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Strategic
Business
Reporting (SBR)

Mock Exam 1
Exam Session December 2023

Facilitation by: Hussain Qazi

Exam Duration: 3 Hours and 20 Minutes
Exam Submission: [email protected]

Pre-Populated Exam Sheet available with separated

excel file.
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Question 1
Background
Fewston Co operates in the agrifood industry and owns shares in a number of companies. The group’s
current financial year end is 30 June 20X1.
The following exhibits, available on the left-hand side of the screen, provide information relevant to the
question:
1. Foreign currency transactions – provides information about two transactions denominated in the
Hemdollar.
2. Forward contract – provides details of a hedge against a future purchase of an item of plant in a
foreign currency.
3. Acquisition of Swinsty Co – explains the acquisition of Swinsty Co on 1 January 20X0.
4. Further information – provides further information about the draft consolidated statement of
profit or loss and other comprehensive income (included in pre-formatted response option and
exhibit 5).
5. Draft consolidated SOPL and OCI – draft consolidation statement of profit or loss (SOPL) and other
comprehensive income (OCI) for the year ended 30 June 20X1.
This information should be used to answer the question requirement within your chosen response
option(s).
Exhibit 1
Foreign currency transactions
During the year ended 30 June 20X1,Fewston Co entered into two transactions denominated in the
Hemdollar(HD), the currency of Hemland:
On 1 July 20X0, the company acquired a 90% equity shareholding in Elarbol Co, a supplier, giving rise to
goodwill of HD6.1 million. For the purpose of calculating goodwill, the non-controlling interest (NCI) was
measured as a proportion of net assets. The net assets of Elarbol Co had a carrying amount equal to their
fair value of HD49.9 million at the acquisition date and a carrying amount of HD56.3million at 30 June
20X1.
On 12 June 20X1, Fewston Co purchased goods for resale on 60 days credit from Elcampo Co, an unrelated
company, at a cost of HD430, 000. At the year end, the amount has not been paid.
Rates of exchange between the $ and HD are given as follows:
1 July 20X0 $1:HD9.2
12 June 20X1 $1:HD9.8
30 June 20X1 $1:HD10
Average for the year ended 30 June 20X1 $1:HD9.3
Neither Fewston Co nor Elarbol Co has recognised any amounts in respect of exchange gains or losses
in their individual financial statements. Elarbol Co has otherwise translated its financial statements in
accordance with IFRS Accounting Standards.
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Exhibit 2
Forward contract
On 12 May 20X1, Menwith Co, which has been a 75% owned domestic subsidiary of Fewston Co for over
10 years, signed a contract to purchase a major new item of processing plant. The plant will be purchased
from a supplier based in Wittland where the local currency is the Wittmark (WM). The plant is priced at
WM5.4 million and this amount is payable when the plant is delivered to Menwith Co. Delivery has been
fixed for 1 August 20X1. In accordance with group risk management policy, Menwith Co has hedged the
purchase by entering into a nil cost forward contract on 12 May 20X1 to buy WM5.4 million at a fixed rate
of $1:WM3.25. It prepared documentation to support fair value hedge accounting prior to 12 May 20X1.
Exchange rate information:
Spot rates Forward rates
(Delivery 1 August 20X1)
12 May 20X1 $1:WM3.30 $1:WM3.25
30 June 20X1 $1:WM3.15 $1:WM3.18
No accounting entries have been made by Menwith Co in respect of the hedging arrangement.
Exhibit 3
Acquisition of Swinsty Co
Fewston Co acquired 80% of the ordinary shares in Swinsty Co on 1 January 20X0. At the acquisition date
Swinsty Co’s administrative offices were found to have a fair value $2.5 million in excess of their carrying
amount and the average remaining useful life of these offices was 20 years.
During the year ended 30 June 20X1, Swinsty Co sold goods to Fewston Co for $1.9 million, giving rise to
an unrealised profit in Fewston Co’s inventory of $80,000 at the year end.
