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CPA
Advanced Leval
Advanvced Financial Reporting November 2019
Suggested solutions

Advanvced Financial Reporting & Analysis
Revision Kit

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
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
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
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
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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