ADVANCED FINANCIAL REPORTING & ANALYSIS NOVEMBER 2019 - CPA SOLUTION|REVISION KITS|KASNEB

QUESTION 1a

Q ➢ Steps followed in the process of setting International financial Reporting Standards

A

Solution

(i) Identifying and reviewing all issues with the subject

(ii) Studying national and regional accounting requirements and practices

(iii) Consultation with the member bodies standard setting bodies and other interested groups

(iv) Public exposure of the draft international financial reporting Standard (IFRS)

(v) Evaluation by the steering committee and the board on the comments received on the exposure drafts

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QUESTION 1b(i)

Q ➢ Reasons why reporting entities would prefer to adopt IFRSs

A

Solution

(i) Tax authorities will find it easier to calculate the tax liability of investors, including multinational corporations that derive income from foreign sources.

(ii) Multinational conglumarates will have better access to foreign investor funds.

(iii) It would enable many companies to comply with reporting requirements of overseas stock exchanges

(iv) There would be easier appraisals of foreign enterprises for takeover and mergers

(v) Governments in developing countries will save time and money by adopting IAS and IFRS

(vi) Individual investors and companies want to be able to compare the financial results of different companies internationally and nationally when making investment decisions.

(vii) Large international accounting firms could benefit from this, as accounting and auditing would be much easier if similar accounting practices existed around the world.

(viii) Regional economic blocs generally facilitate trade within a specific geographic area. This will benefit from common accounting practices in the region.

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QUESTION 1b(ii)

Q ➢ Challenges that reporting entities are likely to encounter while implementing IFRSs

A

Solution

(i) Lack of strong accountancy bodies which would press for better standards and greater harmonization

(ii) Lack of skilled manpower or personnel

(iii) Cultural differences that result in different accounting systems from country to country

(iv) Unwillingness of some countries to accept another country’s accounting standards

(v) Needs of developing countries: Most developing countries are lagging behind in the standard setting process and they need to develop basic standards and principles which are already under threat in most developed countries.

(vi) Different legal systems - this hinders the development of certain accounting practices and limits the options available.

(vii) The purpose of financial reporting varies: in some countries the purpose is simply tax assessment, while in others the purpose is investor decision-making.

(viii) Different user groups: Countries have different ideas about who the relevant user groups are and how important each is.

(ix) Standard interpretation is complex and very tedious work
(x)Some standards are very broad and difficult to grasp

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QUESTION 1c

Q ➢ Objectives of Integrated Reporting (IR)

A

Solution

(i) Support integrated thinking, decision-making and action focused on short, medium and long-term value creation.

(ii) Strengthen accountability and governance at scale in capitals. (financial, manufacturing, knowledge, human, social, relational and the stock of renewable and non-renewable resources ) and promote understanding of their interdependence.

(iii) Promote a more consistent and effective approach to financial reporting, using different reporting standards and communicating the various factors that have a significant impact on an organization's ability to create long-term value.

(iv) Improve the quality of information available to financial capital providers to enable more efficient and productive capital allocation.

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QUESTION 2a

Q ➢ Explain the treatment of exchange differences arising on translation distinguishing between the treatment in individual and consolidated financial statements Individual Entity Stage:

A

Solution

➢ According to IAS 21, translation differences (gains/losses) resulting from the recalculation of monetary assets and liabilities must be recognized in profit or loss in the period in which they arise.

➢ Non-monetary assets measured at fair value must be translated at the exchange rate on the day the fair value is determined.

➢ Non-monetary assets are not retranslated, but non-monetary assets measured at historical cost are translated and carried at the historical exchange rate at the date of initial conversion.

