instruments
The directors of Ratcliffe Co are proposing to issue the following preference shares:
(i) 'A' class: 40 million irredeemable $1 preference shares at par value. Under the terms attaching to the
preference shares, a dividend will be payable on the preference shares only if Ratcliffe Co also pays a
dividend on its ordinary shares relating to the same period.
(ii) 'B' class: 10 million $1 redeemable preference shares at par value. These shares give the holder the right
to a fixed cumulative cash dividend of 5% per annum of the issue price of each preferred share. The
preference shares can be redeemed, but only at the option of Ratcliffe Co, at an unspecified future date.
The directors are seeking advice on the accounting treatment of these preference shares.
Exhibit 2 – Alternative performance measures
The directors are aware that classification of financial instruments as liabilities or equity can have a significant
effect on the financial statements. Guidance is provided in IAS 32 Financial Instruments: Presentation (and other
standards for items outside the scope of IAS 32). However, many financial instruments have features of both
debt and equity which can result in inconsistency of reporting and confusion amongst investors. To aid investors
in their analysis of Ratcliffe Co's financial statements, the directors have decided to disclose 'adjusted gearing'
and 'adjusted interest cover' and emphasise these figures in their management commentary. For the purposes of
calculating this information, the directors have based the classification of financial instruments on their legal form.
This has resulted in some financial instruments classified as debt under IAS 32 being treated as equity in the
'adjusted gearing' and 'adjusted interest cover' calculations.
Required
(a) Using exhibit 1, explain to the directors how the financial instruments they propose to issue should be
classified and presented in the financial statements of Ratcliffe Co under IAS 32 Financial Instruments:
Presentation and IFRS 9 Financial Instruments and the impact of issuing the financial instruments on
gearing and interest cover.
Note. You do not need to discuss the measurement of the financial instruments in your answer.
(8 marks)
(b) Using exhibit 2:
(i) Discuss whether the classification of a financial instrument as debt or equity under IAS 32 is
relevant to investors in making economic decisions and give examples of further disclosures
about financial capital in an annual report that may be useful to investors. (10 marks)

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 (ii) Discuss, from the perspective of investors in Ratcliffe Co, the usefulness of disclosing 'adjusted
gearing' and 'adjusted interest cover'. (5 marks)
Note. Professional marks will be awarded in part (b) for clarity and quality of presentation. (2 marks)
(Total = 25 marks)

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 4 Genovate Co
Genovate Co is a listed company with a year end of 31 December 20X3. Genovate Co's directors are seeking
advice on how to determine the fair value for three items.
The following exhibits provide information relevant to the question.
1. Property - provides information about a property acquired by Genovate Co.
2. Decommissioning liability - provides information about a decommissioning liability assumed by
Genovate Co as part of an acquisition.
3. Development project - provides information about a development project acquired by Genovate Co as
part of an acquisition.
This information should be used to answer the question requirements within your chosen response option(s).
Exhibit 1 – Property
Halfway through the year ended 31 December 20X3, Genovate Co acquired a property situated in the business
district of a large city which it subsequently leased under operating leases to several small businesses. At the
time of purchase, the local government zoning rules stipulated that the property must be used for commercial
rather than residential purposes. However, on 1 December 20X3 this restriction was removed. The directors
have established that were the property to be sold at 31 December 20X3, it would raise $29 million if sold as a
residential apartment block or $25 million if sold as offices. In either case, legal fees of 1% of the sale price would
be incurred. The directors are unsure which measure is appropriate given their intention to continue to lease the
property to small businesses.
Exhibit 2 – Decommissioning liability
Genovate Co acquired a subsidiary, Creogen Co, on 31 December 20X3. As part of the acquisition, Genovate
Co assumed a decommissioning liability and is required to fair value it. Creogen Co has to decommission a
generating plant at the end of its useful life, which is in three years' time.
The directors are unsure how the liability should be measured, but have determined that a valuation technique
will be required. They have provided the following information on the assumption that Genovate Co is allowed to
transfer the liability to another market participant.
• Labour, material and overhead costs to decommission the plant are $3.75 million, not adjusted for
inflation.
• Third party contractors in the industry typically add a 30% mark-up and expect a premium of 5% of the
expected cash flows (after including the effect of inflation) to take into account risk that cash flows may be
more than expected.
• Inflation is expected to be on average 4% annually over the three years.
• The risk-free interest rate for a three-year maturity is 3%. An appropriate adjustment to the risk-free rate
for Genovate Co's non-performance risk is 2%.
Exhibit 3 – Development project
During the year Genovate Co acquired a small start-up company in order to gain access to the company's
development project relating to the next generation of a specialised microchip. The directors of Genovate Co do
not intend to complete the project, but instead acquired the project to prevent competitors from accessing the
technology. If the project was completed, it would compete with one of Genovate Co's own projects. The
directors believe that if Genovate Co's competitors had acquired this project, they would strive to complete the
development as none of Genovate Co's competitors have similar technology in development. As the directors are
planning not to complete the project, they consider the fair value of the related intangible asset to be nil.

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 Required
(a) Explain to the directors of Genovate Co how the fair value of the following items should be determined in
accordance with IFRS Accounting Standards, with reference to the principles of IFRS 13 Fair Value
Measurement.
(i) Property (exhibit 1) (5 marks)
(ii) Decommissioning liability (exhibit 2) (7 marks)
(iii) Development project (exhibit 3) (4 marks)
(b) The directors of Genovate Co are concerned about the increasing levels of disclosure in the Genovate Co
annual report. They have read an article which suggests that excessive disclosure is burdensome and
can overwhelm users. However, other articles argue that there is no such thing as too much 'useful'
information for users.
Discuss why it is important to ensure the optimal level of disclosure in annual reports, describing the
reasons why the users of annual reports may have found disclosure to be excessive in recent years and
the actions taken by the International Accounting Standards Board to address this issue. (9 marks)
Note. You do not need to refer to any exhibit to answer part (b).
(Total = 25 marks)

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