ADVANCED FINANCIAL REPORTING & ANALYSIS NOVEMBER 2018 - CPA SOLUTION|REVISION KITS|KASNEB

QUESTION 1a

Q ➢ Limitations of Financial Reporting in the context of reporting on the social and environmental impacts of corporate activity

A

Solution

(i) Issues with measurement – It is impossible to predict many social and environmental repercussions with adequate accuracy.

(ii) Presumption of a business entity – A transaction is disregarded if it has no impact on the business.

(iii) Financial accounting focuses on the information requirements of capital providers and those who decide how to allocate resources.

(iv) Accounting has a limited definition and corporations are thought to be only answerable to their shareholders.

(v) Financial reporting mostly emphasizes the economic bottom line and pays insufficient attention to the social and environmental bottom lines.

(vi) The reporting entity may ignore the bad features and focus entirely on the good aspects. Users of the social and environmental reports may be misled by this bias.

(vii) It is challenging to compare disclosures of social and environmental information since there is no set format for doing so.

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QUESTION 1b

Q ➢ With regard to IPSAS 4 “The effects of changes in Foreign Exchange Rates” explain the accounting treatment of explain the differences arising on translation of both monetary and non monetary items in the financial statements of a public sector entity.

A

Solution

(i) The statement of changes in net assets (surplus or deficit) for the period includes any exchange difference (gain/loss) resulting from the translation of monetary items.

(ii) Any exchange difference(gain/loss) arising in the translation of non-monetary items is recognised in the statement of net assets/Accumulated fund

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QUESTION 1c

Q Extracts from the financial statements of G Limited for each of the years ended 31 December 2015, 2016 and 2017 to record the above transactions

A

Solution

Share options
Period	Equity	Expenses
2015	(200 - 20 - 40 ) x 500 x 15 x 1 / 3 = 350,000	350,000
2016	(200 - 20 - 15 - 20) x 500 x 15 x 2/3 = 725,000	375,000
2017	(200 - 20 - 15 - 25 ) x 500 x 15 x 3 / 3 = 1,050,000	325,000

Income statement extract
	2015	2016	2017
Expenses(staff cost)	350,000	375,000	325,000

Statement of financial position extract
	2015	2016	2017
Equity reserve	350,000	725,000	1,050,000

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QUESTION 1d

Q ➢ Hedge accounting effectiveness requirements under IFRS 9 “Financial Instruments”

A

Solution

Hedge effectiveness is defined as the extent to which changes in the fair value or cash flows of the hedging instrument offset changes in the fair value or cash flows of the hedged item.

(i) Economic Relationship - The hedged item and the hedging instrument must have an economic connection, sort of in opposing directions. For instance, when the cost of a hedged item decreases, the cost of the hedging instrument must increase by the same percentage. i.e., the credit rating of the hedging instrument may significantly decline if the price of the hedged item decreases.

(ii) Credit Risk - In order to prevent the level of offset from becoming unpredictable or inconsistent, the impact of credit risk must not outweigh the value fluctuations related to the hedged risk.

(iii) Hedging Ratio - calculation comparing the size of the entire position to the value of a hedged position. The value of purchased or sold futures contracts is compared to the value of the cash commodity being hedged to determine the hedge ratio.

(iv) Rebalancing - To keep a hedge ratio that satisfies the standards for hedge effectiveness, modifications are made to the quantities of the hedged item or the hedging instrument of an existing hedging relationship.

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QUESTION 2

Q ➢ Realization account

➢ Preference shareholders sundry members account.

➢ Ordinary shareholders sundry members account.

➢ Journal entries in the books of S Limited to record the transfer of assets and liabilities (Ignore narrations)

➢ Opening statement of financial position of S Limited as at I October 2018.

A

Solution

W1

Determining purchase considaration
	Sh."000"	Sh."000"
Dividend in arrears = B ltd 7.5% x 10,000 x 3	2,250
H ltd 7.5% x 24,000 x 2	3,600
OSC	5,850 x 20%	1,170
Ordinary shares(3,400 x 5)		17,000
To bond holders(20,000 + 15,000)		35,000
To Ordinary shareholders(4,600 x 2.5)		11,500
Liquidation expenses cash(8,000 + 5,000)		13,000
		77,670

Realization account

		Sh."000"
Asset @ NPV
PPE(16,500 + 12,000)		28,500
Current assets(52,500 + 30,000)		82,500
Intangible assets		8,400
Liquidation expenses		13,000
Dividend in arrears		5,850
OSC		20,200
		158,450

		Sh."000"
Payables(37,200 + 18,400)		55,600
Bank overdraft(2,000 + 1500)		3,500
Purchase considaration		77,670
preference shares account		21,680
		158,450

➢ Preference shareholders sundry members account.

		Sh."000"
Consideration
Ordinary shares(1,170 + 17,000)		18,170
Realization account(bal fig)		21,680
		39,850

		Sh."000"
Balance b/d		34,000
Dividend in arrears		5,850
		39,850

➢ Ordinary shareholders sundry members account.

