Strategic Business

Reporting (SBR)
Sept / Dec 2020
Examiner’s report
The examining team share their observations from the
marking process to highlight strengths and
weaknesses in candidates’ performance, and to offer
constructive advice for those sitting the exam in the
future.

Contents
General comments .............................................................. 2
Question 1 – Sugar Co ........................................................ 2
General comments on time management ....................... 2
Requirement (a) – 10 marks ............................................ 3
Requirement (b) – 16 marks ............................................ 6
Requirement (c) – 4 marks .............................................. 8
Question 2 – Calibra Co .................................................... 10
Requirement (a) – 5 marks ............................................ 10
Requirement (b) – 3 marks ............................................ 12
Requirement (c) – 10 marks .......................................... 12
Question 3 – Corbel Co ..................................................... 15
Requirement (a) – 5 marks ............................................ 15
Requirement (b)(i) – 4 marks ......................................... 16
Requirement (b)(ii) – 6 marks ........................................ 16
Requirement (b)(iii) – 6 marks ....................................... 17
Requirement (b)(iv) – 4 marks ....................................... 18
Question 4 – Handfood Co ................................................ 19
Requirement (a)(i) – 4 marks ......................................... 20
Requirement (a)(ii) – 4 marks ........................................ 20
Requirement (a)(iii) – 5 marks ....................................... 21
Requirement (b)(i) – 6 marks ......................................... 22
Examiner’s report – SBR September/December 2020 1
Requirement (b)(ii) – 4 marks ........................................ 22
Conclusion ......................................................................... 23
General comments

This examiner’s report should be used in conjunction with the published

September/December 2020 sample exam which can be found on the ACCA Practice
Platform.
In this report, the examining team provide constructive guidance on how to answer
the questions whilst sharing their observations from the marking process,
highlighting the strengths and weaknesses of candidates who attempted these
questions. Future candidates can use this examiner’s report as part of their exam
preparation, attempting question practice on the ACCA Practice Platform, reviewing
the published answers alongside this report.

Question 1 – Sugar Co

General comments on time management

Sugar Co was a 30-mark question which translates (using 1.8 minutes per mark) into
54 minutes of the exam. It is important to allow yourself time for reading, thinking and
checking your answer within these 54 minutes, and use the same weightings within
each requirement of the question to ensure you have the opportunity to gain the
maximum marks across the question. You should avoid the temptation to expand your
answer to one requirement beyond the allotted time. For example, some candidates
spent too long on Q1(a), meaning that they reached the maximum mark allocation well
before the end of their answer. This meant they used time that should have been spent
answering the remaining requirements. Markers cannot allocate more marks to a
requirement than is available, even if the comments may otherwise be worthy of
marks1. So, in short, stick to your allotted time, and time spent considering a quick
answer plan may help you to keep your answer “on track”.

1 Candidates can discuss issues which may not appear in the suggested solution. Providing their arguments are
logical and the conclusions derived are substantiated, then marks can be awarded accordingly. Full marks

Examiner’s report – SBR September/December 2020 2

Requirement (a) – 10 marks

Part (a) required an explanatory note to the directors, addressing how an initial 40%
investment in Flour Co and an additional 30% investment during the reporting period
should be accounted for in the consolidated financial statements (including the
statement of cash flows). A goodwill figure was provided, and you were guided to use
this amount to calculate the cash paid to acquire control of Flour Co, and include a
brief explanation as to how that cash should be accounted for in the consolidated
statement of cash flows.
Let’s quickly review the requirement, with further implications added in italics (the year
end is 30 June 20X8 according to the introductory note):

Draft an explanatory note (we expect you to explain the accounting

treatment, not just present calculations) to the directors of Sugar Co,
addressing how the initial 40% investment (described in the scenario
as of significant influence – so an associate) in Flour Co and the
additional purchase of the equity shares on 1 July 20X7 (this flags
that the step acquisition arose on the first day of the reporting period:
opportunities to explain the step acquisition process – associate to
subsidiary – and implications for treatment before and after this date)
should be accounted for in the consolidated financial statements
(including the statement of cash flows). (first hint that this question
has a cash flow focus) Using the goodwill figure of $2,259,000,
calculate the cash paid to acquire control of Flour Co (an unusual
requirement where you are guided to work backwards from goodwill to
calculate the cash consideration) and include a brief (“brief” implies not
to overdo this – just a few marks available for this) explanation as to
how that cash should be accounted for in the consolidated
statement of cash flows.

It may help to number the requirements on the exam paper, or if you are answering
on computer, list them out to ensure that you do not miss any aspect (and hence
ensure you satisfy all opportunities for marks). This also breaks the question into
smaller, more manageable tasks:

require the application of relevant knowledge. Conversely, no marks will be awarded for the reproduction of
irrelevant knowledge or irrelevant parts of International Financial Reporting Standards (IFRS).

