ACCA Strategic Business

Reporting (SBR)
Achievement Ladder
Step 6 Questions & Answers
Strategic Business Reporting Achievement Ladder Step 6
Question 1
Uzielli, a public limited company in the house-building trade, acquired the following shareholdings in
Walker and Oglesby:
Retained earnings at Share capital Fair value of net
Date of acquisition acquisition acquired assets at acquisition
$m $m $m
Walker 1 November 20X7 120 200 450
Oglesby 1 November 20X6 260 300 700

The following statements of financial position relate to Uzielli, Walker and Oglesby as at
31 October 20X8.
Uzielli Walker Oglesby
Assets $m $m $m
Non-current assets
Property, plant and equipment 310.0 300 400
Investment in Walker (at cost) 380.0
Investment in Oglesby (at cost) 540.0
Investment in debt instrument 62.5 – –
1,292.5 300 400
Current assets
Inventories 400.0 150 300
Trade receivables 160.0 80 190
Cash and cash equivalents 140.0 90 110
700.0 320 600
TOTAL ASSETS 1,992.5 620 1,000

Equity
Share capital of $1 500.0 250 400
Share premium 100.0 50 40
Retained earnings 642.5 180 310
Total equity 1,242.5 480 750
Non-current liabilities 400.0 40 100
Current liabilities 350.0 100 150
Total liabilities 750.0 140 250
TOTAL EQUITY AND LIABILITIES 1,992.5 620 1,000

The following information is relevant to the preparation of the group financial statements for the Uzielli
Group:
(i) There have been no new issues of shares in the group since 1 November 20X6. The non-
controlling interests in Walker at the date of acquisition were valued at the proportionate share of
the fair value of the acquiree's assets acquired and liabilities assumed. However, as Oglesby is a
quoted company, Uzielli decided to value the non-controlling interests at acquisition at their fair
value of $180 million.
(ii) Any excess of the fair value of Walker's and Oglesby's net assets over their carrying amounts at
acquisition is attributable to plant and equipment which had a remaining useful life of six years
from the respective dates of acquisition. Fair value adjustments on acquisition have not been
included in the individual companies' financial records.
(iii) On 10 September 20X8, Uzielli sold inventories to Oglesby at an agreed price of $5 million, at a
mark up of 25% on cost. Oglesby had sold half of these goods to third parties by the year end
and had settled all amounts owing to Uzielli.
(iv) Uzielli purchased a debt instrument with five years remaining to maturity on 1 November 20X6.
The purchase price and fair value was $60 million at that date. The instrument will be repaid on
31 October 20Y1 at an amount of $75 million. The instrument carries fixed interest of 4.7% per
annum paid annually on 31 October on the principal of $75 million and has an effective interest
rate of 10% per annum. In the current period the fixed interest has been received and accounted
for as finance income, but no other accounting entries have been made. Uzielli's business model
is to hold the debt instrument until it matures in order to collect the cash flows.
(v) Walker entered into a futures contract during the year to hedge a forecast sale in the year ended
31 October 20X9. The futures contract was designated and documented as a cash flow hedge
and as at 31 October 20X8, the IFRS 9 hedge accounting criteria have been met. At
31 October 20X8, had the forecast sale occurred, Walker would have suffered a loss of
$1.9 million and the futures contract was standing at a gain of $2 million. No accounting entries
have been made to record the futures contract.
(vi) At 31 October 20X8, Uzielli conducted an impairment test on Walker and Oglesby, which are
both cash-generating units in their own right. The recoverable amount of Walker was found to be
$520 million (excluding any effect on net assets of the cash flow hedge) and there had been no
impairment of Oglesby.
(vii) 0n 31 July 20X8, Uzielli sold 140 million of its 300 million shares in Oglesby for consideration of
$300m cash. Subsequent to the disposal, Uzielli maintained significant influence over Oglesby.
The fair value of the remaining shareholding at 31 July 20X8 was $340m. Oglesby's profit (and
total comprehensive income) for the year ended 31 October 20X8 was $20 million and no
dividends were paid or declared in the year. This disposal has not yet been accounted for.
Required
Prepare the consolidated statement of financial position of the Uzielli group as at 31 October 20X8.
Note. Work to the nearest $0.1 million. You should ignore the effects of deferred tax.
(Total = 30 marks)

