KASNEB Advanced Financial Reporting and Analysis - Question 5a

The following financial information as at 31 December 2024 relates to Uwezo Bank Limited: Sh.“million”Interest on loans and advances to customers 1,550Inte... [Click to view full question and step-by-step solution]

April 2025

1a

Other Reports and Emerging Issues in Financial Reporting

The Conceptual Framework for Financial Reporting states that financial information is only useful if it is relevant and a faithful representation of an entity’s transactions.

Required:

With reference to the above statement, discuss the TWO fundamental qualitative characteristics of useful financial information mentioned, citing how they are applied while preparing financial reports.

1b

Accounting for Assets and Liabilities

With regards to International Accounting Standard (IAS) 19 “Employee Benefits”, explain the accounting treatment of the defined benefit plan asset (pension surplus) in the financial statements of an employer (contributor).

1c

The International Financial Reporting Standard (IFRS) Practice Statement: Management Commentary provides a framework for the preparation and presentation of management commentary on a set of financial statements.

However, it is not mandatory for entities to produce a management commentary.

Required:

In light of the above statement, discuss FOUR purposes of management commentary.

1d

Preparation of Financial Statements for other entities

In view of the International Financial Reporting Standard (IFRS) 5 “Non-current Assets Held for Sale and Discontinued Operations”, analyse the presentation and disclosure requirements for discontinued operations.

2

Preparation of Financial Statements for Interests in Other entities

Rock Limited, a public limited entity acquired 80% equity shareholding in Paper Limited, another public limited entity on 1 April 2024.

The acquisition consideration comprised of an immediate cash payment of Sh.2,400 million made on 1 April 2024 and a further cash payment of Sh.1,331 million deferred until 1 April 2026. No accounting entries have been made in respect of the deferred cash consideration. Rock Limited has a cost of capital of 10%.

On 1 October 2024, Rock Limited together with another entity entered into a joint arrangement to jointly control Scissors Limited, a public limited entity. Effectively, Rock Limited purchased 50% of the equity shares of Scissors Limited for an immediate cash consideration of Sh.1,500 million. The following financial statements relate to the group of companies:

Statements of profit or loss for the year ended 31 March 2025:

	Rock Limited	Paper Limited	Scissors Limited
	Sh.“million”	Sh.“million”	Sh.“million”
Revenue	8,520	5,180	6,240
Cost of sales	(5,510)	(3,440)	(4,220)
Gross profit	3,010	1,740	2,020
Distribution costs	(830)	(470)	(520)
Administrative expenses	(860)	(520)	(580)
Profit before tax	1,320	750	920
Income tax expense	(450)	(230)	(280)
Profit for the year	870	520	640

Statement of financial position as at 31 March 2025:

	Rock Limited	Paper Limited	Scissors Limited
	Sh.“million”	Sh.“million”	Sh.“million”
Assets:
Non-current assets:
Property, plant and equipment	4,260	3,630	3,190
Investments: Paper Limited	2,400	-	-
Investments: Scissors Limited	1,500	-	-
	8,160	3,630	3,190
Current assets	3,720	2,270	1,610
Total assets	11,880	5,900	4,800
Equity and liabilities:
Equity:
Ordinary Sh.10 share capital	5,000	2,000	2,000
Share premium	500	200	-
Retained earnings	3,380	1,800	1,200
	8,880	4,000	3,200
Current liabilities	3,600	1,900	1,600
Total equity and liabilities	11,880	5,900	4,800

Additional information:

At the date of acquisition, the fair value of Paper Limited’s net assets approximated their carrying amount, with the exception of some office equipment whose carrying amount was Sh.560 million below its fair value. At this date, the office equipment had a remaining economic useful life of eight (8) years. Depreciation on office equipment is an administrative cost. No fair value adjustments were necessary with respect to acquisition of Scissors Limited.
Rock Limited measures the non-controlling interests in subsidiaries at fair value. The fair value of the non controlling interest of Paper Limited at the date of acquisition was Sh.860 million.
During the year ended 31 March 2025, Paper Limited sold goods to Rock Limited for Sh.500 million at a mark-up on cost of 25%. Half (½) of these goods were still held by Rock Limited at 31 March 2025 and the balance payable was still outstanding.
Impairment review performed on 31 March 2025 revealed that both goodwill on acquisition of Paper Limited and interest in Scissors Limited were unimpaired.
Incomes and expenses of the group of companies are deemed to have accrued evenly throughout the year.