Examiner’s report – SBR September/December 2020 3

1. Explain how the 40% investment (associate) should be accounted for on 1 July
20X7
2. Explain how to account for the transition from associate to subsidiary on 1 July
20X7
3. Explanation needs to include impacts on cash flow
4. Prepare a goodwill calculation from the information provided. Since you know the
goodwill amount, you are doing this to work out the cash consideration (which is
the unknown amount)
5. Briefly explain how the cash consideration is shown in the consolidated cash flow.
These five shorter tasks will each earn marks, so don’t ignore any of them as any
attempt may earn you marks if your comments or calculations are relevant and
warranted. Now let’s focus on each task…

1. How the 40% investment should be accounted for

The question’s scenario (exhibit 1 in the computer-based exam (CBE) includes the
information to answer this subtask. You are told that the investment is 40% and the
opening information explicitly states that Flour is an associate company and this is
reinforced with the “significant influence” comment at the start of the scenario. Since
you have already been told that the investment is an associate, there is no need to
explain the reasons why. Instead, you can just explain how the associate will be
accounted for using the equity method in which the original cost will be increased by
the share of net assets since acquisition. Now would also be a good time to calculate
the carrying amount of the associate on 1 July 20X7 just before the step acquisition.
The movement in net assets between the 40% acquisition and the additional 30%
acquisition is provided in the narrative: $12m, so take 40% of this ($4.8m) as the
increase in carrying value onto which the cost of $10m is added, to give you a carrying
amount of $14.8m.
Since the associate is derecognised on the first day of the reporting period,
explanations of the associate’s accounting treatment in the consolidated statement of
profit or loss and the consolidated statement of financial position is not required.

2. How the additional purchase of equity shares on 1 July 20X7 should be

accounted for
This subtask requires an explanation of the step acquisition when control is reached
(on 1 July 20X7). At that time, the 40% equity interest is treated as if disposed and
reacquired at fair value, with any difference included as a gain (or loss) within profit or
loss. You will need to calculate the fair value of the equity interest. The scenario does
not explicitly state the number of shares Flour Co has in issue, but you can work this
out: if three million shares represents a 30% shareholding, there must be 10m shares
in issue (3m/0.3). Since the share price on 1 July 20X7 was $3.80, the 40%
shareholding would therefore have a fair value of (10m x 40% x $3.80) = $15.2m. This
is now attributed to the 40% holding in the goodwill calculation. The carrying value of
the associate ($14.8m see above) is derecognised, resulting in a gain to profit or loss
of $400,000.

Examiner’s report – SBR September/December 2020 4

3. How should both purchases be accounted for in the consolidated financial
statements (including the statement of cash flows).
The focus is on the cash flow statement, although explaining how to record both
purchases in the consolidated statement of financial position is acceptable. There is
no need to explain the impact on the consolidated statement of profit or loss since we
are on the first day of the reporting period (1 July 20X7). So that leaves a description
of how goodwill is calculated, at this date in which control is gained. Your explanation
should include a description of each component of the goodwill calculation: this is
calculated by deducting the fair value of the identifiable net assets at 1 July 20X7 from
the fair values of consideration (including 40% equity interest, a share exchange and
cash) and non-controlling interest. This leads us on to the next subtask, the goodwill
calculation.

4. Using the goodwill figure of $2,259,000, calculate the cash paid to acquire
control of Flour Co
The goodwill can be calculated according to your previous explanation. You know what
the total is ($2.259m), so work backwards to find out the cash that must have been
paid to produce this result. Previous subtasks have already calculated the fair value
of the 40% equity interest, so you now need to work out the fair value of the share
exchange (based on a one of two exchange when the market value of Sugar Co shares
was $6). Sugar is acquiring 3m shares in Flour, so would issue new shares at a fair
value of ($6 x 3m x ½) = $9m. Next, the fair value of the non-controlling interest will
be worth (10m x 30% x $3.80) = $11.4m. The scenario lists the net assets at carrying
amount, valued at a total of £35,741,000, to which a fair value of $600,000 is added.
The components of this list will be used later in answering part (b), and the cash held
by Sugar is netted against the cash paid (this is explained further in the final subtask
5). The goodwill calculation is now only missing the cash that was paid – and this
balancing figure should be $3m.

$000
FV original 40% [10m x 40% x 15,200
$3.80]
FV share exchange [3m x ½ x 9,000
$6]
FV NCI [10m x 30% $3.80] 11,400
FV Net Assets incl FV uplift (36,341)
($35,741k + $600k)
Cash Consideration (β) 3,000
Goodwill per question 2,259

5. Include a brief explanation as to how that cash should be accounted for in

the consolidated statement of cash flows.
Your final subtask requires a quick explanation on how this cash payment will appear
in the consolidated statement of cash flows. Whilst a “brief” answer may be to explain
where in the cash flow this payment would appear (under investing activities), this is

Examiner’s report – SBR September/December 2020 5

only partially correct, since the Sugar group includes cash and cash equivalents of
$1.234m in its net assets so the net outflow will be the $3m paid less this $1.234m.

Conclusion
Overall, section (a) of Q1 was well-answered. Most candidates provided clear
explanations, and a significant number of answers calculated the correct cash
consideration. Many answers explained where the cash outflow would appear in the
statement of cash flows, although very few worked out the net outflow.