		Sh."000"
Accumulated losses		57,700
Consideration		11,500
		69,200

		Sh."000"
Balance b/d		46,000
Share premium		3,000
Realization account(bal fig)		20,200
		69,200

➢ Journal entries in the books of S Limited to record the transfer of assets and liabilities (Ignore narrations)

Journal Entries
	Dr Sh."000"	Cr Sh."000"
Asset taken over
PPE(12,500 + 9,500)	22,000
Current assets(58,000 + 38,600)	96,600
Business Purchase account		118,600
Liquidation expenses	13,000
Cash account		13,000
Liabilities taken over
Business purchase account	59,100
Payables		55,600
Bank overdraft		3,500
Business purchase account	77,670
Vendors account		77,670
Goodwill(77,670 - 118,600 - 13,000 - 59,100)	5,170
Business purchase account		5,170

➢ Opening statement of financial position of S Limited as at 1 October 2018.

S. Ltd
statement of financial position as at I October 2018
Assets	Sh."000"
Non-current assets
PPE	22,000
Preliminary expenses	13,000
Goodwill	5,170
Current assets
Current assets	96,600
Cash	38,500
	175,270
Equity and liabilities
OSC	116,170
Current liabilities
Trade payables	55,600
Bank overdraft	3,500
	175,270

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QUESTION 3a

Q ➢ Areas where the SMEs Standards differ s from the IFRSs and IASs adopted by public limited companies.

A

Solution

(i) Costs associated with borrowing are expensed on the income statement rather than capitalized.

(ii) There is no model for revaluing intangible assets.

(iii) Costs associated with research and development are continually expensed.

(iv) The exchange difference (gain/loss) from the sale of a foreign subsidiary is included in other comprehensive income, which is the statement of changes in equity.

(v) Only the proportionate technique may be used to calculate non-controlling interest; the fair value method is prohibited.

(vi) Over its useful life, goodwill is amortized. In the absence of an economic or usable life, management chooses the best estimate, which cannot exceed ten years.

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QUESTION 3b

Q ➢ Consolidated statement of financial position of the Acacia group as at 30 June 201 8.

A

Solution

W1

Intergroup sales and urealized profit

600 x 1 / 4 = 150

URP = 25 / 125 x 600 x 1 / 4 = 30

W2

Intergroup sales of PPE

Gain on disposal 200

Overcharged depreciation = 200 / 10 = 20

W3

Determining purchase consideration of Cider Ltd

60% x 1,500 = 900

600 x 2.5 = 1,500 :

-OSC 600 x 1 = 600

-Share Premium = 600 x 1.5 = 900

NCI in Cider = 40% x 1,500 x 3.5 = 2,100

W4

Revaluation loss on plant

Depreciation = 150 / 3 = 50

W5

PPE

Balance b/d(6,000 + 5,150 + 2,775)	13,925
Add: -Overcharged dep on disposal	20
-:Overcharged dep on revaluation	50
Less:-Gain on disposal of plant	(200)
-Revaluation loss	(150)
Balance c/d	13,645

W6

NCI
Baobab Ltd = 40%(3,000 + 200 + 1,650 - 30 + 20 +50)	1,956
Cider Ltd = 40%(1,500 + 168 + 987)	1,062
	3,018

W7

Retained earnings
Acacia Ltd	1,200
Gain on disposal of plant	(200)
	1,000
Add: Share of investee post acquisition R.E
Baobab Ltd 60%(1,650 - 810 + 20 + 50 - 30)	528
Cider Ltd 60%(987 - 432)	333
	1,861

Acacia Group
Consolidated statement of financial position as at 30 June 2018
Asset	Sh."million"
Non- current asset
PPE	13,645
Investment	700
Goodwill	504
Current assets
Inventories(1,520 + 645 + 600 - 30)	2,735
Account receivable(735 + 300 + 315 - 105)	1,245
Cash and bank balance(178 + 450 + 375 + 105)	1,108
	19,937
Equity and liabilities
OSC(7,550 + 600)	8,150
Share premium(67 + 900)	967
Retained profit	1,861
NCI	3,018
Non-Current liabilities
8% debenture(975 + 1,020 + 900)	2,895
Current liabilities
Accounts payables(1,050 + 690 + 420)	2,160
Current tax(500 + 200)	700
Dividend payables 141 +(45 x 40% + 45 x 60%)	186
	19,937

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QUESTION 4

Q ➢ Consolidated statement of cash flows for the Bakoki Ltd. group for the vear ended 3 1 July 2018, in accordance with the requirements of International Accounting Standard (IAS) 7 "Statement of Cash Flows".

