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CPA
Advanced Leval
Advanvced Financial Reporting May 2016
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Advanvced Financial Reporting & Analysis
Revision Kit

QUESTION 1a

Q Group statement of comprehensive income for the year ended 31 March 2016
A

Solution


W1

D to E control = 80% x 60% = 48%

Disposal of A = 1/3 x 75 = 25%
Remaining 75 - 25 = 50%

Goodwill on acquisition
S Ltd E Ltd
Purchase consideration 6,720 4,600 x 80% 3,680
Less:Net assets acquired
OSC 3,200 2,000
Share premium 1,600 1,000
Revenue reserve 2,600 2,750
7,400 x 80% (5,920) 5,750 x 48% (2,760)
800 920
Imparement 25% (200) (230)
600 690


W2

4,480 - 75%(2,500 + 1,250 + 650) = 1,180

Unimpared goodwill on disposal
1,180 x 75% x 1/3 = 295

Gain on disposal of Subsidiary A
Disposal proceeds 1,500
Less Net assets disposed(2,500 + 1,250 + 1,650 - (800 x 9 / 12)) x 25% (1,200)
Unimpared goodwill (295)
5


Intergroup sales and URP

S to D = 2,400

URP = 1 / 4 x 2,400 x 20% = 120
1 / 4 x 60 = 15
URP = 135

W4

Investment in associate Sh."million"
Cost of investment = 2/3 x 4,480 2,987
Add post acquisition reserves 50% x (1,650 - 650) 500
Less:Imparement loss on goodwill 25% x 1.180 x 2/3 (197)
3,290


W5

NCI Sh."million"
S Ltd = 20%x(3,200 + 1,600 + 5,600 - 135) 2,053
E Ltd = 52%(2,000 + 1,000 + 2,120) 2,662.4
Less:NCI on acquisition 20% x 4,600 (920)
3,795.4


D Group
Consolidated statement of comprehensive income for the year ended 31 March 2016
Sh."million"
Revenue 26,400 + 24,000 + 20,000 + (15,000 x 3/12) - 2,460 71,690
Cost of sales (12,000 + 12,000 + 16,000 + (12,000 x 3/12) + 135 - 2,460 (40,675)
Gross profit 31,015
Investment income 3,520 + 540 - 3,200 - 360 500
Fair value gain for investment 1,200 - 1,000 200
Gain on disposal of subsidiary 5
Expenses
Distribution cost 3,320 + 2,360 + 1,360 + (800 x 3/12) (7,240)
Admin exp 3,880 + 2,440 + 1,140 + (900 x 3/12) (7,685)
Finance cost (420)
PBT 16,375
Tax expense 2,440 + 2,400 + 580 + (500 x 3/12) (5,545)
PAT 10,830
Revaluation of AFS 500
Add:Associate share of PAT = 50% x 800 x 9/12 300
Total comprehensive income 11,630
Attributable to parent 10,061.6
NCI 1,568.4
11,630

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QUESTION 1b

Q ➢ Group statement of financial position as at 31 March 2016.
A

Solution


D Group
Consolidated statement of financial position as at 31 March 2016
Asset Sh."million"
Non-current assets
PPE(8,760 + 2,200 + 4,500) 15,460
AFS 3,000
Goodwill 600 + 690 1,290
Investment in associate 3,290
Current assets
Investment(2,100 + 2,200 + 1,650 - 135 + 60) 5,875
Trade receivables(2,640 + 6,600 + 500 - 250 - 240) 9,250
Financial asset at fair value 1,200
Cash and cash equivalent(400 + 2,200 + 300) 2,900
Disposal proceed on subsidiary(cash) 1,500
43,765
Equity and liabilities
OSC 6,000
Share premium 3,000
Revenue reserve 11,149.4
NCI 3,795.4
AFS revaluation 500
Non-current liabilities
12%loan stock 3,500
Deferred tax(2,660 + 2,200 + 370) 5,230
Current liabilities
Trade and other payables(2,020 + 3,000 + 790 - 490 + 60) 5,380
Income tax(2,340 + 2,200 + 670) 5,210
43,765

