Answers

Strategic Professional – Essentials, SBR – INT

Strategic Business Reporting – International (SBR – INT) June 2024 Sample Answers

1 (a) Determining an entity’s functional currency

According to IAS 21 The Effects of Changes in Foreign Exchange Rates, the functional currency of a foreign operation is the
currency of the primary economic environment in which the foreign operation operates. This would be the currency which
mainly influences sales prices and related costs relating to goods and services (often this is the currency goods and services
are denominated and settled in); and of the country whose competitive forces and regulations mainly determine these prices.
Secondary factors include the currency in which funds from financing activities are generated, and in which receipts from
operating activities are usually retained.
Further factors are provided in IAS 21 to help assess whether the functional currency of the foreign operation is the same as its
parent. These include whether the foreign operation acts with a significant degree of autonomy, and whether transactions with
the parent company are a high proportion of its overall activities.
If after considering all of the above, the functional currency of the foreign operation is not obvious, then management should
apply judgement to determine the functional currency which most faithfully represents the economic effects of the underlying
transactions, events and conditions.
Nomstra Co’s sales and related costs are predominantly denominated and settled in Ny, indicating the Ny to be the functional
currency. Although Peony Co had previously provided a supporting loan to Nomstra Co (which may provide evidence of
financing in dollars), the loan is now settled and funds from financial activities are generated in Ny.
Finally, there is evidence of autonomy from Peony Co in that Nomstra Co’s board of directors operates independently. Peony Co
is therefore correct in determining that the functional currency for Nomstra Co is the Ny in accordance with IAS 21.

(b) (i) Adjustments to Peony Group for the three issues

Goodwill at acquisition:
Goodwill arising from Nomstra Co’s acquisition should be initially translated into the functional currency of the group ($)
at the acquisition date rate of Ny12:$1.
The non-controlling interest (NCI) should be introduced into the consolidated financial statements at the historic rate from
the date of acquisition (Ny2·7 million/12 = $225,000). Using the closing rate to initially value NCI, (Ny2·7 million/18 =
$150,000) understates both NCI and goodwill by $75,000. Goodwill and NCI must therefore be increased by $75,000.
Goodwill
Ny’000 Rate $’000
Consideration 13,200 12 1,100
NCI 2,700 12 225
Fair value of net assets (6,300) 12 (525)
––––––– ––––––
Goodwill at acquisition 9,600 12 800
Impairment loss (3,300) 15 (220)
––––––– ––––––
580
Exchange loss ß (230)
––––––– ––––––
6,300 18 350

–––––––
––––––– ––––––
––––––
Tutorial note:
Adjustment: to goodwill at acquisition date
$’000 $’000
Dr Goodwill at acquisition 75·0
Cr NCI ($2,700/12 – 2,700/18) 75·0
Explanation of impairment and translation of goodwill at 31 December 20X2:
The impairment loss in 20X2 should be translated at the average rate for 20X2 in accordance with stated group policy.
The impairment loss of $220,000 reduces the carrying amount of goodwill. A corresponding expense is charged to the
statement of profit or loss.
The owners of the parent company and the NCI should be allocated the goodwill impairment in proportion to their
shareholdings. As such, 75% of the impairment loss ($165,000) should be debited to retained earnings, and 25%
($55,000) to the NCI reserve within the equity section of the draft statement of financial position.
The remaining carrying amount of goodwill (Ny6·3 million) is translated at the closing rate at the financial year end.
This creates a balancing difference in dollars which is accounted for as an exchange loss of $230,000. This reduces the
carrying amount of goodwill in dollars and a corresponding expense is charged to other comprehensive income.

