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CPA
Advanced Leval
Advanvced Financial Reporting November 2020
Suggested solutions

Advanvced Financial Reporting & Analysis
Revision Kit

QUESTION 1a

Q ➢ Circumstances under which impairment tests on exploration and evaluation of assets are required:
A

Solution


i) Significant expenditures for further exploration and evaluation of mineral resources in the respective regions are not budgeted or..... planned;

ii) If the period in which we had the right to explore the designated area expired

iii) If facts and circumstances indicate that the carrying amount of Asset may exceed its recoverable amount.

iv) From that date, when the technical and economic feasibility of extracting the mineral resource can be demonstrated, the asset will be outside the scope of IFRS 6 and will be reclassified in the financial statements.

v) Exploration and evaluation of mineral resources in the designated area did not lead to the discovery of commercially viable quantities of mineral resources and the Company decided to cease these activities in the designated area.

vi) It is estimated that the carrying value of the Exploration and Evaluation Asset will not be fully recovered through successful development or sale.

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QUESTION 1b

Q ➢ Circumstances that may potentially threaten the professional accountant’s compliance with the fundamental principles of ethics
A

Solution


i) Self-Interest Threat – The risk that financial or other interests, or immediate or close relatives, will improperly influence the judgment or actions of the professional accountant.

ii) Self-Review Threat – The threat of self-review is that a Member does not adequately evaluate the results of previous evaluations or services performed or supervised by the Member or someone at the Member's company, and the Member relies on that service as part of another service.

iii) Advocacy Threat – The threat of a professional accountant promoting the position of a client or employer to the extent that the professional accountant's objectivity is compromised.

iv) Familiarity Threat ─ The threat of professional accountants being overly sympathetic to their interests or overly accepting of their work because of long-term or close relationships with clients or employers.

v) Intimidation Threat – The threat that professional accountants will be prevented from acting objectively as a result of actual or perceived pressures, including attempts to exert undue influence on them..

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QUESTION 1c

Q C) In the context of IAS 36 (Impairment of Assets), outline the necessary accounting treatment of the machine given the above information.
Note: The present value interest factor of an annuity of Sh1 per year at 9% for 3 years is 2.5313. (4 marks)
A

Solution


Carrying amount of the machine ➫ 10,000,000 - 2,500,000 = 7,500,000.

Recoverable amount is the higher of:
(i) Fair value - Cost of sale ➫ 1,000,000 - 100,000 = 900,000

(ii) Value in use ➫ 3,000,000 x 2.5313 = 7,593,900.

⁂Recoverable amount = 7,593,900.

The recoverable amount of the machine is higher than carrying amount therefore, an impairment should not be recognized on the machine.

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QUESTION 1d

Q ➢ Benefits an organization will derive from providing social and environmental reports.
A

Solution


i) Provides information to assess the effectiveness of programs on ecosystem and community development.

ii) Managers seek to direct their attention to activities that require reporting and evaluation.

iii) Grants the right to control and provide information to external groups based on the company's social performance requirements

iv) They provide users with a convenient means of assessing an organization's overall impact on the wider community, allowing users to further assess their organization's performance and impact..

v) They enable organizations to act responsibly towards society and the environment by ensuring that they are held accountable in their reporting.

vi) Provides information that enables management to compare the effectiveness of different social programs.

vii) They enhance the company's image in society

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QUESTION 2a

Q ➢ How public sector entities identify reportable segments According to IPSAS 18, a public sector entity shall:
A

Solution


According to IPSAS 18, a public sector entity shall:

➢ Identify its reportable segments

▪ An entity must present information about these segments on the basis of the entity's individual activities or groups of activities. Disclosing financial information on a case-by-case basis is appropriate to assess the historical performance of these entities in achieving their objectives and to make decisions about attributable resources.

▪ Segments in Public sector entities comprise service segments and geographical segments which are distinguishable components of an entity that engages in providing related output or achieving particular operating objectives in line with the overall mission of the public sector entity of providing services within a particular region.

According to IFRS 8: Operating segments

➢ Operating segments should be reportable if the following criteria are met:

i) Revenue is 10% or more of total revenue of all segments, both internal and external.

ii) Reported gains or losses are at least 10% of all segment gains or losses.

iii) Its assets are 10% or more of the total assets of all segments

iv) If the operating segments total external revenue reported constitutes less than 75% of the entity's revenue, additional operating segments must be identified as reportable segments (even if they do not meet the quantitative thresholds set out above) until at least 75% of the entity's revenue is included in reportable segments..

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QUESTION 2b(i)

Q (i). Gain or loss arising on disposal of R Lamited is be presented on the consolidated statement of profit or loss and other comprehensive incomes. (4 marks).
A

Solution


Depreciation of plats Ltd
Fair value of identifiable asset 400
Carrying value of net asset(100+200) (300)
Fair value increase on plant 100
Depreciation per year 100/5 20


Intergroup sales and unrealized profit.

Inter group sales 150 + 45 = 195.
URP 20% x 150 x 1/2=15.

