ACCA SBR Exam 1

Mawe obtained control of Sagana on 1 January 20X6 when its holding rose from 30% to 70%. Under IFRS 3 Business Combinations this is a business combination achieved in stages (a step acquisition): Sagana ceases to be an associate and becomes a subsidiary, and the acquisition method is applied at the date control is obtained.

Previously held interest. The 30% equity interest is treated as if it were disposed of and reacquired at fair value. It is remeasured from its equity-accounted carrying amount to fair value, and the difference is recognised in consolidated profit or loss: gain = 36000 − 29500 = 6500. The fair value of 36000 then forms part of the cost of the combination.

Identifiable net assets at fair value: carrying amount 88000 + kiln uplift 6000 − contingent liability 4000 = 90000. IFRS 3 requires the acquirer to recognise a contingent liability of the acquiree when it is a present obligation arising from past events and its fair value can be measured reliably, even though an outflow is not probable, so the farmers' claim is deducted.

Goodwill (NCI at fair value): cash consideration 52000 + fair value of the previously held interest 36000 + NCI at fair value 33000 = 121000. Goodwill = 121000 − 90000 = 31000.

Acquisition-related costs. The legal and due diligence fees of 900 are not part of the consideration transferred. They are expensed in consolidated profit or loss for 20X6 within operating expenses.

Conclusion. The team's figure of 20800 does not comply with IFRS 3: it capitalises the fees, uses the carrying amount rather than the fair value of the previously held interest, ignores the fair value adjustments and in effect measures the NCI at its share of book net assets instead of the group's fair value policy. Goodwill should be 31000, and a remeasurement gain of 6500 is recognised in profit or loss for 20X6.

📋 Objective: 4.1 (Group accounting including statements of cash flows (D1))

IAS 36 requires the carrying amount of a cash-generating unit (CGU), including the goodwill allocated to it, to be compared with its recoverable amount, the higher of value in use (120000) and fair value less costs of disposal (114000). The recoverable amount is therefore 120000.

Carrying amount of Sagana in the group at 31 December 20X6: own net assets 102000 + kiln uplift 6000 − additional depreciation 1200 (6000 / 5) − contingent liability 4000 = 102800; add goodwill 31000 = 133800.

Impairment loss = 133800 − 120000 = 13800.

Allocation. An impairment loss on a CGU is allocated first to goodwill and only then to the other assets pro rata to their carrying amounts. The loss of 13800 is less than goodwill of 31000, so it is charged entirely against goodwill, which falls to 17200. The kiln is not written down. The first proposal conflicts with the goodwill first rule and would leave goodwill overstated.

NCI. Because the NCI is measured at fair value, the goodwill of 31000 is full goodwill attributable to both the owners of Mawe and the NCI, so no gross-up is needed and the whole loss of 13800 is recognised in consolidated profit or loss within operating expenses. It is then attributed on the same basis as profit: owners of Mawe 70% = 9660 and NCI 30% = 4140. Charging only 70% would understate the expense by 4140 and overstate the NCI.

Conclusion: both proposals should be rejected. An impairment loss of 13800 is charged in full against goodwill in consolidated profit or loss, with 4140 attributed to the NCI.

📋 Objective: 4.1 (Group accounting including statements of cash flows (D1))

Adjusted consolidated statement of profit or loss for the year ended 31 December 20X6 ($000)

Workings

1. Intragroup sales: the 24000 of clinker sold by Sagana to Mawe is eliminated from both revenue and cost of sales. Revenue = 412000 − 24000 = 388000.

2. Unrealised profit in inventory (PURP) = 24000 × 25 / 125 × 40% = 1920, added to cost of sales. Sagana is the seller, so this unrealised profit also reduces the profit attributed to the NCI.

3. Additional depreciation on the kiln fair value uplift = 6000 / 5 = 1200, charged to cost of sales. Cost of sales = 268000 − 24000 + 1920 + 1200 = 247120.

4. Operating expenses = 71000 + acquisition fees 900 + goodwill impairment 13800 = 85700. Operating profit = 140880 − 85700 = 55180.

5. The remeasurement gain of 6500 on the previously held 30% interest arises from an equity-accounted investment, so it is presented in the investing category after operating profit. Profit before financing and income taxes = 55180 + 6500 = 61680.

6. Profit before tax = 61680 − 8500 = 53180; profit for the year = 53180 − 16100 = 37080. The contingent liability is unchanged at 4000, so it has no effect on 20X6 profit.