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 The exchange loss should also be allocated to the owners of the parent company and the NCI in proportion to their
shareholdings. As such, 75% of the impairment loss ($172,500) should be debited to the translation reserve, and 25%
($57,500) to the NCI reserve within the equity section of the draft statement of financial position.
Tutorial note:
Adjustment to goodwill post-acquisition: impairment
$000 $000
Dr RE ($220,000 x 75%) 165·0
Dr NCI ($220,000 x 25%) 55·0
Cr Goodwill 220·0
Adjustment to goodwill post-acquisition: translation to CR
Dr Translation reserve ($230,000 x 75%) 172·5
Dr NCI ($230,000 x 25%) 57·5
Cr Goodwill 230·0
Explanation/calculation of translation reserve:
Profit and other comprehensive income for each year are translated at the actual rate of exchange – but the average rate
can be used as an approximation. In the draft consolidated statement of financial position, the closing rate has been
incorrectly used to translate the loss for the year.
Correction for loss in year at average rate not closing rate:
$’000
Loss at average rate: ((900)/15) (60)
Loss at closing rate: ((900)/18) (50)
–––
Adjustment to loss: (10)
–––
The loss needs to be increased by $10,000. Of this, $7,500 will be debited against retained earnings and $2,500
against the NCI reserve. The increase in the loss recorded will decrease the foreign exchange loss by $10,000 (from
$175,000 to $165,000).
Exchange loss on translation of Nomstra Co
Ny’000 Rate $’000
Equity (net assets) at 1 January 20X2
(Ny1,500 + Ny4,800) 6,300 12 525
Loss for year (900) 15 (60)
Exchange loss ß (165)
–––––– ––––
Equity (net assets) at 31 December 20X2 5,400 18 300

––––––
–––––– ––––
––––
The foreign exchange loss has been wholly recorded in the translation reserve, rather than allocating the NCI its share. As
such, the translation reserve should be increased by $41,250 ($165,000 x 25%), and the NCI reserve reduced by the
same amount.
Tutorial note:
Adjustment translate loss for year at average rate not closing rate
$’000 $’000
Dr RE (75% x $10,000) 7·5
Cr Translation reserve 10·0
Dr NCI (25% x $10,000) 2·5
Allocation of NCI’s share of exchange loss
Dr NCI (25% x $165,000) 41·3
Cr Translation reserve 41·3

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 (ii) Peony Group
Consolidated statement of financial position as at 31 December 20X2
Draft NCI Goodwill Exchange Translate NCI share Revised
at HR impairment loss on loss at AR of corrected
GW not CR translation
loss
$’000 $’000 $’000 $’000 $’000 $’000 $’000
Assets
Non-current assets
Property, plant and
equipment 18,500·0 18,500·0
Goodwill 725·0 75·0 (220·0) (230·0) 350·0
––––––––– –––––––––
19,225·0 18,850·0
––––––––– –––––––––
Current assets 3,200·0 3,200·0
––––––––– –––––––––
Total assets 22,425·0 22,050·0
––––––––– –––––––––
Equity
Share capital 6,000·0 6,000·0
Retained earnings 15,462·5 (165·0) (7·5) 15,290·0
Translation reserve (OCE) (175·0) (172·5) 10·0 41·3 (296·3)
––––––––– –––––––––
21,287·5 20,993·8
Non-controlling interest 137·5 75·0 (55·0) (57·5) (2·5) (41·3) 56·3
––––––––– –––––––––
Total equity 21,425·0 21,050·0
––––––––– –––––––––
Liabilities
Non-current liabilities 200·0 200·0
Current liabilities 800·0 800·0
–––––––––
–––––––––
Total liabilities 1,000·0 1,000·0
–––––––––
–––––––––
Total equity and liabilities 22,425·0 22,050·0
–––––––––
–––––––––

(c) Changes in government regulations

According to IFRS 10 Consolidated Financial Statements, a subsidiary is an investment under the control of the investor.
Control arises when the investor is exposed, or has rights, to variable returns from its involvement with the investee and can
affect those returns through its power over the investee. Power arises when the investor has existing rights which give it the
current ability to direct the activities which significantly affect the investee’s returns.
Restrictions on the ability to transfer funds from subsidiary to parent do not preclude the existence of control. However, the
government restrictions which limit the extent to which Peony Co can exercise rights or governance over Nomstra Co suggests
that power, and hence control, may have been lost.
If Peony Co no longer has control over Nomstra Co, it may still exert a significant influence. Indicators of significant influence
under IAS 28 Investments in Associates and Joint Ventures include representation on the board of directors, participation in
policy-making processes (decisions about distributions), material transactions between the entities, interchange of managerial
personnel or provision of essential technical information. If this is the case, it should account for Nomstra Co as an associate
in the consolidated financial statements using the equity method. The goodwill, net assets and non-controlling interest of
the subsidiary would need to be derecognised at the date control was lost, giving rise to a gain or loss on disposal in the
consolidated statement of profit or loss.
IAS 28 also, however, describes how the loss of significant influence can occur when the investee is subject to the control of a
government, which may be the case here. Peony Co may not even be able to account for Nomstra Co as an associate if it no
longer holds significant influence over Nomstra Co, and no longer has the power to participate in Nomstra Co’s financial and
operating policy decisions. If this is the case, the investment will meet the definition of a financial asset, in accordance with
IFRS 9 Financial Instruments, and will be remeasured to fair value at each reporting date.

