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StrategicBusiness Reporting

Revision

Tom Wang (Yuling) FCCA SBR China Tutor Guru

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Revision Topics2

1. Principles on answering SBR questions;

2. Challenging and hot topics:

• Additional reports within annual report;

• Control in business combination;

• Business model with example of crowdfunding;

• Employee Benefits (Asset ceiling test);

• Financial instruments;

• Accounting consideration of COVID-19;

• Current issues - Disclosure of Accounting Policies;

3. How to read questions in SBR exam.

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Principles on answering SBR questions

1. Mark is given for any valid, relevant and specific point;

2. Generally 1 mark per relevant point;

3. Application is everything in SBR, technical knowledge in context of the given scenario not theory;

4. Time management 1 mark allocates 1.8 minutes;

5. Please read the requirement carefully and do not omit anything;

6. Understand the business model for each case;

7. Familiarize computer-based environment.

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SBR main topics (pilot)

Please secure to cover these knowledges before taking the exam.

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Financial statements within annual report (pilot)

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Additional reports within annual report

Forward-looking information about likely or possible future transactions and events is included in the financial statements only if it provides relevant information about an entity’s assets, liabilities and equity that existed at the end of, or during, the period (even if they are unrecognized) or income and expenses for the period.

Other types of forward-looking information are sometimes provided outside the financial statements, for example, in:

▪ Management commentary; https://cn.accaglobal.com/promotion/vhall.html?webinar_id=513733845

▪ Integrated reporting; https://cn.accaglobal.com/promotion/vhall.html?webinar_id=513733845

▪ Sustainability report; https://cn.accaglobal.com/promotion/vhall.html?webinar_id=709473001

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Control in business combination

Control criteria (IFRS 10) Considerations to apply to the SBR exam question scenario:

Power over the investee

1. Owning a majority of the voting rights is not always necessary to

have control;

2. More analysis and judgement is required to determine whether an

investor with a significant minority of voting or other rights has control.

Exposure or rights to

variable returns

1. Returns should be interpreted broadly, for example, to include

synergy benefits as well as financial returns;

2. Returns can be negative or positive;

3. A right to returns that is fixed is not normally consistent with control;

The ability to use its power

to affect returns

In more complex control assessments, IFRS 10 requires identification

of the activities that most affect the investee’s returns and how they are

directed. While in simple assessments, it is sufficient to consider

activities at the financial and policy level.

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Control in business combination

Joo Co and Cat Co hold 40% each of the voting rights of Door Co. The remaining 20% are held by Hag Co. A shareholders’ agreement states that the purpose of Door Co is to generate capital gains from buying and selling properties. All decisions concerning buying and selling properties, and their financing require the unanimous agreement of both Joo Co and Cat Co. Joo Co is responsible for all management activities for which it receives payment and additionally has the final decision on appointments to the board of directors.

The major finance and management activities will both affect Door Co’s returns. Therefore, Joo Co and Cat Co should evaluate which set of activities has the greatest effect on returns.

Given the purpose of Door Co is to achieve capital gains, this may indicate capital investment activities have the most significant impact. If so, the conclusion would be that Joo Co and Cat Co have joint control because these activities are directed by joint decision-making. The deemed significant influence of Hag Co would not change this assessment of which entity has power over Door Co. If however management activities and key management personnel appointments are considered more significant, the conclusion would be that Joo Co has control of Door Co because it solely directs these relevant activities.

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Business model with example of crowdfunding

On 1 September 20X9, Burnett Co decided to undertake a crowdfunding

campaign to finance the production of a new racing bike, the Cracken.

They made a short film with famous cyclists which set out the qualities of the

Cracken bike and posted it on the PeddleStarter crowdfunding platform. The

campaign raised $4 million on which PeddleStarter charged 7% commission.

The contributors to the crowdfunding campaign were promised a reward of 1

Cracken bike for every $4,000 dollars contributed. At the financial year end of

31 December 20X9, Burnett Co had manufactured only 50 Cracken bikes at a

total cost of $240,000 but none had been delivered to contributors.