Overall the adjustments reduce the draft profit for the year by 48400 − 37080 = 11320.

📋 Objective: 4.1 (Group accounting including statements of cash flows (D1))

Under IFRS 15 revenue is recognised when (or as) a performance obligation is satisfied by transferring control of goods or services to the customer.

Zuru Farms: bill-and-hold. Control can pass although the goods stay in Mbolo's warehouse if all the bill-and-hold criteria are met: the reason for the arrangement is substantive (Zuru requested it because its stores are full), the fertiliser is identified separately as belonging to Zuru, it is ready for physical transfer, and Mbolo cannot use it or direct it to another customer. All are met and Zuru has accepted the goods, so control of the fertiliser passed in December 20X6. The storage is a separate performance obligation (a custodial service) satisfied from January to March 20X7. The price of 18000 is allocated on relative standalone selling prices: storage = 18000 × 800 / 20000 = 720; fertiliser = 18000 × 19200 / 20000 = 17280. Revenue for 20X6 is 17280 and 720 is a contract liability, recognised over the storage period in 20X7.

Gwarzo Agro. The urea has not been segregated or identified as Gwarzo's and can be used for other orders, so the criteria are not met and control has not transferred. Revenue of 6000 and the receivable are reversed and inventory of 4500 is reinstated at cost; profit falls by 1500.

Agro-dealers: right of return. Expected returns are variable consideration. Revenue is recognised only for goods not expected to be returned: 30000 × 90% = 27000, with a refund liability of 3000. An asset for the right to recover goods of 22500 × 10% = 2250 is recognised and cost of sales becomes 20250, so profit falls by 3000 − 2250 = 750.

Effect. Revenue falls by 720 + 6000 + 3000 = 9720 to 244880, below 250000, and profit before tax falls by 720 + 1500 + 750 = 2970 to 18430.

📋 Objective: 3.1 (Revenue (C1))

Accounting context. Part (a) shows that applying IFRS 15 correctly reduces revenue by 9720 to 244880, below the 250000 bonus threshold, and reduces profit before tax by 2970. These are not 'immaterial technicalities': they decide whether a bonus is paid and whether the statement to the investor is true, so they are material by nature.

Threats. Tunde has a self-interest threat because his bonus depends on reported revenue, and his insistence on the draft figures suggests he is not acting with integrity or objectivity. Hauwa faces an intimidation threat: Tunde has linked her probation review to being 'a team player' and imposed a Friday deadline. She also faces a self-interest threat to her own job security.

Principles at risk. Under the ACCA Code of Ethics and Conduct, Hauwa must act with integrity and must not be associated with information she believes is materially misleading. Objectivity requires her not to let pressure override her judgement. Professional competence and due care require her to apply IFRS 15 correctly; as a new employee she should check her analysis of the bill-and-hold and returns issues carefully. Professional behaviour requires compliance with law: misleading a prospective investor could expose Mbolo and its directors to legal action. The financial statements must give a faithful representation.

Recommended actions. Hauwa should document her calculations, the discussions and Tunde's comments; explain the IFRS 15 requirements to Tunde in writing and propose the corrected figures; and, if he refuses, escalate the matter to the audit committee or the chair of the board, using any internal whistleblowing procedure. She should not finalise figures she knows are misstated, whatever the deadline. She may contact the ACCA ethics helpline and should take legal advice before any external disclosure. The board should be told that the 'record revenue' claim cannot be made. If the matter is not resolved, resignation is a last resort after internal escalation, and she should keep records to protect herself.

📋 Objective: 1.1 (Professional and ethical behaviour in corporate reporting (A1))

Reassessment, not a modification. Under IFRS 16 a lease modification is a change in the scope of, or the consideration for, a lease that was not part of its original terms. The extension option was in the original contract, so using it is not a modification. Instead IFRS 16 requires a lessee to reassess whether it is reasonably certain to exercise an option when a significant event or change in circumstances within its control occurs. Installing a bespoke plant with a ten-year life that cannot be removed creates a significant economic incentive to stay, so from 1 January 20X6 Frigo Atlas is reasonably certain to extend and the remaining lease term becomes eight years.

Remeasuring the lease liability. A change in lease term requires a revised discount rate at the reassessment date (7%). Remaining payments: 3 + 5 = 8 annual payments of 2000. Revised liability = 2000 × 5.971 = 11942. Increase = 11942 − 5346 = 6596, which is added to the right-of-use asset rather than taken to profit or loss.