A

Solution

W1

Finance lease obligation

Lease fees paid		1,543
Bal c/d		1,897
		3,440

Balance b/d(1,340 + 400)		1,740
Acquisition		1,700
		3,440

W2

Investment in associate

Bal c/d		2,000
P & L		990
		2,990

Tax of associate		355
Dvidend received		435
Bal c/d		2,200
		2,990

W3

Tax account

Tax paid		500
Bal c/d:	- Deffered tax	60
	-Current	924
		1,484

Balance b/d	-deferred	26
	-Current	434
		34
P & L		990
		1,484

W4

NCI

Dividend paid		96
Bal c/d		230
		326

Balance b/d		0
P & L		200
Nyange Ltd(25% x 504)		126
		326

W5

Consideration in acquisition of Nyange Ltd
	Sh."million"
Old shares(44 X 10)	440
Share premium(44 x 2.5)	110
Total issues of shares	550
Cash	28
Total	578

Goodwill on acquisition = 578 - (504 x 75%) = 200

NCI = 504 x 25% = 126

Bakoki Group
Consolidated statement of cashflows for the year ended 31 July 2018
OPERATING ACTIVITIES	Sh."million"
Profit before tax	4,015
Adjustments
Depreciation	650
Finance cost	300
Gain on disposal of PPE	(300)
Income from associate profit	(990)
Income from investment	(80)
Working capital changes
Inventories(2,000 + 64) - 3,930	(1,866)
receivables(2,550 + 56) - 3,700	(1,094)
Payables(960 + 136) - 1,600	504
Gross operating cashflow	1,139
Less:Tax paid	(500)
Interest paid(60 + 300) - 80	(280)
Net operating cash flows	359
INVESTING ACTIVITIES
Proceed on disposal of tangible assets(1,000 - 200) + 300	1,100
Investment income	80
Dividend received (associate)	435
Acquisition of assets:-tangible asset(4,200 - 1,700 - 330)	(2,170)
subsidiary(224-28)	196
Net investment cash flows	(359)
FINANCING ACTIVITIES
Issue of shares- ordinary(4,000 + 440) - 780	3,440
Share premium(4,190 + 110) - 5,766	1,466
Issues of debenture	2,923
Dividend paid-Holding company(4,600 + 2,470) - 6,270	(800)
NCI	(96)
Lease fees paid	(1,543)
Net financing cash flows	5,390
Cash and cash equivalent(359-359+5,390)	5,390
Cash bal b/d	3,640
Cash bal c/f	9,030

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QUESTION 5(a)

Q ➢ Usefulness of related party disclosures when analyzing the financial position and financial performance of a business organization

A

Solution

Related party disclosures are a critical component of a company’s financial statements. They provide transparency on how its financial position and financial performance may be affected by transactions with related parties, which may or may not be conducted on an arm's-length basis.

(i) Intercompany sales and other transactions may have an impact on a company's performance, which aids in a better understanding of the entity's performance.

(ii) The performance and position of the company's finances could be affected by the valuation of related party transactions (receivables and payables).

(iii) It is useful in subsequent events which are related party transactions guarantees issued for a subsidiary company

(iv) The provided financial information might not accurately reflect actual transactions when transactions are not conducted at arm's length.

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QUESTION 5(b)

Q ➢ Significance of the EPS figure in the analysis of the performance of companies

A

Solution

(i) It serves as a metric for profitability.

(ii) It provides a comparison of the relative earnings per share with the EPS of other companies

(iii) It is a crucial instrument for determining a company's value.

(iv) . It enables one to figure out how much money the business made on your behalf.

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QUESTION 5c

Q ➢ The basic earnings per share (EPS) for the vears ended 31 Julv 2017 and 31 Julv 2018

➢ The comparative EPS for 2017 to be reported in the 2018 financial statements. The EPS figure reported in 2017 was Sh.O.525.

A

Solution

Basic EPS

=

PATOSH

WANOS

PATOSH
	2017	2018
PAT	240	325
Less Preference dividend 4% x 100	(4)	(4)
	236	321

WANOS
Date	Share transaction	Shares	Weight	Weight shares
1/8/2017	Balance b/d	400	1	400
1/11/2017	Issue of market price	100	9 / 12	75
1/2/2018	Rights issue
	At full price = 150 x 1.5 / 2	112.5	6/12	56.25
		612.5		531.25
	Bonus = (150 - 112.5)	37.5	(37.5 x 531.25) / 612.5 =	32.5
		650		563.75
30/6/2018	Bonus issue(135 / 0.5)	270	(270 x 563.75) / 650 =	234
		920		797.75

Basic EPS 2017

=

236

400

=

0.59

Basic EPS 2018

=

321

797.75

=

0.4

➢ The comparative EPS for 2017 to be reported in the 2018 financial statements. The EPS figure reported in 2017 was Sh.O.525.

Outstanding shares	400
Adjustment for share at no consideration
Rights issue bonus 0.5 / 2 x 150	37.5
Bonus	270
	707.5

EPS

=

236

707.5

=

0.33

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CPA
Advanced Leval
Advanvced Financial Reporting November 2018
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Comments on CPA past papers with answers:

Advanced Public Finance

Advanced Financial Management

Advanced Auditing & Assurance

Advanced Management Accounting

Advanced taxation

Comments on:

CPA
Advanced Leval
Advanvced Financial Reporting November 2018
Suggested solutions