Required:

(a) Consolidated statement of profit or loss for the year ended 31 March 2025.

(b) Consolidated statement of financial position as at 31 March 2025.

3a

Public Sector Accounting Standards

International Public Sector Accounting Standard (IPSAS) 35 “Consolidated Financial Statements” states: “An entity controls another entity when it is exposed, or has rights to variable benefits from its involvement with the other entity and has the ability to affect the nature or amount of those benefits through its power over the other entity”.

Required:

With reference to IPSAS 35 “Consolidated Financial Statements”, describe the “power over the other entity”.

3b

Analysing Financial Statements

The following condensed consolidated financial statements for the year ended 31 December 2024 relate to Elektra Limited and its investment companies. Elektra Group deals in a wide range of electronic products.

Elektra Group Condensed consolidated statement of profit or loss for the year ended 31 December 2024:

	Sh.“million”
Revenue	640,000
Cost of sales	(250,000)
Gross profit	390,000
Operating expenses	(220,000)
Profit from operations	170,000
Net finance expenses	(6,000)
Profit before tax	164,000
Income tax expense	(46,000)
Profit for the year	118,000
Attributable to the owners of the parent	86,000
Attributable to the non-controlling interests	32,000
	118,000

Elektra Group Condensed consolidated statement of financial position as at 31 December 2024:

	Sh.“million”
Assets:
Non-current assets	960,000
Current assets	260,000
Total assets	1,220,000
Equity and liabilities:
Ordinary share capital (Sh.10 par value)	300,000
Share premium	100,000
Retained earnings	333,000
Equity attributable to owners of parent	733,000
Equity attributable to non-controlling interests	72,000
Total equity	805,000
Non-current liabilities	250,000
Current liabilities	165,000
Total equity and liabilities	1,220,000

Additional information:

1.	Information provided by the Chief Operating Officer (COO) comprised of:
	Division	Segment revenue	Intersegment revenue	Segment expenses	Intersegment profit	Segment assets	Segment liabilities
		Sh.“million”	Sh.“million”	Sh.“million”	Sh.“million”	Sh.“million”	Sh.“million”
	Production	380,000	130,000	257,000	25,000	490,000	154,000
	Wholesale	240,000	45,000	160,000	18,000	205,000	103,000
	Retail	130,000	25,000	90,000	7,000	176,000	98,000
	Online	90,000	-	65,000	-	148,000	60,000

2.	Other elements of financial statements include:
		Sh.“million”
	Finance costs	24,000
	Income from interest-bearing securities	18,000
	Other general expenses	48,000
	General investments	144,000
	Other general assets	57,000

3.	Information on intersegment expenses is not available. No capital investments were made during the year.

Required:

Segment financial information in accordance with International Financial Reporting Standard (IFRS) 8 “Operating Segments”.

4

Preparation of Financial Statements for other entities

Collin Limited, a private limited company, has experienced dwindling sales in the recent years largely due to stiff competition.

The company directors, who are also the main shareholders would like to transfer the assets and liabilities of Collin Limited to a newly formed company, Tobin Limited with effect from 1 April 2025.

The following is the latest statement of financial position of Collin Limited as at 31 March 2025:

Assets	Sh.“000”	Sh.“000”
Non-current assets:
Land and buildings		48,500
Plant and machinery		27,115
Motor vehicles		9,940
Furniture and equipment		4,260
		89,815
Current assets:
Inventories	10,550
Accounts receivable	7,370	17,920
Total assets		107,735
Equity and liabilities:
Equity:
Ordinary shares of Sh.10 each		80,000
12% redeemable preference shares of Sh.10 each		45,000
Share premium		4,000
Retained earnings (losses)		(41,760)
Total equity		87,240
Current liabilities:
Accounts payable	16,605
Bank overdraft	3,890	20,495
Total equity and liabilities		107,735

Additional information:

1.	The authorised share capital of Tobin Limited is Sh.100 million comprising of ordinary shares of Sh.10 par value.
2.	Tobin Limited issued new ordinary shares in favour of the preference shareholders in Collin Limited on the basis of three (3) new ordinary shares for every five (5) preference shares held. These ordinary shares were credited at Sh.6 each and the preference shareholders in Collin Limited agreed to pay up the balance immediately to make their ordinary shares fully paid.
3.	Preference dividends in Collin Limited were two years in arrears and the new company issued 540,000 fully paid ordinary shares of Sh.10 each as final settlement of the arrears.
4.	Tobin Limited also issued new ordinary shares in favour of the ordinary shareholders in Collin Limited on the basis of two (2) new ordinary shares for every five (5) ordinary shares held. These ordinary shares were credited at Sh.4 each and the ordinary shareholders in Collin Limited committed to pay up the balance immediately to make their ordinary shares fully paid.
5.	The assets of Collin Limited were transferred to the new company at the following fair values:

		Sh.“000”
	Land and buildings	52,400
	Plant and machinery	22,220
	Motor vehicles	7,170
	Furniture and equipment	3,320
	Inventories	10,130
	Accounts receivable	6,830
6.	The current liabilities were taken over by Tobin Limited at their book values.

7.	Liquidation expenses of Collin Limited amounted to Sh.12,800,000 and were paid for by Tobin Limited.
8.	Assume all the transactions were completed by the close of business on 1 April 2025.

Required:

(a)	The following ledger entries to close off the books of Collin Limited:
	(i)	Realisation account.
	(ii)	Preference shareholders sundry members account.
	(iii)	Ordinary shareholders sundry members account.

(b)	Journal entries in the books of Tobin Limited to record the acquisition of Collin Limited. (Narrations not required).
(c)	Opening statement of financial position as at 1 April 2025.

5a

Preparation of Financial Statements for other entities

The following financial information as at 31 December 2024 relates to Uwezo Bank Limited:

	Sh.“million”
Interest on loans and advances to customers	1,550
Interest on deposits with other banks	472
Interest on deposits from other banks	287
Interest on customer deposits	1,383
Interest on long term borrowings	386
Interest on government securities	501
Other interest income	200
Other interest expenses	204
Fees, commission and foreign exchange gain	3,350
Administrative expenses	1,469
Other operating expenses	1,396
Ordinary share capital	5,500
Share premium	2,800
Revaluation reserve	440
Retained profit as at 1 January 2024	2,738
Loan loss reserve	3,750
Loans and advances to customers	7,980
Customer deposits	6,640
Long term borrowings	3,510
Cash and balances with Central Bank	3,190
Money on demand and short term deposits	1,978
Deposits with other commercial banks	3,772
Deposits from other commercial banks	2,392
Equity investments	726
Investments in government securities	3,856
Property and equipment	5,042
Intangible assets	2,592
Other receivables	1,994
Other payables	2,037
Deferred tax	385
Current tax payable	232
Income tax expense	302
Gain on equity investments	60

Required:

(i) Statement of profit or loss for the year ended 31 December 2024.

(ii) Statement of financial position as at 31 December 2024.

5b

Accounting for Assets and Liabilities

On 1 October 2022 Benny Limited acquired an investment in 5% loan stock with a nominal value of Sh.60,000,000 at a discount of 5% and incurred Sh.1,200,000 transaction costs. The loan stock will be redeemable at a premium of Sh.3,576,000 on 30 September 2025.

The effective rate of interest on the loan stock approximated 8% per annum.

Benny Limited operates in a business model where it holds debt financial assets to collect the contractual cash flows comprising of coupon interest payments and capital repayment on redemption, but also to sell the assets if an opportunity for investments with higher returns arises.

The credit risk on the loan stock has been significantly low and the expected credit losses are negligible.

The fair values of the loan stock were as follows:

	Sh.“000”
30 September 2023	66,000
30 September 2024	62,400

Required:

Using suitable calculations, illustrate the accounting treatment of the above transactions in the financial statements of Benny Limited for the years ended 30 September 2023, 2024 and the year ending 30 September 2025 (Round off your answers to the nearest thousand).

April 2025

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