Requirement (b) – 16 marks

This requirement was explicit in stating that no explanations were required, so

candidates should not provide any narrative, provided your workings are clear. This is
important in terms of time management. The task required you to prepare extracts of
the cash flows generated from (i) investing activities and (ii) financing activities in the
consolidated statement of cash flows for the Sugar group for the year ended 30 June
20X8. You should refer to the detailed answer when using this commentary – this will
help you to better understand the workings that should have been prepared in support
of the answer.
There were some very good and some very poor attempts to this part of the question,
suggesting that some candidates were insufficiently prepared to present workings and
extracts from a consolidated statement of cash flows. Weaker answers focused only
on the movements between opening and closing positions, with little or no accounting
for the narrative aspects in which important information explaining the movements was
provided. Some answers wasted valuable time in attempting to work out the net cash
flow from operating activities – which was not a requirement. Extracts from the
consolidated statement of profit or loss were presented because of the need to
calculate movements in cash flow relating to the items presented in the statement of
financial position.
As in part (a), it may help to break the requirement into smaller tasks. To help you, the
descriptions provided in the scenario (exhibit 2 in CBE) were laid out in the same order
as the extract from the consolidated statement of financial position, offering a logical
progression through each, where a working, (optimising the use of the spreadsheet
functionality) would reveal cash items as the balancing item. It may help to cross
reference the information in the scenario (exhibits 1 and 2) so that the acquisition of
Sugar (part a) is included in the appropriate workings. Forgetting to include these items
would significantly reduce opportunities for relatively easy marks.

Examiner’s report – SBR September/December 2020 6

1. Intangible assets: the narrative says there were no disposals or impairments, with
only an amortisation charge to deduct. However, the acquisition of Flour as a
subsidiary means the closing balance on intangibles includes $6.781m worth of
intangible assets and goodwill of $2.259m (both from the scenario/exhibit 1). Both
amounts should be added to the 30 June 20X7 figure to leave cash paid for
additions as the balancing item (to include under investing activities).
2. Property Plant and Equipment: the narrative provides a helpful hint to include
additions relating to the Flour acquisition (part a) and depreciation charged in the
year of $10m should be deducted, leaving a balancing figure representing carrying
value of the disposal. Since the disposal was at a loss of $2m, the proceeds to
show in investing activities would be $2m less than this balancing figure.
3. Associates: The $5m paid to acquire another investment should be added to the
opening position (30 June 20X7) and also shown as a deduction for cash outflow
in investing activities. You might find it helpful to make a note as you read the
narrative that the adjustment (Dr Associate, Cr Cash) has a cash flow impact. You
are told that dividends were received from associates (which hints that this is what
requires working out). This will be the balancing item to include under investing
activities once the share of profits from associates (from the consolidated
statement of profit or loss extract) is added, and the derecognition of Sugar as an
associate (from part a) is removed.
4. Financial Assets at fair value through profit or loss (FVTPL): There are two
cash inflows in this case: the disposal of investments and the receipt of investment
income (you are told there are no additions).
If disposals with a carrying amount of $4m resulted in a profit of $0.5m, proceeds
on disposal are $4.5m (a fairly straightforward calculation).
The $3.891m investment income (from the statement of profit or loss) includes the
$0.5m profit from disposal (a non-cash item), fair value gains or losses (another
non-cash item), and dividends from investments (the cash inflow, and balancing
item). The fair value gains from FVTLP assets must be $1m given disposals were
$4m and the change from opening to closing balances was $3m. A second fair
value gain resulting from the step acquisition restatement of the associate to fair
value (from part a) should also be included (a gain of $0.4m). The cash received
from dividends is therefore $3.891m less $1.0m less $0.5m less $0.4m = $1.991m
(in investing activities). Very few candidates remembered to include the fair value
gain from the step acquisition.
5. Equity – issue of ordinary shares: the movements in ordinary shares and other
components of equity (all share premium) are explained by shares issued to
acquire control of Flour (from part a), and a further issue for cash. Combining both
share capital and share premium makes the task easier (working each out
separately is redundant as you are looking for the cash raised regardless of
nominal/premium components). There is a net increase in equity of $18.6m,
explained in part by the share exchange (part a) of $9m (a non-cash transaction),
and the rest by a $9.6m cash issue (to be shown under investing activities).
6. Non-controlling interest (NCI): the statement of profit or loss extract shows the
profit attributable to NCI in the year, and we need to remember that (from part a)
there was an increase in the fair value of NCI as a result of the acquisition of Flour.

Examiner’s report – SBR September/December 2020 7

 Adding each to the opening NCI balance and deducting the closing balance reveals
the amount paid to NCI as dividends (an investing activity outflow).
One additional item should be added to the investing activities that is not covered in
the above workings: the net cash paid on the acquisition of Flour Co (from part a). Few
candidates remembered to add this.
Most of the marks were available for attempting these workings. Credit was available
for each adjustment (beyond a mere statement of the change between opening and
closing positions), provided entries were either added or subtracted appropriately.

Conclusion
Q1(b) required collating information from various sources, and there was evidence
from some candidates’ answers that they found this challenging. However, as with
Q1a, breaking the requirement into more manageable subtasks may ease the
pressure and you should also allow yourself time to think through the implications of
each paragraph of narrative. Working through the narrative logically (as it is presented)
will give structure to the workings and answer. Do not just jump into the answer! In
relation to the computer-based answers, some answers showed weak spreadsheet
design skills. Spreadsheets should be set out in a clear order to help yourself (and any
reader) follow the logic of the process – just as you would set out your answer on
paper. A well-presented answer would include a list of additions or deductions leading
from opening to closing balances, with a balancing item for the cash item. Some
spreadsheet answers did not use the functionality available which meant basic
arithmetic errors occurred. Similarly, some candidates did not show the workings
behind a figure – this could have been presented as a typed out working or as formula
within a cell. Not showing any supporting workings means it is not possible to award
partial marks.

