Mixed Deck — All ACCA SP Topics Flashcards

A multinational company uses residual income (RI) to evaluate overseas divisions. Division X operates in a high-risk emerging market. To fairly evaluate Division X, the company should:

Answer: Apply a higher cost of capital charge to Division X to reflect the higher risk

When using RI across divisions with different risk profiles, the cost of capital charge should reflect each division's specific risk level. A division in a high-risk emerging market faces greater political risk, currency risk, and economic volatility, justifying a higher required return. Using a uniform rate would unfairly disadvantage low-risk divisions and subsidise high-risk ones, leading to misallocation of capital.

When applying the TARA framework to risk management, which response involves accepting the risk but implementing controls to reduce its impact or likelihood?

Answer: Reduce

The TARA framework offers four risk responses: Transfer (shift risk to a third party, e.g., insurance), Avoid (eliminate the activity causing risk), Reduce (implement controls to mitigate likelihood or impact while continuing the activity), and Accept (tolerate the risk without action). Reducing risk means keeping the activity but putting controls in place.

A UK sole trader has been trading for several years and is considering incorporating the business. Which of the following Capital Gains Tax (CGT) reliefs is specifically designed to defer gains arising on the transfer of a business to a company?

Answer: Incorporation relief under s.162 TCGA 1992

Section 162 TCGA 1992 provides incorporation relief, which automatically applies when a business (not just individual assets) is transferred to a company as a going concern in exchange wholly or partly for shares. The gains on the chargeable assets transferred are deferred by reducing the base cost of the shares received. This is distinct from BADR (which provides a lower rate but doesn't defer) and rollover relief (which relates to replacement of assets).

According to the UK Corporate Governance Code, what approach must listed companies take if they do not comply with a specific provision?

Answer: They must explain their reasons for non-compliance

The UK Corporate Governance Code operates on a 'comply or explain' basis, requiring companies to either comply with provisions or publicly explain why they have not.

Under IFRS 9 Financial Instruments, which of the following financial assets must ALWAYS be measured at fair value through profit or loss (FVTPL)?

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.

A company is considering an acquisition and identifies potential synergies of £5 million per year in perpetuity. The acquiring company's WACC is 10%. The maximum premium the acquirer should pay above the target's standalone value is:

Answer: £50 million

The maximum premium equals the present value of all synergies. If synergies of £5m per year continue in perpetuity and the discount rate is 10%, the PV = £5m ÷ 0.10 = £50m. Paying any more than £50m would mean the acquisition destroys value for the acquirer's shareholders, as the premium exceeds the value created by the synergies.

Organisational 'culture' (Johnson & Scholes) is best represented by:

Answer: The cultural web — the paradigm, stories, symbols, routines, power structures, control systems and organisational structures

Johnson & Scholes' cultural web depicts organisational culture through six interrelated elements (stories, rituals, symbols, power structures, control systems, organisational structures) surrounding the paradigm.

Which of the following describes 'emergent strategy' (Mintzberg)?

Answer: Strategy that develops incrementally in response to unplanned opportunities and environmental changes

Mintzberg distinguished intended strategy (planned) from emergent strategy, which arises from ad-hoc responses to events. Realised strategy is a combination of deliberate and emergent elements.

Fitzgerald and Moon's 'building block' model applies to:

Answer: Service organisations, using dimensions of results and determinants, with standards and rewards

Fitzgerald and Moon's building block model for service businesses uses: Results (financial performance, competitiveness) and Determinants (quality, flexibility, resource utilisation, innovation), supported by fair Standards and Rewards.

A company is considering using a currency swap to manage its foreign exchange exposure on a USD-denominated loan. Which of the following BEST describes the primary advantage of a currency swap over a forward contract?

Answer: Currency swaps can hedge both the principal and periodic interest payments over the loan term

The primary advantage of a currency swap over a forward contract for hedging a foreign currency loan is that the swap can hedge both the periodic interest payments (through regular exchanges of interest) and the principal repayment (through the re-exchange of principal at maturity). A forward contract only hedges a single future cash flow, making it impractical for a series of payments.

