ACCA SP Strategic Business Reporting 2 — Questions and Answers
Question 1: Under IFRS 16, how does the lessee account for a lease on commencement?
- Recognise lease payments as an operating expense on a straight-line basis
- Recognise a right-of-use asset and a lease liability at the present value of future lease payments (Correct answer)
- Recognise a prepayment equal to the total future lease payments
- Disclose in the notes only; nothing is recognised on the balance sheet
Correct answer: Recognise a right-of-use asset and a lease liability at the present value of future lease payments
IFRS 16 requires the lessee to recognise a right-of-use asset (ROU asset) and a corresponding lease liability at the commencement date, measured at the present value of future lease payments.
Question 2: Under IAS 19, actuarial gains and losses on a defined benefit pension plan are recognised:
- Immediately in profit or loss
- In other comprehensive income (OCI) as remeasurements (Correct answer)
- Spread over the average remaining service life of employees
- Only disclosed in the notes, never recognised
Correct answer: In other comprehensive income (OCI) as remeasurements
IAS 19 requires remeasurements of defined benefit obligations (actuarial gains and losses and return on plan assets) to be recognised immediately in OCI and never recycled to profit or loss.
Question 3: Under IFRS 9, the expected credit loss (ECL) model requires entities to:
- Recognise credit losses only when a loss event actually occurs
- Recognise expected credit losses based on forward-looking information at all times, not just when a default occurs (Correct answer)
- Apply a fixed provision rate to all financial assets
- Disclose only in the notes; no balance sheet impact
Correct answer: Recognise expected credit losses based on forward-looking information at all times, not just when a default occurs
IFRS 9's ECL model is forward-looking and requires entities to recognise expected losses from day one (Stage 1: 12-month ECL) and lifetime ECL when credit risk increases significantly.
Question 4: The 'substance over form' principle in financial reporting means:
- Financial statements must follow the legal form of transactions strictly
- Transactions should be accounted for in accordance with their economic substance, not merely their legal form (Correct answer)
- All disclosures must be in plain English
- Only tangible assets should be recognised on the balance sheet
Correct answer: Transactions should be accounted for in accordance with their economic substance, not merely their legal form
Substance over form requires that transactions are accounted for to reflect their economic reality rather than their strict legal form. A key application is lease accounting under IFRS 16.
Question 5: Under IFRS 8, operating segments should be reported separately if they:
- Have revenues exceeding £1 million
- Meet the quantitative thresholds: 10% of combined revenue, profit or assets of all segments (Correct answer)
- Are in different countries
- Have separate management accounts prepared
Correct answer: Meet the quantitative thresholds: 10% of combined revenue, profit or assets of all segments
IFRS 8 uses the 'management approach' to identify segments, reporting separately those meeting quantitative thresholds: 10% of combined (absolute) revenue, profit/loss or assets.
Question 6: Which of the following transactions requires elimination on consolidation?
- Sales to an external third-party customer
- Intra-group sales of goods that remain in the subsidiary's closing inventory (Correct answer)
- Dividends paid to external shareholders
- Interest paid to an external bank
Correct answer: Intra-group sales of goods that remain in the subsidiary's closing inventory
Unrealised profit on intra-group transactions (goods in closing inventory) must be eliminated on consolidation to avoid double-counting. The profit has not been realised through an external sale.
ACCA SP Strategic Business Reporting 2
Under IFRS 16, how does the lessee account for a lease on commencement?