Feedback

Marking scheme

Marks
Goodwill – Walker 2
Impairment loss – Walker 3
Goodwill – Oglesby 2
Investment in associate 3
Non-controlling interests (Walker) 2
Retained earnings 4
Fair value adjustment 2
Unrealised profit 2
Investment in debt instrument 3
Cash flow hedge 2
Group profit on disposal 3
Adding assets and liabilities and posting share capital and share premium 2
Maximum for question 30
Top tips. The key to this question was a methodical approach: having read through the question and
drawn up a proforma (with space for extra lines), transfer the statement of financial position figures to
the face of your proforma or to a working (as appropriate). Then work through the adjustments (in the
order you find them easiest), showing your workings and transferring your figures as appropriate to
the face of your answer (referenced back to your working) or to a group working.
Remember that it is unlikely that you will be required to prepare full consolidated financial statements
in the SBR exam, but instead may be asked for extracts thereof. It is important that you are
comfortable with the preparation of full consolidated primary statements as the same techniques can
be applied in preparing extracts.
Easy marks. There are some basic calculations in respect of goodwill and fair value adjustments.

(a) UZIELLI GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 OCTOBER 20X8
$m
Non-current assets
Property, plant and equipment (310 + 300 + (W6) 25) 635.0
Goodwill (W2) 12.0
Investment in associate (W3) 341.8
Investment in debt instrument (62.5 + (W8) 2.8) 65.3
1,054.1
Current assets
Inventories (400 + 150) 550.0
Trade receivables (160 + 80) 240.0
Financial asset (futures contract) (W9) 2.0
Cash and cash equivalents (140 + 90 + 300 proceeds on disposal) 530.0
1,322.0
2,376.1
Equity attributable to owners of the parent
Share capital of $1 500.0
Share premium 100.0
Retained earnings (W4) 783.2
Cash flow hedge reserve (1.9 (W9)  80%) 1.5
1,384.7
Non-controlling interests (W5) 101.4
1,486.1

Non-current liabilities (400 + 40) 440.0

Current liabilities (350 + 100) 450.0
890.0
2,376.1
Workings
1 Group structure
Uzielli

1.11.20X7 80% 1.11.20X6 – 31.7.20X8 75%

31.7.20X8 – 31.10.20X8 40%

Walker Oglesby
Ret'd $120m $260m
earnings

Oglesby:

1.11.20X7 31.07.20X8 31.10.20X8

Had 300m shares ie 75% Sold 140m shares so Consol SOFP –

= subsidiary have 160m shares ie have 40% of
40% = associate shares

(profit on disposal) ie associate

2 Goodwill
Walker Oglesby
$m $m
Consideration transferred 380 540
Non-controlling interests (450  20%)/FV 90 180

Fair value of net assets at acq'n (450) (700)

Goodwill 20 20
Impairment loss (W11) (10  80%) (8)
12
3 Investment in associate (Oglesby)
$m
Fair value at date control lost 340.0
Group share of post-acquisition profit (W4) 2.0
Unrealised profit (W7) (0.2)
341.8
4 Retained earnings
Oglesby Oglesby
Uzielli Walker 75% 40% ret'd
$m $m $m $m
Per question/at disposal (310 – (3/12  20)) 642.5 180.0 305 310
Fair value adjustment (W6) (5.0)
Unrealised profit (W7) (0.2)
Investment in debt instrument (W8) 2.8
Cash flow hedge (W9) 0.1
Group profit on disposal of Oglesby (W11) 66.2
Pre-acquisition (W1)/at disposal (above) (120.0) (260) (305)
55.1 45 5
Group share of Walker post acquisition
(55.1  80%) 44.1
Group share of Oglesby post acquisition
(45  75%) 33.8
(5  40% ret'd) 2.0
Impairment loss (W10) (8.0)
783.2
5 Non-controlling interests
Walker:
$m
NCI at acquisition (W2) 90.0
NCI share of post acq'n retained earnings ((W4) 55.1  20%) 11.0
NCI share of cash flow hedge reserve ((W9) 1.9  20%) 0.4
101.4
Oglesby:
$m
NCI at acquisition (W2) 180.00
NCI share of post acq'n retained earnings ((W4) 45  25%) 11.25
191.25
Decrease in NCI on loss of control (to W11) (191.25)
0.00
6 Fair value adjustments
Walker
Acq'n date Movement At year end
$m $m $m
PPE (450 – 250 – 50 – 120) 30 (5)* 25