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QUESTION 2b(i)

Q ➢ Consolidated statement of financial position for the H group as at 30 September 2019 in accordance with International Financial Reporting Standards. Round your figures to the nearest Ksh."million"

A

Solution

H Group
Consolidated statement of financial position as at 30 September 2019
	Ksh."million"
Asset
Non-current assets
Property, Plant and Equity	8,722
Goodwill	114
Current assets
Inventories(1,566 + 2,605/5)	2,087
Trade Receivables(1,401 + 400)	1,801
Cash and cash equivalent (1,238 + 280)	1,518
	14,242
Equity and liabilities
Ordinary share capital	2,875
Share premium	1,437
Revaluation surplus	22
Retained earnings	3,468
Non-controlling interest	845
Exchange reserve	269
Non-current liabilities
10% loan note	704
Deferred tax 569 + 320	889
Current liabilities
Trade payables(2,498 + 248)	2,746
Current tax(871 + 116)	987
	14,242

End

W1

Goodwill on acquisition
Purchase consideration(838 x 6)		5,028
Fair value of NCI @acquisition		4,550
Less:Fair value of net assets @acquisition
O.S.C	3,640
Share premium	1,820
Retained earnings	3,100
Revaluation surplus(land)	448	(9,008)
Goodwill		570

Goodwill as 1/10/2018 in Ksh.570/6 = 95
Goodwill as at 30/12/2019 is 570/5 = 114
Exchange gain = 19

W2

Net assets in B ltd in Krones
	Acquisition date	Reporting date	Post acquisition change
	Kr."million"	Kr."million"	Kr."million"
Share capital	3,640	3,640	-
Share premium	1,820	1,820	-
Retained earnings	3,100	3,640	540
Add:exchange gain on loan note	-	40	40
Add fair value adjustment land(bal fig)	448	448	-
Fair value of identifiable assets	9,008	9,588	580

W3

10% loan note to B ltd
	Rate	Kr."million"
Ksh 40 minus from Investment and also from B ltd
As at 1/10/2018	40 x 6	240
As at 30/9/2019	40 x 5	200
		40
Exchange gain in Ksh	40/5	8

W4

Property,plant and equipment	Ksh."million"
H ltd	7,007
B ltd	1,565
Add:Fair value uplift(448/5)	90
Add:Gain on land exchange(140 - 100)	40
Less:depreciation on overseas property(140/35 x 6/12)	(2)
Revaluation as at 30 September 2019(800/5) - (140 - 2)	22
	8,722

W5

Retranslation of assets of B ltd
	Kr."million"	Exchange rate	Ksh."million"
Operating net assets-opening rate	9,008	6	1,501
Add Retained earnings-average rate	580	5.8	100
Exchange gain(Bal figure)			317
Fair values of identifiable net assets	9,588	5	1,917

W6

Allocation of exchange gain
	Ksh."million"
To H ltd(80% x 317)	254
To NCI(20% x 317)	63
	317

W7

NCI
	Ksh."million"
NCI at acquisition(4,550/6)	758
Add NCI,s share of post acquisition net profit(20% x 100)	20
Add NCI,s share of of exchange gain-Net assets	63
-Goodwill	4
NCI at reporting date	845

W8

Retained earnings
	Ksh."million"
H ltd	3,350
Add group share of post acquisition-B ltd(80% x 100)	80
Add gain of land transfer	40
Less:Depreciation on oversees property	(2)
Group retained earnings	3,468

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QUESTION 3a

Q ➢ Factors that encourage reporting entities to disclose social and environmental information

A

Solution

(i) Company and stakeholder’s relationship. - The report will create a socially and environmentally responsible company in the eyes of various stakeholders, thereby improving relations with customers and other stakeholders.

(ii) Public Recognition - Companies providing this information are recognized with awards such as FIRE (Financial Reporting) and COYA (Company of the Year Award) for their strategic advocacy.

(iii) Current trends in many businesses; - Many governments and other groups are also pushing businesses to be socially and environmentally responsible, so providing this information can be in line with current trends and compliant with relevant legislation. (iv) Legal Requirements

(v) Pressure of society and economic factors

(vi) Expectations from the society

(vii) Reputation

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QUESTION 3b(i)

Q ➢ Imparement loss to be recorgnized for the market using the cost restoration approach.