There was some doubt as to the capability of the company to develop,

manufacture, and deliver the bikes promised but Burnett Co is sure that the

funding will cover any costs incurred.

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Equity-based crowdfunding

The equity-based approach is targeted at investors who receive shares in the new company.

Debt-based crowdfunding

With debt-based crowdfunding, a contributor makes a loan to a business that’s looking to crowdfund, with the intention of subsequently being repaid with interest.

Reward-based crowdfunding

This involves promising specific items (rewards) to contributors before the launch of a new project, product, or business. A reward-based campaign isn’t generally targeted at contributors who are looking to profit from their investment but at those who want to own a new product.

Donation-based crowdfunding

Contributors make “donations” to a project or company and may receive existing ‘rewards’ in return. Some forms of donation-based crowdfunding don’t involve any sort of reward as donors wish to contribute to further a particular cause.

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Business model with example of crowdfunding

March 2020

Section B

3 (b) (ii)

how to account for the players’ contract costs (including the contingent

performance conditions), any impairment which might be required to these

non-current assets and whether a player can be considered a single cash

generating unit.

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Employee Benefits (Asset ceiling test)

The asset ceiling is the present value of those future benefits. Future economic benefits are available to the entity in the form of a reduction in future contributions or a cash refund, either directly to the entity or indirectly to another plan in deficit. IAS 19 states that, when an entity has a surplus in a defined benefit plan, it should measure the net defined benefit of the asset at the lower of:

i) the surplus in the defined benefit plan; and

ii) the asset ceiling,

After the plan amendment, curtailment or settlement has been accounted for, the entity should then determine the effect of the asset ceiling. An entity should recognize any past service cost, or a gain or loss on settlement in profit or loss.

Any changes in the value of the asset ceiling is recognized in other comprehensive income, as opposed to being recognized in the statement of profit or loss.

Note: the asset ceiling will be provided as part of the question scenario in the SBR exam but in practice is determined using the discount rate based upon market yields at the end of the reporting period on high quality corporate bonds.

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Employee Benefits (Asset ceiling test)

Apolline Co manages a defined benefit scheme for its employees. At 1

January 20X8, the fair value of the pension scheme assets were estimated to

be $137 million and the present value of the pension scheme liabilities were

$122 million. The asset ceiling has been calculated at $4 million.

The discount rate on high quality corporate bonds is 4%. The following are

the details of the scheme for the year to 31 December 20X8.

At 31 December 20X8, the asset ceiling has been calculated at $11 million.

During the year, there was a scheme curtailment which resulted in a gain on

settlement of $3 million. Immediately after the scheme curtailment the actuary

valued the scheme’s assets as $148 million and the scheme’s liabilities as

$136 million.

$m

Cash contributions 7

Benefits paid 6

Current service cost 5

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The pension scheme surplus at 31 December 20X8 is summarized as follows

Assets Liabilities

Net plan asset

before ceiling

adjustment

Ceiling

adjustment

Net plan asset

after ceiling

adjustment

Balance 1

January 20X8 137 122 15 (11) 4

Net interest at

4%

5.48

（4%*137）4.88

（4%*122）0.6 (0.44)

0.16

（4%*4)

Cash

contributions 7 7 7

Benefits paid (6) (6) -

Current service

cost 5 (5) (5)

Curtailment and

settlement (3) 3 3

Total at 31

December

20X8

143.48 122.88 20.6 (11.44) 9.16

As any past service cost does not consider

the effect on the asset ceiling, a gain on

settlement of $3 million should therefore be

recognized in profit and loss.

At 31 December 20X8, the scheme is now

valued at the lower of the:

• surplus of the scheme, $12 million

($148million - $136million) and

• the present value of the economic

benefits in the form of refunds from the

plan or reductions in the future

combinations (the asset ceiling) i.e.$11

million.

This means that there is a net gain of $1.84

million being the difference between the net

plan asset in the scheme ($9.16 million) and

the asset ceiling ($11 million). This gain is

credited to other comprehensive income.

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Financial instruments

Financial asset – Equity instrument

• FVTPL: All financial asset – equity instrument should use FVTPL except those under FVTOCI.

