ACCA SP Strategic Business Reporting (SBR) 2 — Questions and Answers
Question 1: Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, a provision should be recognised when which THREE conditions are ALL met?
- A past event has occurred, a future outflow is possible, and the amount can be estimated
- A present obligation exists from a past event, an outflow of resources is probable, and the amount can be reliably estimated (Correct answer)
- A legal obligation exists, payment is certain, and the exact amount is known
- Management intends to make a payment, the amount is material, and board approval has been obtained
Correct answer: A present obligation exists from a past event, an outflow of resources is probable, and the amount can be reliably estimated
IAS 37 requires all three conditions: (1) a present obligation (legal or constructive) as a result of a past event, (2) it is probable (more likely than not) that an outflow of economic benefits will be required, and (3) a reliable estimate can be made of the amount. If the outflow is only 'possible', it is a contingent liability disclosed in notes, not a provision.
Question 2: A company with a functional currency of GBP holds a foreign currency monetary asset of USD 500,000. At the transaction date, the rate was £1 = $1.25. At the reporting date, the rate is £1 = $1.30. Under IAS 21, what exchange difference is recognised?
- A gain of £15,385 in profit or loss
- A loss of £15,385 in profit or loss (Correct answer)
- A gain of £15,385 in other comprehensive income
- No adjustment is required until the asset is settled
Correct answer: A loss of £15,385 in profit or loss
At transaction date: USD 500,000 ÷ 1.25 = £400,000. At reporting date: USD 500,000 ÷ 1.30 = £384,615. The GBP value has decreased by £15,385 (£400,000 - £384,615). Since the pound has strengthened against the dollar, the USD asset is worth less in GBP terms, creating a loss. IAS 21 requires monetary items to be retranslated at the closing rate with differences in profit or loss.
Question 3: Under IFRS 9 Financial Instruments, which of the following financial assets must ALWAYS be measured at fair value through profit or loss (FVTPL)?
- Debt instruments held within a 'hold to collect' business model
- Equity investments for which no irrevocable OCI election has been made (Correct answer)
- Trade receivables with no significant financing component
- Debt instruments held within a 'hold to collect and sell' business model
Correct answer: Equity investments for which no irrevocable OCI election has been made
Under IFRS 9, equity investments are measured at FVTPL by default. An entity may make an irrevocable election at initial recognition to present fair value changes in OCI (with no recycling), but if this election is not made, FVTPL is mandatory. Debt instruments may qualify for amortised cost or FVOCI depending on the business model and SPPI test.
Question 4: In the Conceptual Framework for Financial Reporting (2018), which qualitative characteristic requires that financial information is free from error, neutral, and complete?
- Relevance
- Faithful representation (Correct answer)
- Comparability
- Verifiability
Correct answer: Faithful representation
Faithful representation is one of the two fundamental qualitative characteristics (alongside relevance). It requires information to be complete (including all necessary descriptions and explanations), neutral (without bias in selection or presentation), and free from error (no errors in the process used to produce the information, though estimates are acceptable).
Question 5: Company X issues 1,000 convertible bonds at £1,000 each. Similar bonds without conversion rights would carry an interest rate of 8%. The bonds pay 5% coupon annually for 3 years and are convertible at maturity. Under IAS 32, how should the bonds be classified?
- Entirely as a financial liability at £1,000,000
- Entirely as equity since they are convertible into shares
- Split into a liability component (PV of cash flows at 8%) and an equity component (residual) (Correct answer)
- As a financial liability with a derivative liability for the conversion option
Correct answer: Split into a liability component (PV of cash flows at 8%) and an equity component (residual)
IAS 32 requires convertible bonds to be split into a liability component and an equity component. The liability component is measured at the present value of the contractual cash flows (coupons and principal) discounted at the market rate for similar non-convertible bonds (8%). The equity component is the residual: total proceeds minus the liability component. This is a compound financial instrument.
Question 6: Under IAS 10 Events after the Reporting Period, which of the following post-reporting date events requires adjustment to the financial statements?
- A major fire destroys a warehouse after the reporting date
- The resolution of a court case confirming an obligation that existed at the reporting date (Correct answer)
- A decline in fair value of investments after the reporting date
- The announcement of a major restructuring plan after the reporting date
Correct answer: The resolution of a court case confirming an obligation that existed at the reporting date
IAS 10 distinguishes between adjusting events (providing evidence of conditions existing at the reporting date) and non-adjusting events (arising after the reporting date). A court case resolved after year-end that confirms an obligation existing at the reporting date is an adjusting event. The fire, investment decline, and restructuring announcement are all non-adjusting events as they relate to conditions arising after the reporting date.
ACCA SP Strategic Business Reporting (SBR) 2
Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, a provision should be recognised when which THREE conditions are ALL met?