Requirement (c) – 4 marks

This final part required a description of the impact, if any, that the defined benefit
pension scheme (outlined in the scenario/exhibit 3) has on the consolidated statement
of cash flows (calculated by the indirect method). The exhibit explained that:

1. Movement in the liability is because of service cost and interest charges

2. Movement in the liability is also because of a remeasurement component
3. No cash contribution was paid in the current year, but one was paid in the next
year
4. Benefits were paid during the year

Examiner’s report – SBR September/December 2020 8

For 4 marks, therefore, you must explain the impact of these on the statement of cash
flow, if any. Summarising the information like this helps you to focus each aspect of
the pension scheme and its impact on the cash flow.
For (1): both service costs and interest charges are non-cash items, so these would
have no direct impact on the statement of cash flows but each cost would reduce
operating activities. Therefore, since the indirect method is used to calculate the cash
flow statement, both of these costs would be added back in presenting the net cash
flow from operating activities.
For (2): the remeasurement is reported in the other comprehensive income section
(OCI) so would have no impact on operating activities, and hence no impact on the
cash flow (this explains the “if any” comment in the requirement).
For (3): Contributions paid would normally appear in the operating activities section of
the cash flow, but since there were none in the year, this would have no impact either.
For (4): Benefits are paid out of the pension scheme, which is a separate entity and
would also have no impact on Sugar’s cash flow.
The four comments would earn four marks.

Conclusion
For Q1(c), weaker answers tended to focus too much on the benefits paid in the next
year, which was not relevant for answering the question on cash flow impact. Some
candidates incorrectly suggested this represented an adjusting event and missed the
cash flow focus of the requirement.

Examiner’s report – SBR September/December 2020 9

Question 2 – Calibra Co

Question 2 was a 20 mark question in which the scenario included issues relating to
revenue recognition of apartment blocks constructed by Calibra Co (operating in the
property sector), the treatment of customer payments in advance, and concerns over
the lack of expertise of the chief accountant in the use of distributed ledger technology
(blockchain) to trade property. As in previous SBR exams, there is a significant ethical
focus in question 2, with part (c) awarding 10 marks for a discussion of how the chief
accountant should have acted to maintain ethical standards.

Requirement (a) – 5 marks

Part (a) required a discussion on how to account for the sale of apartment blocks in
accordance with IFRS 15 Revenue from Contracts with Customers and IAS 23
Borrowing Costs. The scenario (exhibit 1) described a two-year construction period for
the blocks, and stated “title and possession, and therefore control, of the apartment
blocks pass to the customer upon completion”. A further issue related to two choices
in which the customer may pay: either $9.55m on completion, or $8.5m on the date
the contract is signed (using an appropriate borrowing rate of 6%).

Let’s summarise each issue in list format:

1. Control passes to the customer upon completion of construction
2. Payment can be $8.5m at the start (of the 2-year construction period) or £9.55m
on completion

Examiner’s report – SBR September/December 2020 10

IFRS 15 Revenue from Contracts with Customers
This standard has been examined quite often and is now established to the point that
the examiner expects more from candidates than a summary of the recognition
process. Listing out the recognition criteria, for example, would not earn marks unless
these are then correctly applied to the scenario.
In this case, the performance obligation is met upon completion. A significant number
of candidates outlined the option of recognition “over time”, with some suggesting
(incorrectly) that revenue can be recognised over the two-year period using some
systematic method. This would only apply when a performance obligation is satisfied
over a period of time – which is not the case here. The performance obligation is in
fact satisfied at a point in time; when the customer obtains control. This was specifically
stated in exhibit 1 as arising upon completion of construction and is reinforced by it
then stating this is also when title and possession passes. It is important to use these
clear ‘steers’ given in the scenario – they are there to help. So, comments about “over
time” are not relevant for this scenario and move away from a recommended answer.
Five marks is not a lot of time (5 x 1.8 = 9 minutes), so be careful not to get side-
tracked with superfluous information. In short, Calibra Co is incorrect in recognising as
revenue the $8.5m payment when the contract is signed and revenue is recorded on
completion as this is the point in time when control passes.
Having confirmed that revenue is recognised upon completion, you then need to
consider the appropriate accounting treatment for what we have now ascertained to
be an advanced payment under IFRS 15. The $8.5m payment in advance is the
present value of $9.55 in two years, using a 6% discount rate. Some candidates
decided to confirm this in their answer ($9.55 x 1/1.062 = $8.5), although this is not
needed and the requirements in part Q2(b) would confirm this by showing the
unwinding of the finance charge over two years. IFRS 15 outlines that when a
significant financing component exists, as it the case here (Calibra gains a significant
benefit from this advanced payment), then a contract liability is recorded on receipt of
the $8.5m, and the effects of financing (an interest expense) is accounted for
separately over the two year period. Unwinding the liability using a 6% rate of interest
will result in a $9.55 balance upon completion of the contract. You may be tempted to
show this in Q2(a), but this is actually what is required of you in Q2(b). Some
candidates repeated the journal entries in both Q2(a) and Q2(b) which is wasting time.
Make sure you read through all question requirements to avoid this.
IAS 23 Borrowing Costs
Given their business model is based on construction, Calibra Co can include borrowing
costs that are directly attributable to the construction of a qualifying asset (the
apartment block) as part of that asset’s cost. Many candidates correctly identified the
apartment block as a qualifying asset. The asset is constructed specifically for the
customer, and the liability created by the customer’s advance payment is directly
attributable to the construction. Few candidates explained that the apartment block
and related interest are treated as inventory, but other than this, most answered this
part well.