2 (a) Accounting treatment of the money received

Mr Pain can demand repayment of the $0·5 million, meaning that Abasi Co has a contractual obligation to transfer cash. In
accordance with IAS 32 Financial Instruments: Presentation, this should be accounted for as a financial liability.
As per IFRS 9 Financial Instruments, financial liabilities are initially recognised at fair value. For a loan, this is normally the
amount received, which in this case is $0·5 million. However, there does not seem to be an interest rate on the loan, and so
the transaction has not taken place on terms equivalent to those in an arm’s length transaction. As such, the fair value of the
financial liability should be calculated as the present value of the future expected cash flows. The discount rate used should be
Abasi Co’s usual rate of borrowing.

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 The financial liability would be measured at amortised cost because it is not held for trading.
According to IAS 1 Presentation of Financial Statements, an entity presents a liability as current if it does not have an
unconditional right to defer settlement for at least 12 months after the reporting date. The financial liability is repayable on
demand so should be presented as a current liability.
Related party transaction
Mr Pain is a director of Abasi Co. This means that, in accordance with IAS 24 Related Party Disclosures, Mr Pain and Abasi Co
are related parties. The loan provided to Abasi Co is a related party transaction.
Disclosure is required of the nature of the related party relationship as well as information about the amount of the loan, the
outstanding balance, and the terms and conditions.
In the disclosure note, Abasi Co cannot state that the loan was provided on terms equivalent to those which prevail in arm’s
length transactions because the loan appears to be interest-free.
Crowdfunding
In accordance with IFRS 15 Revenue from Contracts with Customers, a contract exists between Abasi Co and each contributor
which establishes the obligations of each party and the payment terms. There appears to be one performance obligation: to
provide each contributor with a drone.
Abasi Co must determine if the performance obligation is satisfied over time or at a point in time. Control of a drone does not
transfer to a customer over time, but on delivery and so this is the date when revenue should be recognised.
The drones have not been delivered and so revenue should not be recognised. The $2·4 million received should be recorded
as a contract liability on the statement of financial position.
The $1·5 million cost of producing the drones should be recorded as inventories.

(b) Ethics
From the outset, there was a lack of integrity displayed by Mr Mavic. He should have been straightforward and honest in
his business relationships with the contributors. Integrity also means he should not have knowingly been associated with
misleading information. The Zolo drone was advertised at a trade show where it was not capable of performing adequately
and he knew that the crowdfunding campaign video was misleading as to the existing capabilities and readiness of the Zolo.
The fact that Mr Mavic honestly thought that the company would be able to develop and produce the Zolo by the estimated
delivery date does not mitigate the fact that he knew that the company was misleading contributors. The communications from
him to the contributors were regular and honest, however, they were also incomplete and reflected a lack of awareness of the
problems the company was facing. This demonstrated a lack of professional competence and due care which Abasi Co could
expect from its finance director.
Financial pressures led Mr Mavic to ship Zolo drones to favour new customers in the hope of receiving additional revenues.
This action was unethical at least in respect of the crowdfunding contributors; whilst not being creditors, they are consumers,
and Abasi Co has a duty of care to them. The contributors obviously had faith in the project as there was only one contributor
who reported the project on the CrowdPeople platform.
Mr Mavic knew that the Zolo drones were not functional and, whilst shipping to new customers was earning revenue, a
significant amount of the revenue was being refunded because of the poor quality of the drone. This again showed a lack of
objectivity and professionalism in dealing with these customers. Mr Mavic made a serious error in committing the business
to extremely high initial levels of component parts in the absence of proven production models. Also, the cost of producing
a Zolo had increased by 300%, but he naively felt that these costs would ultimately be covered by the monies raised from
crowdfunding. He should have produced a cash budget which may have indicated a shortfall in cash required to produce the
Zolo.
The fact that Mr Mavic awarded himself a market-based salary and leased an executive car for himself is not by itself an issue,
unless he felt that the company was going to suffer financial problems which at the time of the award (1 May 20X7) was
unlikely. Also, at 31 December 20X7, there was no sign of sustained extravagance or criminal fraud, which would lead to a
conclusion that Mr Mavic acted in an honest manner but he lacked integrity, objectivity and professional competence.
It appears from the outset that Mr Mavic and Mr Pain did not possess the technical or commercial competencies necessary to
deliver the Zolo drone as specified in the original campaign. The directors managed their business poorly and seemed to spend
their money irresponsibly. Mr Mavic demonstrated a lack of professional behaviour which might discredit the profession. He
should have avoided any conduct which he knew or should have known might discredit the profession.