Both Fewston Co and Swinsty Co pay corporate income tax at 20%.
Exhibit 4
Further information
The draft consolidated statement of profit or loss and other comprehensive income has been prepared
by adding together the income, expenses and other comprehensive income (OCI) of Fewston Co, Elarbol
Co, Menwith Co and Swinsty Co. No further adjustments have been made other than to eliminate the
intercompany sale between Swinsty Co and Fewston Co; however, in each case the relevant proportion
of the subsidiary’s separate profits and total comprehensive income has been allocated to the NCI.
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Exhibit 5
Draft consolidated SOPL and OCI
Draft consolidated statement of profit or loss and other comprehensive income The draft extracts have
been replicated in the spreadsheet response option.
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Requirements
Part (a) Using exhibit 1:
i. Calculate the exchange differences to be included in the consolidated financial statements for the
year ended 30 June 20X1, explaining how each should be presented; (6 Marks)
ii. Discuss how the exchange differences calculated are recognised, referring to the requirements of
the Conceptual Framework; (4 marks)
Part (b) Using exhibit 2:
i. Discuss whether Menwith Co is correct to apply hedge accounting; (5 marks)
ii. Explain how Menwith Co should account for the hedging arrangement in the year ended 30 June
20X1, calculating amounts to be recognised in the financial statements. (4 marks)
Part (c)
Using the pre-populated spreadsheet response option with exhibits 3 and 4 and your previous answers,
prepare a corrected consolidated statement of profit or loss and other comprehensive income at 30 June
20X1, clearly showing any adjustments made.
(11 marks)
Note: Show all workings to the nearest $100,000 in part (c).
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Question 2
Background
Aguafresca Co provides environmentally-sustainable premium water filtration systems to hotels,
restaurants and the leisure industry under lease agreements. The senior management team is assessed
on a number of metrics, including operating profit adjusted for non-recurring items. The financial year
end of Aguafresca Co is 30 June 20X1.
The following exhibits, available on the left-hand side of the screen, provide information relevant to the
question:
1. Filtration systems – provides details of filtration systems and a new lease agreement with a hotel
group.
2. Credit losses – explains how credit losses are currently accounted for.
3. Sustainability report – describes the chief accountant’s concerns about the draft sustainability
report.
This information should be used to answer the question requirement within the response option.
Exhibit 1
Filtration systems
Each filtration system includes filtration units as well as reusable glass bottles and a mechanism to seal
bottles. Aguafresca Co plan to capitalise on the continuing move towards sustainability by reducing the
need for ready-bottled drinking water and in turn, plastic waste. It expects to seek new investment
for further growth within two years. The terms and conditions of each lease agreement vary depending
on the customer’s requirements. On 1 March 20X1, Aguafresca Co entered into a contract to lease a water
filtration system including 50 filtration units to a hotel group. The lease term is five years and after this
time the hotel group would be able to buy the filtration system for a fixed price, which is expected to be
approximately 15% of its fair value at that date. The useful life of a filtration system is eight years. The
terms of the contract require the payment of $600,000 per annum in advance. The finance director,
an ACCA member, has instructed the new chief accountant, who is also an ACCA member, to
recognise this amount as operating income in the year ended 30 June20X1.
Exhibit 2
Credit losses
It is in the nature of the hospitality industry that each financial year, a small proportion of Aguafresca Co’s
customers cease to trade. The finance director has indicated to the chief accountant that a balance due
to the company should only be written off to profit or loss only when it is absolutely certain that no monies
can be recovered. In this situation, the resulting credit losses should be presented as a non-
recurring exceptional item in the statement of profit or loss.
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Exhibit 3
Sustainability report
Aguafresca Co publishes a sustainability report each year and the finance director has prepared the draft
report for the year ended 30 June 20X1. He has included a number of assertions that the chief
accountant does not believe to be correct, including the fact that all bottles and lids used in the
filtration systems are made from recycled materials. Also, certain employee data relating to training
and retention appears to have been inflated.
