Strategic Business Reporting (SBR) March/June 2022 Examiner’s report

Strategic Business Reporting (SBR) March/June 2022 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 ? Luna ............................................................... 2

Part (a)(i) ? 7 marks......................................................... 2 Part (a)(ii) ? 6 marks ........................................................ 3 Part (a)(iii) ? 4 marks ....................................................... 4 Part (b) ? 7 marks ............................................................ 4 Part (c) ? 6 marks ............................................................ 5 Question 2 ? Renshu........................................................... 6 Part (a) ? 10 marks .......................................................... 6 Part (b) ? 4 marks ............................................................ 7 Part (c) ? 6 marks ............................................................ 8 Question 3 ? Bohai.............................................................. 9 Part (a) ? 9 marks ............................................................ 9 Part (b) ? 7 marks .......................................................... 10 Part (c) ? 9 marks .......................................................... 11 Question 4 ? Wing............................................................. 12 Part (a)(i) ? 5 marks....................................................... 12 Part (a)(ii) ? 4 marks ...................................................... 13 Part (a)(iii) ? 6 marks ..................................................... 13 Part (b) ? 10 marks ........................................................ 14

Examiner's report ? SBR March/June 2022

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General comments

This examiner's report should be used in conjunction with the published March/June 2022 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 ? Luna

Question 1 in the SBR examination carries 30 marks which equates to 54 minutes of the three hour examination. Candidates however seem to give this question disproportionate significance with the result that candidates appear to spend more time on this question than the allotted time. The result is that the final question on the SBR exam is quite often poorly answered because of the lack of time available. A candidate is more likely to pass the SBR exam with four reasonably answered questions than if the final question is poorly answered because of time constraints. There is a significant amount of material which discusses examination technique, but it seems that many candidates still ignore the advice.

Part (a)(i) ? 7 marks

Explain, with calculations, how the disposal of shares in Starlight Co should be accounted for in the consolidated financial statements of the Luna group for the year ended 31 March 20X6

Part (a)(i) required candidates to explain, with calculations, how a disposal of shares should be accounted for in the consolidated financial statements. The disposal

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reduced the equity interest from 80% to 70%. This would not result in a loss of control and would therefore be accounted for as an equity transaction, ie a transaction between owners in their capacity as owners. The carrying amounts of the controlling and non-controlling interests (NCI) are adjusted to reflect the changes in their relative interests in the subsidiary. No gain or loss on the disposal of the shares is recognised within profit or loss.

In this part of the question, candidates needed to understand that this was an equity transaction. Many candidates recognised this fact, but the question asked in addition how the disposal should have been accounted for. Candidates found it difficult to explain the actual accounting entries, and in particular the accounting for the NCI which had obtained an extra 10% of the shares. Candidates could score one mark for every valid point explained and the own figure rule was used for the calculations of the increase in the NCI and the equity gain. There is more than one approach to calculating the values to be used for this transaction and candidates are not penalised for using one method rather than another. The sample answer covers two different approaches.

Overall, the performance in this part of the question was encouraging despite obvious weaknesses in some candidates' answers.

Part (a)(ii) ? 6 marks

Discuss the principles that should be considered by Luna Co in recording the sale of the goods to Starlight Co in Luna Co's INDIVIDUAL financial statements for the year ended 31 March 20X6. Conclude on whether the accounting treatment currently adopted is correct.

Part (a)(ii) required candidates to discuss for 6 marks the principles which should be considered in recording the sale of the goods in the individual financial statements of the holding company. Candidates also had to conclude on whether the accounting treatment currently adopted was correct. This part of the question required the application of IFRS 15 Revenue from Contracts with Customers and knowledge of the principles of variable consideration. Candidates who discussed that revenue should be recognised when a performance obligation is satisfied and that this can be over time or at a point in time, gained marks. However, simply setting out the five-step approach adopted in IFRS 15 did not score marks. If candidates recognised that the value of the consideration was variable and uncertain, they scored marks. Even though the requirement emphasised the fact that the accounting was in the individual financial statements, many candidates discussed the elimination of intercompany profit which scored no marks.