3 (a) Impairment review

IAS 36 Impairment of Assets requires an entity to assess at the end of each reporting period whether there is any indication
that an asset or cash generating unit (CGU) may be impaired. If any such indication exists, the entity should estimate the
recoverable amount of the asset or CGU. This requirement also applies to goodwill, indefinite life intangible assets, and
intangible assets not yet ready for use.
Generally, internal indicators would provide reasonably direct evidence that a specific asset or CGU may be impaired. For
example, internal reports might show that actual net cash flows are significantly worse than those budgeted. However, external

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 sources of information will more typically be broader and less clearly linked to a specific asset or CGU. For example, a decline
in market capitalisation to less than the carrying value of the entity’s net assets.
In this case, there has been an increase in customers using online shopping. Therefore, Jobon Co was correct in the assumption
that an impairment review was necessary.
Value in use
The lease payment outflows have been discounted at 5% for value in use (VIU) purposes whereas the interest rate implicit in
the lease is 4%. Thus, the lease payment outflows would be stated at a lesser amount than the lease liabilities. This would
therefore mean that the VIU is higher using Jobon Co’s method which could mean that the asset is under impaired.
In accordance with IAS 36, it may be necessary to consider liabilities to determine the recoverable amount of a CGU. This can
occur if the disposal of a CGU requires the buyer to assume the liability. If this is the case, the carrying amount of the liability
is deducted from both the CGU’s VIU and its carrying amount. Jobon Co has deducted the lease liabilities from the carrying
amount of the CGU but has not deducted the same amount from the VIU of the CGU. Therefore, the lease payment outflows
should be excluded from the determination of VIU and the carrying amount of the lease liabilities should be deducted instead.
When determining VIU, IAS 36 states that projections based on budgets or forecasts should cover no more than five years
(unless a longer period can be justified). Jobon Co is incorrectly using budgets for a ten-year period. Instead, IAS 36 states that
cash flows beyond five years should be determined by extrapolating budgets using a steady or declining growth rate.
The future cash flows used to determine VIU should include estimated costs necessary to maintain the level of economic
benefit expected to arise from the CGUs in their current condition. They should exclude any estimated costs ($5 million) to
enhance their performance and the estimated increase in cash flows anticipated from enhancing its performance.
Discount rate
Jobon Co should not use the weighted average cost of capital of a different company in the sector. The discount rate for a VIU
model must be the pre-tax rate which reflects current market assessments of the time value of money and the risks specific to
the asset for which the future cash flow estimates have not been adjusted. This would mean that Jobon Co should incorporate
the implicit interest rate relating to the lease liabilities.