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QUESTION 2

Q The group statement of cash flow in accordance with IAS 7 (Statement of Cash Flows) for the year ended 31 December 2015.
A

Solution


Interest bearing account
Translation gain
30
Loan repayment(bal fig)
156
Bal c/d
4,194
4,380
Bal b/d
3,180
Foreign equity investment
900
Cash
300
4,380


Non-controlling interest
Dividend
87
bal b/d
753
-
840
Bal b/d
450
P&L
330
Zebra = 20% x 300
60
840


Goodwill account
Bal b/d
246
Zebra = 291 -(80% x 300)
51
297
Imparement
27
Bal c/d
270
297


Investment in associate account
Bal b/d
660
P&L
249
909
Dividend received
9
Bal c/d
900
909


Trade investment account
Bal b/d
150
Acquisition(cash)
1,905
2,055
Exchange differences
615
Bal c/d
1,440
2,055


Cash to acquire PPE
Total additions 834
PPE fro Zebra (180)
Aquired using loan(notes) (300)
Cash 354


Tax paid = 600 + 90 + 594 - 609 = 675


Samaki Group
Consolidated statement of cash flows flows for the year ended 31 Dec 2015
OPERATING ACTIVITIES Sh."million"
PBT 2,178
Adjustments
Depreciation 117
Imparement of goodwill 27
Finance cost 111
Gain on disposal of PPE (45)
Interest income (141)
Associate profit (249)
Working capital changes
Inventory(1,914 + 120) - 2,400 (366)
Receivables(1,440 + 45 - 45) - (1,830 - 51) (339)
Payables(2,739 + 48) - (3,579 - 27) 765
Accruals(300 + 12) - 315 3
Gross operating cash flows 2,061
Less:Tax paid (675)
Interest paid(111 - 27) (84)
Net Operating Cash flows 1,302 (A)
INVESTING ACTIVITIES CASH FLOWS
Proceeds on disposal of PPE(45 + 90) 135
Dividends received from associate 9
Interest income(141 + 45 - 51) 135
Acquisition of asset - PPE (354)
Trade investment (1,905)
Subsidiary(51 - 105) 54
Net investing cash flows (1,926) (B)
FNANCING ACTIVITIES CASH FLOWS
Issue of shares(90 + 210 - 240) 60
Cash from loan borrowed 900
Loan paid (156)
Dividend Paid-Holding company (378)
NCI (87)
Net financing cash flows 339 (C)
Cash and cash equivalent (A + B + C) (285)
Cash bal b/d 420
Cash bal c/d 135


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QUESTION 3(a)

Q ➢ The relevant ledger accounts to close the books of Hasara Ltd
A

Solution


Determining Purchase Consideration
To preference shareholders Sh,"million"
OS(3 / 5 x 400) = 240 x 10 2,400
Preference shares(2 / 5 x 400) = 160 x 10 1,600
Preference dividend in arrears 7% x 4,000 x 3 = 840
OS(3 / 100 x 840 = 25.2 x 10) 252
Debentures
100 = Sh.20
840 = 		168
To debenture holders
Ordinary Shares
100 = Sh.5
4,000 = 200 x 10		 2,000
Debenture 40 / 100 x 4,000 1,600
To OS
OS 2 / 5 x 600 = 240 x 10		 2,400
Dissolution expenses(cash) 30
10,450


OSC Members account
Accumulation losses
3,822.7
Goodwill
120.0
Consideration
2,400.0
Realization(bal fig)
58.1
6,400.8
Bal b/d
6,000.0
Revaluation
400.8
-
-
6,400.8


Preference shareholders sundry account
Consideration-OS
2,400
Preference shares
1,600
OS
252
Debenture
168
Realization(bal fig)
420
4,840
Bal b/d
4,000
Dividend in arrears
840
-
-
-
4,840


Debenture account
Consideration-OS
2,000
Debentures
1,600
Realization(bal fig)
400
4,000
Bal b/d
4,000
-
-
4,000


