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ACCA SBR Mock exam

QUESTION PAPER

September 2019

Tom Clendon

[email protected]

facebook – tom clendon lecturer

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Section A - Both questions must be attempted

Q1 Sting

Sting plc is the parent company with a number of different subsidiaries. It has
recently started to grow through the acquisition of other businesses.

Goodwill

On 1 January 2018 Sting plc acquired control of Glenn Ltd by acquiring a further
25% of the equity of Glenn Ltd for consideration of $60,000 that will be settled in
cash on 31 December 2019.

Three years prior to obtaining control of Glenn Ltd, Sting plc had acquired an existing
holding of 40% which it had acquired for consideration with a fair value of $30,000.
This original 40% holding gave Sting plc significant influence over the operating and
financial affairs of Glenn Ltd and so equity accounting was applied in the group
accounts. The carrying value in the group accounts of the investment in the
associate at the date Sting plc acquired control was $45,000 and the fair value
$49,500.

The group policy is to measure NCI at fair value. The fair value of the 35% NCI of
Glenn Ltd at the date of acquisition was $21,000.

The provisional fair value of the net assets of Glenn Ltd at the date of acquisition has
been assessed at $35,000 excluding both the contingent liability and the customer
data base. Any adjustments to the provisional fair value of net assets will not impact
on the measurement of the NCI and deferred tax can be ignored.

Glenn Ltd has a contingent liability that it has not recognised on the basis that it is
not probable that there will be a transfer of economic benefits. Glenn Ltd could be
liable for damages for $100,000 in two years’ time. Legal advice suggests that there
is only a 10% chance of the case being successful.

Glenn Ltd has many customers and so a valuable data base of contacts. These are
not recognised as an asset by Glenn Ltd. On the open market it is estimated that this
data base could be sold for $12,000. Sting plc already enjoys good relations with
many of the same customers and on that basis Sting plc considers the value maybe
only $6,000.

Where relevant you may assume a discount rate of 10%.

Impairment review

On 31 December 2018 Glenn Ltd was identified as a cash-generating unit within the
Sting plc group. At that reporting date the net assets of Glenn Ltd has been
determined at $50,000 (including the consolidation adjustments) with the cash
generating unit having a value in use estimated at $110,000 and a fair value less
costs to sell of $55,000.

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Cryptocurrency
One month before the reporting date Sting plc accepted as consideration on the sale
of goods bitcoins – the cryptocurrency – which at the transaction date had a fair
value of $200,000. At the reporting date the value of the bitcoin had appreciated and
had a fair value of $250,000. In the draft financial statements of Sting plc the finance
director had accounted for the revenue from the sale of goods at $250,000 and
classified the Bitcoin as cash at bank. The directors are aware that there is no
specific accounting standard that deals with crypto currencies.

Required

a) Explain how the goodwill arising on the acquisition of Glenn Ltd is

determined and accounted for in the Sting plc group accounts. (8 marks)

b) Calculate the goodwill arising on the acquisition of Glenn Ltd in the

Sting plc group accounts. (4 marks)

c) Explain the impairment review process of the goodwill of Glenn Ltd

arising in the Sting group accounts. (4 marks)

d) Calculate the outcome of the impairment review process of the goodwill

of Glenn Ltd in the Sting group accounts and show the accounting
entry. (4 marks)

e) Discuss how the transaction and balance in the cryptocurrency Bitcoin

should have been recorded. (10 marks)

Total 30 marks

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Q2 Shenzhen
Following completion of the financial statements of Shenzhen plc for the year ended
31 May 2019, it became apparent that there were three material transactions which
had not been properly addressed as follows:
Foreign currency
A payable due to an overseas supplier for ENG 3,000 million had been translated
using the rate ruling at the date of the initial transaction on 30 April 2019, and was
stated at this rate at this amount in the financial statements at 31 May 2019. The
payable was then settled on 15 June 2019. Relevant exchange rates are as follows:
Date ENG to $1
30 April 2019 1.6
31 May 2019 1.5
15 June 2019 1.7
Borrowing cost
Borrowing costs amounting to $100,000 incurred on a loan taken out to finance the
construction of a non-current asset had been charged to the statement of profit or loss
during the year to 31 May 2019.
Leases
Lease payments amounting to $150,000 had been charged to the statement of profit
or loss, despite the lease being considered to be a right of use asset lease.
Ethical issues
The directors are aware that the proposed treatments do not conform to IFRS
Standards. The directors believe that the proposed treatments are justified as it will
help Shenzhen improve its profitability and maintain its debt covenant obligations and
will therefore be in the best interests of their shareholders who are the primary
stakeholder. The directors have indicated that, should the accountant not agree with
their accounting treatment, then she will be replaced.
Required:
(a) Comment upon the accounting issues associated with each of these three
transactions (12 marks)
(b) Comment upon the professional and ethical issues associated with these
transactions and advise the accountant as to the appropriate course of
actions. (6 marks)