(b) Year ended 31 December 20X6

In accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, the following conditions must be
met for an asset (or ‘disposal group’) to be classified as held for sale:
– management is committed to a plan to sell;
– the asset is available for immediate sale;
– an active programme to locate a buyer is initiated;
– the sale is highly probable, within 12 months of classification as held for sale (subject to limited exceptions);
– the asset is being actively marketed for sale at a sales price reasonable in relation to its fair value;
– actions required to complete the plan indicate that it is unlikely that the plan will be significantly changed or withdrawn.
The presentation of the investment in the subsidiary, Tilte Co, as a disposal group held for sale would seem to apply for the
year ended 31 December 20X6. This is because of the shareholders of Jobon Co authorising management on 1 May 20X6 to
sell all the shares held in Tilte Co within the next 12 months. At the same time, Jobon Co had instructed its agents to sell the
shares as soon as possible at the current market price. The actions of Jobon Co, at this stage, seem to indicate also that it is
unlikely that the plan will change. The shareholders’ approval is required in the jurisdiction and therefore should be considered
as part of the assessment of whether the sale is highly probable.
In accordance with IFRS 5, a discontinued operation is a component of an entity which has been disposed of or is classified
as held for sale, and which:
– represents a separate line of business or geographical area; or
– is part of a co-ordinated plan to dispose of the above; or
– is a subsidiary acquired exclusive with a view to resale.
Tilte Co is a distinct geographical component which meets the criteria to be classified as held for sale. Therefore, its results
were correctly presented as arising from discontinued operations in the year ended 31 December 20X6.
Year ended 31 December 20X7
A disposal group can, exceptionally, be classified as held for sale/discontinued after a period of 12 months if it meets certain
criteria. These criteria refer to the occurrence of circumstances arising which were previously considered unlikely. As a result,
the non-current asset (or disposal group) previously classified as held for sale is not sold by the end of that period. However,
the sale still has to meet the criteria to be classified as held for sale, even after the 12-month period has elapsed.
There is no real evidence that Tilte Co met the held for sale criteria for classification as a disposal group over the extended
period beyond 12 months. The instructions to the agents now stated that they were authorised to sell the shares in Tilte Co if
the losses suffered by Tilte Co exceeded $20 million. Tilte Co made quarterly losses of approximately $4·5 million per quarter
during 20X7 which cumulatively did not reach the threshold of $20 million. In addition, Jobon Co transferred additional
activities to Tilte Co during February 20X7, meaning that Tilte Co recruited new employees and invested in new assets. This
fact confirmed that Tilte Co was not available for sale in its present condition. At the shareholders meeting in May 20X7, there

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 was no further discussion on or approval for the sale of Tilte Co. The authorisation to sell the shares in Tilte Co was only granted
for one year and this was not authorised again by the subsequent shareholders meeting in May 20X7. Shareholder approval is
required in the jurisdiction in order to sell shareholdings in subsidiaries.
Based on the above, the investment in Tilte Co should not have been shown as a disposal group in the consolidated financial
statements as at 31 December 20X7. As such, its results should not have been presented as discontinued for the year
ended 31 December 20X7 either. The classification of Tilte Co as held for sale in the comparative figures for the year ended
31 December 20X6, and the presentation of its results, would need to be restated.

(c) Signed letter of intent to purchase

In accordance with IAS 10 Events After the Reporting Period, an event after the reporting period is one which could be
favourable or unfavourable, and which occurs between the end of the reporting period and the date when the financial
statements are authorised for issue. An adjusting event is one which provides further evidence of conditions which existed at
the end of the reporting period whereas a non-adjusting event is one which is indicative of a condition which arose after the
end of the reporting period.
Although the preliminary results of the group had been published by 1 April 20X8, the financial statements had not been
authorised for issue; therefore the signing of the letter of intent should be taken into account before the authorisation of the
financial statements. The sale of Tilte Co is now highly probable. However, the issue arises as to whether the signing of the
letter of intent constitutes an adjusting or non-adjusting event. As the held for sale criteria were only met on 1 April 20X8, the
conditions did not exist at the end of the reporting period. This means that the investment in Tilte Co should still not be shown
as a disposal group held for sale, or its results presented as arising from discontinued operations, in the consolidated financial
statements for the year ended 31 December 20X7.
Deferred tax asset
In accordance with IAS 12 Income Taxes, an entity should recognise a deferred tax asset for all deductible temporary differences
arising from investments in subsidiaries to the extent that, and it is probable that, the temporary difference will reverse in the
foreseeable future and taxable profit will be available against which the temporary difference can be utilised.
Jobon Co’s treatment of the deferred tax asset does not conflict with the requirements of IAS 12. This is because the sale of
Tilte Co is highly probable, and the tax allowable loss can be used to relieve future taxable profits.
However, a deferred tax asset should be recognised when the held for sale conditions of IFRS 5 are met. This did not occur until
1 April 20X8 and, therefore, the deferred tax asset of $3·6 million will be recognised in the financial statements for the year
ended 31 December 20X8. No adjustment is required in the consolidated financial statements for the year ended 31 December
20X7.