W3

Goodwill on acquisition of S.Ltd & R.Ltd
S.Ltd R.Ltd
Purchase Consideration 560 600
Add:Fair value of NCI 240 150
800 750
Less:Fair value of identifiable asset (400) (550)
Full:Goodwill 400 200
Imparement loss:30 April 2019(15%) (60)
Administrative expenses 30 April 2020(5%) (20)
Net Goodwill 320 200


W4

Profit attributable to NCI
S.Ltd R.Ltd
Report profit for the period 480 190
Less Depreciation on plant (20)
460 190
NCI share of profit 115 38
Full:Goodwill 400 200
Add: Share of Revaluation
S.Ltd 25% x 80 (20)
135 38


(i)

Gain/Loss on disposal of R.Ltd to the group
Disposal proceeds 375
Add:Fair value of remaining interest(50%) 575
950
Less:Net assets
identifiable assets 675 x 80% (540)
Parent Goodwill 200 x 80% (160)
250

or


Disposal proceeds 375
Add:Fair value of remaining interest(50%) 575
Less:Net asset disposal
identifiable assets 675
Goodwill 200
Less:NCI interest on disposal (175) (700)
250


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QUESTION 2b(ii)

Q Consolidated statement of profit or loss why other co April 2020. rehensive incomes for H Group for the year ended 30 April 2020. (12 marks)
A

Solution


H Group
Consolidated statement of comprehensive income.
For the yearnended 30 April 2020
Sh.Million
Revenue 4,275 + 2,515 + 1,730 x 6/12 - 195 7,460
Cost of sales 2,735 + 1,445 + 1,010 x 6/12 + 15 + 20 - 195 (4,525)
Gross profit 2,935
Gain on disposal of R 250
Expenses
Distribution cost 305 + 195 + 90 x 6/12 (545)
Administrative expenses(370 + 235 + 120 x 6/12 + 20 (685)
Finance cost 45 + 40 + 30 x 6/12 (100)
PBT 1,855
Income tax expense(160 + 120 + 100 x 6/12) (330)
PAT 1,525
Add:Associate share of PAT 380 x 6/12 x 50% 95
OCI
Gain on property Revaluation 150 + (80 x 75%) 210
Total comprehensive income 1,830
attributable to parent 1,657
attributable to NCI(135 + 38) 173
1,830


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QUESTION 3a

Q Advise the management of Madini Ltd. on how to account for the share options in the financial statements for the year ended 31 December 2019. (6 marks)
A

Solution


IFRS 2 required the fair value of equity-settled share-based payment schemes to be recognized as an expense over the vesting period.

Expense to be recognized in the 2019 financial statement.

20,000,000 × 80% X 1/10 = Sh. 1,600,000
Entries
Dr. Expenses / share option expense 1,600,000
Cr. Equity 1,600,000


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QUESTION 3b(i)

Q ➢ Conditions/criteria to classify an asset as being held for sale/disposal group
A

Solution


i) Assets must be available for immediate sale/disposal.

ii) Very likely sale.

iii) Management must commit to a plan to sell the assets.

iv) An active buyer search program should be initiated.

v) Assets must be actively offered for sale at current fair value and at a reasonable price.

vi) The sale must be completed within one year from the date of classification.

vii) Major plan changes are unlikely.

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QUESTION 3b(ii)

Q (ii) Draft the statement of profit or loss for Uzamatt Ltd. for the year ended 31 December 2019, together with the comparatives for 2018, taking the above information into account. (8 marks)
A

Solution


Working 1 2019 2018
Trading less 300 200
Less:of transfer(2,000 - 1,720) 280
Provision for closure cost 390
970 200


Uzamatt Ltd
Statement of Profit or Loss for the year ended 31 Dec 2019
Continuing operations 31 Dec 2019 31 Dec 2018
Revenue 3,900 3,200
Cost of sales (1,300) (1,100)
Gross Profit 2,600 2,100
Operating cost (1,000) (800)
Profit from continuing operations 1,600 1,300
Profit for the year from
Discontinuing operations (970) (200)
630 1,100


Notes
As retail operations appear to meet the criteria of IFRS 5 to be classified as discontinued operations, continuing operations should be separated in the income statement.

The building appears to meet the criteria of IFRS 5 to be classified as held for sale and should therefore be recorded at fair value less costs to sell, with a loss recognized in gain or loss on transfer. This amount of 280 million shillings (2000-1720) is included in losses from discontinued operations.

Other expected closing costs should be deferred as the IAS 37 conditions for recognition of restructuring costs appear to have been achieved.


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QUESTION 4a

Q ➢ Types of joint arrangements as described by IFRS 11 “Joint arrangements”
A

Solution


i) Joint Operation - Parties to an arrangement have rights to certain assets and obligations to certain liabilities. The joint operators will recognize and measure their share of the assets and liabilities of (and recognize related income and expenses) in accordance with the terms of the agreement establishing the joint operation. No adjustments are required during integration.

ii) Joint venture - The parties to the arrangement have joint rights to the net assets of the arrangement. Investments are accounted for using the equity method (such as associates) or in accordance with IFRS 9 'Financial Instruments'. .