A

Solution

Imparement Under IPSAS
	"Million"
Cost of the asset	159
Depreciation(150/40 X 10)	(37.5)
Carrying amount	112.5	(A)
Replacement cost	300
Depreciation(300/40 x 10)	(75)
Depreciation cost	225
Less:Restoration cost	(106.5)
Recoverable amount	118.5	(B)
Impairement gain (A - B)	6

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QUESTION 3b(ii)

Q ➢ Imparement loss to be recorgnized for the software using the depreciated replacement cost approach.

A

Solution

Imparement Under IPSAS
	"Million"
Cost of the software	350
Amortization(350/8 X 5)	(218.78)
Carrying amount	113.25	(A)
Replacement cost	150
Amortization(150/8 x 5)	(93.75)
Recoverable amount	56.25	(B)
Impairement loss (A - B)	57

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QUESTION 3c

Q ➢ The amount to be recorgnized in the income statement as an expense for each of the 5 years and the liability to be recorgnized in the statement of financial position as at 31 December for each year.

A

Solution

Year	Equity Sh."000"		Expenses Sh." 000"
2014	(500 - 35 - 60)1000 x 72 x 1/3	9,720		9,720
2015	(500 - 35 - 40 - 25)1000 x 72 x 2/3	19,200	19,200 - 9,720	9,480
2016	(500 - 35 - 40 - 22)1000 x 72 x 3/3	29,016	29,016 - 19,200	9,816
2017	140 x 1000 x 107	14,980		14,980
2018	113 x 1000 x 25	14,125		14,125

	2014	2015	2016	2017	2018
Expenses	9,720	9,480	9,816	14,980	14,125
Equity	9,720	19,200	29,016
Liability				14,980	14,125

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QUESTION 4a

Q ➢ Consolidated statement of cash flows for the Makongeni Group for the year ended 31 October 2019 using the indirect method in accordance with International Accounting Standard (IAS) 7 "Statement of Cash Flows".

A

Solution

Makongeni Group
Consolidated statement of cash flows for the year ended 31 October 2019
Operating activities cash flows	Sh."million"
Profit before tax	4,460
Adjustments
Depreciation	1,540
Imparement of goodwill	320
finance cost	140
Gain on disposal- PPE(1,100 - 1000)	(100)
Subsidury	(400)
Associate profit	(460)
Working capital changes
Inventory (1,740 + 600 + 660) - 1,880	(200)
Receivables(1,320 + 960 - 480) - 1,560	240
Payables(2,900 + 880 - 320) - 3,200	(260)
Gross operating cashflow	5,280
Less:tax paid	(720)
Interest paid	(140)
Net operating cashflows	4,420	A
Investing activities cashflows
proceeds of disposal of PPE	1,100
Subsidury(3,400 - 200)	3,200
Dividend received(associate)	340
Acquisition of asset: PPE	(3,200)
Subsidury(6,000-320)	(5,680)
Net investing cashflows	(4,240)	B
Financing activities cash flows
Loan borrowed (2,000 - 1,200)	800
Dividend paid:Holding (4,340 + 3,180 - 7,020)	(500)
NCI	(200)
Net financing cashflows	100	C
Cash and cash equivalent (A + B + C )	280
Cash balance b/d(200 + 360)	560
Cash balance c/d(300 + 540)	840

W1

PPE account

bal b/d

6,500

Subsidury

2,900

Subsidury(Razak)

5,120

Disposal

1,000

Revaluation

800

Depreciation

1,540

Acquisition

3,200

Bal c/d

10,180

15,620

W2

Goodwill

bal b/d

7,400

Disposal(Salama)

760

Razak

1,400

Imparement

320

Revaluation

800

Balance c/d

8,520

9,600

W3

Goodwill on acquisition of subsidury

Precise considaration

6,000

NCI

1,360

Less: net asset acquired

(5,960)

