Answers

Strategic Professional – Essentials, SBR – INT

Strategic Business Reporting – International (SBR – INT) March/June 2022 Sample Answers

1 (a) (i) The disposal of 100,000 shares by Luna Co would reduce its equity interest from 80% to 70%. This would not result in
a loss of control over Starlight Co. Income and expenses should be consolidated for the entire year. Similarly, the disposal
does not affect the consolidation of Starlight’s assets and liabilities, including goodwill.
A decrease in the parent’s ownership interest which does not result in a loss of control is accounted for as an equity
transaction, i.e. a transaction with owners in their capacity as owners. The carrying amounts of the controlling and
non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiary. Luna Co should
recognise directly in equity any difference between the amount which the non-controlling interest is adjusted by and the
fair value of the consideration received. No gain or loss on the disposal of the shares should be recognised within profit
or loss.
It is not clear under IFRS 10 Consolidated Financial Statements as to what happens to the non-controlling interests’ share
of goodwill when there is a change in the relative ownership of a subsidiary. However, it seems reasonable that Luna
Co should reallocate 10% of the carrying amount of goodwill to the non-controlling interest. This will ensure that future
impairments of goodwill will reflect the revised ownership interest in the goodwill.
The net assets of Starlight Co at 1 January 20X6 should be determined as follows:
$
Share capital 1,000,000
Retained earnings at 1 April 20X5 4,658,000
Add 9 months of profit to the disposal date (9/12 x $165,056) 123,792
Fair value adjustment on land 200,000
Carrying amount of goodwill ($320,000 x 85%) 272,000
––––––––––
Net assets at 1 January 20X6 6,253,792
––––––––––
Since the non-controlling interest is obtaining an extra 10% of the equity of Starlight Co, the non-controlling interest in
the consolidated statement of financial position will be credited with $625,379 (10% x $6,253,792). The fair value of
the consideration received is $700,000 (100,000 x $7). Luna Co should record a credit directly in equity equal to the
difference of $74,621 ($700,000 – $625,379).
In summary
Dr Cash 700,000
Cr NCI 625,379
Cr Equity 74,621
Tutorial note: A different acceptable approach would be to calculate the non-controlling interest at the date of disposal
and then to increase non-controlling interest by 10/20 to reflect their increased ownership interest in Starlight Co.
However, this cannot be calculated as the non-controlling interest at acquisition is not given in the question.
(ii) Revenue should be recognised when a performance obligation is satisfied. This can be over time or at a point in time.
Since the risks and rewards of ownership of the goods pass to Starlight Co on 20 March 20X6, it is right that Luna Co
should recognise revenue at this date and not when Starlight sells the goods to the final consumer.
The price concession which is likely to be offered by Luna Co means that the value of the consideration is variable and
uncertain. IFRS 15 Revenue from Contracts with Customers requires the entity to estimate the amount of consideration
to which it is entitled in exchange for the goods sold. Luna Co should either choose an expected value method or choose
the most likely outcome to estimate the amount of the variable consideration. Luna Co should choose whichever method
will better predict the amount of the consideration to which it is entitled.
Since Luna Co has a history of offering price concessions but over a range from 8% to 38%, it would appear that an
expected value method is probably more appropriate. In the absence of further information, it would seem reasonable to
make an initial estimate of the variable consideration by using the mid-point of the previous price concessions. This would
be a price concession equal to 23%. This would result in a revenue figure equal to $770,000 ($200 x 5,000 x 77%).
IFRS 15 states that when estimating the amount of variable consideration, revenue must only be recognised to the extent
that it is highly probable that a significant reversal of the cumulative revenue will not be required in the future. The risk of
obsolescence means that the value of the consideration Luna Co is entitled to is highly contingent on factors outside the
control of Luna Co. Luna Co has a history of offering price concessions of up to 38%, so it is unlikely that Luna Co can
conclude that it is highly probable that a significant reversal in revenue will not be required. Current market data suggests
that the maximum price concession is likely to be 35%. Therefore, it seems reasonable for Luna Co to revise its estimate
to $650,000 ($200 x 5,000 x 65%). This is the maximum that it is highly probable that a significant reversal of revenue
will not be required. Since the whole $1,000,000 ($200 x 5,000) has been included within revenue, the accounting
treatment adopted is not correct. Revenue should be reduced by $350,000 ($1,000,000 – $650,000).
Tutorial note: Candidates are given full credit for different assumptions on the price concession provided that they are
justified in their answer.

