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SBR D22 PT Q - Mock exam june 2022 answer
ACCA accounting (SBR P3)
Sunway University
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STRATEGIC PROFESSIONAL
ESSENTIAL EXAMINATION
Strategic Business Reporting
ACADEMIC SESSION – SEPTEMBER 2022
PROGRESS TEST FOR ACCA PAPER SBR
LECTURER: MS MENON, MS JEIN & MS BOR SHI
GROUP: SBR-G11, SBR-G12 & SBR-G
EXAM DATE: 6 OCTOBER 2022
Time allowed: 3 hours 15 minutes
This question paper is divided into two sections:
Section A – BOTH questions are compulsory and MUST be attempted
Section B – BOTH questions are compulsory and MUST be attempted
Do NOT open this question paper until instructed by the supervisor.
This question paper must not be removed from the examination hall.
Paper SBR
(a) Share based payments Manding is a listed manufacturer and retail conglomerate. At the start of the accounting period Manding implemented a share option plan for key employees. Under the terms of the plan staff were granted options to subscribe to the company9s shares for $10 per share if the individual remains a Manding employee at the end of a three-year vesting period. At the reporting date the company9s share price has fallen to $8 per share. On this basis the finance director considers that these options now have no value and accordingly their issue has not been reflected in the financial statements.
Discuss the appropriate accounting treatments which Manding should adopt for the issues identified. (3 marks)
(b) Acquisition of perfume brands Another company Corbel Co trades in the perfume sector. The current financial year end is 31 December 20X7. Corbel Co has acquired two other perfume brand names to prevent rival companies acquiring them.
The first perfume (Locust) has been sold successfully for many years and has an established market. The second is a new perfume which has been named after a famous actor (Clara) who intends to promote the product. The directors of Corbel Co believe that the two perfume brand names have an indefinite life.
Discuss the accounting issues relating to Corbel Co’s financial statements for the year ended 31 December 20X7 in accordance with IFRS standards on how to account for intangible assets with an indefinite life and whether the Locust and Clara perfume brand names can be regarded as having an indefinite life; (4 marks)
c) Sale of licence Another Company, The Agency Group manufactures products for the medical industry. They have been suffering increased competition and therefore have sold a licence to distribute an existing product and have also developed a new product which they hope will improve their market reputation. They have recently employed an ACCA student accountant. The year end is 31 December 20X7.
On 1 January 20X7, Agency Co granted (sold) Kokila Co a licence with no end date to sell a headache product (Headon) in South America. Agency Co has retained the rights to sell Headon in the rest of the world. The South American market9s relative value compared to the rest of the world is 20%. The manufacturing process used to produce Headon is not specialised and several other entities could also manufacture it for Kokila Co. Kokila Co will purchase Headon directly from Agency Co at cost plus 50%. The product has been sold for many years.
On 1 January 20X7, Kokila Co made an up-front payment of $15 million and will make an additional payment of $3 million when South American sales exceed $35 million. Agency Co had correctly capitalised development costs for Headon as an intangible asset at a carrying amount of $30 million.
Discuss how the granting (sale) of the licence to Kokila Co should be accounted for by Agency Co on 1 January 20X7.
(5 marks)
Gdansk has a year end of 31 December 20X5. It manufactures and distributes products throughout the world. The group operates in a competitive market and has had a tough year and it may be that profit targets will not be met. The directors are reviewing the draft financial statements which are prepared in accordance with International Financial Reporting Standards. Sunil is a recently qualified ACCA accountant and has just been appointed the finance director of the Gdansk group. Sunil has been assured that if the current year9s profit targets are met then he will receive a back dated full year9s directors9 bonus – even though this would not be contractually due to Sunil because he has just joined the group.
Non-current assets The directors wish to classify a property owned by Lagos, a subsidiary of Gdansk, as an investment property of the group. The property is currently rented by Lagos to Kingston, another subsidiary of Gdansk. The directors suggest that by classifying the property as an investment property of the group, any gains in value can be included in group profit or loss, with any losses included in other comprehensive income.
The directors wish to increase the useful life of all plant and machinery from four years to ten years. During the accounting period there was water damage at the head office of Gdansk. The costs of repairing the damage have been capitalised. (7 marks) Intangible assets The goodwill that arose on the acquisition of Lagos was written off some years ago. However, Lagos has been trading successfully and the directors wish to reflect this by recognising a reversal of the impairment loss.
On the original acquisition of Lagos there was a fair value adjustment such that in the consolidated financial statements the brand name of Lagos was correctly recognised as an intangible asset. The directors of Gdansk have in the current year incurred considerable advertising and marketing costs building up the value of their own brand and wish that this expenditure be capitalised. They know that this inconsistent with current accounting standards but argue that it is the best interests of the shareholders for all group brands to be recognised as assets, as this improves transparency and accountability. (3 marks) Share issues During the financial year, Gdansk issued 1 million shares of $1 nominal value for the acquisition of franchise rights at a local airport. Similar franchise rights are sold in cash transactions on a regular basis and Gdansk has been offered a similar franchise right at another airport for $2 million. This price is consistent with other prices given the market conditions. The share price of Gdansk was $2 at the date of the transaction. The transaction has been recorded at the nominal value of the shares issued. (3 marks)
Required: (a) Explain the appropriate accounting treatments which Gdansk should adopt for all the issues identified above. Note: The mark allocation is shown against each issue above.
(b) Discuss any ethical issues which arise from the directors’ proposed accounting treatments and behaviour. Your answer should also consider the implications for Sunil arising from the directors’ behaviour. (5 marks) Professional marks will be awarded in part (b) for the quality of the discussion. (2 marks) (20 marks)
a) Impairment loss of mines
At 31 December 20X7, Bismuth Co owns mines which have a carrying amount of $250 million. The company has committed itself to decommissioning its mines at the end of their useful life (five years or less) and has created a decommissioning provision of $85 million. However, the directors are unsure how the decommissioning provision will impact on the impairment testing of the mines. At the end of the useful life of a mine, its reusable components will be dismantled and sold.