Goodwill

1,400

NCI goodwill = 1,360 - (20% X 5,960) = 168

W4
Disposal of Salama

Goodwill = holding = 2,400 - (60% x 2,920) = 648

NCI = 1,280 - (40% x 2,920) = 112

Full goodwill = 760

W5

Determining disposal proceed of Salama

Disposal proceed(Balancing figure)

3,400

Less:net asset disposed (3,920 x 60%)

(2,352)

Unimpaired goodwill

648

Gain on disposal

400

W6
Investment in associate

(2,160 + 460 + 200) - 2,480 = 340

W7

Tax account

Tax paid

720

Balance b/d(420 + 1,440)

1,860

Balance c/d(600 + 1,600)

2,200

P&L

900

Razak

160

2,920

W8

NCI Goodwill

Salama(3,920 x 40%)

1,568

Balance b/d

1,280

Goodwill

112

Razaki(20% x 5,960)

1,192

Bal c/d

1,240

P&L

480

Dividend paid

200

Goodwill

168

3,120

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QUESTION 5a(i)

Q ➢ The basic EPS 2018

A

Solution

Basic EPS

=

PATOSH

WANOS

PATOSH	2018
	Sh."000"
P.B.I.T	7,012
Less: Interest	(987)
P.B.T	6,025
Less: Tax expense	(1,264)
P.A.T	4,761
Less:Preference dividend	(60)
Less:NCI	(160)
	4,541

WANOS
Date	Share transaction	Number of shares	Weight	Weighted shares
1/10/2017	Balance b/d	3,000,000	12/12	3,000,000
1/1/2018	Issue of shares	500,000	9/12	375,000
		3,500,000		3,375,000

Basic EPS

=

4,541

3,375

=

1.35

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QUESTION 5a(ii)

Q ➢ The basic EPS 2019

A

Solution

Basic EPS

=

PATOSH

WANOS

PATOSH	2019
	Sh."000"
P.B.I.T	8,830
Less: Interest	(1,045)
P.B.T	7,785
Less: Tax expense	(1,718)
P.A.T	6,067
Less:Preference dividend	(60)
Less:NCI	(180)
	5,827

1/10/2019	Balance b/d	3,500,000	12/12	3,500,000
1/4/2019	Rights issue at full price 2/10 x 3,500,000 x 42.5/48	619,792	6/12	309,896
		4,119,792		3,809,896
	Bonus = (700,000-619,792)	80,208		74,175
		4,200,000		3,884,071

Basic EPS

=

5,827

3,884.07

=

1.5

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QUESTION 5b(i)

Q ➢ Mafuta Ltd: Temporary difference account

A

Solution

Item	Carrying amount	Tax base	Temporary difference
	Sh."million"	Sh."million"	Sh."million"
Available for sale	80	88	(8)
Financial asset at fair value	40	48	(8)
Inventory	3,120	3,200	(80)
Receivables	2,000	2,000 + 80 -160 = 1,920	80
Trade and other payables	(3,600)	(3,640)	40
PPE	(4,800)	(4,000)	800
Intangible assets	240	0	240
Total			1,064
Deferred tax 30% x 1,064 = 319.2

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QUESTION 5b(ii)

Q ➢ Journal entries to record changes in the deffered tax liability

A

Solution

Deffered tax account
Dr	Cr
Available for sale(30% x 8) 2.4	Balance b/d 400
P&L 138.4	PPE(200 x 30%) 60
Balance c/d 319.2
460	460

Journal entries
	Dr	Cr
Deferred tax A/C	138.4
P&L A/C		138.4
PPE	60
Deffered tax		60
Deffered tax	2.4
AFS		2.4

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CPA
Advanced Leval
Advanvced Financial Reporting November 2019
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Advanced Public Finance

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Advanced Auditing & Assurance

Advanced Management Accounting

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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 2019
Suggested solutions