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Advanvced Financial Reporting December 2017
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Advanvced Financial Reporting & Analysis
Revision Kit

QUESTION 1a

Q ➢ Benefits of Integrated Reporting to both an organization and the users of the financial statements
A

Solution


Integrated Reporting is a reporting framework that provides a comprehensive view of an organization's strategy, governance, performance, and prospects. It goes beyond traditional financial reporting by incorporating both financial and non-financial information, enabling organizations to communicate their value creation story in a more holistic manner. Integrated Reporting offers several benefits to both organizations and the users of financial statements:

Benefits for Organizations:

➧ Enhanced transparency: Integrated Reporting promotes transparency by providing a more complete and balanced picture of the organization's performance, risks, and opportunities. It enables stakeholders to understand the organization's value creation process, including its social, environmental, and economic impacts.

➧ Improved decision-making: By integrating financial and non-financial information, organizations can gain better insights into the drivers of value creation. This helps in making informed decisions related to strategy, resource allocation, and risk management. Integrated Reporting encourages a long-term perspective, fostering sustainable decision-making.

➧ Stronger stakeholder relationships: Integrated Reporting enables organizations to engage more effectively with their stakeholders. By providing a clear and concise overview of the organization's activities, performance, and future prospects, it builds trust and credibility among stakeholders, including investors, customers, employees, regulators, and communities.

➧ Efficient resource allocation: Integrated Reporting helps organizations identify areas where they can improve their resource allocation and efficiency. By considering various capitals (financial, manufactured, intellectual, human, social, and natural), organizations can optimize their resource utilization, mitigate risks, and identify opportunities for value creation.

Benefits for Users of Financial Statements:

➧ Comprehensive view of performance: Integrated Reporting provides users with a holistic understanding of an organization's performance, encompassing financial, environmental, social, and governance aspects. This broader perspective enables investors and other stakeholders to assess the organization's long-term sustainability and resilience.

➧ Improved risk assessment: By incorporating non-financial information, Integrated Reporting enhances the assessment of an organization's risks and opportunities. Users gain insights into the organization's exposure to environmental, social, and governance factors, helping them evaluate potential risks that may impact the organization's performance and value.

➧ Long-term value assessment: Integrated Reporting encourages a focus on long-term value creation rather than short-term financial metrics. This allows users to evaluate an organization's performance in the context of its overall strategy, sustainability, and societal impact, leading to more informed investment decisions.

➧ Alignment with sustainable development goals: Integrated Reporting facilitates the alignment of an organization's activities and goals with the United Nations' Sustainable Development Goals (SDGs). Users of financial statements can assess an organization's contribution to the SDGs, enabling them to make investment choices that support sustainable and responsible practices.

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QUESTION 1b

Q ➢ Gain or loss on disposal of the shares in S Ltd on 31 March 2017
➢ Consolidated statement of comprehensive income
A

Solution


(i) Gain or loss on disposal of the shares in S Ltd on 31 March 2017

W1

Goodwill on acquisition on land

Purchase consideration 900
Less net asset acquired
OSC 775
Retained earnings 625
1,400 x 60% (840)
Goodwill 60


W2

Intergroup sales

URP = 15 x 50 / 150 x 3 / 5 = 3

W3

Intergroup Balances
= 4.3

W4

Bond interest
5% x 300 = 15

W5

Dividend receivable
90% x 9 = 8.1

W6

Profit attributable to NCI
S Ltd 40% x 90 = 36
F Ltd 10% x 14 = 1.4
37.4


Gain (loss) on disposal of the shares
Sales proceeds 1,150
Less net asset disposal
OSC 775
Retained earnings 715
Revaluation reserve 12
1,502 x 60% (901.2)
Less impared goodwill (60)
Gain on disposal 188.8