Retained SOFP
earnings
* Extra depreciation = 30  1/6
Oglesby
Acq'n date Movement At year end
$m $m $m
PPE (700 – 400 – 40 – 260) 0 0 0
7 Unrealised profit
Uzielli Oglesby
Unrealised profit = $5m  25%/125%  ½ in inventories  40% associate share = $0.2m
DEBIT Consolidated retained earnings $0.2m
CREDIT Investment in associate $0.2m
(the associate holds the inventories)
8 Investment in debt instrument (Uzielli)
$m
Amortised cost 1.11.20X6 60.0
Effective interest (60  10%) 6.0
Coupon received (75  4.7%) (3.5)
Amortised cost 31.10.20X7 b/d per question 62.5
Effective interest (62.5  10%) 6.3
Coupon received (75  4.7%) (3.5)
65.3
Adjustment:
DEBIT Investment in debt instrument (65.3 – 62.5) $2.8m
CREDIT Profit or loss/retained earnings $2.8m
9 Cash flow hedge (Walker)
The loss on the forecast sale should not be accounted for as the sale has not yet taken
place. However, the gain on the future should be accounted for under IFRS 9. As the IFRS 9
hedge accounting criteria have been met, the future should be accounted for as a cash flow
hedge.
The double entry required is:
DEBIT Financial asset (future) $2m
CREDIT Other comprehensive income/cash flow hedge reserve $1.9m
(with effective portion)
CREDIT Profit or loss/retained earnings $0.1m
(with ineffective portion)
10 Impairment loss on Walker
$m
Notional goodwill (20  100%/80%) 25
Net assets (480 + (W9) 2) 482
Fair value adjustments (W6) 25
Consolidated carrying amount 532

Recoverable amount (520 + (W9) 2) 522

Impairment loss (532 – 522) 10

Allocate to:
(1) Goodwill 10
(2) Other assets pro rata 0

Group share of goodwill impairment (10  80%) 8

 11 Group profit on disposal of Oglesby
$m $m
Fair value of consideration received 300.00
Fair value of 40% investment retained 340.00
Less: Share of consolidated carrying amount when control lost:
Net assets (750 – (20  3/12)) 745.00
Goodwill (W2) 20.00
Less non-controlling interests (W5) (191.25)
(573.75)
66.25
Rounded down to $66.2m