Examiner’s report – SBR September/December 2020 11

Requirement (b) – 3 marks

Q2(b) required a presentation of the accounting entries required to record the

contractual sale of an apartment block on 1 January 20X8 at the discounted amount
over the two-year construction period.
The requirement wanted the accounting entries and did not expressly require any
explanation. A simple presentation of the journals would therefore suffice for 3 marks.
It may help to think about how these marks may be awarded, based on the key aspects
that the transaction portrays, a mark is likely awarded to portray:

1. The recognition of a contract liability on 1 January 20X8

2. The recognition of annual finance costs over the two-year period (unwinding
the liability)
3. The derecognition of the liability and recognition of revenue upon completion of
the contract.

Most answers to this were clear and gained full marks, although some answers
neglected to show the ultimate derecognition of the liability and recognition of revenue
from the contract.

Requirement (c) – 10 marks

The ethical issues relating to SBR’s Question 2 are likely to involve issues beyond
basic accounting errors and malpractice. A scenario could involve personal
relationships and pressures that such relationships create. Merely quoting ethical
guidance without then applying this to the scenario will restrict your opportunities for
marks in both the question and the associated professional marks (there are 2 marks
awarded for the quality of the discussion in Q2(c)).
In this case, part (c) asked for a discussion on how the chief accountant should have
acted to maintain ethical standards in dealing with issues described in exhibits 2 and
3. Answers to this part should consider both exhibits as restricting your answer to only
one also restricts opportunities for marks.

Examiner’s report – SBR September/December 2020 12

Exhibit 2: Bodoni (a customer) and employment reference
The scenario explains how the chief accountant (who is not a permanent employee of
Calibra Co) may be reliant on a good employment reference from Bodoni, and
agreeing to a reduced $8.5m price despite Bodoni delaying payment until a month
after signing the contract. The chief accountant was concerned that he may lose both
the customer and his good reference if he had not agreed.

Exhibit 3: Distributed ledger technology and concerns over sufficient

experience
Whilst the context of this scenario may be unusual (using blockchain to sell share in a
property to investors), the exhibit provides sufficient information for an answer to be
constructed without any technical knowledge on how blockchain works – so don’t let
the details of the technology distract you from the underlying ethical issues and
appropriate recommendations for action. The key issues are that the chief accountant
publicly supports the technology but has private concerns over the due diligence and
possible regulatory violations. The board approves the project and wants to scale up
activities, and despite the chief accountant’s basic knowledge, he has assured the
board that he can do this.

Ethical issues
You should not consider these paragraphs/exhibits individually, since there are
aspects that are important to both. For example, you are told in exhibit 3 that the chief
accountant is only recently qualified and (in both exhibits) that he wants to be
employed on a permanent basis. This is important information in both cases, as it
highlights the pressures that the chief accountant is facing. He is at the start of his
career and may be considered more vulnerable to influence because of a perceived
lack of experience, and a sense that he needs to prove himself worthy of a permanent
position (resulting in the accountant accepting questionable payment terms with a
customer, over-stating his abilities, or taking on a role beyond his current knowledge).
Pressures from more senior colleagues or relationships with customers may lead him
to act in ways that lack objectivity. For example, pressures are exerted by Bodoni who
is seeking a cashflow advantage by offering to act as a potential referee for a
permanent position with Calibra Co. The chief accountant faces a self-interest threat;
a personal interest in allowing Bodoni to delay payment for a “good reference”. This
threat may extend further, given his concern that he may lose Bodoni as a customer if
he refuses to accept the delay in payment – and further reduce his chances of the
permanent position.
The chief accountant may also feel pressure to take on more responsibility than he
can manage relating to the distributed ledgers in order to impress directors who will
soon be interviewing him for a permanent position. The directors want to scale up
activities and, despite the chief accountant’s basic knowledge, he has assured that he
can do this. Whilst publicly supporting the technology, he has not voiced his private
concerns over the reliability of due diligence and possible regulatory violations.

