ACCA Strategic Business Reporting (SBR)

Past Exam Questions Rewritten

March/June 2021 Questions

Copyright – Steve Chen

March/June 2021



(i)Whether Columbia is the acquirer

Tutorial note:

Students can answer this question using the following framework:

  1. IFRS 10 Consolidated Financial Statements – Control definition
  2. Power instrument including assessing voting shares; contractual rights; whether those rights are substantive or just protective.
  3. Direct relevant activities – strategy, principal revenue stream
  4. Obtain variable returns
  1. Acquisition accounting – to identify an acquirer (per IFRS 3 Business Combinations)
  2. General rule to identify this is an acquirer – who paid cash/other financial assets
  3. Other rules – who dominates the board; whether premium is paid to acquire shares (indicator to have control); whether it has the largest voting rights after acquisition.

This 9-mark question is tough for many students (although most of them can input 4 points – not enough to pass this question). Students need to apply case information (copy and paste + comment) in their answer.

A very interesting point in this question is about 50% and 50% shares by Columbia Co and Brazil Co – may indicate joint control? But in fact, this is not a joint control – students can also discuss why this is not a joint control initiative by referring to IFRS 11 Joint Arrangements – marks are awarded here.


Columbia is the acquirer because the it has control over Peru Co from the following reasons.


Voting shares

Columbia acquired 50% voting shares by cash, plus additional shares through share for share exchange which gives Columbia Co for over 50% voting shares.

This is further evidenced by the premium paid in consideration by Columbia Co to Peru Co because the fair value of each share acquired by both Columbia and Brazil is $8, whilst for Columbia, it also undertakes the share for share exchange, ie sharing its $10 share with $8 share in Peru Co (effectively, $2/share as the premium paid). Premium paid in this case often indicates the additional amount paid in exchange of control to be acquired.

As the ordinary shares of Peru Co has one voting right each, it is deemed that Columbia Co has power instrument to exercise control over Peru.


Columbia Co seems to dominate the management team of Peru Co because Columbia Co has the contractual right to appoint more than 50% of directors in Peru Co.

This is further evidenced by the decision to be made in its core revenue stream activities by management of Columbia Co.

Columbia Co also has the supervisory role to request significant activities get board approval before they go ahead, and this is also seen as a further evidence for Columbia Co to control over Peru Co.

Joint control

Brazil Co and Columbia Co do not have joint control over Peru Co because there will be no unanimous content of any decisions to be made in Peru Co.

Although Brazil Co has veto rights over any articles of incorporation amendments as well as auditors, this is seen to be the protective rights but not substantive rights giving Brazil Co the right to control over Peru Co.


Tutorial note:

Marking scheme:

  • Goodwill calculation – 3 marks
  • Calculation of fair value of net assets – 3 marks
  • Discussion about net assets and consideration – 5 marks

In other words, as a good habit, students need to split marks either:

  • 50% and 50% for calculation and comments, or
  • Split marks equally among goodwill calculation, net assets and consideration

What examiner really wants from this question is the application of IFRS 13 Fair value measurement principles. Students are awarded a maximum of 2 marks to discuss about the general principles of fair value per IFRS 13:

  • Definition of fair value - the price paid which would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
  • Three levels of input – level 1 (observable price for same assets); level 2 (observable price for similar assets); level 3 (unobservable price – management’s estimate)
  • Market perspective not entity perspective

However, students need to demonstrate their understanding regarding ‘market perspective’ when adjusting fair value for brand, and contract liability.

Students also need to know the IFRS 9 Financial instrument – bond with a business model to hold and sell bonds in the market – FVTOCI in order to gain good marks.

In word processor:

Calculation of goodwill (W5) = $5.5m

Discussion of fair value of consideration and net assets:

Fair value of consideration (W5) = $21.25m

Fair value of cash paid equals to the face value, ie $20m.

To determine the fair value of share for share exchange using Columbia Co’s shares, an observable price for the same (identical) assets should be used (level one input), ie the share price of Columbia Co to determine the value of Peru Co’s shares to be exchanged, $10.