Requirements:
Part (a)
i. Discuss how Aguafresca Co should have accounted for the lease of the filtration system to the
hotel group. (5 marks)
ii. Explain why the treatment of credit losses is wrong, including an explanation of the correct
treatment. (4 marks)
iii. Discuss the importance of effective sustainability reporting for Aguafresca Co.
(3 marks)
Part (b)
Identify and discuss the ethical issues arising from the scenario which the new chief accountant should
consider and what actions he should take as a consequence. (6 marks)
Professional marks will be awarded in part (b) for the quality of the discussion. (2 marks)
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Question 3
Background
Hebers Co develops artificial intelligence (AI) solutions for use in the healthcare industry. The current
financial year end is 30 June 20X8.
The following exhibits, available on the left-hand side of the screen, provide information relevant to the
question:
1. Project Diagnose – information relating to an ongoing development project.
2. Bank loan – details of the renegotiation of a loan from Crown Bank.
3. Service contract with Ghyll Health – details of a contract with Ghyll Health for health services.
4. Medico AI – provides information relating to Hebers Co’s plan to set up a separate legal entity
with Mill Co and Spicey Co.
This information should be used to answer the question requirement within your chosen response
option(s).
Exhibit 1
Project Diagnose
On 1 January 20X5,HebersCo commenced a project to develop AI for use in the diagnosis of medical
conditions. ‘Project Diagnose’ was expected to be complete and the AI product successfully launched to
market by 31 December 20X9. The project progressed well and all project costs incurred to date,
including administrative overheads, employee benefits and depreciation of dedicated IT equipment,
were recognised as an asset on 18 July 20X7 when the recognition criteria of IAS 38 Intangible
Assets were all met. Costs incurred since this date have increased the carrying amount of the asset. In
October 20X7, a competitor’s breakthrough caused Hebers Co to reassess its position and the available
market. It decided to progress with its project, but to redefine its objectives and extend its term by two
years.
Exhibit 2
Bank loan
On 1 January 20X5,Hebers Co obtained a $15 million loan from Crown Bank to finance the
development of AI for use in the diagnosis of medical conditions. The loan agreement required annual
interest payments in arrears at a rate of 6% over the loan term and the repayment of the loan principal
on 31 December 20X9. As a consequence of the extension of Project Diagnose(Exhibit 1), Hebers Co
commenced negotiations to amend the terms of the bank loan in October 20X7. On 1 January 20X8,
a two-year extension to 31 December 20Y1 was agreed with the interest rate for the remaining term
reduced to 4.5%, payable annually in arrears.
Exhibit 3
Service contract with Gyll Health
During the year to 30 June 20X8, Hebers Co obtained services from Ghyll Health, a company controlled by
the sister of the managing director of Hebers Co for $600,000. The transaction, which was negotiated on
terms at arm’s length, was approved by the board of directors. The managing director did not participate
in the tendering process and declared an interest in the transaction.
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Exhibit 4
Medico Al
Hebers Co has plans to establish a separate legal entity, Medico AI, with two other unrelated companies,
Mill Co and Spicey Co, for the delivery of cost effective AI solutions for healthcare in emerging markets.
Mill Co will hold 50% of the shares in Medico AI, Hebers Co will hold 30% and Spicey Co will hold 20%. The
three parties will enter into a contractual arrangement to specify the level of votes required to make
decisions about the relevant activities of Medico AI. This will be either 70% or 75%, and is currently under
discussion. A separate contractual arrangement will modify the features of the separate legal entity so
that each investor has an interest in Medico AI’s assets and each is liable for its liabilities in a specified
proportion.
Requirements:
Part (a)
Discuss the following accounting issues relating to Hebers Co’s financial statements for the year ended 30
June 20X8 in accordance with International Financial Reporting Standards (IFRS®):
i. How the costs associated with Project Diagnose should be accounted for; (7 marks)
ii. The effect of the renegotiation of the bank loan on the financial statements; and (8 marks)
iii. Whether the transaction with Ghyll Health is required to be disclosed in the financial statements.