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 (iii) Extracts for the statement of profit or loss for the year ended 31 March 20X6:
$
Revenue ($29,812,540 + $14,185,160 – $350,000 – $650,000) 42,997,700
Cost of sales ($18,154,020 + $11,042,120 – $350,000 – $650,000 + $600,000) 28,796,140
Profit attributable to non-controlling interests 37,138
(($165,056 x 9/12 x 20%) + ($165,056 x 3/12 x 30%))
Tutorial note: Revenue and purchases should be reduced by $350,000 to correctly record the sale and purchase per
(a)(ii). Since the transaction is intra-group, a further $650,000 should be removed from revenue and cost of sales.
The original cost of the goods sold by Luna Co is (5,000 x $80) = $400,000. Since the closing inventory is currently
valued at $1,000,000, unrealised profit is $600,000.
The profit of Starlight Co of $165,056 will be consolidated for the entire year but the allocation of the profits between
the shareholders of Luna Co and the non-controlling interest will need to be time-apportioned. The profit attributable to
non-controlling interests would be $37,138 (($165,056 x 9/12 x 20%) + ($165,056 x 3/12 x 30%)).

(b) In accordance with IAS 28 Investments in Associates and Joint Ventures, Luna Co should adopt equity accounting within its
consolidated financial statements for its investment in Roquet Co. This means that in the consolidated statement of financial
position the investment should be included as one figure within non-current assets (an investment in joint venture). This is
initially recognised at cost but will be increased by its 50% equity interest in the increase in net assets since incorporation.
Within the consolidated statement of profit or loss, 50% of the profit for the year of Roquet Co will need to be included as a one
line item. Since the profit is before deducting any dividend payments during the year, it is important to exclude the $15,000
dividend received by Luna Co from investment income within the consolidated statement of profit or loss.
The share of the profits of the joint venture for the year ended 31 March 20X6 should be calculated as $63,490 (50% x
$126,980). Since Luna Co received a dividend of $15,000, total dividends paid by Roquet Co would have been $30,000
($15,000/0·5). This means that the net assets of Roquet Co would have increased since incorporation by $170,430 ($73,450
+ $126,980 – $30,000). The investment in the joint venture in the consolidated statement of financial position should be
valued at $6,085,215 ($6,000,000 + (50% x $170,430)).
The joint venture is not part of the single entity concept and therefore it is not necessary to eliminate transactions and
outstanding balances at the reporting date between the parent and the joint venture. However, IAS 28 does require that
gains and losses arising between a parent entity and its joint venture should only be recognised to the extent of the unrelated
investors’ interest in the joint venture. An exception to this rule is that losses should be recognised in full by the parent where a
downstream transaction provides evidence that the asset is impaired. This is relevant to Luna Co as they have sold the property
to Roquet Co (a downstream transaction) at a loss of $2 million ($10 million – $8 million). Since it is agreed that the proceeds
of $8 million are equal to the market value of the property, this provides evidence that the property was indeed impaired.
Luna Co should recognise the loss of $2 million within its individual and consolidated financial statements for the year ended
31 March 20X6. The investment in the joint venture and the share of the profits of the joint venture will not be affected by the
transaction.

(c) A business combination, in accordance with IFRS 3 Business Combinations, is a transaction in which the acquirer obtains
control over one or more businesses. For the acquisition to be treated as a business combination, it is therefore necessary
to assess whether the activities of Eclip Co constituted a business in the first place. This means that the activities must have
been capable of being conducted and managed in a way for the purpose of providing a return to investors or other owners and
members of the entity.
The components of a business will consist of inputs and processes which have the ability to create outputs. Inputs are
economic resources which have the ability to create outputs when one or more processes are applied to it. Processes will
involve strategic management or operational processes capable of being applied to the inputs to create outputs but would
not include administrative or accounting functions. Usually, such processes would be formally documented but an organised
workforce having the necessary skills and experience, as indicated by Eclip Co, may provide the necessary processes. Output
does not need to be present at the acquisition date for the activities of the entity to constitute a business.
It can be seen that the activities of Eclip Co do constitute a business. Inputs are in place by having secured a licence to
manufacture the new medicine. Operational and management processes would be associated with the performance and
supervision of the clinical trials. Also, Eclip Co is pursuing a plan to produce an output which is capable of generating a return
for the investors and owners of the entity. That is a commercially developed medicine to be sold on the market in the future. It
is not relevant that the medicine is not yet on the market.
A further consideration is whether Luna Co may choose to apply a concentration test which, if met, eliminates the need to
consider further whether the activities of the acquiree constitute a business. Under this optional test, where substantially all of
the fair value of the gross assets acquired is concentrated in a single asset (or a group of similar assets), the assets acquired
would not represent a business.
The only assets on the statement of financial position of Eclip Co relate to the licence and development of the new medicine.
Additionally, in accordance with IAS 38 Intangible Assets, it would not be permitted to recognise the knowledge and skills of
the workforce as a separate intangible asset within the consolidated financial statements. The workforce is not separable in