Right-of-use asset: 5055 + 6596 = 11651, depreciated over the remaining eight years: 11651 / 8 = 1456 for 20X6, leaving 10195.

Lease liability in 20X6: finance cost 11942 × 7% = 836; closing liability = 11942 + 836 − 2000 = 10778, split between current and non-current.

Blast-freezing plant. The plant is Frigo Atlas's own property, plant and equipment (a leasehold improvement) under IAS 16. It can only be used while Frigo Atlas occupies the warehouse, so its useful life to the entity is limited to the lease term of eight years: depreciation = 9000 / 8 = 1125, not 900 over ten years.

Conclusion: profit or loss for 20X6 shows depreciation of 1456 and 1125 and interest of 836; the statement of financial position shows a right-of-use asset of 10195, plant of 7875 and a lease liability of 10778.

📋 Objective: 3.4 (Leases (C4))

IAS 37 defines an onerous contract as one in which the unavoidable costs of meeting the obligations exceed the economic benefits expected to be received under it. The present obligation under an onerous contract is recognised as a provision. The unavoidable costs are the lower of the cost of fulfilling the contract and any compensation or penalty from failing to fulfil it.

Cost of fulfilling. Under the amendments to IAS 37 effective from 2022, the cost of fulfilling a contract comprises the costs that relate directly to the contract: the incremental costs (electricity and direct labour) and an allocation of other directly related costs, such as depreciation of the chambers used. Cost of fulfilling = 2 × (1400 + 400) = 3600, against benefits of 2 × 1500 = 3000, a net cost of 3600 − 3000 = 600. The cost of exiting is the penalty of 700. The unavoidable cost is the lower amount, the net cost of fulfilling of 600.

Directors' argument. Looking only at incremental costs (2 × 1400 = 2800, below the 3000 of fees) is not permitted, because it ignores the depreciation of chambers that relate directly to the contract. The contract is onerous. Before recognising a provision, Frigo Atlas must recognise any impairment loss on assets dedicated to the contract; the chambers are shared with other customers and are not impaired, so no impairment arises.

Conclusion. A provision of 600 is recognised at 31 December 20X6, with the expense in profit or loss for 20X6 (discounting ignored). It is used in 20X7 and 20X8 as the losses arise, and the key judgements are disclosed.

📋 Objective: 3.7 (Provisions, contingencies and events after the reporting period (C7))

IAS 8 distinguishes changes in accounting estimates, which result from new information or new developments, from prior period errors, which are omissions or misstatements caused by failing to use reliable information that was available when earlier financial statements were authorised for issue.

(i) Trucks: change in estimate. Useful life is an accounting estimate and the corrosion survey is new information obtained in 20X6. The eight-year estimate was reasonable when made, so there is no error. A change in estimate is applied prospectively, in the current and future periods only, and comparatives are not adjusted. Carrying amount at 1 January 20X6 = 12000 − (2 × 1500) = 9000. Remaining life = 5 − 2 = 3 years, so depreciation for 20X6 = 9000 / 3 = 3000, and 3000 in each of 20X7 and 20X8. The directors' proposal is not permitted: it would charge the catch-up of 1800 ((2400 − 1500) × 2) to opening retained earnings instead of profit or loss, so 20X6 would bear only 2400 instead of 3000 and current profit would be flattered by 600. The nature and amount of the change is disclosed.

(ii) Electricity invoice: prior period error. The invoice was received before the 20X5 statements were authorised, so the information was available and was omitted through a formula mistake. This is a material prior period error, corrected by retrospective restatement in the first financial statements authorised after its discovery. The 20X5 comparatives are restated, increasing operating expenses and accruals by 850, and the opening retained earnings for 20X6 are reduced by 850. The 850 is removed from 20X6 operating expenses, so 20X6 profit rises by 850. The nature of the error and the correction for each line item affected are disclosed. Leaving the charge in 20X6 would misstate both years.

Conclusion: both proposals should be rejected: the estimate is applied prospectively and the error is corrected retrospectively.

📋 Objective: 3.11 (Other reporting issues (C11))

Definition. IFRS 18 defines an MPM as a subtotal of income and expenses that an entity uses in public communications outside the financial statements, that communicates management's view of an aspect of the financial performance of the entity as a whole, and that is not listed in IFRS 18 or specifically required by IFRS Accounting Standards. IFRS 18 lists subtotals that are not MPMs, including operating profit before depreciation, amortisation and impairments within the scope of IAS 36.