(3 marks)
Part (b)
Explain how the investment in Medico AI should be accounted for in the consolidated financial statements
of Hebers Co, considering each of the two potential voting thresholds. (7 marks)
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Question 4
Background
Huxton Co operates throughout Europe, providing in-flight catering to a number of European short-haul
airlines. The financial statements for the year ended 31 March 20X0 are due to be authorised for issue on
1 July 20X0. The company maintains large cash reserves and a low level of gearing.
The following exhibits, available on the left-hand side of the screen, provide information relevant to the
question:
i. Events after the reporting date – details of two events after the reporting date.
ii. Commercial ovens and packing machines – information relating to Huxton Co’s production
equipment and operations.
iii. Salary subsidy – describes a government support scheme for the aviation industry.
This information should be used to answer the question requirement within your chosen response
option(s).
Exhibit 1
Events after the reporting date
On 30 March 20X0, a large volcano on an unpopulated Western Pacific island began to erupt, emitting a
significant ash cloud. As a result, all airspace in Central and South America was shut down immediately;
however, flight operations were not interrupted elsewhere and Huxton Co was unaffected. The volcano
continued to erupt and, due to unusual jet stream activity, the ash cloud reached North America and then
Europe and Western Asia on 18 April 20X0. All airspace in affected continents was immediately closed to
commercial aircraft. Huxton Co’s customers all cancelled their orders until flights could resume and
several airlines postponed plans to open new summer routes. As at 20 May 20X0, all affected airspace
remained closed and the volcano continued to erupt; geologists predicted that eruptions would cease
within a month, although the ash cloud is likely to take a further month to clear. On 1 February 20X0,
Huxton Co acquired a competitor which gave rise to provisional goodwill of $12 million goodwill. The
assets acquired included an intangible asset relating to food preservation methods at high altitude;
its fair value has been determined provisionally at $2.1million. On 25 April 20X0, the management of
Huxton Co were able to confirm the fair value of the intangible asset acquired in the business combination
at $2.25million.
Exhibit 2
Commercial ovens and packing machines
The draft financial statements for the year ended 31 March 20X0show significant investment during
the year in new commercial ovens and packing machines to increase capacity to meet demand from
airlines opening new short-haul routes for the summer season. These are measured using the cost model
and depreciated on a straight-line basis. On the closure of European airspace, and cancellation of
customers’ orders, Huxton Co temporarily closed its largest production site; the new ovens and packing
machines were switched off. The company continued to operate a scaled back production line from a
smaller site, producing meals to sell at cost to stranded travellers. In keeping with existing company policy,
any surplus meals were donated to a local charity and food waste was transferred to a local facility for
composting.
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Exhibit 3
Salary subsidy
All staff continued to be paid in full while Huxton Co’s operations were affected by the closure of European
airspace. An emergency government support scheme for the aviation industry offered a subsidy of 75%
of the salaries of those not working due to the cut backs. Huxton Co could claim the subsidy at the end of
each calendar month on condition that an individual remained in employment at that date. Huxton Co
took the opportunity to provide training for affected staff members on a range of subjects including
foreign languages and business management and finance. Staff were able to attend any courses regardless
of their role at the company.
Requirements
Part (a)
Advise the directors of Huxton Co whether the financial statements for the year ended 31 March 20X0
should be adjusted for the events after the reporting date. (8 marks)
Part (b)
i. Discuss the accounting issues relating to the new commercial ovens and packing machines for the
year ended 31 March 20X1 arising from the production site shut down. (4 marks)
ii. Advise the directors of Huxton Co how the salary subsidy should be accounted for. (3 marks)
Part (c)
Discuss the relevance of integrated reporting for the year ended 31 March 20X1 to Huxton Co’s
shareholders. (8 marks)
Professional marks will be awarded in part (c) for clarity and quality of discussion. (2 marks)

THE END