(ii) Consolidated statement of comprehensive income

W Ltd
Consolidated statement of comprehensive income
for the year ended 31 March 2017
Sh."million"
Revenue(976 + 420 + 63 -15) 1,444
Cost of sales(687 + 228 + 26.2 + 3 - 15) (929.2)
Gross profit 514.8
Other incomes 6.1
Gain on disposal 188.8
Expenses
Operating expenses(68 + 54 + 13.4) (135.4)
Finance cost (12 + 18 + 6.2 + 15) (51.2)
Profit before tax 523.1
Income tax expense(45 + 30 + 3.2) (78.2)
PAT 444.9
Other comprehensive income (15 + (60% x 12) + (90% x 2) 24
Total comprehensive Income 468.9
attributable to:- NCI (37.4)
- Parent 431.5


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QUESTION 2(a)

Q ➢ With reference to IPSAS 21 “Impairment of Non-Cash Generating Assets”, explain matters in respect of which an entity should disclose each material impairment loss recognized or reversed during the reporting period
A

Solution


(i) The events and circumstances that triggered the recognition or reversal of the impairment loss, shedding light on the factors that influenced the assessment.

(ii) The specific amount of the impairment loss that was recognized or reversed, enabling stakeholders to understand the financial impact on the entity.

(iii) The nature of the asset affected by the impairment, providing details about the type of asset involved (e.g., property, equipment, intangible asset) to give context to the impairment.

(iv) Clarification on whether the recoverable service amount of the asset is determined based on its fair value less cost to sell or its value in use. This helps users of financial statements understand the basis used for determining the recoverable amount.

(v) If the recoverable service amount is based on fair value less cost to sell, disclosure of the methodology used to determine the fair value less cost to sell, including any reference to an active market. This provides transparency regarding the valuation approach employed.

(vi) An explanation of the approach utilized to determine the value in use if the recoverable service amount is based on this measure. This disclosure assists stakeholders in understanding the calculations and assumptions involved in assessing the asset's value in use.

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QUESTION 2(b)

Q ➢ Show how the bonus would be accounted for and reported over the three-year period ended 3 December 2016.
A

Solution


Year Liability Expenses
2014 (200 - 10) x 100 x 55 x 1 / 3 = 348,333 348,333
2015 (200 - 25) x 100 x 58 x 2 / 3 = 676,667 328,334
2016 (200 - 40) x 100 x 60 x 3 / 3 = 960,000 283,333


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QUESTION 2(c)

Q ➢ The actuarial gains or losses.
➢ The net pension cost to be charged in the income statement for each of the two years.
➢ Balances to be reflected in the statement of financial position as at the end of each year.
A

Solution


(i) The actuarial gains or losses.

Measuring Defined plan asset 2016
Sh."million"		 2017
Sh."million"
Fair value of plan asset balance b/d 100 96
Add:Contribution to the plan 9 11
Return on plan asset 12% x 100 | 10% x 96 12 9.6
Less:benefits paid (15) (12)
106 104.6
Acturial changes(bal fig) (10) 5.4
Fair value bal c/d 96 110



Measuring Defined plan liability 2016
Sh."million"		 2017
Sh."million"
Fair value of plan obligation balance b/d 100 100
Add:Current service cost 8 10
Past service cost 4 -
Interest expense 10% x 100 | 8% x 100 10 8
Less:benefits paid (15) (12)
107 106
Acturial changes(bal fig) 7 (19)
Present value bal c/d 100 125



2016
Sh."million"		 2017
Sh."million"
On plan asset (10) 5.4
On plan liability 7 (19)
Net actuarial loss (3) (13.6)


(ii) The net pension cost to be charged in the income statement for each of the two years.

2016
Sh."million"		 2017
Sh."million"
Return on Plan asset 12 9.6
Current service cost (8) (10)
Past service cost (4)
Interest expense (10) (8)
Net pension cost (10) (8.4)


(iii) Balances to be reflected in the statement of financial position as at the end of each year.

2016
Sh."million"		 2017
Sh."million"
Non-current asset
Fair value of plan asset 96 110
Equity and liabilities
Acturial changes (3) (13.6)
Non-current liabilities
Present value of obligation 100 125


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QUESTION 3a

Q ➢ Explain the rationale behind the inclusion of an environmental report in an entity’s annual report
A

Solution


➧ Stakeholder expectations: In recent years, stakeholders, including investors, customers, employees, and communities, have increasingly shown a strong interest in an organization's environmental practices and their impact on the environment. By including an environmental report, entities respond to the rising expectations of stakeholders for greater transparency and accountability regarding their environmental performance.