Fair value of net assets (W1) = $35.75m

Fair value adjustments in Peru’s net assets should be made when its accounting policy differs from the group, or when its assets and liabilities values need to be adjusted to fair value.

  • Bond – the accounting policy is to carry bonds at amortised cost in the single account, however, in consolidated accounts, group’s business model is to hold and sell those bonds, ie bonds should be measured at FVTOCI and therefore, the value of bonds should be revalued to fair value on acquisition date.
  • Brand – the brand needs to be revalued by $1m upwards and this is because the fair value is market specific not entity specific, ie even though Columbia decides to discontinue the brand, since the market is prepared to pay $5m for this, and therefore, the brand needs to be revalued to $5m.
  • Contract liability – again, contract liability should be revalued to fair value on acquisition date, ie using the estimated costs to complete the contract times by 1+mark up%. This is because it reflects what market thinks that the value Columbia Co will get when completing those contracts on acquisition date. In this case, a $0.59m decrease in contract liability is recognised per W4.

Workings are shown in the Spreadsheet:

W1: Fair value of net assets of Peru Co at acquisition date:


Carrying amount at acquisition date


Fair value adjustment – bond (W2)


Fair value adjustment – brand (W3)


Fair value adjustment – contract liability (W4)



W2: FVA - Bond

Carrying amount until on acquisition date = $6m + $6m x 6/12 x 8%


Fair value on acquisition date = ($6m/$1) x $2 x (1-30%)


Fair value adjustment (upwards)


W3: FVA – Brand

Carrying amount until on acquisition date =


Fair value on acquisition date =


Fair value adjustment (upwards)


W4: Contract liability

Carrying amount until on acquisition date =


Fair value on acquisition date = Cost x (1+mark up%) = $1.7m x 1.3


Fair value adjustment (downwards = increase net assets)


W5: Goodwill calculation


Fair value of consideration:

  • Cash consideration (5m shares x 50% x $8


  • Shares exchange (5m shares x 50%/20 x $10)


NCI (5m shares x 50% x $8)


- Fair value of net assets (W1)


Goodwill on acquisition date


(b) How defined benefit and defined contribution schemes should be accounted for by 31 Dec 20x5

Tutorial note:

Marking scheme:

  • Defined benefit scheme – 9 marks (5 marks calculation and 4 marks comment)
  • Defined contribution scheme – 1 mark only


  • In your word processor, showing how much to be recognised in the accounts for defined benefit scheme (vital), plus commenting on why pension assets and liabilities to be recognised (substance over form concept).
  • Do not forget about the discussion in ‘asset ceiling’.

My thought:

However, I would not suggest students to score 100% marks on this question, as there is a very technical part in the defined benefit scheme, ie the adjustment of asset ceiling for opening pension assets including its net interest – resulting in the OCI of $1m as a result – this is wroth at 2 marks in this question – but may consume students lots of time doing this.

In word processor:

Defined benefit scheme


Net pension assets of $25m pension asset ceiling should be recognised.

In P/L:

Net interest cost of $27m ($10m+$30m-$13m) should be recognised.


Remeasurement losses of $19m ($11m+$8m) should be recognised.

Under defined benefit scheme, when money is transferred to the trustee, the risks and rewards remain in Columbia Co, and therefore, separate pension assets and liabilities should be accounted for in Columbia Co’s account.

Per prudence concept, pension asset should not be overstated, ie the maximum amount of pension asset to be recognised is the present value of the economic benefits in the form of refunds from the plan or reductions in the future combinations, and in this case, $25m.

Defined contribution scheme

The $0.5m should be recognised into the staff costs (P/L) by:

Dr Expense $0.5m

Cr Accrued expense/Cash $0.5m

Under the defined contribution scheme, when money is transferred to the trustee, its risks and rewards have been transferred to the trustee, ie pension assets and liabilities should not be recongised by Columbia Co, but instead, the expense and the corresponding liability (if not paid) should be recognised.