Question 2
Pharma is a group of companies listed in the EU reporting under IFRSs. The company develops and
makes a large portfolio of pharmaceutical products, both for the healthcare and beauty markets.
Pharma's customers include hospitals, governments, pharmacies and retail parapharmacy and
supermarket chains. The company has two divisions: Research & Development and Fabrication. In
addition to working for the Pharma group, the Research & Development division also conducts
research and development on behalf of smaller pharmaceutical companies and for governments.
(a) Due to the nature of its business, Pharma undertakes a significant amount of new research and
development expenditure each year. During the current financial reporting period, Pharma started
two new significant development projects and abandoned development on another project which
was not generating the results expected in human trials, as well as some significant adverse side
effects. One of the testers is suing Pharma for hair-loss suffered in one trial, although Pharma's
lawyers have advised that the chances of success are slim given that a legal contract outlining
the risk was signed with the human testers. One of the drugs that had been developed in recent
years went into commercial production for the first time during the year and has been an instant
success. (5 marks)
(b) February 20X7 Pharma won a significant new contract to make large quantities of a generic drug
for the government of a developing country. Under the terms of the arrangement with the
government, payment is made on delivery in cash once customs have been cleared. Pharma
bears the risks of shipping and will replace any shipment that is damaged or goes missing. The
drugs will be delivered four times a year on 1 April, 1 July, 1 October and 1 January. The batches
made for 1 April 20X7 and 1 July 20X7 were delivered and paid for successfully, although
Pharma incurred significant costs in determining the customs arrangements for the first delivery.
The 1 October batch was despatched prior to the year end, delivered and paid for on
1 October 20X7. (4 marks)
(c) On 1 October 20X0 the government awarded Pharma a ten-year licence to make a cancer-
treatment drug. The licence was recognised on that date at its fair value of $9.8 million. As a
result of the award of the licence, Pharma purchased a division of a competitor making similar
products in 20X1 and merged it with its own activities, within its Specialist Drug sub-division,
which is a separate cash-generating unit. Goodwill of $12 million was recognised on the
purchase. By 20X6/20X7 the part of the Specialist Drug division producing the cancer drug
amounted to about 5% of the revenues of the Group.
On 1 May 20X7, the government revoked the licence on the grounds that Pharma had failed to
meet some of the criteria of the licence. At the date of the decision, the net book value of the
combined assets of the Specialist Drug division was $942 million (including the goodwill on the
purchase of the competitor's business). No impairment losses had previously been recognised.
As a result of this Pharma decided to sell the associated assets or redeploy them elsewhere
within the Specialist Drug division. As part of an impairment test conducted after the decision fair
value less costs to sell of the Specialist Drug division was estimated at $804 million. Revised
estimated net cash inflows for the Specialist Drug division at the end of each of the next five
years (taking into account sale or redeployment of the assets making the cancer drug) were
 estimated at $112 million for years 1–3, $130 million for year 4 and $1,014 million for year 5
assuming the disposal of the division after five years. An appropriate discount factor is 12%.
Employees of the division were notified of the decision on 1 June and redundancy notices for
those who could not be redeployed elsewhere were issued on that date. The estimated amount
of redundancy payment was $400,000 which had not been paid by the year end as the division
had not been shut down by that date. (10 marks)
(d) Following higher than planned employee departures in 20X5/20X6, Pharma initiated a group-
wide share-based payment scheme for employees in July 20X7, whereby employees would
receive as a cash benefit, the increase in the share price from 1 July 20X7 to 1 July 20Y0,
provided they remained in Pharma's employment throughout the period. The scheme was taken
up by approximately 10,000 employees and 1,050,000 rights (in total) were granted. It was
estimated at 1 July 20X7, that the fair value of this benefit was approximately $2 per right and
$2.10 at 30 September 20X7. Due to the effect of adverse circumstances on Pharma's share
price, this has now fallen to about $1.50. Management estimated that 70% of the rights would be
exercisable on 1 July 20Y0 due to expected employee departures. (3 marks)
(e) During the period Pharma set up a joint (50:50) arrangement with a competitor to market and
distribute certain over the counter products in the EU market. The joint arrangement is set up as
a separate company which will pay dividends to the investors. Pharma transferred a portfolio of
distribution assets and a significant amount of cash to the entity as part of the set-up
arrangement. The investors do not have direct rights to or ownership of the assets of the joint
arrangement once contributed unless the entity is wound up, when the proceeds from the sale of
the assets less liabilities would be distributed 50:50. No guarantees were entered into for the
liabilities of the joint arrangement. The joint arrangement has been loss making so far, mainly due
to set-up costs and has paid no dividends, but is expected to be profitable in the future.
(3 marks)
Required
Write a report to the directors advising them about the implications of the above information for the
financial statements for the year ending 30 September 20X7.
(Total = 25 marks)
Feedback

Marking scheme

Marks
(a) Development expenditure
– Capitalise if IAS 38 criteria met 1
– Expense otherwise 1
– Amortisation 1
Court case
– Accounting treatment 1
– Disclosure 1
5
(b) Revenue recognition
– Revenue recognition issue 1
– Accounting principle 1
– Treatment of 1 Apr, 1 Jul and 1 Oct deliveries 1
– Treatment of costs 1
4
 Marks
(c) Granted licence
– Explanation 1
– Calculation 1
Impairment loss
– Explanation 1
– Calculation 2
– Recognition of loss 1
Non-current assets held for sale
– Explanation 1
– Not discontinued 1
Termination benefits 2
10
(d) Share-based payment
– Explanation 2
– Calculation 1
3
(e) Joint arrangement
– Joint venture rather than joint operation 1
– Accounting treatment 1
– Impairment indicator 1
3

Maximum for the question 25

Top tips. Don't be daunted by a question set in a specific industry like this: you are not expected to
know any detailed knowledge about the industry concerned, merely apply your accounting knowledge
to the scenarios given. Try to identify all the accounting issues relating to each area, as there may be
more than one for each point.
Easy marks. This question covers many different standards, but this actually works in your favour in
that the knowledge required on each is limited, so if you get stuck, move on to the next area.