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 that it cannot be sold, transferred, rented or otherwise exchanged without causing disruption to the acquirer’s business. Such
assets tend to be subsumed into goodwill on recognition of a business combination.
Nor does the assembled workforce represent the intellectual capital of the skilled workforce which is the specialised skills and
experience that the employees bring to their jobs. However, prohibiting an acquirer from recognising an assembled workforce as
an intangible asset does not prohibit the intellectual property from being recognised as a separate intangible asset. In relation
to Eclip Co, it is likely that much of the processes and systems which have been undertaken to the development have been
documented. Whilst some of this may have been capitalised within the development costs, much of this knowledge will have
been at the research stage where IAS 38 states it is prohibited to capitalise research costs as an intangible asset. Since Luna
Co acquires not just the manufacturing rights but the assembled workforce, it is unlikely that the concentration test would be
met. The acquisition should therefore be treated as a business combination.

2 (a) The financial accountant must ensure that the artificial intelligence (AI) system complies with applicable laws and regulations
which means for Renshu Co that the system must take into account the laws on consumer credit. This a fundamental principle
of professional behaviour.
There is a requirement for the AI system to be robust from a technical perspective and be secure against a cyber-attack and
data leakage. AI should adhere to ethical principles and values, including fairness and explicability. It is morally unacceptable
to provide credit to group A as it appears that this group cannot afford to repay the loan. It could be argued that providing credit
to group A could lead to stabilising or improving an individual’s position. Alternatively, it could lead to the reverse whereby the
individual spends the money on gaming and defaults on the loan. The bias in the granting of loans to group A is such that the
financial accountant knows that this group is unlikely to repay the amounts on time and, therefore, they will be subject to a
high interest charge on the loan. The financial accountant should act with integrity and be straightforward and honest in all
professional and business relationships. This would preclude the targeting of group A. He should be straightforward and honest
and not allow bias to override his professional judgement.
The financial accountant has the responsibility to oversee loans and therefore he should ensure that the system uses the same
score threshold for granting credit to both groups of individuals in order for the process to be fair. The likelihood of the approval
of the loan from Renshu Co should be based on credit-worthiness using the same criteria for all individuals thus ensuring
demographic parity. Renshu Co should have systems which build and calibrate separate score card models for the two groups
to ensure that they have the same positive rate of acceptance.
It may be necessary to develop systems which segment a population. However, in this case, there is the difficulty that there
is a clear cut label which is social demographics. It is possible to create segments based upon social demographics but the
financial accountant of Renshu Co should not allow the use of such a feature for ethical and legal reasons.
The financial accountant is demonstrating a lack of integrity and a degree of self-interest by defending the use of the AI system.
He receives a commission based upon the number of loans approved which will influence his decision making. Also, there is
a moral dilemma for the financial accountant as he authorises loans to customers who use the money on the gaming app and
the loan interest rate is extortionate at 1076% per annum.
The financial accountant should consider his position with the company. He is in a situation where there are many moral
dilemmas. He should revisit and reflect upon the ethical guidelines which should be used as a basis for his professional
conduct. Once he has reflected upon his position, he could discuss it further with his superior and try to change company
policy but this is unlikely to happen. If this is the case, he should consider contacting ACCA for advice which may include
disassociating himself from Renshu Co and leaving the company.

