Question 1

SECTION B

Background:
AeroForge is a heavy manufacturing company specializing in aerospace components. The financial year-end is 31 December 20X5.

Event 1: Sale and Leaseback
On 1 January 20X5, AeroForge sold one of its manufacturing facilities to a real estate trust for $40 million and immediately leased it back for 10 years. The fair value of the facility at the date of sale was $35 million, and its carrying amount was $28 million. The transfer of the asset satisfies the requirements of IFRS 15 to be accounted for as a sale. The present value of the annual lease payments (discounted at the appropriate rate) is $25 million.

Event 2: Impairment of CGU
AeroForge has a specific division (a Cash Generating Unit - CGU) that manufactures parts for a commercial jet program that was recently cancelled. At 31 December 20X5, the carrying amounts of the CGU's assets are:
- Goodwill: $10 million
- Specialized Machinery (PPE): $40 million
- Inventory: $5 million
The recoverable amount of the CGU as a whole is determined to be $38 million. The inventory's net realizable value is $4 million. The specialized machinery has no active secondary market, so its individual fair value less costs of disposal cannot be reliably estimated.

Event 3: Restructuring
Due to the cancelled jet program, the Board of Directors held a secret meeting on 20 December 20X5 and decided to close a factory associated with the division. A detailed formal plan was drafted. On 28 December 20X5, the Board informed the senior management team of the closure, but no public announcement was made, and the factory workers were not informed until 15 January 20X6. The estimated restructuring costs are $8 million.

Requirements:
(a) Detail the accounting treatment for the sale and leaseback transaction for the year ended 31 December 20X5, including the calculation of the right-of-use asset and the gain on rights transferred. (9 marks)
(b) Explain the principles of allocating an impairment loss to a CGU under IAS 36, and calculate the allocation of the impairment loss to the assets of the specific division. (8 marks)
(c) Discuss whether a restructuring provision should be recognized at 31 December 20X5 under IAS 37, and explain how lenders (stakeholders) would view the overall financial position of AeroForge given the events of the year. (8 marks)

Accepted Answer

Step 1: For IFRS 16, identify the excess sale price as financing. Calculate the ROU asset based on the proportion of the carrying amount retained. Calculate the gain based on the proportion of rights transferred. Step 2: For IAS 36, calculate the total impairment. Allocate strictly in order: specific assets (inventory), then goodwill, then pro-rata to PPE. Step 3: For IAS 37, strictly apply the 'constructive obligation' criteria for restructuring (announcement to affected parties). Step 4: Synthesize the three events to assess the company's liquidity, gearing, and future cash flows from a lender's perspective.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

In sale and leasebacks, students often recognize the full $7m gain. In impairment, students often forget to write down the inventory to NRV first before attacking goodwill. In restructuring, students assume informing senior management is sufficient to trigger a provision.

How to approach this question

Full Answer

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Practice the full ACCA SBR — Strategic Business Reporting Practice Exam 4

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