Purchase company account
Purchase Consideration-OS
10,450
-
-
-
10,450
OS
7,052
Preference Shares
1,600
Debentures
1,768
Cash
30
10,450


Realization account
PPE
10,957.4
AFS
647.0
Preliminary expenses
87.8
Inventories
872.5
Receivables
689.9
Financial asset
216.4
Dividend in arrears
840.0
Dissolution expense(cash)
30.0
14,341.0
Bank overdraft
775.8
Payables
1,962.0
Current tax
275.1
Purchase consideration
10,450.0
OSC account
58.1
Preference share account
420.0
Debenture account
400.0
-
14,341.0


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QUESTION 3(b)

Q ➢ Journal entries to record the relevant transactions in the books of Zawadi Ltd.
A

Solution


Assets taken over Dr Cr
PPE 9,486.8
AFS 810.0
Inventory 608.7
Receivables 477.1
Financial asset 216.4
Preliminary expenses(cash) 30.0
Business Purchase account 11,629.0
Liabilities taken over
Business purchase account 3,012.9
Bank overdraft 775.8
Payables 1,962.0
Current tax 275.1
Consideration
Business purchase 10,450.0
Hasara Ltd 10,450.0
Goodwill 10,450-(11,629-3,012.9) 1,833.9
Business purchase account 1,833.9

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QUESTION 3(c)

Q ➢ Statement of financial position of Zawadi Ltd. as at 1 April 2016.
A

Solution


Zawadi Ltd
Statement of financial position as at 1 April 2016.
Assets” Sh."million"
Non-current assets
PPE 9,486.8
AFS 810.0
Goodwill 1,833.9
Current assets
Receivables 477.1
Inventory 608.7
Financial asset 216.4
13,432.9
Equity and Liabilities
OSC 7,052.0
PSC 1,600.0
Non-current liabilities
Debentures 1,768.0
Current liabilities
Bank overdraft 775.8
Accounts payable 1,962.0
Current tax 275.1
13,432.9

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QUESTION 4(a)

Q With reference to IAS 36 “Impairment of Assets” discuss the accounting treatment of impairment losses.
A

Solution


➢ Impairment loss is recognized when the recoverable amount is lower than the carrying amount.

➢ Impairment loss is treated as an expense, except for revalued assets where it is considered a revaluation decrease.

➢ The impairment loss is allocated to reduce the carrying amount of assets in the following order:

  1. First, it reduces any goodwill allocated to the cash-generating unit or group of units.
  2. Then, it proportionally reduces the carrying amounts of other assets within the unit or group of units.

➢ The carrying amount of an asset cannot be reduced below the highest of:

  • Its fair value less costs of disposal (if measurable).
  • Its value in use (if measurable).
  • Zero.

➢ If there is still an impairment loss remaining, it is further allocated proportionally to other assets of the unit or group of units.

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QUESTION 4(b)

Q Procedure adopted when translating the financial performance and financial position functional currency into a presentation currency
A

Solution


➢ A foreign currency transaction should be recorded initially at the rate of exchange at the date of the transaction

➢ At each subsequent balance sheet date:

  • Foreign currency monetary amounts should be reported using the closing rate
  • Non-monetary items carried at historical cost should be reported using the exchange rate at the date of the transaction
  • Non-monetary items carried at fair value should be reported at the rate that existed when the fair values were determined

➢ Exchange differences arising when monetary items are settled or when monetary items are translated at rates different from those at which they were translated when initially recognised or in previous financial statements are reported in profit or loss in the period

➢ Exchange differences arising on monetary items that form part of the reporting entity's net investment in a foreign operation are recognised in other comprehensive income

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QUESTION 4(c)

Q ➢ Share base payment
A

Solution


Share base payment
Period Equity Expenses
2013 (1000 x 0.95 x 0.95 x 0.95) x 500 x 30 x 1/3 = 4,286,875 4,286,875
2014 (1,000 x 0.92 x 0.92 x 0.92) x 500 x 30 x 2/3 = 7,786,880 3,500,005
2015 (1,000 x 0.94 x 0.94 x 0.94) x 500 x 30 x 3/3 = 12,458,760 4,671,880

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QUESTION 5(a)

Q ➢ Rationale for regulatory framework in financial reporting
A

Solution


➧ Investor Protection: The framework ensures that financial information provided by companies is accurate, reliable, and relevant. This protects the interests of investors and stakeholders by enabling them to make informed decisions based on trustworthy information.