In spreadsheet:

Defined benefit scheme:


Pension assets

Pension liabilities

Opening balance 1.1.20x5


Opening balance



Interest at 5%


Interest at 5%


Contributions in


Current service cost


Benefits paid


Benefits paid


Curtailment and settlement


Curtailment and settlement


Expected closing balance


Expected closing balance


Remeasurement component


Remeasurement component


Actual closing balance


Actual closing balance


Asset ceiling:

  • Asset ceiling (pension asset) = $25m
  • Actual closing net pension assets ($242m - $195m) = $47m
  • Loss to be recognised = $25m - $47m = $(22m)

Dr Expense $22m

Cr Pension assets $22m

*Bonus point – this question also gives us the ‘asset ceiling’ for opening net pension asset, this means 'interest’ should be adjusted per the opening pension asset ceiling of $20m, ie 5% x $20m = $1m. However, the net interest income from the above table is $13m-$10m=$3m, there should be a further reduction of $2m interest income and pension assets, which will finally give us $1m interest value:


Pension assets

Pension liabilities

Net pension assets

Ceiling adjustment

Net pension assets after adjusting ceiling

Opening balance 1.1.20x5


Opening balance






Interest at 5%


Interest at 5%





Contributions in


Current service cost



Benefits paid


Benefits paid



Curtailment and settlement


Curtailment and settlement



Expected closing balance


Expected closing balance



Remeasurement component


Remeasurement component


1 (Dr pension asset and Cr OCI)

Actual closing balance


Actual closing balance



Tutorial note – I do not think under exam conditions, students could be attempting this question perfectly. I would rather suggest students to focus more on comment part than simply for this technical part.


(a) Discuss whether Bismuth Co should recognise an impairment loss for the mines.

Tutorial note:

  • IFRS knowledge – include definition, principles of impairment treatment are awarded.
  • Application to the case

I would say that ‘decommissioning liability’ is a super niche area to be tested by the examiner - how wonderful he is! However, students do not need to give detailed explanation about decommission liability knowledge to pass this question.

Examiner is very generous in this question because marks are also warded for IAS 36 knowledge (general) including definition of impairment. Students can also mention about CGU impairment (general principles) to pass this question.

As always, a good habit in the exam would be to treat 50% knowledge marks and 50% application to the case – therefore, do not forget about working out numbers in the exam – case information.

Definition of impairment loss

Impairment loss is recognised when the amount by which the carrying amount of an asset or cash-generating unit exceeds its recoverable amount.

Recoverable amount

The recoverable amount of the mine is the higher of value in use and fair value less costs of disposal. To determine the value in use of mines, cash flows projections based on reasonable and supportable assumptions should be used (these projections should not usually go beyond 5 years).

Treatment of decommissioning liability

The decommissioning liability is recognised as

Dr PP&E $53m

Cr Provision liability $53m

When assessing impairment, the $53m should be both deducted from the Value in Use and carrying amount of the mine.


Carrying amount of mines

$200m - $53m


Recoverable amount (Value in Use)



Impairment loss


Journal entry

Dr Impairment loss $25m

Cr PP&E $25m

(b) Discuss whether Class A and B shares should be classified as equity or liability

Tutorial note:

Many students attempted well on this question by stating:

  • IAS 32 Presentation requirements
  • Say something regarding two types of shares – apply to the case

Although many candidates give the wrong conclusion, students are awarded for the comments they made.

Therefore, it is tough to gain 100% marks in this question but not difficult to secure a pass.

Surprisingly, the contingent obligation in Class A shares is tested (one of my favourite areas I spot in my tuition class – IAS 32 para 25). However, students are not expected to know this to pass the question.


Class A share should be classified as financial liability whilst for Class B shares to be classified as equity.

Financial liability and equity instrument

Financial liability involves the party has contractual obligation to deliver cash or other financial asset to another party. Equity instrument is the contract to share residual interest in an entity’s asset.