Professional marks will be awarded in question 2b for quality of discussion

(2 marks)

Total 20 marks

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Q3 Gauff plc

Gauff plc is the parent company of a large group of companies that has various
accounting issues that need to be resolved.

It was discovered that during the year the credit controller had stolen monies that the
customers of the group had paid in settlement of their debts. The total amount stolen
was $5 million of which $3 million related to the current period and $2 million related
to last year and was included in the receivables of last year. There is no prospect of
being able to successfully recover these monies from the credit controller. (5 marks)

The group operates has a defined benefit pension scheme for the benefit of its
employees. At the reporting date the pension fund assets and liabilities were re-
measured and this resulted in a re-measurement gain of $55 million. The pension
fund has year-end assets with a fair value of $800 million and pension obligations of
$700 million. Under the terms of the pension agreements the group is unable to
receive refunds from the pension fund and is restricted in its ability to reduce future
level of payments. The actuary has ascertained that the present value of future
reductions can be reliably assessed at $40 million. (6 marks)

During the accounting period the parent company of the group sold some equity
shares in a HJK, an entity that it had controlled for a number of years. As a result of
the disposal of the shares the investment in HJK was reduced from 70% to a 45%
holding. The 25% shares sold were placed with a wide variety of institutional
investors, with no single investor holding more than 4%. The other shareholders in
HJK are widely held amongst unconnected investors. Following the disposal of
shares the group has maintained its representation on the board of directors and
HJK continues to pursue the same financial and operating policies as before. The
transaction has been accounted for in the group accounts by de-recognising the net
assets, goodwill and NCI of HJK, recognising the reduced investment in HJK as an
associate and reporting a profit in the group profit and loss account. (6 marks)

During the accounting period the Gauff plc the parent company of the group made
an investment of $100 million in a newly formed company call POL. The holding
acquired represented 60%. The other shares in POL were subscribed by two other
investors who each will hold 20%. The three investors in POL are not related parties.
All the investors will be represented on the board of directors of POL. The
contractual agreement made between the three investors in POL specifies that at
least 90% of the voting rights are required on all major decisions concerning the
running of POL. The agreement does not specify that the parties have any rights to
the assets or obligations for the liabilities relating to POL. (6 marks)

Professional marks will be awarded in Q3 for quality of discussion (2 marks)

Required
Advise the Gauff group on how the above accounting issues should be dealt
with in its financial statements

Total 25 marks

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Q4 Framework and Gibson

Chapter 6 of the revised IASB’s Conceptual Framework for Financial Reporting

describes three measurements of current value: fair value, value in use (or fulfilment
value for liabilities) and current cost.

Required

a) Explain what is meant by these three values and illustrate your answer
with examples of their application. (6 marks)

b) Discuss the basis that Chapter 6 of the revised IASB’s Conceptual

Framework for Financial Reporting suggests that historical cost or
current value be used as a measurement base. (6 marks)

Gibson is a company that is uncertain as to how to account for two recent

transactions it has entered into.

On 1 December 2017 Gibson entered into a rental agreement for its head office
during the current accounting period and the agreement terminates in six years’ time.
There is a clause in the agreement that on cessation of the agreement the condition
of the property should be identical to that at the outset. During the year Gibson has
incurred costs in improving the premises by installing another floor.
(6 marks)

On 1st December 2016 Gibson granted 200 share options exercisable at $10 to each
of its 20 employees, subject to the qualifying condition that they remain in service
over the next three years. The fair value of each option at the grant date is $12. It
was not expected that any employees would leave during the qualifying period.
However in fact one employee did leave the employment of the company in March
2018. Subsequent to the issue of the share options the share price of the company
fell resulting in the options having no value to the employees. As a result on 1st July
2018 Gibson repriced the existing options which gave the employees a further
benefit value of $6 per option. (7 marks)

Required

c) Discuss, with suitable computations where applicable, how the above

transactions would be dealt with in the financial statements of Gibson
for the year ending 30 November 2018.

Total 25 marks

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