(b) The arbitrary allocation of the purchase price to the two intangible assets is inaccurate.
Renshu Co has a present right to receive future cash flows under the contractual arrangement in relation to the customer
database and therefore, in accordance with IAS 38 Intangible Assets, an intangible asset should be recognised for the customer
database as it is probable that the expected future economic benefits will flow to Renshu Co.
In addition, Renshu Co also acquired domain names for websites which have gaming content. This will satisfy the separability
criterion for recognition in IAS 38 and should therefore be recognised as an intangible asset.
The arbitrary allocation of the purchase price on a 50:50 basis to the domain names and customer database is not in
accordance with IFRS 3 Business Combinations. New purchase price allocations for the separate intangible assets should be
carried out in accordance with IFRS 3 whereby the purchase price should be allocated to the individual identifiable assets and
liabilities on the basis of their relative fair values. The fair value of the separate intangible assets should be identified using
appropriate valuation techniques in accordance with IFRS 13 Fair Value Measurement.

(c) IAS 38 requires an entity to recognise an intangible asset if it is probable that the future economic benefits which are
attributable to the asset will flow to the entity; and the cost of the asset can be measured reliably.
(i) If the payments met the criteria for recognition of intangible assets, then according to IAS 38, the intangible asset should
have been recognised prior to the current period.
The intangible asset should be derecognised only on disposal or when no future economic benefits are expected from its
use or disposal. It seems that neither of these tests for derecognition have been met by Renshu Co. Therefore, it is not
appropriate to derecognise the intangible assets.

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 If there are doubts over the recoverable amount of the intangible asset, then Renshu Co should assess whether the
intangible assets are impaired at 31 December 20X8, in accordance with IAS 36 Impairment of Assets. If Renshu Co
considers that the intangible assets’ carrying amounts exceed their recoverable amounts, then the company should
recognise an impairment loss in profit or loss.
(ii) Renshu Co should have considered whether the recognition criteria in IAS 38 or the recognition criteria for internally
generated intangible assets were fulfilled at the time Renshu Co capitalised the intangible assets prior to the current
period. If in the current period it is discovered that the criteria were not met and the payments should have been
expensed, Renshu Co will have to recognise a prior period error correcting the effects retrospectively, as if the error had
never occurred. This would mean adjusting the opening balance of each affected components of equity for the earliest
prior period presented and the other comparative amounts disclosed for each prior period.
The reclassification of intangible assets to be expensed as research and development costs does not constitute a change
in an accounting estimate. Estimates must be revised when new information becomes available which indicates a change
in circumstances upon which the estimates were formed. However, the payments for the app are not estimates of the cost
of developing the assets.
Thus, if the payments were intangible assets, then they should be recognised and tested for impairment. If they did not
qualify as intangible assets, then the amounts should be treated as prior period errors.

3 (a) IAS 36 Impairment of Assets requires Bohai Co to assess at 31 December 20X8 whether there is any indication that an asset
may be impaired. If any such indication exists, it should estimate the recoverable amount (higher of fair value less costs of
disposal and value in use (VIU)) of the asset. It appears that there were impairment indicators (both internal and external) at
this date.
The carrying amount of the net assets is significantly higher than the company’s market capitalisation because the
price‑to‑book ratio is 0·3. This ratio is one of the impairment indicators mentioned in IAS 36. The directors of Bohai Co
argued that this ratio was similar to other companies in the industry. However, several companies in this industry had actually
written down the value of their ships during 20X8 and Bohai Co had not taken this into account in its comparison. Also, any
comparison needs to consider factors such as the ships’ type and age.
Bohai Co stated that there had been no losses from the sale of ships which were material to the financial statements for the
year ended 20X8. However, although the disposal losses were immaterial compared to the year end results, there were several
cases where the loss per ship was 40% of the carrying amount of the ship. Thus, in these cases, the loss per ship was material
in relation to its carrying amount.
Bohai Co mentioned that there had only been an estimated 2% drop in the market value of the fleet in December 20X8.
The lack of change in market value is not an indicator that there should not be an impairment review. Further, there is little
relevance in looking at estimates unless they are based on actual market transactions or a valuation by experts and neither of
these events had occurred.
Bohai Co pointed out that fuel prices were falling and there was an increased demand for cruising after a significant reduction
due to a recession. However, the price of a cruise had not increased in two years. As a result, conservative income estimates
had been applied in budgets because of an anticipated delay in the recovery of the cruise market with ships still lying idle.
These estimates would be used for VIU calculations which would almost certainly result in VIU calculations being below the
carrying amount of the ships.
IAS 36 requires an entity to assess at the end of each reporting period whether there is any indication that an asset may be
impaired. There are several potential indications of impairment of the ships existing as of 31 December 20X8 and thus an
impairment test should be carried out and recoverable amounts for the ships estimated.
Considering information available on the market, it seems that Bohai Co faces challenging market conditions with overcapacity
and cruise ships lying idle. This has led to liquidity problems and negotiations with its creditors on deferral of payments to
20X9. This is not a justifiable argument to not carry out an impairment review.