4 (a) (i) Disclosure of judgements and estimates

According to the IASB’s Conceptual Framework for Financial Reporting, the users of financial statements require
information which will help them to make decisions about advancing resources to the reporting entity. To make these
decisions, they require information which will help them to assess the entity’s future profits and net future cash flows.
An entity always makes judgements and estimates in preparing financial statements, some of which will have a significant
effect on the reported results and financial position. An explanation of the key judgements made in determining an
element of the financial statements is valuable to investors as it helps them to assess an entity’s financial position and
performance. It also enables an understanding of the sensitivities to changes in assumptions.
A description of management’s thinking in an area with possible quantification of information or a range of possible
outcomes will enable investors to assess the quality of management’s accounting policy decisions.
It may also allow investors to gauge how changes to estimates could affect the future results. Often, disclosure of
management’s judgements can help investors understand the potential cash flow implications and help investors in
their future cash flow modelling. However, only the judgements in applying accounting policies which have the most
significant effect on amounts recognised are included in the IAS 1 Presentation of Financial Statements disclosure of key
judgements.
(ii) Judgements and estimates when accounting for business combinations
Examples of potential areas where judgements and estimates may arise when accounting for a business combination
include:
– whether an investee is a subsidiary or associate;
– whether an acquisition is of a business or group of assets;
– which entity is the acquirer in a business combination;
– determining the acquisition date;
– estimated goodwill impairment;
– classification of joint arrangements;
– the fair value of the subsidiary’s identifiable net assets; and
– the fair value of the non-controlling interest at acquisition.

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 (b) (i) Usefulness of disclosure note
The note clearly states financial statement areas affected by judgements and estimates, thus giving investors an insight
into the areas most significantly affected in the financial statements. This is relevant information because it will help
investors assess the level of risk associated with their investment.
The note is clearly structured. This will make it more understandable for financial statement users.
Property, plant and equipment (PPE)
Depreciation is an estimate and Maple Co is clearly outlining the methodology used. This enables investors to assess its
adequacy. They will also be able to make comparisons with other businesses in the same sector.
The depreciation recognised in the period is based upon estimates of unmined ore. This information is determined by
Maple Co’s own engineers. This may give investors confidence about the technical knowledge of those involved in this
estimation process. Conversely, investors may believe that the use of external experts, who are less likely to be influenced
by management, will lead to a more faithful representation of the underlying PPE balance.
Provisions
Provisions are liabilities of uncertain timing or amount. Due to this, they can be an area of high risk for investors, who
require information to help determine the future net cash flows of the entity.
The investors are informed in the note that the measurement of provisions is subject to significant judgements and
uncertainty. This is important because, if the mines are closed earlier than expected, cash outflows might be required
sooner than anticipated.
Maple Co has made reference to external, independent experts who are involved in estimating future restoration costs. This
means that the estimates are more likely to be based on a recognised method, rather than on estimates and assumptions
made by the directors. Investors may therefore have more confidence that the provision is faithfully represented and that
the actual future cash outflows will not significantly differ from the provision which has been recognised.
Maple Co has not provided a sensitivity analysis in relation to the impact of mine closure plans on its restoration and
decommissioning provisions. This information would help users to quantify the potential impact of this uncertainty on the
entity’s future profits and future cash outflows.
Inventories
Maple Co states that the assumptions are periodically updated but there is no information about how frequently estimates
were revised or the date when the assumptions were made. The assumptions underlying significant estimates should be
quantified if possible as investors need this information to fully understand their effect. This is particularly relevant in this
industry where there are significant sources of estimation uncertainty and where investors wish to make comparisons with
other companies.
(ii) Accounting policies
In the absence of a specific IFRS Accounting Standard, the management of Maple Co will need to apply the hierarchy
in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to develop and apply an accounting policy.
IAS 8 states that management must use its judgement in developing and applying an accounting policy which results
in information which is relevant and reliable. In making that judgement, management must refer to, and consider the
applicability of, the following sources in descending order:
– the requirements and guidance in IFRS Accounting Standards dealing with similar and related issues; and
– the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the
IASB’s Conceptual Framework for Financial Reporting.

(c) Financial instruments

Although both agreements stipulate the same payment date, there is no contractual obligation binding these agreements.
Accordingly, Maple Co collects $3 million from the third party on its own behalf, to fulfil its obligations towards its preference
shareholders. The lack of a contractual link between the two agreements means that Maple Co is subject to two separate
contracts which result in the receipt and payment of cash on the same day, 1 May 20X8.
The definition of a financial asset in IAS 32 Financial Instruments: Presentation includes a contractual right to receive cash.
The definition of a financial liability given by IAS 32 includes a contractual obligation to deliver cash. IFRS 9 Financial
Instruments states that an entity should recognise financial assets and liabilities when they become party to the contract.
The third-party loan creates a right to receive cash in the future, and therefore a financial asset should be recognised on
1 January 20X7. IFRS 9 states that financial assets are recognised at fair value which is $3 million.
The preference shares create a separate obligation to repay cash in the future and therefore should be recognised as a financial
liability on 1 January 20X7. Financial liabilities should be recognised at fair value, which is $3 million.
Although the financial asset and financial liability are both recognised at fair value of $3 million, they should not necessarily
be offset. IAS 32 states that a financial asset and a financial liability should be offset and the net amount presented in the
statement of financial position when an entity:

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 – currently has a legally enforceable right to set off the recognised amounts; and
– intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.
The financial asset and financial liability are held with different parties and cannot be offset.
Tutorial note: The requirement specifically makes reference to recognition. However, credit would also be given if candidates
approach this question using principles from IFRS 9 on derecognition.
IFRS 9 states that a financial asset should be derecognised when the contractual rights to the cash flows from the financial
asset expire, or the entity transfers the financial asset. The rights to the cash flows will not expire until 1 May 20X8 and not
on 1 January 20X7.
For the transfer of an asset to occur, the entity must have an obligation to remit any cash flows it collects on behalf of the
eventual recipients without material delay. This is not the case for Maple Co, as there is no obligation to use the cash received
from the repayment of the loan to redeem the preference shares.
Similarly, a financial liability should be derecognised only when it is extinguished, which is when the obligation specified in the
contract is discharged, cancelled or expires. This will occur on 1 May 20X8 and not 1 January 20X7. Therefore, the liability
should not be derecognised on 1 January 20X7.
Therefore, the financial asset does not qualify for derecognition and the financial liability resulting from preference shares was
not extinguished. Both should be presented in the statement of financial position as at 31 December 20X7.

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Strategic Professional – Essentials, SBR – INT
Strategic Business Reporting – International (SBR – INT) June 2024 Sample Marking Scheme

Marks
1 (a) Determining an entity’s functional currency under IAS 21:
Principles 4
Application 3
–––
Max 5
–––

(b) (i) Explanation with calculations of the three issues:

Goodwill at acquisition 3
Goodwill impairment and translation at 31 December 20X2 5
Translation reserve 4
–––
Max 10
–––
(ii) Adjust consolidated statement of financial position:
Goodwill 3
Retained earnings 2
Translation reserve 3
NCI 4
–––
Max 10
–––

(c) Discussion about control/significant influence:

Control definition and application 2
Loss of control impact on treatment as subsidiary 1
Alternative treatment: equity method IAS 28 2
Alternative treatment: financial asset IFRS 9 2
–––
Max 5
–––
30
–––

2 (a) 1 mark per discussion point of key principles and application to the scenario:
Financial liability 5
Related parties 3
Revenue 4
Inventories 1
–––
Max 10
–––

(b) Application and discussion of ethical principles to scenario, including:

Integrity in relation to misleading information 3
Professional competence in relation to awareness of project 2
Impact of financial pressure on decisions 2
Issues relating to salary and car 2
Duty of care/responsibility to customers 1
Responsibilities to investors 1
–––
Max 8
–––
Professional skills marks 2
–––
20
–––

11
 Marks
3 (a) 1 mark per discussion point of key principles and application to the scenario:
IAS 36 impairment indicators 2
Application of above to scenario 1
Comparability/consistency of VIU and carrying amount 4
Length of forecasts 2
Future costs 1
Discount rate 2
–––
Max 9
–––

(b) 1 mark per discussion point of key principles and application to the scenario:
IFRS 5 principles 3
Application to year ended 31 December 20X6 3
Application to year ended 31 December 20X7 5
Comparative figures 1
–––
Max 8
–––

(c) 1 mark per discussion point of key principles and application to the scenario:
IAS 10 principles 2
Application of above to scenario 3
IAS 12 principles 1
Application of above to scenario 4
–––
Max 8
–––
25
–––

4 (a) (i) 1 mark per relevant discussion point 3

–––
(ii) 1 mark per specific example 3
–––

(b) (i) Discussion of good practice and areas to improve, in relation to:
General usefulness 2
PPE 3
Provisions 3
Inventories 2
–––
Max 7
–––
(ii) Discussion of IAS 8 3
–––

(c) Application and discussion of:

IFRS 9/IAS 32 principles 4
Application to scenario 5
–––
Max 7
–––
Professional skills marks 2
–––
25
–––

12