Many candidates did recognise that IFRS 15 should be applied but failed to discuss the principles of variable consideration. 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. In this case, the value of the consideration was highly contingent on factors outside the control of Luna Co so it was unlikely that Luna Co could conclude that it is highly probable that a significant reversal in revenue will not be required. IFRS 15 has been in issue since 2014 and candidates still appear to have only a superficial knowledge of the standard which is very disappointing. IFRS 15 appears regularly in SBR questions and knowledge level three is required as set out in the syllabus. This

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means that candidates should be capable of synthesis and evaluation. Unfortunately, in many cases, candidates do not show this level of knowledge or application.

Part (a)(iii) ? 4 marks

Using exhibits 1 and 2 only, present extracts that should be included in the consolidated statement of profit or loss of the Luna group for the year ended 31 March 20X6. Your answer should include revenue, cost of sales and the profit of Starlight attributable to the non-controlling interest.

Part (a)(iii) required candidates to present extracts, for 4 marks, from the consolidated statement of profit or loss including revenue, cost of sales and the profit attributable to the NCI. It required candidates to eliminate intercompany profit and to time-apportion the profit attributable to the NCI. This part of the question was not well answered. Many candidates failed to time-apportion the profit attributable to the NCI and there were many candidates who did not attempt this part of the question. This was quite surprising given that the knowledge level required is that of Financial Reporting. Although narrative was not required, credit was given for an explanation of the process for example, the calculation of NCI share of profits. It was surprising that many candidates could calculate but not eliminate the unrealised profit of $600,000.

Part (b) ? 7 marks

Discuss, with calculations, how the investment in Roquet Co and the sale of the property should be accounted for in the consolidated financial statements of the Luna group in the year ended 31 March 20X6.

Part (b) required candidates to discuss, with calculations for 7 marks, how an investment in a joint venture and the sale of the property should be accounted for in the consolidated financial statements. Many candidates realised that the equity method should be used to account for the joint venture. However, few could explain the accounting for the gains and losses arising between a parent entity and its joint venture.

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 Investments in Associates and Joint Ventures 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 was relevant to Luna Co as they had sold the property to the joint venture at a loss which provided evidence that the property was impaired. The loss of $2 million was recognised within Luna Co's individual and consolidated financial statements for the year. Again, it was difficult to find candidates who had the knowledge to discuss this transaction. Many candidates had no knowledge of this subject, with the result that some candidates simply did not attempt this part of the question. Many candidates who attempt SBR are not fully prepared for the examination. The knowledge level required is mainly at level three which means that rote learning knowledge is not sufficient to pass the examination.

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Part (c) ? 6 marks

Discuss whether the acquisition of Eclip Co should be treated as a business combination in accordance with IFRS 3 Business Combinations. Your answer should consider whether the skills and experience of the team of scientists can be recognised as a separate identifiable asset

Part (c) of the question required candidates to discuss for 6 marks whether an acquisition should be treated as a business combination in accordance with IFRS 3 Business Combinations. Candidates were also asked to consider whether the skills and experience of the team of scientists could be recognised as a separate identifiable asset. This type of question has been asked several times in the past and requires discussion of whether the acquisition constitutes a business. The components of a business 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.

Candidates needed to consider the scenario, otherwise it is impossible to conclude. Some candidates mentioned the optional concentration test which eliminates the need to consider further whether the activities of the acquiree constitute a business and gained marks. However, it is important to apply the test to the scenario and many candidates failed to do this.

The activities of Eclip Co did constitute a business and many candidates came to this conclusion. However, opinion seemed split as to whether the company would be permitted to recognise the knowledge and skills of the workforce as a separate intangible asset within the consolidated financial statements. A workforce is not separable and therefore cannot be recognised separately. However, the intellectual property acquired may be able to be recognised as an intangible asset. Candidates' performance was mixed on this part of the question. Some produced excellent answers whilst many failed to demonstrate the principles involved. Also, where knowledge was demonstrated, the application to the scenario was often missing. More than half of the allotted marks were given for the application of knowledge to the scenario.

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