➧ Risk management: Environmental issues, such as climate change, pollution, and resource depletion, pose significant risks to organizations. Integrating an environmental report within the annual report allows entities to assess and communicate their exposure to these risks. It helps in identifying potential environmental liabilities, regulatory compliance issues, and emerging risks that may impact the entity's operations, reputation, and financial performance.

➧ Regulatory requirements: In many jurisdictions, there are legal obligations for certain entities to disclose their environmental performance and impacts. For example, environmental reporting may be mandated by environmental regulations, sustainability reporting frameworks, or stock exchange listing requirements. Inclusion of an environmental report ensures compliance with such obligations.

➧ Enhanced decision-making: Environmental factors can have material impacts on an entity's financial performance, risk profile, and long-term sustainability. By including an environmental report, entities provide decision-makers, such as investors and management, with additional information to assess the organization's environmental performance and risks. This information can influence investment decisions, resource allocation, and strategic planning.

➧ Reputation and brand image: Environmental responsibility has become a significant aspect of an organization's reputation and brand image. Companies that demonstrate a commitment to sustainable practices and environmental stewardship are more likely to attract environmentally-conscious customers, investors, and employees. Inclusion of an environmental report helps entities showcase their environmental initiatives, achievements, and goals, thereby enhancing their reputation and brand value.

➧ Long-term value creation: Environmental sustainability is closely linked to long-term value creation. Organizations that integrate environmental considerations into their business strategies can identify opportunities for cost savings, operational efficiencies, innovation, and market differentiation. An environmental report highlights these initiatives and their potential impact on the entity's financial performance and competitiveness.

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QUESTION 3b

Q ➢ The group statement of cash flows in accordance with International Accounting Standard (IAS) 7 "Statement of Cash Flows" for the year ended 31 October 2017.
A

Solution


W1

PPE Account.
Bal b/d 13,500
Lease 900
Revaluation 60
Acquisition cost 6,690
21,150
Disposal 885
subsidiary 2,025
Depreciation 240
Bal c/d 18,000
21,150


W2

OSC Account.
Bal c/d 6,000
-
6,000
bal b/d 4,500
Cash 1,500
6,000


W3



Goodwill on acquisition of disposed subsidiary

Holding company 660 - (80% x 675) 120
NCI 150 - (20% X 675) 15
135


Goodwill Account.
Bal b/d 390
-
390
Disposed subsidiary 135
Bal c/d 255
390


W4

NCI Account.
Disposal(1,200 x 20%) 240
Goodwill 15
Dividend paid 120
Bal c/d 225
600
Balance b/d 525
Profit 75
-
Profit -
600


W5

Finance lease.
Lease rental paid 390
Bal c/d(630 + 45) 675
1,065
Balance b/d(135 + 30) 165
Acquisition(PPE) 900
1,065


W6

Tax expenses
Disposal 15
Tax paid 3
Bal b/d - Deferred 1,020
-Current 84
1,122
Balance b/d -deferred 915
-Current 63
P & L 144
1,122




>
Maneno Group
Consolidated statement of cash flow for the year ended 31 October 2017
OPERATING ACTIVITIES Sh."million"
Profit before tax 699
Adjustments
Depreciation 240
Finance cost 450
Loss on disposal[PPE] (750 - 885) 135
Gain on sale of subsidiary (120)
Associate profit (144)
Working capital chages
Inventory(3,090 - 90) - 3,900 (900)
receivables(3,120 - 135) - 3,120 (135)
payables(1,785 - 540) - 2,955 1,710
Gross operating cash flows 1,935
Less tax paid (3)
Interest paid(27 + 450 - 21) (456)
No operating cash flows 1,476 (A)
INVESTING ACTIVITIES
Disposal Proceeds on PPE 750
Subsiduary(1,170 - 105) 1,065
Dividend received fro associate(420 + 144 - 510) 54
Acquisition of asset PPE (6,690)
Net investing cashflows (4,821)(B)
FINANCING ACTIVITIES
Issue of shares -Ordinary shares(6,000 - 4,500) 1,500
Share premium 900
Loan borrowed(3,000 - 600) - 4,200 1,800
Lease rental paid (390)
Dividend paid -Holding company (120)
NCI (120)
Net financing cashflows 3,570(C)
Cash and cash equivalent (A + B + C) 225
cash bal b/d(30 + 390) 420
cash bal c/d(135 + 510) 645