Class A shares

It seems Class A shares must be redeemable to the investor either in the form of cash or shares with fixed value (cash to 1 Bitcoin per 1,000 Class A shares; or shares to 2 Bitcoins per 1,000 Class A shares).

Contingent obligation in Class A shares

Although there is a contingent event that Bismuth Co could be listing on the stock exchange although it can avoid doing so, and in the event of successful listing, Class A shares need to be redeemed. This is an example of contingent obligation and the business should treat this as the financial liability.

Class B shares

Class B shares do not involve the obligation to be redeemed, although it contains repurchase options, the option could or could not be exercised. As this does not constitute a contractual obligation to deliver cash or other financial asset to investor, it should be classified as equity instrument.

(C) Discuss the ethical issues by Chief Accountant and the Finance Director, including appropriation actions

Tutorial note:

The first step to tackle ethical question is to copy and paste case information into the answer box/word processor, followed by your comments made in step two.

Step 1 – information from the case:

  1. Previous employer Gymsam Co is relevant to the blockchain project
  2. If Ms Pleasant discloses this information:
  3. this would compromise the patent process
  4. but will consolidate her position in the business
  5. When Ms Pleasant left the previous employer, confidentiality agreement was signed
  6. Ms Pleasant has significant knowledge of Blockchain technology whilst the FD does not
  7. The FD (Mr Fricklin) has erased the data to stop the project

Ethical issues

Previous employer Gymsam Co is relevant to the blockchain project

According to integrity principle, conflicts of interest between the previous and current employer may need to be informed by Ms Pleasant to the current employer.


Ms Pleasant should consider informing the matter to the previous employer as to what data is relevant from the previous company, and informing the current employer about the potential conflicts of interest between previous and current employers.

If Ms Pleasant discloses this information - this would compromise the patent process

As Ms Pleasant is working for the current employer, it is important for Ms Pleasant to represent current employer’s shareholders best interests.

If Ms Pleasant discloses this information - but will consolidate her position in the business

According to objectivity principle, Ms Pleasant should avoid conflict of interests between her own interest and the entity’s interests. A Failure to inform about previous employer about this information may cause a situation that current employer may be sued by the previous employer when the issue is brought to them.


Therefore, when Ms Pleasant decides to inform the previous employer about the Blockchain project information, care must be exercised in what information to be disclosed, especially for those sensitive information.

When Ms Pleasant left the previous employer, confidentiality agreement was signed

According to confidentiality principle, Ms Pleasant should understand what information is sensitive so that sensitive information is not passed to the current employer, otherwise it will put Ms Pleasant in an unfavourable position.


If the agreement is not clear or specific, then it will be left up to the ethical conscience of Ms Pleasant as to whether she should disclose the information.

Ms Pleasant has significant knowledge of Blockchain technology whilst the FD does not

The FD (Mr Fricklin) has erased the data to stop the project

According to the competence principle, it is important for the professional staff to undertake significant tasks for which the professional accountant has, or can obtain, sufficient specific training or experience.

A professional accountant should not intentionally mislead an employer as to the level of expertise or experience possessed such as is the case with Mr Fricklin who has told the board that he has ‘in depth knowledge’ of the technology.


Ms Pleasant is in a difficult position as regards the competence and sabotage of the project by Mr Fricklin, as an act of ‘whistleblowing’ can cause a conflict of interest between the personal and business values.



(i) Whether the four-year software contract is a single performance obligation, including whether revenue should be recognised at a point in time or over time

Tutorial note:

Either single or separate performance obligations – in this case, fine. – one mark here for making a conclusion. Therefore, I would argue both single or two performance obligations are acceptable in this case.


The license and updates are treated as a single performance obligation with the following reasons.

IFRS 15 Requirement

Per IFRS 15 Revenue from contracts with customers, the performance obligation is distinct if:

  • Customers can benefit from the goods or services provided; and
  • The goods or services in the contract are identifiable from other promises in the contract.