• FVTOCI: Financial asset – equity instrument not held for trading and make an selection to use (i.e.other comprehensive income option);

Financial asset – Debt instrument (Key topic)

• Amortized cost

• FVTOCI

• FVTPL

Financial liability – Debt instrument

• FVTPL: Financial liabilities held for trading or make a selection (fair value option);

• Amortized Cost: All financial liability – debt instrument should use amortized cost except those underFVTPL.

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Financial Instruments

IFRS 9 uses an Expected Credit Loss (ECL) model which requires a calculation of the expected value decrease in a financial asset. Essentially, a provision is required for expected credit losses on the financial asset over a period of time. Expected losses should be discounted to the reporting date using the effective interest rate of the financial asset that was determined at initial recognition.

The impairment model of IFRS 9 introduces a three-stage approach:

▪ Stage 1 deals with financial instruments that have not had a significant increase in credit risk since they were first recognized or that have low credit risk at the financial year end. For these assets, 12-month ECL are recognized which means that the entity has to calculate the expected losses in the next 12 months taking into account the risk of default. Any interest revenue is calculated on the gross carrying amount of the asset without the deduction of the credit loss.

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Financial Instruments

▪ Stage 2 deals with financial instruments that have had a significant increase in credit risk since they were first recognized unless the credit risk is still low at the financial year end. These instruments are not credit-impaired. The expected losses over the life of the financial instrument are recognized (lifetime ECL) taking into account the risk of default. Interest revenue is still calculated on the gross carrying amount of the asset.

▪ Stage 3 deals with financial assets that are credit-impaired, which is where events have occurred that have a detrimental impact on the estimated future cash flows from the financial asset. For these assets, lifetime ECL are also recognized. However, interest revenue is calculated on the carrying amount less the ECL allowance.

For trade receivables or contract assets that do not contain a significant financing component, the loss allowance should be measured, at initial recognition and throughout the life of the receivable, at an amount equal to lifetime ECL.

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Accounting considerations of COVID-19

The following tables consider some of the existing accounting requirements that should be considered whenaddressing the financial effects of the COVID-19 outbreak:

IFRS Standards Issues for discussion

IAS 1 Presentation of Financial

Statements

Assessment of an entity’s ability to continue as a going concern at the dates the

financial statements are approved.

Disclose uncertainties - significant judgements and sources of estimation/uncertainty

need to be appropriately disclosed.

IAS 2 InventoriesInventory must be stated at the lower of cost or net realizable value (NRV) however

NRV calculation may be challenging (no market prices or no demand for products).

IAS 10 Events after the reporting period

Entities will need to judge how much of the impact of COVID-19 should be

considered to arise from adjusting or non-adjusting events given the dates when

knowledge of the pandemic became known and events like travel bans, lockdowns

and similar took effect.

IAS 12 Income Taxes

Recovery of deferred tax (DT) assets arising from accumulated tax losses and

therefore assess probable future taxable profits or tax planning opportunities or

whether sufficient DT liabilities which are expected to reverse.

Will entities have to restrict the Dt Asset recognized? Consequences of adjustments

to the carrying amounts of assets and liabilities will have DT impact e.g. impairment.

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Accounting considerations of COVID-19

The following tables consider some of the existing accounting requirements that should be considered whenaddressing the financial effects of the COVID-19 outbreak:

IFRS Standards Issues for discussion

IAS 19 Employee Benefits

Adjustments/provisions for severance. Falls in interest rates and plan asset portfolios

may require significant adjustments requiring the services of actuaries to reflect

changes in any defined benefit schemes.

IAS 20 — Accounting for Government

Grants and Disclosure of Government

Assistance

Government assistance to help entities that are experiencing financial difficulty.

Reimbursement of employment costs is recognized in profit or loss.

Disclosure of aid such as short-term debt facilities.

IAS 23 Borrowing Costs

Suspension of capitalization of borrowing costs if Covid-19 has interrupted the

acquisition, construction or production of a qualifying asset.

Any borrowing costs incurred during such periods should be expensed through P/L.

