SBR Survival Guide: Financial Instruments, Leases and Changes in Group Structure

Most of the marks in these three areas are lost in the same place: not in the arithmetic, but in the first decision. What is this thing, and where do the movements go? Get the category right and the numbers follow almost mechanically. Get it wrong and every figure after it is wrong too.

The tables below are your tutor’s own summaries, reproduced exactly as written. Each one is built around the same idea — a small number of rows that cover everything the SBR examiner realistically throws at you. The short notes around them explain how to read each table; the tables themselves are what you should be able to reproduce from memory before you sit the exam.

Part 1 — Survival guide to financial instruments (IFRS 9)

Every financial instrument question is answered in four steps: decide the category, measure it at T0 (initial recognition), decide where the change in value goes, and state the measurement at T1 (the reporting date). The table below runs those four steps for every instrument the SBR examiner uses, written from the point of view of “I” — you, the reporting entity.

Two things to notice as you read it. First, almost everything starts at fair value at T0; the categories differ in where they end up. Second, the only row where the change bypasses profit or loss is the equity investment held at FVTOCI — the examiner’s favourite trap, because it behaves like a revaluation rather than a gain.

Classification and measurement

Derivatives — what is fair value?

Before you can apply the table above to a derivative you need to know what it is worth on day one. The distinction is simple: an option costs a premium, so there is something to recognise immediately; a future, forward or swap costs nothing to enter into, so it starts at nil and only becomes an asset or a liability as prices move. That last point is why forwards and swaps can flip sides between reporting dates — and options cannot.

Hedge accounting

Hedge accounting exists to fix a timing mismatch. Without it, the hedging instrument is remeasured through profit or loss while the thing it protects sits untouched, so a perfectly hedged position looks volatile. The two hedge types fix that mismatch from opposite ends.

In a fair value hedge you already own the item, so you pull the hedged item’s gains and losses forward into profit or loss to sit alongside the instrument. In a cash flow hedge the item has not happened yet, so you park the instrument’s gains and losses in OCI and recycle them to profit or loss when the forecast transaction finally occurs.

Part 2 — Leases overview (IFRS 16)

IFRS 16 removed the lessee’s operating-lease escape route: essentially every lease now goes on the statement of financial position. What is left for the lessee is a single short exemption test. For the lessor, by contrast, the old finance/operating split survives intact — so the two halves of the standard are asked in quite different ways.

The lessee

There are only two outcomes. If the lease is short (twelve months or less) or the asset is low value, it stays off the statement of financial position and you simply charge rent to profit or loss. Everything else gets a right of use asset and a matching lease liability — and note the consequence in the P&L column: one rental expense becomes two charges, depreciation and finance cost, which is what makes the early-year expense higher than under the old rules.

The lessor

The lessor asks one question: have the risks and rewards substantially passed to the lessee? The two indicators in the table are the ones worth quoting — the lease covers a major part of the asset’s life, or the present value of the minimum lease payments is substantially all of its fair value. If either holds, the lessor has effectively sold the asset and financed it: it comes off the books and a receivable goes on, earning finance income.

If neither holds, the lessor has simply rented something out. The asset stays on the statement of financial position — as PPE, or as investment property if IAS 40 is met — and that classification decides what appears in profit or loss.

Part 3 — Change in group structure (assume mid-year)

Group restructuring questions look intimidating because several things move at once. They become manageable the moment you accept that only one event matters, and everything else is bookkeeping around it: did control change hands?

Apply those two rules and the four scenarios below split cleanly into two families. In the first two rows control changes, so there is a profit on disposal and the consolidated profit or loss is stitched together from two different treatments — six months of one, six months of the other. In the last two rows control never changes: the entity was a subsidiary before and remains one after, so you consolidate all twelve months, time-apportion the non-controlling interest, and the difference is a transaction with owners that goes to the statement of changes in equity — never to profit or loss.

The four scenarios

The three workings

1 — the caterpillar. because when associate goes and subsidiary arrives, it's like the caterpillar turning into butterfly.

2 — the wedding speech. I've lost a daughter (subsidiary) but gained a son (or whatever)(associate).

3 — the lodger. Lodger in means more money but more mess (otherwise known as NCI).

Before the exam — three questions that unlock the marks

If you remember nothing else from this handout, remember the three opening questions. Each one selects the right table, and the right table makes the rest routine.

1. Financial instruments — what is the category? Once you have named it, T0, the destination of the change, and T1 are all fixed by the classification table.

2. Leases — am I the lessee or the lessor? Answer that first, then apply the exemption test (lessee) or the risks-and-rewards test (lessor).

3. Group structure — did control change? If yes, there is a profit on disposal and a split-year profit or loss. If no, consolidate twelve months and send the adjustment to the statement of changes in equity.