Application to the case

It is clearly seen that customers can benefit from the license, and the updates. Whilst the license is clearly identifiable from the updates because software can function without updates (Software updates are not essential to the software functionality).

However, clues from the case may indicate both license and updates could be combined into one performance obligation because:

  • Technology has been rapidly changing in the industry, benefits of using the software will be reduced if there are no updates – indicates businesses in this industry will necessarily choose the updates option.
  • However, Cent Co does not choose this option quite often because it has only updated software on two occasions – although this is the case, this does not change the nature of industry and software to be fit in the industry.

Accounting treatment

If both software and updates are combined into one contract, ie the total $3m contract price can be directly allocated over the Four-year period by $0.75m each year.

To allocate consideration over the four years is the output method allowed in IFRS 15, and this should be disclosed properly in the disclosure note in the accounts.

Two performance obligations

Alternatively, if license and updates are treated as separate performance obligations, the consideration of $3m must be allocated based on the stand-alone prices of license and software updates, with revenue of software updates to be recognised over the Four-year period.

  • Revenue from software license: $3m x ($2m/($2m+$2.5m))
  • Revenue from updates: $3m x ($2.5m/($2m+$2.5m))

(ii) Why the right to receive access to software is not an intangible asset nor a lease in CENT’s (customer) account

Tutorial note:

2 marks for each standard argument.

Please note, this is from Cent Co (customer)’s perspective rather than from our company (S Company) (seller)’s point of view.

Intangible asset

IAS 38 Intangible asset requirements

The following criteria need to be met to recognise the intangible asset in the account:

  • The asset is identifiable – in this case, likely to be met as the software is bought via the contract.
  • Meet with asset definition – in this case, unlikely to meet with this criteria because Cent co (customer) does not own any rights of the software (exhibit 1), ie Cent Co can not resell or relicense the software to other parties.
  • Expenses can be reliably measured – this criteria is met as the amount of expenses paid by Cent Co is confirmed.

Therefore, this is not an intangible asset to Cent Co.


IFRS 16 Leases requirement

A lease contract is the contract containing the right to direct the use of the identified asset.

  • Direct the use – this means Cent Co should have rights to determine how and why the software can be used, in other words, software may have been installed on multiple computers and combined with other functions. However, Cent Co is only granted the right to access the software, this criteria is not met.
  • Identified asset – this criteria is met as the software access is explicitly specified in the contract.

Therefore, to Cent Co, this is not a lease contract but just a service contract to Cent Co, ie to recognise expenses over the four-year period.

(b) Disposal of 45% interest and 15% retained interests in the single account

Tutorial note:

A very touch question in deed combining different requirements.

Students need to have solid knowledge on IAS 27, 28 and IFRS 9.

IAS 27 Separate Financial Statements requirements

Per IAS 27, the investment in other companies could be accounted for as:

  • Cost
  • Per IFRS 9 Financial Instrument
  • IAS 28 Investment in associates

After disposal of 45% interest

Changing the controlling interest from 60% to 15 ownership, ie disposing 45% interests, the remaining 15% is not a NCI, nor associate. To best account for this, IFRS 9 requirements should be followed.

IFRS 9 requirement

The 15% investment should be classified as investment in equity instrument and should be fair valued.

  • Option 1 – to use Fair Value through Profit or Loss (FVTPL) – if for trading purposes
  • Option 2 – to use Fair Value through Other Comprehensive Income (FVTOCI) – if not for trading purposes

Either option can be chosen by the business, however, if the second option (FVTOCI) is chosen, this is an irrevocable option, ie it can not be subsequently changed to FVTPL option.

Accounting treatment

The difference between proceeds + 15% retained interests on disposal date, and the carrying value of the 60% investment in M, should be put into the P/L:

Dr Investment in equity instrument (opted as FVTOCI) $10m+$3.5m = $13.5m

Cr Investment in associate (on 31 July) $12m

Cr P/L $1.5m


Therefore, it is inappropriate for the business to present $1.5m into OCI, but should rather, present it into P/L, with subsequent changes in fair value of investment in equity instrument going into OCI.