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QUESTION 4(a)

Q ➢ Three levels of Fair Value hierarchy under IFRS 13 “Fair Value Measurement”
A

Solution


Level 1: Quoted Prices (Unadjusted) in Active Markets

This is the highest level of the fair value hierarchy. Level 1 inputs are based on quoted prices for identical assets or liabilities in active markets. These prices are readily available on an exchange or from other reliable sources, and they represent the most reliable evidence of fair value. Examples of Level 1 inputs include quoted market prices for listed stocks or bonds.

Level 2: Inputs other than Quoted Prices Included in Level 1

Level 2 inputs are inputs other than quoted prices in active markets that are directly or indirectly observable for the asset or liability. These inputs include market data from similar assets or liabilities or other pricing models. Level 2 inputs are based on observable market data, but they might require some adjustments or assumptions to arrive at fair value. Examples of Level 2 inputs include market prices for similar securities, benchmark yields, or broker quotes for securities that are not actively traded.

Level 3: Unobservable Inputs

Level 3 inputs are unobservable inputs for the asset or liability, which means they are not based on market data. Instead, they are based on the entity's own assumptions, which may involve significant judgment. Level 3 inputs are used when there are no observable market prices or when observable prices are significantly adjusted due to lack of liquidity or other factors. Examples of Level 3 inputs include discounted cash flow models, option pricing models, or other valuation techniques.

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QUESTION 4(b)

Q ➢ EPS for the year ended 31 May 2016
➢ Diluted EPS for the year ended 31 May 2016
A

Solution


(i) EPS for the year ended 31 May 2016

Basic EPS
=
PATOSH
WANOS



Weighted Average Number Of Shares (WANOS)
Date Share transaction No of shares Weight Shares
1/6/2015 Bal b/d 6,000,000 12/12 6,000,000
1/9/2015 Issue of shares at fair price 1,200,000 9/12 900,000
7,200,000 6,900,000
1/12/2015 Conversion of preference shares 60,000 x 2 120,000 6/12 60,000
7,320,000 6,960,000
1/1/2016 Issues of partialy paid shares 300,000 x 50% 150,000 5/12 62,500
7,470,000 5/12 7,022,500
1/4/2016 Conversion of loan stock
Sh 1,000 = 300
Sh 5 = (5 x 300)/1,000		 1,500,000 2/12 250,000
8,970,000 7,272,500


PATOSH
PAT 14,600,000
Less Preference Dividend(6% x 1,000,000 x 6/12) (30,000)
6% x 400,000 x 6/12 (12,000)
14,558,000


Basic EPS
=
14,558,000
7,272,500
=
2


(ii) Diluted EPS for the year ended 31 May 2016

Potential Ordinary Shares

Convertible loan stock
Interest {(5% x 20m x 10 / 12) + (5% x 15 x 2 / 12)} x 0.7 670,833
Incremental shares(20,000,000 / 1,000) x 300 6,000,000
Less weighted shares (250,000)
5,750,000


Incremental EPS
=
670,833
5,750,000
=
0.1167


Convertible preference shares

Dividends = (6% x 1,000,000 x 6 / 12) + (6% x 400,000 x 6 / 12) = 42,000

Incremental Shares

(2 x 100,000 x 6 / 12) + (2 x 40,000 x 6 / 12) = 140,000

Incremental EPS
=
42,000
140,000
=
0.3


Diluted EPS
=
14,558,000 + 670,833 + 42,000
7,272,500 + 5,750,000 + 140,000
=
1.16


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QUESTION 5(a)

Q ➢ Examples of Unethical behavior by the management of business entities which professional accountants should report about.
A

Solution


➧ Financial Statement Fraud: Deliberately manipulating financial statements to misrepresent the financial performance or position of the company. This could involve inflating revenues, understating expenses, or hiding liabilities.