(b) IAS 12 Income Taxes sets out the principle that accounting for the deferred tax effects of an event should be consistent with
the accounting for the event itself. IAS 12 also states that at the end of each reporting period, an entity should reassess
unrecognised deferred tax assets.
IAS 12 requires deferred tax which relates to items which are recognised
– in other comprehensive income, to be recognised in other comprehensive income and
– directly in equity, to be recognised directly in equity.
IAS 12 explains that IFRS standards require (or permit) particular items to be credited (or charged) directly to equity, such
as an adjustment to the opening balance of retained earnings resulting from a change in accounting policy which is applied
retrospectively.
However, such accounting treatment does not necessarily extend to the subsequent adjustments to the deferred taxes of
$5 million in December 20X8, originally recognised on 1 January 20X8. Also, where the IFRS 9 Financial Instruments
expected credit loss model is applied, all impairment charges are recognised in profit or loss. Therefore, it is acceptable to
recognise the additional deferred tax assets in profit or loss.

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 Deferred tax assets and liabilities are required to be offset only in certain restricted scenarios. Deferred tax assets and liabilities
must be recognised gross unless the entity has a legally enforceable right to set off current tax assets against current tax
liabilities and the deferred tax assets and the deferred tax liabilities relate to the same taxation authority. This is only the case
where the above relates to the same taxable entity or different taxable entities which intend either to settle taxation on a net
basis, or to realise the assets and settle the liabilities simultaneously.
As the deferred tax asset and liability of Bohai Co and Yuyan Co do not relate to the same taxable entity, the directors of Bohai
Co must consider whether these entities either intend to settle current tax liabilities and assets on a net basis or to realise the
assets and settle the liabilities simultaneously. This will generally not be the case, unless Bohai Co and Yuyan Co are part of a
tax group and where the local tax jurisdiction allows a group of companies to file tax returns on a consolidated basis. Therefore,
Bohai Co should not set off the Yuyan Co deferred tax liability in the consolidated financial statements.

(c) IFRS 16 Leases states that for a contract which contains a lease, an entity should account for each lease component within
the contract as a lease separately from non-lease components. In this case, IFRS 16 is applicable because the lessee has the
right to use the cruise ship for a specified period (five years) in exchange for a rental fee. Bohai Co should reflect the underlying
asset (the cruise ships) subject to the lease arrangement on the statement of financial position.
Bohai Co has to assess whether the operating services for the cruise ship are non-lease components. This in turn leads to
an assessment as to whether therefore IFRS 15 Revenue from Contracts with Customers is applicable or whether amounts
payable do not give rise to a separate component but are part of the consideration which is allocated to the separately identified
components of the contract. In this case, both IFRS 15 and 16 can be applicable, depending on the identified components.
Bohai Co should allocate consideration between individual lease and non-lease components of the contract in line with
IFRS 15’s guidance on allocating the transaction price to performance obligations, i.e. based on stand-alone selling prices or
estimation thereof. Therefore, the operating costs are deemed to be separate non-lease components.
When more than one party is involved in providing goods or services to a customer, IFRS 15 requires an entity to determine
whether it is a principal or an agent in these transactions by evaluating the nature of its promise to the customer. An entity is
a principal and, therefore, records revenue on a gross basis, if it controls a promised good or service before transferring that
good or service to the customer. An entity is an agent and, therefore, records as revenue the net amount which it retains for
its agency services, if its role is to arrange for another entity to provide the goods or services. The operating costs of the cruise
ship such as engine maintenance and cleaning of the cruise ship are carried out by Bohai Co and are billed at a price agreed
on the signing of the lease. Therefore, Bohai Co is acting as a principal and therefore the recording of the operating costs at the
gross amount is correct.
The direct purchase agreements with third parties at each port are billed to Bohai Co and the entity adds a management fee
and bills the total to the lessee. In this case, Bohai Co is acting as an agent for arranging the supply of fuel and food supplies.
The fact that Bohai Co acts as an agent is only relevant for the presentation of the consideration and not for identification of
separate components in a lease contract. Bohai Co should recognise revenue only in the amount of the management fee to
which it expects to be entitled in exchange for arranging for the specified goods or services to be provided by the third party. The
relevant criterion is whether Bohai Co obtains control of the services before they get passed to the lessee. In this case, Bohai
Co cannot control the fuel and food supplies before they are transferred to the lessee.
Bohai Co has no consumption or inventory risk, is not able to set its own prices and does not earn any margin on the supply
of goods. The fact that Bohai Co arranges the port facility does not give the entity control over the fuel and food supplies.