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QUESTION 4b(i)

Q (i). The capital reduction account to record the scheme of capital re-organisation.(8 marks)
A

Solution


Dynamic Ltd. Capital reduction amount as at (July 2019) Preference divided arrears

Dynamic Ltd.
Capital reduction amount as at (July 2019)
Preference divided arrears(6% x 2,560 x 4)
614.4
Investment gain
544
Accumulated losses
2,624
Preference dividends 6% x2,560×4x3/4
460.8
Patent
976
Preference shares(5 x 128)
640
Goodwill
896
Ordinary shares(16 x 240)
3,840
Inventory
480
Gain on property transfer 768-640
128
Receivables
374.4
Directors loan 5 x 640
32
Penalty(3 ¾% x 2,400)
80
Revaluation of freehold property
400
6,044.8
6,044.8


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QUESTION 4b(ii)

Q The statement of financial position of Dynamic Ltd, as at 1 July 2019 immediately after effecting the scheme of reorganisation.(8 marks)
A

Solution


Dynamic Ltd.
Capital reduction amount as at I July 2019
Asset Sh. Million
Non currenr assets
Free hold property 2,480
Plant 320
Current Assets
Inventory(2,720 - 480) 2,240
Receivables(3,104 - 374.4) 2,729.6
7,769.6
Equity and liabilities
Ordinary share capital 1,689.6
10% Cumulative Preference shares(128 x 15) 1,920
Non-Current liabilities
6% debentures(Secured)(2,400-768) 1,632
12%debentures(Floating charge) 832
Current liabilities
Accounts payable (1,600-640) 960
Accruals 320
Bank overdraft 416
7,769.6


Working 1

Bank Account account
Sale of Investment
896
12%debentures
832
Balance c/d
416
-
-
2,144
Bal b/d B.O.D
1,248
Debenture Interest
144
Directors Loan
32
Penalty
80
Preference shares
640
2,144


Working 2

6%Debenture
Sh. Million
Free hold property
768
Balance c/d
1,632
2,400
Sh. Million
Bal b/d
2,400
-
2,400


Working 3

Free hold
Sh. Million
Bal b/d
2,720
Revaluation Surplus
400
3,120
Sh. Million
6%Debenture
640
Bal c/d
2,480
3,120


Working 4

Directors Loan
Sh. Million
O.S.C(90% x 640)
576
Cash(5% x 640)
32
Waived(5% x 640
32
640
Sh. Million
Bal b/d
640
-
-
640


Working 5

Directors Loan
Sh. Million
Capital reduction W/off
3,840.0
Bal c/d
1,145.6
-
4,985.6
Sh. Million
Bal b/d
4,800.0
Preference divided 1/4 x 614.4
153.6
Directors loan
32.0
4,985.6


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QUESTION 5a

Q Demonstrate how the bond issue should be accounted for in the books of Dodoma Ltd. for the year ended 31 December 2019. (10 marks)
A

Solution


According to IFRS 8, amortized cost model, financial liabilities are initially recognized at the fair value of the cash received. All expenses directly attributable to the issuance of bonds are offset against the carrying amount of the debt.

Therefore, at initial recognition the bond should be measured at:

Fair value of consideration received 95,000,000
Less:Transaction cost (1,800,000)
Carrying amount 93,200,000


Debt Amortization Schedule
Period Bal b/d Effective Interest Expense Coupon Interest Payment Bal c/d
1 93,200,000 7,101,840 (5,000,000) 95,301,840
2 95,301,840 7,262,000 (5,000,000) 97,563,840
3 97,563,840 7,434,365 (5,000,000) 100,000,000


1,000,000 x 100 = 100,000,000

The correct accounting treatment therefore should be.

Winding up effect ➫ 7,101,840 - 5,000,000 = 2,101,840.

Journal entry.
Dr Interest expense/P&L 2,101,840
Cr 5%Bond 2,101,840


Conclusion
Dr:Interest expense 7,101,840
Cr:Non-Current liability 95,301,840


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QUESTION 5b

Q Evaluate the treatment Kamili Ltd.'s accountant has given the above issues and offer any correction, if and where necessary. Use journal entries. (10 marks)
A

Solution


Defined Plan Asset
Fair value of the plan asset b/d 0
Add:Contribution to the plan 550,000
Return on plan asset 16,500
Less:Benefit paid -
carrying amount 566,500
Fair value c/d 580,000
Acturial gain 13,500
Defined plan liability
Present value obligation b/d -
Add current service cost 600,000
Interest expense 18,000
Less benefit paid -
carrying amount 618,000
Present value bal c/d 620,000
Acturial loss 2,000
Net acturial gain
13,500 - 2,000 = 11,500


Journal entries
Dr Cr
Net interest expense 18,000
Pension liability 18,000
Current service cost 600,000
Pension liability 600,000
Net pension liability 11,500
Acturial gain 11,500
To correct employers contribution treatment
Dr Cr
Net pension asset 550,000
Pension contribution expense 550,000


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