Calculation. Operating profit (IFRS 18 basis) = 125200 − 41200 − 12600 − 5300 − 4700 − 2100 = 59300. Operating profit before depreciation, amortisation and impairment = 59300 + 41200 + 12600 + 5300 = 118400, which is a listed subtotal and so not an MPM. Adjusted EBITDA goes further, adding back restructuring and share-based payment: 118400 + 4700 + 2100 = 125200. It is a subtotal of income and expenses, used in results announcements and investor presentations, and conveys the directors' view of underlying performance, so it is an MPM.

Consequences. The directors cannot keep it outside the financial statements. Sankofa must disclose in a single note: why the measure is useful and how it is calculated; that it gives management's view and may not be comparable with other entities; a reconciliation to operating profit before depreciation, amortisation and impairment (the most directly comparable listed subtotal); and the income tax effect and NCI effect of each reconciling item. Tax effect: restructuring 4700 × 25% = 1175; share-based payment nil as it is not deductible; no NCI effect. The note is audited.

Stakeholder view. Equity investors find EBITDA-type measures useful for comparing capital-intensive telecoms operators and assessing cash generation. However, restructuring has been excluded for four years, so it is recurring rather than exceptional, and share-based payment is a real cost of rewarding staff; together they flatter performance by 6800. Lenders focus on debt capacity and covenant compliance, so they need to see how the loan agreement's EBITDA relates to audited figures.

Conclusion. Adjusted EBITDA is useful context, but the IFRS 18 note with its reconciliation gives investors and lenders the transparency to judge the adjustments, and the directors should stop excluding recurring restructuring costs.

📋 Objective: 5.1 (Analysis and interpretation of information and measurement of performance (E1))

IFRS 18 replaces the previous presentation standard for periods beginning on or after 1 January 2027. It requires income and expenses in the statement of profit or loss to be classified in five categories: operating, investing, financing, income taxes and discontinued operations, and it requires two defined subtotals, operating profit and profit before financing and income taxes. Classification depends on the main business activities; Sankofa has no specified main business activity of investing or providing finance.

Investing category. Income from assets that generate returns individually and largely independently of other resources is classified in the investing category, including the share of profit of an equity-accounted associate (4100) and interest income on cash and bank deposits (3200). Both are removed from operating profit.

Financing category. Interest on borrowings (22500) is financing, and interest expense on other liabilities, such as lease liabilities (6800) and the unwinding of the discount on the decommissioning provision (900), is also financing. The 900 is removed from operating costs: 427600 − 900 = 426700.

Restated extract for 20X6: revenue 486000; network and operating costs (426700); operating profit = 486000 − 426700 = 59300 (previously 65700); investing: interest income 3200 and share of profit of associate 4100 = 7300; profit before financing and income taxes = 59300 + 7300 = 66600; financing: 22500 + 6800 + 900 = 30200; profit before tax = 66600 − 30200 = 36400 (unchanged); income tax (9100); profit for the year 27300.

Other implications. Operating profit falls by 6400, which may affect ratios, remuneration targets and any covenant based on operating profit. IFRS 18 is applied retrospectively, with restated comparatives and a reconciliation for 20X6 of each line item previously presented. Sankofa must also apply the enhanced aggregation and disaggregation guidance, disclose specified expenses by nature (depreciation, amortisation, employee benefits and impairment) if it presents expenses by function, and include the MPM note. Systems and data capture will need updating.

📋 Objective: 6.1 (Discussion of issues in financial reporting (F1))

IAS 7 previously allowed a choice in classifying interest and dividends paid and received. The amendments made by IFRS 18 remove this choice for an entity such as Sankofa that has no specified main business activity of investing in assets or providing finance to customers.

Classification: interest paid (28600, including interest on lease liabilities) and dividends paid (14000) are classified in financing activities; interest received (3000) and dividends received from the associate (1500) are classified in investing activities. This aligns the cash flow statement with the IFRS 18 categories in profit or loss. In addition, the indirect method reconciliation must start from operating profit rather than profit before tax.

Revised net cash from operating activities = 138000 + 28600 + 14000 − 3000 − 1500 = 176100. Net cash from investing activities improves by 3000 + 1500 = 4500 and net cash used in financing activities increases by 28600 + 14000 = 42600. The total change in cash is unchanged.

Advice: the change is applied retrospectively, with the 20X6 comparatives restated. Sankofa should explain to investors and lenders that the higher operating cash flow comes from reclassification, not better cash generation, and review any covenant or KPI based on operating cash flow.

📋 Objective: 3.10 (Presentation and disclosure in financial statements (C10))