4 (a) Going concern

The IFRS Conceptual Framework for Financial Reporting states that the going concern assumption is an underlying assumption.
Thus, the financial statements presume that an entity will continue in operation indefinitely or, if that presumption is not valid,
disclosure and a different basis of reporting are required. IAS 1 Presentation of Financial Statements requires management,
when preparing financial statements, to make an assessment of an entity’s ability to continue as a going concern, and whether
the going concern assumption is appropriate. Furthermore, disclosures are required when the going concern basis is not used
or when management is aware of material uncertainties related to events or conditions which may cast significant doubt upon
the entity’s ability to continue as a going concern. In assessing whether the going concern assumption is appropriate, the
standard requires that all available information about the future, which is at least 12 months from the end of the reporting
period, should be taken into account. This assessment needs to be performed up to the date on which the financial statements
are issued and should take into account measures taken by the government and banks to provide relief to affected companies.
Wing Co has taken advantage of the business reduction loan scheme and the national bank’s short-term debt scheme but its
operations have been suspended before and after the reporting date. In addition, the company has several contracts which may
turn out to be loss making and its investment properties appear to have lost value due to the pandemic.
The directors should take into consideration the existing and anticipated effects of the pandemic on the entity’s activities.
Wing Co has a history of profitable operations and relies on external financing resources, but because of the pandemic, it finds
itself in difficulties. The directors have to consider the expected impact on liquidity and profitability before they can satisfy
themselves that the going concern basis is appropriate. This consideration is particularly relevant given that operations have
been temporarily suspended.
Significant judgement and continual updates to the assessments up to the date of issuance of the financial statements may be
required given the evolving nature of the pandemic and the related uncertainties.

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 Onerous contracts
An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the
economic benefits expected to be received under it. The unavoidable costs under a contract reflect the minimum cost of exiting
from the contract, which is the lower of the cost of fulfilling it and any compensation arising from cancelling the contract.
IAS 37 Provisions, Contingent Liabilities and Contingent Assets requires the entity to recognise and measure the present
obligation under the contract as a provision. Before a separate provision for an onerous contract is established, an entity
recognises any impairment loss which has occurred on assets dedicated to that contract.
One significant impact of the pandemic is the disruption to the global supply chain. Wing Co has contracts to sell goods at
a fixed price and, because of the shutdown of its manufacturing facilities, which was required by the government, it cannot
deliver the goods itself without first buying them from a third party at a significantly higher cost.
All contracts should be reviewed to determine if there are any special terms which may relieve an entity of its obligations or any
contracts which can be cancelled without paying compensation. In this case, such contracts are not deemed onerous as there
is no obligation.
Fair value measurement
IFRS 13 Fair Value Measurement says that the objective of fair value measurement (FVM) is to estimate the price at which an
orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement
date under current market conditions. Due to the pandemic, valuations will be subject to significant measurement uncertainty.
As a result, there will be a wider range of possible estimates of FVM. Wing Co is required to apply judgement to find the fair
value which is most representative in the circumstances.
The definition of fair value requires an orderly transaction, that is not a forced transaction. Evidence of an orderly transaction
must be evaluated when estimating FVM. If the observed price is based on a transaction which is determined to be forced, little
weight should be placed on it.
The fact that the directors have stated that they would not sell their own assets at prices currently observed in the market
does not mean these transactions should be presumed to be forced. IFRS 13 makes clear that fair value is a market-based
measurement, not entity-specific and that an entity’s intention to hold an asset in a market downturn is not relevant.
There has been a significant decrease in the volume of transactions in the property market and, therefore, it could be argued
that the market is not active. An active market is one in which transactions for the asset or liability occur with sufficient
frequency and volume to provide pricing information on an ongoing basis. Observable prices from inactive markets may not be
representative of fair value. However, such transactions should not be ignored and the relevance of the transactions such as
type, and location of the property should be taken into account.
A significant decrease in the volume of transactions in a market can also influence which valuation technique is used. The
market approach can prove challenging, and the use of additional valuation techniques may be needed. This may need the
use of unobservable inputs. However, a significant decrease in the volume of transactions does not automatically mean that a
market is no longer active as transactions may still occur with sufficient frequency and volume to provide pricing information.
Also, several properties similar to those held by Wing Co have been sold in December, therefore data from these sales could
be used to measure the fair value of their properties. Relevant prices observed from orderly transactions in these markets must
still be considered. It would be inappropriate to measure fair value based on unobservable inputs such as an income approach
when Level 2 information, such as recent transacted prices, is available. Judgement is required in assessing the relevance of
observable market data where there has been a significant decrease in market activity.