Which of the following is a component of 'other comprehensive income' (OCI) under IAS 1?

Answer: Gains on revaluation of PPE under IAS 16

IAS 1 requires OCI to include items not recognised in profit or loss, such as gains on revaluation of PPE (IAS 16), remeasurements of defined benefit pension plans (IAS 19), and translation differences (IAS 21).

In the context of corporate governance, what does the principle of 'transparency' primarily require of companies?

Answer: Disclosing material information to stakeholders in a timely and accurate manner

Transparency requires companies to disclose material and relevant information to stakeholders accurately and in a timely manner, enabling informed decision-making.

Which board committee is primarily responsible for reviewing the company's financial reporting processes and the effectiveness of internal controls?

Answer: Audit committee

The audit committee oversees internal and external audit functions, financial reporting integrity, and the effectiveness of the company's internal control systems.

Under IFRS 16 Leases, a lessee enters a 5-year lease for office space with annual payments of £100,000 paid in arrears. The lessee's incremental borrowing rate is 6%. Which entry is recorded at lease commencement?

Answer: Debit right-of-use asset £421,236, Credit lease liability £421,236

Under IFRS 16, lessees recognise a right-of-use asset and corresponding lease liability at the present value of future lease payments. The PV of £100,000 per annum for 5 years at 6% = £100,000 × annuity factor (4.21236) = £421,236. The undiscounted total (£500,000) is incorrect as IFRS 16 requires discounting. There is no operating lease treatment for lessees under IFRS 16.

Corporate social responsibility (CSR) at the strategic level is best described as:

Answer: Integrating social, environmental and ethical considerations into core business strategy and operations

Strategic CSR integrates ethical, social and environmental concerns into business strategy and operations, creating shared value for both the company and society beyond mere legal compliance.

During the audit of a listed company, the audit team discovers that management has recorded a material transaction with a related party at an amount significantly above market value. Under ISA 550, the auditor should FIRST:

Answer: Evaluate whether the transaction has been properly disclosed and consider the implications for the risk of material misstatement

Under ISA 550 Related Parties, the auditor's first step is to evaluate the transaction — understand the business rationale, assess whether it has been properly authorised, recorded, and disclosed, and consider the implications for the risk of material misstatement due to fraud or error. Related party transactions at non-market rates are not automatically problematic but require enhanced scrutiny and disclosure. Jumping to resignation or qualification without investigation would be premature.

Company A acquires 80% of Company B for £12 million. The fair value of B's identifiable net assets is £10 million. The non-controlling interest is measured at fair value of £2.8 million. What is the goodwill arising on acquisition under IFRS 3?

Answer: £4.8 million

Under IFRS 3 (full goodwill method), goodwill = consideration transferred + NCI at fair value - fair value of identifiable net assets. Goodwill = £12m + £2.8m - £10m = £4.8m. This is the full goodwill method which attributes goodwill to both the parent and the NCI.

A company is evaluating whether to outsource its IT function. According to the strategic management literature, which factor is MOST critical in determining whether outsourcing is appropriate?

Answer: Whether the function represents a core competence of the organisation

While cost is often the primary driver cited for outsourcing, strategic management theory (particularly the resource-based view and core competence theory from Prahalad and Hamel) emphasises that organisations should never outsource core competences as these are the source of competitive advantage. If IT is a core competence (e.g., for a tech company), outsourcing could destroy strategic capability.

A 'reward management' system is most likely to be effective when:

Answer: Rewards are clearly linked to the performance indicators used in the performance management system

For performance management to work, rewards must be clearly aligned with the organisation's key performance measures, motivating the desired behaviours and creating goal congruence.

In the context of integrated reporting (), which of the six capitals refers to the relationships and trust an organisation builds with external stakeholders and communities?

Answer: Social and relationship capital

The framework identifies six capitals: financial, manufactured, intellectual, human, social and relationship, and natural. Social and relationship capital encompasses the relationships within and between communities, stakeholder groups, and networks, including shared norms, values, and trust. It captures the organisation's social licence to operate.