REPORT
To: Board of Directors
From: Financial Controller
Date: Today
Subject: Financial statements year ended 30 September 20X7
As requested this report considers the implications of various matters both internal and external to the
Group for the financial statements for the year ending 30 September 20X7.
(a) Development expenditure
Development expenditure is only capitalised under IAS 38 Intangible Assets when certain criteria
demonstrating the existence of future economic benefits are met. If these are not met at the year
end in relation to the two new projects or the existing development projects, all expenditure must
be written off as an expense on a project by project basis. Any capitalised expenditure relating to
the abandoned development project must be expensed and may require separate disclosure
under IAS 1 Presentation of Financial Statements if material.
The development expenditure relating to the drug now in commercial production should begin to
be amortised over its expected useful life to a nil residual value as of the date when it is 'available
for use', ie when commercial production starts.
 Court case
If the chance of success of the human tester is considered possible and the amount is material, a
disclosure of the court case and the possible payment should be made in a note to the financial
statements. If the chance of success and therefore outflow of resources embodying economic
benefits is considered remote, no disclosure is necessary.
(b) Revenue recognition
IFRS 15 Revenue from Contracts with Customers requires revenue to be recognised when (or
as) the performance obligation is satisfied ie when an entity transfers a promised good or service
to a customer. The good or service is considered transferred when (or as) the customer obtains
control of that good or service (ie the ability to direct the use of, and obtain substantially all of the
remaining benefits from, the asset).
To determine the point in time when a customer obtains control of a promised asset and an entity
satisfies a performance obligation, the entity should consider indicators of the transfer of control
that include the entity having a present right to payment for the asset, the customer having the
significant risks and rewards of ownership of the asset and the customer accepting the asset.
In this case, the performance obligation is satisfied and transfer of control takes place on delivery
of the drugs to the customer (rather than when they are dispatched by Pharma) because this is
when Pharma becomes entitled to payment, and when the customer takes on the risks and
rewards and accepts the goods. Therefore, in the year ended 30 September 20X7, revenue
should be recognised for the 1 April 20X7 and 1 July 20X7 deliveries but not for the 1 October
20X7 delivery as it does not take place until after the year end. Costs incurred in relation to the
1 October 20X7 delivery should be held as work in progress in the statement of financial position
until revenue is recognised in the year ended 30 September 20X8.
(c) Granted licence
Since the grant has been recognised at fair value rather than cost (nil), the grant should have
been amortised to profit or loss and the asset recognised amortised over the life of the grant. This
would have a nil effect on profit or loss as the amount of the grant credit would equal the
amortisation of the asset. During the current year the amortisation income and expense should
be recognised for seven months until the 1 May decision, ie $0.57 million ($9.8m/10  7/12). Now
that the licence has been revoked, it and the grant should be derecognised in the financial
statements. This will simply require the remaining grant to be credited against the remaining
asset value.
Impairment loss
More serious is the necessary impairment review conducted as a result of the loss of the licence.
The impairment test (see Working 1) reveals an impairment loss of $15 million. This should be
recognised first against the goodwill of $12 million with the remaining $3 million being recognised
against the other non-current assets of the unit pro-rata, but not so as to reduce any asset below
its fair value less costs of disposal (or value in use if determinable).
Non-current assets held for sale
Any assets planned to be sold not sold by the year end will require separate classification in the
statement of financial position as 'non-current assets held for sale', and written down to their fair
value less costs to sell if lower than carrying amount (after performing a final revaluation if held
under the revaluation model of IAS 16).
Given that the revenues of the drug only represented 5% of the Group figure, it would not be
appropriate to classify the activity as a discontinued operation.
Termination benefits
A provision should be made for the $400,000 of redundancy payments as the issue of
redundancy notices in June demonstrates commitment to discontinue the cancer drug
production. This is a termination benefit under IAS 19 Employee Benefits and should be
disclosed as such.
(d) Share-based payment
Under IFRS 2 Share-based Payment Pharma should recognise the expected cost of the share-
based payment over the vesting period, ie from 1 July 20X7 to 1 July 20Y0, based on information
available about the expected number of employees exercising their rights and the fair value of the
right at each reporting date. The fall in share price after the year end should not therefore be
taken into account. On this basis, Pharma should recognise an expense of $128,625 (see
Working 2). This will be shown as a liability in the statement of financial position and adjusted at
each reporting date for future employee service and changes in fair value and estimated number
of rights to be exercised.
(e) Joint arrangement
The joint arrangement is a joint venture under IFRS 11 Joint Arrangements rather than a joint
operation. This is because the parties (Pharma and the competitor) have rights to the net assets
(rather than rights to the assets and obligations for the liabilities) of the entity. Under IAS 28
Investments in Associates and Joint Ventures, the joint venture must be equity accounted in the
consolidated financial statements. The investment in the joint venture (cost plus share of post-
acquisition reserves less impairment) is shown as a single line in the consolidated statement of
financial position and a single line for each of profit or loss (group share) and component of other
comprehensive income (group share) in the statement of profit or loss and other comprehensive
income.
Given the losses, which are an impairment indicator, an impairment test should be conducted on
the investment in the joint venture at the year end and any impairment losses recognised in the
financial statements.
Workings
1 Impairment loss
Value in use: $m
Year 1 112 1/1.12 100.0
Year 2 112 1/1.122 89.3
Year 3 112 1/1.123 79.7
Year 4 130 1/1.124 82.6
Year 5 1,014 1/1.125 575.4
927.0