(b) Many investors will be concerned about the disclosure of relevant information, particularly information about how the pandemic
will affect reported profits and the cash flows of the entity. Investors will be concerned about ineffective communication, lack of
clarity and lack of understandability of the issues which companies are facing as a result of the pandemic. Investors will want
clear explanations of unusual or infrequently occurring items.
The judgemental nature of materiality assessments could lead to companies omitting useful information from the financial
statements. Voluntary information about performance measures which companies provide is often useful to investors’ analysis.
Accounting policies are always necessary for understanding information in the financial statements, and relate to material
items, transactions or events. Investors will wish to know whether any policies have changed as a result of the pandemic or
whether the entity has made significant judgements or assumptions in applying accounting policies.
Investors will want to ensure that companies put effective processes in place to identify and disclose material events after the
reporting period which could reasonably be expected to influence their decisions. Investors will require information about the
magnitude of the disruptions caused by the pandemic to companies which they have invested in and about those assets and
liabilities which are subject to significant estimation uncertainty, in order to be better provided with an understanding of the
financial impact.
Companies may need to use significant judgement to determine the effect of uncertainties related to the pandemic on its
revenue accounting, for example, estimates of variable consideration. Investors will require information about decisions made
in response to the pandemic, for example, the modification of contracts, onerous contracts and disclosures for ongoing and
future contracts which may be affected.
Other uncertainties may include the potential ability to make a claim on an insurance policy for the effects of the pandemic. The
terms and conditions of an insurance policy are often complex. Investors will want to know that there is a potential insurance

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 recovery and may require evidence confirming that the insurer will be covering the claim. It should be established that it is
virtually certain that the entity will be compensated for at least some of the consequences of the pandemic. Any uncertainty as
to the amount receivable should be reflected in the financial statements.
The characteristics of any loans, tax relief or rebates received from the government will need to be carefully assessed and the
impact disclosed. Uncertainties relating to income taxes arising from government measures will need to be considered as
should whether companies should recognise and measure current and/or deferred tax assets or liabilities at a different amount.
Wing Co manufactures textile products. Investors will require information concerning the effect on its business. For example,
issues regarding remote working policies, and travel restrictions. Wing Co will usually have agreed covenants regarding how
the business will be operated. This may include a covenant to continue to operate the business ‘in the ordinary course’. In light
of the pandemic, Wing Co may seek some leeway to operate outside the ordinary course of business without the investors’
consent in order to deal with disruptions in the business. In light of a pandemic, business continuity becomes critical. Investors
will require knowledge of redundancy and business continuity plans including the impact of a pandemic on the board of
directors and employees.
Given the public health objectives, remote-based industries will attract investor focus. There will also be renewed interest in
the biotech and healthcare sectors. As a result, investors may move their funds away from Wing Co and into these industries.

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Strategic Professional – Essentials, SBR – INT
Strategic Business Reporting – International (SBR – INT) March/June 2022 Sample Marking Scheme

Marks Marks
1 (a) (i) 1 mark per discussion point of key principles in IFRS 3 and application to
the scenario, including: Max
4
No loss of control
Consolidation all year
Equity transaction
No gain/loss reported in profit or loss
Consider how to treat goodwill
Marks for calculations as follows:
9/12 profit added 1
Goodwill less impairment 1
Fair value adjustment of land 1
10% of net assets to NCI 1
Gain to equity 1
Max 3 7
–––
(ii) 1 mark per discussion point of key principles in IFRS 15 and application to
the scenario, including:
Timing of revenue recognition 1
Variable consideration Max
4
Estimate needed
Expected value or most likely outcome
Consider if reversal likely
Historic concessions
Conclusion
Calculations 1 6
–––
(iii) Marks for calculation as follows:
PUP adj 1
Intra-group sale 1
NCI time apportionment 1
NCI 20%/30% 1 4
–––