IAS 36 Impairment of Assets

Assess whether the impact of COVID-19 has potentially led to an asset impairment

(tangible, intangibles and financial assets). Covid-19 is a trigger event that indicates

an impairment review is required. Management may face significant challenges in

preparing the budgets and forecasts necessary to estimate the recoverable amount

of an asset (or CGU) because of decreased demand, business interruptions,

cancelled orders and similar issues.

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Accounting considerations of COVID-19

The following tables consider some of the existing accounting requirements that should be considered whenaddressing the financial effects of the COVID-19 outbreak:

IFRS Standards Issues for discussion

IAS 37 Provisions, Contingent Liabilities

and Contingent Assets

Potential restructuring provisions and onerous contract provisions may need

measured and recognized and insurance recoveries disclosed.

IFRS 2 Share-based PaymentVesting conditions for share-based payments with performance conditions may not

be met.

IFRS 5 Non-current Assets Held for

Sale and Discontinued Operations

An asset (or a disposal group) no longer meets the conditions for ‘held for sale’ for

example an entity may now face difficulties in identifying a buyer or in completing the

sale within the 12-month period from classification.

Ceased operations that meet the definition of discontinued operations will require

separate presentation and disclosure.

IFRS 9 Financial Instruments

Allowance for expected credit losses (ECL).

Classification of financial assets - consider whether there has been a change in the

entity’s business model.

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Accounting considerations of COVID-19

The following tables consider some of the existing accounting requirements that should be considered whenaddressing the financial effects of the COVID-19 outbreak:

IFRS Standards Issues for discussion

IFRS 13 Fair Value Measurement

Companies need to look at the decisions, assumptions and inputs to fair value

measurement as market-based measures are likely to change significantly and

perhaps in unpredictable ways.

If using level 2 or 3 inputs will require more extensive disclosure.

IFRS 15 Revenue from contracts with

customers

Contract enforceability: may not be able to approve a contract under an entity’s normal

business practices.

Collectability: may be a significant deterioration of a customer’s ability to pay.

Variable considerations: an entity may need to consider updating its estimated

transaction price.

Significant financing component: an entity may provide extended payment terms.

IFRS 16 Leases Impairments to right-of use assets.

Alternative performance measures

Entities may consider providing new alternative performance measures (APMs) or

adjust existing APMs – adequate/extensive disclosures will be required to ensure they

do not mislead.

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Current Issues - Disclosure of Accounting Policies

Only material accounting policies that relate to material transactions, other events or conditions should bedisclosed in financial statement notes:

(a) was changed during the reporting period because the entity was required to or chose to change its policy andthis change resulted in a material change to the amounts included in the financial statements;

(b) was chosen from one or more alternatives in an IFRS Standard, for example, the option to measureinvestment property at either historical cost or fair value;

(c) was developed in accordance with IAS 8 in the absence of an IFRS Standard that specifically applies;

(d) relates to an area for which an entity is required to make significant judgements or assumptions in applying anaccounting policy; or

(e) applies the requirements of an IFRS Standard in a way that reflects the entity’s specific circumstances, forexample, by explaining how the requirements of a Standard are applied to the facts and circumstances of amaterial class of transactions, other events or conditions

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How to read questions in SBR exam

Section A (20 marks)

Required:

(a) (i) Discuss the appropriate accounting treatment of the restructuring costs in the financial statementsof

Bagshot Co for the year ended 31 December 20X5. (6 marks)

(ii) Discuss what is meant by good stewardship of a company and whether the restructure and therecognition of a restructuring provision in the financial statements are examples of good stewardship. (4marks)

(iii) Discuss briefly whether Mrs Shaw’s acquisition of the equity shares in Bagshot Co should bedisclosed as a related party transaction. (3 marks)

(b) Identify and discuss the ethical issues arising from the scenario which Mr Shaw needs to consider andwhat actions he should take as a consequence. (5 marks)

Professional marks will be awarded in part (b) for the clarity of discussion. (2 marks)

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How to read questions in SBR exam

Section B (8 marks)

Required:

Discuss why the disclosure of sustainable information has become an important and influentialconsideration for investors.

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Questions?

25