The following information relates to the decommissioning of the mines at 31 December 20X7: $ million Carrying amount of decommissioning provision 85 Present value of future cash inflows from: sale of reusable components at decommission date (inflows) 20 sale of mining output from 31 December 20X7 to decommission date (inflows) 203 operating costs from 31 December 20X7 to decommission date (outflows) 48
Discuss, with suitable calculations, whether Bismuth Co should recognise an impairment loss for the mines. (5 marks) (b) Potential insurance policy proceeds Colat Co9s insurance policy provides compensation for losses based on the fair value of non-current assets, any temporary relocation costs estimated at $2 million and any revenue lost during the two- month period from 1 November 20X7. At 31 December 20X7, it is unclear which events and costs are covered by insurance policies and significant uncertainty exists as to whether any compensation will be paid. Before the financial statements were approved, it was probable that the insurance claim for the loss of the non-current assets would be paid but no further information was available about other insured losses.
The insurance policy does not cover environmental damage which is the responsibility of the government.
Discuss how the potential insurance policy proceeds should be accounted for in the financial statements for the year ended 31 December 20X (4 marks)
c) Closure of overseas branches Another company, Wader has decided to close one of its overseas branches. A board meeting was held on 28 February 20X8 when a detailed formal plan was presented to the board. The plan was formalised and accepted at that meeting. Letters were sent out to customers, suppliers and workers on 15 March 20X8 and meetings were held prior to the year end to determine the issues involved in the closure. The plan is to be implemented in April 20X8. The company wants to make a restructuring provision of $8 million for the closure, but is unsure whether this is permissible.
Wader identified a contract with a supplier as potentially onerous. The company sought legal advice, which confirmed that the contract is onerous. Under the contract, Wader must purchase a minimum of $1 million of goods each year for the two years ending 31 March 20X9 and 20Y0. The relevant discount rate for these payments is 5%. When contacted by Wader, the supplier offered to cancel the contract for a one-off payment of $2 million on 31 March 20X8.
Explain how the closure of the overseas branch and the onerous contract should be treated in accordance with IFRS Standards. (6 marks)
Canto Co is a company which manufactures industrial machinery and has a year end of 28 February 2017. The directors of Canto require advice on the following issues:
a) On 28 February 2017, Canto acquired all of the share capital of Binlory, a company which manufactures and supplies industrial vehicles. At the acquisition date, Binlory has an order backlog, which relates to a contract between itself and a customer for 10 industrial vehicles to be delivered in the next two years.
In addition, Binlory requires the extensive use of water in the manufacturing process and can take a pre- determined quantity of water from a water source for industrial use. Binlory cannot manufacture vehicles without the use of the water rights. Binlory was the first entity to use water from this source and acquired this legal right at no cost several years ago. Binlory has the right to continue to use the quantity of water for manufacturing purposes but any unused water cannot be sold separately. These rights can be lost over time if non-use of the water source is demonstrated or if the water has not been used for a certain number of years.
Binlory feels that the valuation of these rights is quite subjective and difficult to achieve.
Requied: Explain to the directors of Canto how to account for the above intangible assets on the acquisition of Binlory. (7 marks)
b) Another Company Norman owns a chain of hotels in Europe, and has recently took up a loan, incurring borrowing costs to build a new hotel in a new vicinity. In the midst of constructing the hotel, natural disaster strikes Europe and the construction of the hotel has to come to a halt. The directors of Norman are unsure if they should continue capitalizing the borrowing costs during this period.
The natural disaster has significantly impacted all hotel businesses in Europe as tourists has now stopped
travelling to Europe as most roads are now inaccessible, causing Norman to suffer significant losses in his hotel business. The government has decided to grant assistance to Norman, where the company has obtained a
significant amount of grant income to continue constructing the hotel, and with condition that Norman will retain its 250 employees in the workforce for the next two years.
The intention of the grant income was to create job opportunities and to support employee retention in areas where there was significant redundancy due to the natural disaster. The grant received of $70 million will have
to be repaid if the staff retention is less than 250 employees for the next two years.
Discuss how the above borrowing costs and income would be treated in the financial statements of Norman
for the year ended 31 May 2008.
(6 marks)
(c) Investment property portfolio
Another company, Banken , has an investment property portfolio consisting of a few tracts of undeveloped land and several commercial real estate properties which the company provides to tenants through operating
lease arrangements. For three of the buildings which are part of an office park, the initial costs included start- up and transaction costs totalling $2 million and $3 million, respectively. The company applies the fair
value model to investment properties. Two buildings saw a decline in value totalling $1 million in 20X7, and these losses were recognised in other comprehensive income (OCI).
Discuss the appropriate accounting treatment which Banken should adopt for the issues identified above and their impact on the financial statements. (6 marks)
(d) Defined benefit scheme Manding has a defined benefit plan for its employees. At the reporting date the plan has a surplus of $ million, all of which is recognised as an asset in the statement of financial position. The terms of the pension fund stipulate that no refunds can ever be repaid to the company and owing to the minimum funding requirements reduced payments can only be marginally reduced. The present value of this benefit has been estimated at $250 million.
Discuss the appropriate accounting treatments which Manding should adopt for the issues identified.
(4 marks)
Professional marks will be awarded in part (a) for clarity and quality of discussion.
(2 marks)
(25 marks)
END OF QUESTION PAPER
SBR D22 PT Q - Mock exam june 2022 answer
Course: ACCA accounting (SBR P3)
University: Sunway University
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