IAS 28 Investment in associate

There are no further clues suggesting the business can exercise significant influence over M after disposal of the 45% interests. The 15% retained interest does not constitute significant influence over M and M is not the associate any longer.

(d) Fair value on the two acquired assets per IFRS 13

Tutorial note:

Although this is a 4-mark question, many students did not give a correct conclusion regarding the fair value of those two assets.

The definition, highest and best use value concept should be discussed.

This then comes along with the application to the case.

I would rather aim at 2 marks (a pass) in this question.

Definition of fair value

Fair value is the price which would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Non-financial assets

Fair value for non-financial assets should be the price to maximise the group of assets and liabilities within which the asset would be used. This is the concept of the ‘highest and best use’ value.

Application to two buyers’ group

For group one, the combined value is $30m+$200m=$230m

For group two, the combined value is $50m+$150m=$200m

Therefore, the $230m should be used to value those two assets.

Value placed on ‘Qbooks’ and ‘Bestclouds’

Therefore, Qbooks should be valued at $30m instead of $50m whilst for ‘Bestclouds’, $200m rather than $150m.


(a) Discuss why sustainability becomes an important aspect of investors’ analysis of companies

Effects and links

There is a growing recognition that sustainability can have a significant effect on company financial performance. Investors are increasingly integrating consideration of sustainability issues and performance indicators into their decision-making.

Better understanding of the company

Investors need to completely understand the nature of the companies in which they are looking to invest and need to incorporate material sustainability factors into investment decisions. They need to understand whether there are material risks or opportunities connected with sustainability factors which do not appear in traditional financial reports.

Creditability of company

This creates a greater trust and credibility with investors and a reduced risk of investors using inaccurate information to make decisions about the company.

Importance in different industries

Their importance will differ from sector to sector, industry to industry. Sustainability is often unique to the sector. This analysis can be the deciding factor between otherwise identical companies

(b) Any events affecting Colat Co indicating impairment test ought to be conducted

Tutorial note:

The 3-mark question does not really require references back to the IAS 36 – general principles.

A better approach would be to copy and paste indicators from the case directly to your answer, followed by your comments.

Another approach would be to layout the information from the case (2 points) explaining whether this is the internal or external impairment indicator, followed by your conclusion at the end of the question.

Share price declined

The decrease in share price may indicate the equity book value may be less than its market capitalisation which suggests an impairment taking place of the NCA from the natural disaster.


Manufacturing facilities are destroyed and this is the internal impairment indicator suggesting the impairment review test should be done.

Reputation and decrease in demand

The decrease in customer demand as a result from suffering poor reputation would be an other external impairment indicator suggesting an impairment review test should be done.


(i)Destruction and decommission of the power plant

Tutorial note:

Marking scheme:

  • 1 mark to correctly identify the asset should be de-recognised not impaired.
  • 3 marks explaining decommission liability:
  • Added to cost and discount
  • Increased liability as a result of shortened useful life
  • Increased asset as a result of shortened useful life
  • Depreciate over the remaining (new) years for the remaining NCAs

Derecognition of NCA

The destruction of a non-current asset (NCA) results in the derecognition (writing it off) of that asset as opposed to an impairment as there will be no future economic benefits expected either from its use or disposal.

Therefore, the NCA of $250 million would be derecognised by Cr PP&E at cost and Dr Accumulated depreciation (Cr PP&E at carrying value)

Provision liability

Accounting entry

Dr PP&E at cost (per IAS 16 to include the estimate of dismantling and removing costs)

Cr Provision liability (per IAS 37 to include this at the start of operations)

Shorten useful life

The decommission liability would increase as the useful life of NCAs is shortened and therefore, the carrying value of the asset is added.

Prospective adjustment

The remaining carrying amount is depreciated prospectively over the following eight years.