Carrying value 942

Recoverable amount (927) Higher of $804m and $927m
Impairment loss 15
2 Share-based payment
Amount recognised at 30 September 20X7:
1,050,000  70%  $2.10  3/36 = $128,625.
Question 3
Bower is a 70% subsidiary of Minny. The directors of Bower are preparing its individual financial
statements for the year ended 30 November 20X2.
(a) Bower has a property which has a carrying value of $2 million at 30 November 20X2. This
property had been revalued at the year end and a revaluation surplus of $400,000 had been
recorded in other components of equity. The directors were intending to sell the property to Minny
for $1 million shortly after the year end. Bower previously used the historical cost basis for
valuing property.
Required
Discuss the ethical and accounting implications of the intended sale of assets to Minny by Bower.
(7 marks)
(b) On 30 November 20X2, Bower sold some of its land (which had cost $8 million) to Hendrix Bank
for $10 million, its fair value at that date as determined by an independent surveyor. The terms of
the agreement were as follows:
 Bower has the right to develop the land at any time during Hendrix Bank's ownership. The
cost of any development will be incurred by Bower.
 Bower has the option to reacquire the land for $10 million at any time within five years from
the date of sale.
 Bower will pay Hendrix a quarterly sum calculated by reference to Hendrix Bank's lending
rate plus 2% per annum applied to the purchase price of $10 million.
 On the expiry of Bower's five-year option to reacquire the land, Hendrix Bank will offer it for
sale generally. At any time prior to that it may only offer the land for sale if it obtains the
consent of Bower.
 The finance director of Bower entered into this transaction to raise finance without increasing
the gearing ratio of Bower. He has recorded the transaction as a normal disposal of property,
plant and equipment.
Required
(i) Discuss whether the finance director's accounting treatment of this transaction is correct.
(8 marks)
(ii) Discuss briefly the importance of ethical behaviour in the preparation of financial statements
and whether the finance director's accounting treatment for this transaction could constitute
unethical behaviour. (8 marks)
Note. Professional marks will be awarded for discussing the ethical implications of the above
transactions (2 marks)
(Total = 25 marks)
Question 3
Feedback

Marking scheme
Marks
(a) Accounting treatment 3
Ethical considerations 2
Manipulation 2
7
(b) (i) Discussion of accounting treatment
Substance over form – determine if sale has taken place 1
IAS 16 requires IFRS 15 principles to be applied (ie transfer of control) 2
Control not transferred as Bower can repurchase 2
In substance, secured loan 1
Discuss correct accounting treatment 2
8
(ii) Importance of ethical behaviour 2
Professional competence 2
Objectivity and integrity 2
Not associated with reports that are misleading/biased/omit information 2
8
Professional marks 2
25