Examiner’s report – SBR September/December 2020 13

Actions
Most of the actions that can be recommended relate to the distributed ledger
technology, since the chief accountant has already accepted the delay in payment by
Bodoni. The pressure of applying for a permanent position inappropriately influenced
the chief accountant’s professional judgement and behaviour relating to Bodoni – he
should not have accepted the delay in payment.
The most important action to maintain ethical standards relating to the distributed
ledgers project is for the chief accountant to be honest and not claim to have an
understanding where his knowledge is only basic. In summary some of the actions
expected from the chief accountant are:
▪ be honest about any knowledge limitations; act with integrity and admit to the
directors to having a basic understanding of distributed ledgers
▪ follow up his concerns and find evidence that scaling up is viable before
promising it is possible under his administration
▪ recommend the recruitment of a specialist to perform due diligence on regulation
compliance
▪ act in a professional manner to ensure that data on distributed ledger remains
confidential and within local regulations
▪ exercise independence; resist any board pressure to accept the role if he has
private concerns over its viability or his ability to undertake the role and inform the
board of such reservations.
Please note that this list is not exhaustive, and marks were awarded for any further
appropriate actions, such as improving professional competence through training or
courses.
Marks would be divided between identification of ethical issues and action that the
chief accountant should take to ensure standards are maintained. Answers need not
be presented in the manner outlined above and some very good answers incorporated
both the ethical issues and actions to maintain ethical standards rather than detailing
each separately. This sometimes lead to a more readable and concise answer.

Conclusion
Answers to Q2(c) were in general good and many candidates provided a clear
identification of the ethical issues and suggestions to resolve them. Conversely, a
presentation of a “boiler plate” list of ethical responsibilities did not meet the
requirements and gained very few marks, if any, unless applied to the two scenarios.
Some candidates repeated too much information from the question without adding any
new insights or concerns, which limited scope for marks.
Overall, it is pleasing to see most answers identifying the threats and recommending
appropriate actions to mitigate these and maintain ethical standards.

Examiner’s report – SBR September/December 2020 14

Question 3 – Corbel Co

Corbel Co was a 25-mark question which translates into 45 minutes time to spend on
this question (based on 1.8 minutes per mark).

Requirement (a) – 5 marks

3(a) required candidates to describe the main challenges in recognising and

measuring intangible assets. There was no need to refer to any exhibits in answering
this question, and so candidates should not waste time with this type of question,
referring to the exhibits. The SBR examination requires candidates to demonstrate
their ability to appraise, assess, and critically discuss various syllabus elements. Also,
it is important to realise that listing points does not normally create a discussion.
There are many challenges in recognising and measuring intangible assets. For
example, many intangible assets are not frequently traded on a stand-alone basis and
therefore very often there is no active market for them which makes arriving at a
valuation more difficult. In addition, there are complexities and subjectivity in
measuring intangible assets and determining their useful life can be subjective.
Candidates are reminded that there will be other challenges outside of the suggested
answer that would have scored marks. It is always a good idea to refer to the
Conceptual Framework in answering such a question. For example, answers
mentioning relevance, reliability, materiality, verifiability etc would have gained marks.
The use of the Conceptual Framework is recommended in answering many questions
even though it may not be specifically referred to in the question or the answer.
Generally, in this type of question, candidates will score 1 mark for each well explained
point.

Examiner’s report – SBR September/December 2020 15

Requirement (b)(i) – 4 marks

3(b)(i) required candidates to discuss whether a brand name would be accounted for
separately from goodwill on acquisition and whether it should be accounted for as a
separate cash generating unit. The brand was capable of generating future economic
benefits and control over the future benefits was achieved by the registration of the
brand. The registration allowed the intangible asset to be recognised and fair valued
separately from goodwill. Some candidates failed to discuss relevant considerations
because they did not perform an analysis of the given scenario. If there is little
reference to the scenario, there is a risk of missing key marks. Also, the scenario and
requirements are linked – the requirement is based upon the scenario. It is very difficult
to score good marks without using the scenario. There is always a maximum number
of marks given for simple rote knowledge and they are limited.
Because the brand could be separately identified and valued, it should be allocated to
each of the company’s cash generating units (CGUs) expected to benefit. IAS 36
Impairment of Assets recognises that sometimes there is no basis for allocating the
brand to an individual CGU, so it permits it to be allocated to a group of CGUs.
It can be seen that the key to answering this question successfully is application of
basic knowledge of IAS 38 Intangible Assets and IAS 36 to a realistic scenario.

Requirement (b)(ii) – 6 marks

3(b)(ii) asked how to account for intangible assets with an indefinite life and whether
the two perfume brand names could be regarded as having an indefinite life. Some
candidates continued to list facts without elaborating on why these facts were relevant
to their discussion or explaining the relationship to the point being argued. Simply
repeating facts in a scenario or an accounting standard without any further explanation
is insufficient. This part of the question actually broke down the requirements into a
discussion of indefinite life intangibles and the application of this discussion to the
scenario.
Intangible assets have an indefinite useful life when there is no limit to the period over
which the asset is expected to generate net cash inflows. An intangible asset with an
indefinite useful life should not be amortised but should be tested annually for
impairment. The various factors to consider were the company support for the brands

Examiner’s report – SBR September/December 2020 16

and the movement in the market and fashion trends and how much the purchase of
the brand was a defensive measure. In this case, there was doubt as to the support
that the company would give to the brands. The second brand was linked to the
popularity of an actor and therefore was likely to have a finite life. The conclusion to a
discussion is important but if the candidate can justify a different conclusion to that of
the suggested solution, then credit can be given. However, if this conclusion is in
conflict with an accounting principle/standard, then no marks will be awarded.
Candidates generally performed well on this part of the question. Some questions will
mention in the requirement which IFRS standard should be used to answer the
question, others will not. The determining factor will often be the complexity of the
scenario or the fact that numerous IFRS standards could be applicable to the scenario.