➧ Transparency and Accountability: The framework promotes transparency in financial reporting, allowing stakeholders to assess a company's financial health, performance, and risk exposure. It holds companies accountable for their financial activities and prevents fraudulent practices.

➧ Comparability: Standardized reporting frameworks facilitate the comparison of financial statements across different companies, industries, and countries. This enhances the ability to evaluate and benchmark performance, assess investment opportunities, and make informed economic decisions.

➧ Facilitating Capital Allocation: Financial reporting regulations ensure the availability of reliable and consistent information for capital providers. This helps them allocate capital efficiently, directing investments to companies with sound financial positions and growth prospects.

➧ Stability and Confidence in Financial Markets: A robust regulatory framework promotes stability and confidence in financial markets by minimizing information asymmetry, reducing market manipulation, and enhancing overall market integrity. It contributes to the overall functioning and credibility of the financial system.

➧ Legal and Compliance Requirements: Financial reporting frameworks often incorporate legal requirements and compliance obligations. These regulations ensure companies adhere to accounting standards, disclosure requirements, and reporting deadlines, fostering trust and legal compliance within the business environment.

➧ Global Harmonization: Regulatory frameworks aim to achieve harmonization and convergence of accounting standards across countries. This facilitates international trade, investment flows, and financial analysis, reducing complexity and costs associated with multiple reporting frameworks.

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QUESTION 5(b)

Q ➢ Steps followed by IASB in the development and publication of an exposure draft
A

Solution


➧ Identification of the Project: The IASB identifies the need for a new or revised accounting standard based on emerging issues, feedback from stakeholders, or changes in the business environment.

➧ Project Planning: The IASB establishes a project team and defines the scope and objectives of the project. This includes determining the specific issues to be addressed and the timeframe for completion.

➧ Preliminary Research and Analysis: The project team conducts research and analysis on the identified issues. They review existing literature, consult with experts, analyze relevant data, and consider different perspectives to gain a comprehensive understanding of the topic.

➧ Preliminary Discussion Paper (optional): In some cases, the IASB may issue a preliminary discussion paper to seek public input and gather feedback on potential approaches or alternatives before developing the exposure draft. This step is not mandatory for all projects.

➧ Development of the Exposure Draft: Based on the research and analysis, the project team prepares the exposure draft. This involves formulating proposed accounting principles, disclosure requirements, and any accompanying guidance or illustrations. The draft is developed in line with the IASB's conceptual framework and existing accounting standards, ensuring consistency and coherence.

➧ Board Deliberations: The exposure draft is presented to the IASB board members for deliberation. Board meetings are held to discuss the draft, consider alternative views, evaluate the potential impact, and reach consensus on the proposed changes.

➧ Internal and External Review: Before publication, the exposure draft undergoes internal review by the IASB staff and technical experts to ensure technical accuracy, clarity, and consistency. External consultations may also be sought from various stakeholders, including preparers, auditors, users, and regulators, to gather diverse perspectives and identify any potential issues.

➧ Public Exposure: The exposure draft is released for public exposure and comment. It is made available on the IASB's website, along with a comment period allowing interested parties to provide feedback, raise concerns, and propose alternatives. The exposure draft is widely circulated to maximize stakeholder engagement and participation.

➧ Analysis of Feedback: The IASB analyzes the feedback received during the comment period. This involves reviewing and considering each comment, identifying common themes or concerns, and assessing the potential implications of suggested changes.