(b) 1 mark per discussion point of key principles in IAS 28 and application to the
scenario, including:
Explanation of equity method Max 2
Exclude dividend received
Property disposal Max
2
No need to eliminate intra-group
Impairment indicator
Calculations Max
3
Share of profits of JV
Investment in JV
Dividend adj 7

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 Marks Marks
(c) 1 mark per discussion point of key principles in IFRS 3 and IAS 38 and
application to the scenario, including:
Definition of a business Max 4
Control
Managed to provide a return
Inputs are resources
Processes not admin team
Outputs not necessary at acquisition date
Conclusion
Workforce Max
2
Not separable
IP can be a development cost
Research costs
Concentration test not met 6
–––
30
–––

2 (a) Generally, 1 mark for identifying the issue in the scenario and 1 mark for linking
it to ethical principles plus a further 1 mark for each relevant action suggested
Application and discussion of ethical principles to scenario, including:
Artificial intelligence (AI) system
Loans to group A
Fair and equitable system
Self-interest
Relevant actions 8

(b) 1 mark per discussion point of key principles in IAS 38 and IFRS 3 and
application to the scenario:
Recognition of intangible assets IAS 38 Max 3
New purchase price allocations IFRS 3/IFRS 13 Max 3 4
–––

(c) 1 mark per discussion point of key principles and application to the scenario:
If the payments met the criteria for recognition as an intangible, including: Max 4
Correct to recognise as an intangible asset
Derecognition rules
Impairment IAS 36
If the payments did not meet the criteria for recognition as an intangible, including: Max 4
Should have been expensed
Prior period error not accounting estimate
Retrospective adjustment 6
Professional marks– 1 mark awarded for identifying the ethical dilemma in part (a) and
1 mark for appropriate actions 2
–––
20
–––

12
 Marks Marks
3 (a) 1 mark per discussion point of key principles in IAS 36 including
knowledge of indicators, principles and relevant definitions Max 4
1 mark for each relevant point discussed with application to the scenario
Conclusion 1 9
–––

(b) 1 mark per discussion point of key principles in IAS 12 and application
to the scenario including:
Recognition of movement in deferred tax asset in PL v OCI Max 4
Offsetting deferred tax assets and liabilities Max 5 7
–––

(c) 1 mark per discussion point of key principles in IFRS 16 and IFRS 15 and
application to the scenario including:
IFRS 16 Max
4
– principle of separating lease and non-lease components
– applies here as RoU (5 years) for rent
– separate accounting each lease and non-lease component
– operational services: assess if non-lease component
IFRS 15 Max
3
– allocate consideration between components
– base on stand-alone prices/estimates
– allocate transaction price to performance obligations
Principal v agent: Max 5
– assess principal/agent based on nature of performance obligations
– principal: controls goods/service before transfer
– principal: records revenue on gross basis
– agent: arranges for 3rd party to transfer good/service
– agent: records revenue net
– accounting if principal/agent applied to scenario 9
–––
25
–––

13
 Marks Marks
4 (a) (i) 1 mark per discussion point of key principles in IAS 1 and application to
the scenario, including: Max
3
Going concern definition and assumptions
Disclosures including uncertainties
12 months and up to date of issue
Pandemic aspect from scenario Max 4 5
–––
(ii) 1 mark per discussion point of key principles in IAS 37 and application
to the scenario, including: Max 3
Onerous contracts – key definition
Requirement for provision – obligation
Impairment test first
Special terms which cancel obligation
Pandemic aspect from scenario Max 2 4
–––
(iii) 1 mark per discussion point of key principles in IFRS 13 and application
to the scenario, including: Max 4
Fair value measurement (FVM): definition
Pandemic uncertainty: wider FVM tests
Needs orderly transaction, NOT forced
Market based: but inactive and/or unrepresentative
Alternative valuations discussion (Levels 2 and 3)
Pandemic aspect from scenario Max 3 6
–––

(b) 1 mark per discussion point and application to the scenario 8

Note: Any sensible discussion point would be awarded credit – there is wide
scope, however, it needed to have investor focus and be related to issues
which might arise for Wing Co from the pandemic
Professional marks – to obtain 2 marks all areas listed in requirement (b) had to be addressed 2
–––
25
–––

14