➧ Insider Trading: Management using non-public information to trade securities of the company, resulting in personal gains at the expense of other shareholders. This behavior is illegal in most jurisdictions.

➧ Bribery and Corruption: Offering or accepting bribes, kickbacks, or other illicit payments to secure business advantages or favorable treatment. This undermines fair competition and can be damaging to the company's reputation.

➧ Embezzlement: Management misappropriating company funds for personal use, such as siphoning off cash or diverting company assets for personal gain.

➧ Fraudulent Expense Reimbursements: Submitting false or inflated expense claims for personal expenses or non-business-related activities.

➧ Misuse of Company Assets: Management using company resources, such as equipment, facilities, or intellectual property, for personal gain or non-business purposes without proper authorization.

➧ Conflict of Interest: Management engaging in activities or transactions that create a conflict between their personal interests and the interests of the company. This could include self-dealing, diverting business opportunities, or accepting gifts or favors from parties with whom the company has business relationships.

➧ Discrimination and Harassment: Management engaging in discriminatory practices or allowing a hostile work environment based on factors such as race, gender, religion, or sexual orientation.

➧ Environmental Violations: Management disregarding environmental regulations, knowingly causing pollution or damage to the environment, or failing to disclose environmental liabilities.

➧ Health and Safety Violations: Management ignoring or failing to address health and safety regulations, which can put employees, customers, or the public at risk.

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QUESTION 5(b)(i)

Q ➢ Disclosure requirements for reportable segments under IFRS 8 “Operating Segments”
A

Solution


General Information:

➢ Identification of the types of products and services provided by each reportable segment.
➢ Description of the basis of the organization's internal reporting system used to identify reportable segments.
➢ Factors used to identify the entity's chief operating decision-maker (CODM) responsible for allocating resources and assessing performance.

Segment Revenues and Results:

➢ Segment revenue, including both external revenue and intersegment revenue.
➢ Profit or loss before tax, including any unusual items or items of a similar nature.
➢ The amount of certain specified items, such as interest revenue or expense, depreciation and amortization, and the share of profit or loss of associates and joint ventures accounted for using the equity method.

Segment Assets and Liabilities:

➢ Segment assets, including both operating and non-operating assets, such as cash and cash equivalents, property, plant and equipment, intangible assets, and investments in associates and joint ventures.
➢ Segment liabilities, including both operating and non-operating liabilities, such as trade and other payables, provisions, and long-term borrowings.

Measurement of Segment Profit or Loss:

➢ Explanation of the measurement basis used to determine segment profit or loss, such as whether it is consistent with the accounting policies used in the financial statements.

Reconciliation:

➢ Reconciliation of the total of the reportable segments' profit or loss to the entity's profit or loss before tax, and the total of the reportable segments' assets to the entity's assets, if different.

Additional Disclosures:

➢ Description of any changes in the composition of reportable segments during the period.
➢ Information about products and services, geographical areas, and major customers if they are included in the CODM's review of segment performance.

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QUESTION 5(b)(ii)

Q ➢ Segment report, as far as the information provided above allows, according to International Financial Reporting Standard (IFRS) 8 Operating Segments.
A

Solution


Super Four Group
Retail Catering Manufacturing Publishing Other Reconciliation Total
Sh."000" Sh."000" Sh."000" Sh."000" Sh."000" Sh."000" Sh."000"
Revenue-External 129,842 59,388 2,704 32,306 31,784 256,024
Intersegment 7,465 36,791 5,663 (49,919)
Tota revenue 129,842 66,853 39,495 32,306 37,447 (49,919) 256,024
Operating profit 6,887 4,716 1,283 1,169 3,284 (4,223) 13,116
Segment asset 50,152 45,145 24,620 14,165 23,829 157,911
Uncollected assets 764
Total assets 158,675
Segment liabilities 14,839 9,783 3,609 4,704 34,175 67,110


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