Requirement (b)(iii) – 6 marks

In 3(b)(iii), the scenario set out a plan to close six stores of the company and a local
newspaper had written an article saying that up to 30 stores could be closed. The
question required candidates to discuss how to account for the proposed closure of
the six stores and the suggested closure of the remaining stores. Most candidates
correctly identified that IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations was the applicable standard to discuss. However, the issue for candidates
is how much time should be spent outlining the IFRS standard and how much time
applying the IFRS standard to the scenario. Only the relevant sections of the IFRS
standard should be discussed. There is no point in setting out the terms of an IFRS
standard if they are not relevant. In theory, a candidate could rote learn the whole of
an IFRS standard and reproduce it in the exam, leaving the examiner to mark the
relevant parts. This is a poor strategy as very few marks would be given if the examiner
has to decide the relevancy of a rote learned answer.
The key points were the carrying amounts of the assets and liabilities measured in
accordance with IFRS standards, at the lower of carrying amount and fair value less
costs to sell and consideration of impairment. The approval and announcement of a
plan to close the six stores was an indication that the assets may be impaired. In
addition, the six stores would be classified as a 'disposal group'.
Although there has been a report in a local newspaper, there has been no formal
announcement by the company. Therefore, it was feasible that the closure of the
additional 24 stores would not take place and there was no constructive obligation.
The exam requires the knowledge learnt to be implemented in real life situations. The
bulk of the six marks available were for the application but many candidates set out
the terms of IFRS 5 in excessive detail. As set out above, there nothing to be gained
from explaining irrelevant parts of the IFRS standard.

Examiner’s report – SBR September/December 2020 17

Requirement (b)(iv) – 4 marks

The final part of the question part ((b)(iv)) required candidates to discuss whether the
primary store should be tested for impairment and whether internet sales can be
attributed to this store in an impairment test. The primary store was situated in Paris
and was loss making. The internet goods were sourced from a central distribution
centre or from individual stores. Although the store was loss making, the performance
of the store was in line with management’s expectations. Therefore, there is no
indication of impairment and therefore no impairment test is required. As the internet
sales were sourced from a central warehouse or another store, the cash inflows should
be excluded from the primary store’s impairment assessment. This part of the question
required application of basic knowledge. There was no need and no time (seven
minutes for the four marks) to set out the detailed rules of the impairment of a CGU.
Of the four marks for this section, two marks were for the IFRS standard and two marks
for the application. It is important for candidates to be able to draw on first principles,
explore alternatives, and use their professional judgment to deal with the issues
presented.

Examiner’s report – SBR September/December 2020 18

Question 4 – Handfood Co

Handfood Co was a 25-mark question which translates into 45 minutes to spend on

this question. The main issue with this question was that some candidates seemed to
spend less than the allocated time on answering the question. As set out earlier in this
report, some candidates spent a disproportionate amount of time on question 1.
Question 1 is allocated 30 marks and should be answered in 54 minutes and no longer.
The principle of 1.8 minutes per mark should be used across all questions. It is often
said that the final few marks in a question are the most difficult to achieve and the first
few marks in a question are the most achievable. Therefore it makes perfect sense to
end question 1 after the allotted time and move on to another question (maybe
question 4).The marks for question 4 seem to suffer because candidates do not leave
enough time to make a reasonable attempt at the question.
The subject matter of the question shows the need to cover the whole syllabus in
preparation for the exam. The reason for this is that the IFRS for SMEs standard does
not appear in the examination as regularly as other sections of the syllabus such as
group accounting but it is still an important part of the SBR syllabus. Additionally, as a
word of caution, any part of the syllabus can appear in consecutive exams. The
syllabus requires candidates to discuss the key differences in accounting treatment
between full IFRS Standards and the IFRS for SMEs Standard® and to discuss and
apply the simplifications introduced by the IFRS for SMEs Standard.
This question contained both discursive and computational elements. The first part of
the question was based around an introductory paragraph which set out an
explanation of information asymmetry in the context of SMEs and a view that
integrated reporting would be useful to SMEs and investors alike. If candidates did not
read this introduction and absorb the information, then answering the questions would
prove to be quite difficult.

Examiner’s report – SBR September/December 2020 19

Requirement (a)(i) – 4 marks

4(a)(i) required candidates to outline the nature of the IFRS for SMEs standard and
the principal differences between IFRS for SMEs and full IFRS standards. The answer
to this part of the question was for four marks and was purely knowledge based. This
is unusual in SBR as normally candidates will have to apply their knowledge. The
question was well answered with candidates discussing the fact that the publication of
IFRS for SME standard provided a high quality and understandable accounting
standard suitable for SMEs. Similarly, candidates set out the numerous simplifications
to the recognition, measurement and disclosure requirements in full IFRS standards.