➧ Redeliberations and Finalization: The IASB holds additional board meetings to redeliberate the proposed changes based on the feedback received. They consider alternative approaches, make revisions as necessary, and finalize the content of the accounting standard.

➧ Publication of the Standard: Once the standard is finalized, it is officially issued and published by the IASB. It includes the revised accounting standard, explanatory material, and the basis for conclusions. The standard becomes part of the International Financial Reporting Standards (IFRS) and is effective from a specified date.

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QUESTION 5(c)

Q ➢ Reasons why Social accounting and reporting has gained prominence financial statements
A

Solution


Social accounting and reporting

Social accounting and reporting refers to the practice of measuring, monitoring, and disclosing an organization's social and environmental performance alongside its financial performance. It involves the systematic tracking and reporting of non-financial indicators related to areas such as social impact, environmental sustainability, ethical practices, and stakeholder engagement.

Social accounting focuses on capturing and evaluating the social and environmental impacts of an organization's activities, products, and services. It goes beyond traditional financial accounting by considering the broader societal implications of business operations and decision-making.

Social reporting involves the communication of social and environmental performance information to stakeholders, including investors, employees, customers, communities, and regulators. It typically includes the publication of reports, statements, or disclosures that provide transparency and accountability regarding a company's sustainability practices, goals, and achievements.

The purpose of social accounting and reporting is to enable organizations to understand and manage their social and environmental impacts, demonstrate responsible business practices, engage with stakeholders, and contribute to sustainable development goals. It helps organizations align their activities with societal values, improve their social and environmental performance, and meet the growing expectations for corporate transparency and responsibility.

Reasons why Social accounting and reporting has gained prominence financial statements

➧ Stakeholder Expectations: There is increasing demand from stakeholders, including investors, customers, employees, and communities, for companies to be transparent and accountable for their social and environmental impacts. Stakeholders want to know how companies are addressing issues such as climate change, human rights, labor practices, diversity, and community engagement.

➧ Sustainable Development Goals (SDGs): The adoption of the United Nations' SDGs has highlighted the need for businesses to contribute to global sustainability objectives. Social accounting and reporting enable companies to measure, monitor, and report on their progress towards achieving these goals, demonstrating their commitment to sustainable development.

➧ Reputation and Brand Enhancement: Social accounting and reporting can enhance a company's reputation and brand value. Consumers are increasingly conscious of ethical and responsible business practices and are more likely to support companies that demonstrate a positive social and environmental impact. Social reporting provides an opportunity for companies to showcase their responsible behavior and differentiate themselves in the market.

➧ Risk Management and Compliance: Social accounting and reporting help companies identify and manage social and environmental risks. By measuring and monitoring their impact on issues such as pollution, resource depletion, labor conditions, and supply chain ethics, companies can proactively address potential risks, comply with regulations, and avoid reputational damage.

➧ Investor Decision Making: Investors are increasingly integrating environmental, social, and governance (ESG) factors into their investment decisions. Social accounting and reporting provide investors with relevant and reliable information to assess a company's sustainability performance and long-term viability. Companies that disclose their ESG performance may attract a broader investor base and potentially access sustainable investment funds.

➧ Regulatory and Reporting Frameworks: Governments and regulatory bodies are introducing or strengthening regulations requiring companies to disclose their social and environmental impacts. Reporting frameworks, such as the Global Reporting Initiative (GRI) and Sustainability Accounting Standards Board (SASB), provide standardized guidelines for companies to report on their non-financial performance, facilitating comparability and transparency.

➧ Internal Performance Management: Social accounting and reporting enable companies to assess their social and environmental performance, set targets, and track progress over time. By integrating social indicators into their performance management systems, companies can align their business strategies with sustainability objectives, improve resource efficiency, and drive innovation.

➧ Improved Stakeholder Engagement: Social accounting and reporting foster dialogue and engagement with stakeholders. By reporting on social and environmental performance, companies invite feedback, input, and collaboration from stakeholders, leading to better relationships, informed decision-making, and the identification of new opportunities for positive impact.

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