Strategic Business Reporting (SBR) Flashcards

Under IFRS 15 Revenue from Contracts with Customers, at which point should revenue be recognised for a contract that includes a significant financing component?

Answer: When the performance obligation is satisfied, with the transaction price adjusted for the time value of money

IFRS 15 requires revenue to be recognised when (or as) performance obligations are satisfied. Where a significant financing component exists (typically when payment timing differs significantly from performance), the transaction price must be adjusted to reflect the time value of money. This means separating the revenue element from the financing element (interest income or expense).

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.

Under IAS 36 Impairment of Assets, which of the following is the correct definition of 'value in use'?

Answer: The present value of estimated future cash flows expected to arise from the continuing use of the asset and its ultimate disposal

IAS 36 defines value in use as the present value of the future cash flows expected to be derived from an asset or cash-generating unit. This includes cash flows from continuing use and from disposal at the end of its useful life, discounted at an appropriate pre-tax rate. Option A describes fair value (IFRS 13), not value in use.

A company has a defined benefit pension plan. Under IAS 19 Employee Benefits, which of the following components is recognised in other comprehensive income (OCI) and NOT recycled to profit or loss?

Answer: Remeasurements of the net defined benefit liability

IAS 19 requires remeasurements (actuarial gains/losses and return on plan assets excluding net interest) to be recognised in OCI and they are never reclassified (recycled) to profit or loss. Current service cost, past service cost, and net interest are all recognised in profit or loss. This is one of the permanent OCI items under IFRS.

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.

A parent company sells goods to its subsidiary at a profit. At the year-end, 40% of these goods remain in the subsidiary's inventory. In the consolidated financial statements, how should this unrealised profit be treated?

Answer: Eliminate 100% of the unrealised profit on the unsold inventory by reducing group inventory and group retained earnings

For downstream sales (parent to subsidiary), 100% of the unrealised profit on the goods remaining in inventory must be eliminated in consolidation, regardless of the NCI percentage. The adjustment reduces consolidated inventory (to cost to the group) and reduces consolidated retained earnings. The full profit is charged against the parent as the selling entity.