Requirement (a)(ii) – 4 marks

4(a)(ii) required candidates to discuss the effect that information asymmetry can have
on the decision to invest in SMEs. Candidates needed to understand what the term
‘information asymmetry’ actually means and if candidates had not read and digested
the introductory paragraph, then this part of the question would prove to be quite
difficult.
The question was referring to the issue that SMEs have access to all relevant
information, while investors lack much of the relevant information. Therefore, the
quality of the financial statements is important as increased disclosure will reduce the
level of information asymmetry which in turn reduces perceived risk.
The SBR exam requires candidates to apply their knowledge to different contexts.
Candidates may not be familiar with the term ‘information asymmetry’ but it is a term
used regularly to describe the lack of information available to investors when
assessing the long-term prospects of an entity. In this question there was an
explanation of the term in order to help candidates discuss the issue for investors.
Those candidates that answered this part of the question, answered it quite well. As a
reminder to candidates, answers outside of the suggested solution will gain marks. It
would have been relatively easy to gain a pass mark in this part of the question if
candidates had attempted it, however many candidates simply did not attempt this part

Examiner’s report – SBR September/December 2020 20

which goes back to the issue of overall time management. We know from our analysis
of previous exam sessions that all questions (and all parts thereof) must be answered
and that this will go a long way towards passing the SBR exam.

Requirement (a)(iii) – 5 marks

4(a)(iii) of the question required a discussion of how integrated reporting could help
SMEs better understand and better communicate how they create value to investors.
There will always be an investor related question in the SBR exam. It requires
candidates to answer the question from the investor’s perspective. The type of
question can vary from an explanation of an accounting standard to a discussion of
the issues for investors surrounding sustainability reporting. Candidates tend to simply
discuss the ‘capitals’ when it comes to integrated reporting and this will always gain
some marks. However, it is important for candidates to understand the guiding
principles underpinning an integrated report. Integrated thinking would help SMEs gain
a deeper understanding of the mechanics of their business which in turn would help
them assess their strengths and any deficiencies. Integrated Reporting and other
alternative ways of reporting corporate performance, such as sustainability reporting,
are increasingly important topics and should be given due consideration by
candidates.
It is understandable that in a time pressured exam, a candidate will resort to simply
answering questions with rote knowledge. However, the SBR exam is looking for
application of that knowledge and in this case, the context was SMEs. If a candidate
simply described the ‘capitals’ without any reference to SMEs, then the marks were
reduced accordingly. Maximum marks will never be achieved if candidates do not
apply their knowledge.
Part (a) of the question attracted the professional marks (2 marks). Candidates are not
awarded these marks simply for answering the question, although this obviously helps
and is another reason to ensure all questions, and parts of questions, are attempted.
The marks were awarded for the quality of the discussion in part (a). This part
contained requirements relating to investors and the investment decision. Therefore,
if candidates did not discuss the ‘investor perspective’, then professional marks would
not be awarded. These two marks can and often are the difference between pass and
fail.

Examiner’s report – SBR September/December 2020 21

Requirement (b)(i) – 6 marks

4(b)(i) of the question required both a discussion and calculation. Candidates were
required to discuss, with calculations, how Handfood Co should account for the current
service cost of an additional employee benefit for the year ended 31 December 20X2
under IFRS standards. Candidates were required to use the scenario to answer the
question. As Handfood Co was an SME, this benefit plan for employees was
somewhat limited. The question required candidates to understand the accounting for
the benefit liability based upon the present value of its obligations at the reporting date.
From this calculation, the current service cost could be determined.
The scenario set out that the current salary level was $1.1 million and that this would
increase to $1.238 million at 31 December 20X6, the qualifying date for the lump sum
payment to the employees. The benefit payable is 1% which would equate to $12,400
(rounded). As there is a probability that only 75% of the employees at 1 January 20X2
will still be with Handfood Co at 31 December 20X6, then this is reduced by 75% to
$9,300. The current service cost will therefore be this figure discounted back to 31
December 20X2, that is four years at 5%. The discount factors were given in the
question. Handfood Co therefore recognises a current service cost expense of $7,700
in profit or loss. Only the current employees are entitled to the lump sum and therefore
future service does not accrue benefit. This figure ($7,700) will be unwound each year
and the movement recorded as the current service cost in so far as no other changes
to the assumptions are made.
The question was not well answered, maybe because of time pressures or maybe
because the principles were not understood. Essentially, all that Handfood Co was
doing was providing for a current cost based upon a future certain liability.
Candidates could still score a pass mark in this part of the question if they discussed
the principles behind the calculation and candidates scored well when this was
attempted.

Requirement (b)(ii) – 4 marks

4(b)(ii) required candidates to discuss the impact on the additional benefit liability if the
assumptions relating to the employees’ salaries and the number of employees leaving
the company were changed. In this case because the change in assumptions related

Examiner’s report – SBR September/December 2020 22

to an increase in employees’ salaries and a decrease in the probability of employees
leaving the company, the effect was the same. It would result in an increase in the
benefit liability (discounted) which would in turn increase the current service cost. This
part of the question could have been answered without an attempt at part (b)(i), if the
candidate had used basic principles.

Conclusion
Candidates at the strategic professional level should possess a high level of
critical and strategic thinking. If candidates have strong written communication
skills, they are more likely to gain the professional marks in the exam. The SBR
exam does require sound knowledge of IFRS standards but the application of
basic knowledge is also examined on a regular basis. An understanding of the
underlying principles of financial reporting is extremely important and often
candidates demonstrate that they do not have sufficient basic knowledge. The
responsibility of accounting is not only limited to recording financial
transactions but also to develop a framework for decision making and providing
relevant information to users, including investors. The SBR exam will continue
to examine candidates on the principles needed to operate within this current
environment.

Examiner’s report – SBR September/December 2020 23