(a) Transfer of property

The proposed transfer of property from Bower to its parent Minny is not a normal sale. The
property's carrying amount of $2 million probably reflects the current value as it was revalued at
the year end, but the 'sale' price is only $1 million. In effect, this is a distribution of profits of
$1 million, the shortfall on the transfer.
Distributions of this kind are not necessarily wrong or illegal.
Certain IFRS may apply to the transfer.
(i) If the asset meets the held for sale criteria under IFRS 5 Non-current Assets Held for Sale
and Discontinued Operations, it will continue to be included in the consolidated financial
statements, but it will be presented separately from other assets in the statement of
financial position. An asset that is held for sale should be measured at the lower of its
carrying amount and fair value less costs to sell. Immediately before classification of the
asset as held for sale, the entity must update any impairment test carried out.
(ii) As the transfer is from a subsidiary to its parent, IAS 24 Related Party Disclosures will
apply and in the individual financial statements of Bower and Minny, although it would
be eliminated on consolidation. Knowledge of related party relationships and transactions
affects the way in which users assess a company's operations and the risks and
opportunities that it faces. Even if the company's transactions and operations have not been
affected by a related party relationship, disclosure puts users on notice that they may be
affected in future, but in this case the related party relationship clearly has affected the price
of the transfer.
 Even though the transfer is likely to be legal, and even if it is correctly accounted for and
disclosed in accordance with IAS 24 and IFRS 5 (or IAS 16 if the IFRS 5 criteria are not met) the
transaction raises ethical issues. Ethical behaviour in the preparation of financial statements, is
of paramount importance. This applies equally to preparers of accounts, to auditors and to
accountants giving advice to directors.
Financial statements may be manipulated for all kinds of reasons, for example to enhance a
profit-linked bonus or to disguise an unfavourable liquidity position. In this case, suspicion might
be aroused by the fact that the transfer of the property between group companies at half the
current value has no obvious logical purpose, and looks like a cosmetic exercise of some
kind, although its motives are unclear. Accounting information should be truthful and neutral, and
while the transaction is probably permissible, the directors need to explain why they are
doing it.
(b) (i) The concept of substance over form needs to be applied to determine the correct
accounting treatment of the sale of land between Bower and Hendrix Bank.
The legal form is that a sale has taken place and Hendrix Bank is now the legal owner of the
land.
However, in order for the disposal to be accounted for as a sale, control of the land would
need to pass from Bower to Hendrix Bank. The passing of control is required in order for
Bower to satisfy its performance obligation relating to the sale.
Per IFRS 15, control of the land does not transfer to Hendrix Bank on 30 November 20X2
because Bower has the right to repurchase the land. This means Hendrix Bank is limited in
its ability to direct the use of, and obtain sustainably all of the remaining benefits from, the
land.
Therefore, the land should be not be derecognised and should continue to be carried as a
non-current asset in the statement of financial position at $8m. No profit on disposal should
be recognised. A loan liability of $10m should be recorded in non-current liabilities.
As the transaction took place on the last day of the year, no interest is yet payable on the
loan. However, in the year ended 30 November 20X3, the loan balance should be increased
by a finance cost calculated using the effective interest rate of loan, and reduced by the
quarterly sums payable to Hendrix Bank. The finance cost should be recorded in profit or
loss.
Should Bower choose not to exercise their right to repurchase the land, at the end of the
five-year period the loan liability should be derecognised and a profit on disposal recorded
for the sale.
(ii) Ethical behaviour in the preparation of financial statements, and in other areas, is of
paramount importance. This applies equally to preparers of accounts, to auditors and to
accountants giving advice to directors. Accountants act unethically if they use 'creative'
accounting in accounts preparation to make the figures look better, and they act unethically
if, in the role of advisor, they fail to point this out.
One of the ACCA Code of Ethics and Conduct fundamental principles is professional
competence and due care. Professional competence in the case of a preparer of financial
statements, is demonstrated by compliance with accounting standards. By recording the sale
of the land as a disposal rather than a secured loan, the finance director of Bower has failed
to comply with the concept of faithful representation required by the IASB Conceptual
Framework for Financial Reporting and the concept of substance over form required by
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Therefore, he has
failed to comply with the principle of professional competence.
Objectivity and integrity are two further fundamental principles. It appears that the finance
director has deliberately entered into a sale and repurchase transaction rather than a loan to
avoid increasing the gearing ratio. If this accounting treatment is deliberate rather than an
unintentional error, the finance director is not acting with integrity and objectivity.
Finally, the ACCA Code of Ethics and Conduct clearly states that members should not be
associated with reports that are misleading, prepared with bias or omit or obscure
information (ACCA Rulebook: para. 110.2). If the financial statements are not corrected for
the incorrect accounting treatment of the sale and repurchase, the finance director will be
associated with such a report.
In conclusion, if the finance director has deliberately accounted for the transaction incorrectly
to hide the true gearing ratio and indeed if he has acted without authorisation of the board,
he has contravened the ACCA Code of Ethics and Conduct.