(ii) The cost of repairing the environmental damage and the potential receipt of government compensation

Tutorial note:

Marking scheme:

  • 2 marks for each part
  • Tough to make a conclusion regarding whether a provision, contingent liability or recognition of government grant – The good news is, even though incorrect conclusions are made, students can still earn FULL marks if relevant principles are discussed about IAS 37 and IAS 20 MAKING UP 4 SENTENCES. (Exam Trick)

The cost of repairing the environmental damage


No provision liability should be recognised nor contingent liability to be disclosed.

Provision liability

A provision liability is recognised if there is a present obligation (legal or constructive) for the probable future economic outflows where expenses are reliably estimated.

Present obligation

Colat Co has not present obligation because there is no constructive obligation to repair the environmental damage because there is no established pattern of past practice, published policies or a specific current statement that Colat Co will pay for the damage.

The potential receipt of government compensation

When grant is recognised

A government grant is recognised only when there is reasonable assurance that the entity will comply with any conditions attached to the grant and the grant will be received. (Tutorial note: per IAS 20 Accounting for Government Grants and Disclosure of Government Assistance)

Accounting journal

A grant receivable as financial support should be recognised as income in the period in which it is receivable.

No accounting adjustments are needed

In this case, Colat Co has only received acknowledgement of its application for a grant on 1 March 20X8 and, therefore, there is no reasonable assurance that the grant will be received. Further, it is not probable that the grant will be received and it should not be disclosed in the financial statements.

(iii) Hedge

Tutorial note:

Marking scheme:

  • Hedge transaction – 2 marks (identify this is a cash-flow hedge; hedge item and hedging instrument accounting; cease hedging)
  • Accounting treatment – 2 marks (no accounting treatment for hedged item; hedging instrument into OCI; reclassification from OCI to P/L when hedge accounting is ceased.)
  • Exam trick – effectiveness of hedging can also be discussed - general principle

Cash flows hedge

As these are highly probable transactions, Colat Co may be afraid of spending extra money in buying aluminium, ie cash flows risk. Therefore, in accounting for the hedge, this is the cash flow hedge.

Hedged item

Accounting for hedged item, aluminium, should be in place when transaction takes place. Therefore, no accounting journals are needed.

Transaction will not take place – stop hedge accounting

However, the purchases which were considered highly probable prior to the natural disaster are now not expected to occur. Colat Co should follow hedge accounting principles up until the date of the natural disaster and then should stop hedge accounting.

Hedging instruments OCI into P/L

As the forecast transaction is no longer expected to occur, Colat Co should reclassify the accumulated gains or losses on the hedging instrument from other comprehensive income into profit or loss as a reclassification adjustment.

(iv) Potential insurance proceeds

Tutorial note:

Students are expected to apply their knowledge specifically to the question, ie copy and paste hints from the case with your comments made.

  • Contingent asset discussion
  • Events after the reporting period – adjusting event but with disclosure (because this is for contingent asset)

Contingent assets

IAS 37 does not permit the recognition of contingent assets. Accordingly, an insurance recovery asset can only be recognised if it is determined that the entity has a valid insurance policy which includes cover for the incident and a claim will be settled by the insurer.

Proceeds receivable

The recognition of the insurance recovery will only be appropriate when its realisation is virtually certain, in which case the insurance recovery is no longer a contingent asset. Decisions about the recognition and measurement of losses are made independently of those relating to the recognition of any compensation which might be receivable.

Can not simply net off proceeds with losses

It is not appropriate to take potential proceeds into account when accounting for the losses. The potential receipt of compensation should be assessed continually to ensure that it is appropriately reflected in the financial statements.

Adjusting event

The asset and the related income are recognised in the period in which it is determined that a compensation will be received which means reviewing the situation after the end of the reporting period and before the date of approval of the financial statements.

In this case, as it appears probable that the insurance claim for the loss of the non-current assets would be paid and as this information was received before the financial statements were approved, the potential proceeds ($280 million) should be disclosed in the financial statements for the year ended 31 December 20X7.

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Categories: : Strategic Business Reporting (SBR)