KASNEB Advanced Financial Reporting and Analysis - Question 2

The statements of financial position of three companies as at 31 December 2025 are provided below: Patana Ltd.Salama Ltd.Fundi Ltd.Sh.“million”Sh.“million”S... [Click to view full question and step-by-step solution]

CPA Advanced Financial Reporting and Analysis April 2026 Past Paper with Answers (PDF)

1

Other Reports and Emerging Issues in Financial Reporting Preparation of Financial Statements for Interests in Other entities Public Sector Accounting Standards

(a) Explain FOUR benefits of rules-based accounting standards.

(b) IAS 29 (Financial Reporting in Hyperinflationary Economies), lays out the accounting treatment for financial statements of entities whose functional currency is the currency of a hyperinflationary economy.

Required:

Explain THREE indicators that may signal that an economy is hyperinflationary.

(c) In the context of reporting of the social and environmental impacts of corporate activity, explain SIX limitations of financial reporting that have led to the sustained push for more extensive disclosures.

(d) With reference to IPSAS 20 (Related Party Disclosures), describe FOUR entities that are deemed to be related parties.

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2

The statements of financial position of three companies as at 31 December 2025 are provided below:

	Patana Ltd.	Salama Ltd.	Fundi Ltd.
	Sh.“million”	Sh.“million”	Sh.“million”
Assets:
Non-current assets:
Property, plant and equipment	4,860	2,100	1,530
Investments	4,450	750	250
	9,310	2,850	1,780
Current assets:
Inventories	1,350	460	375
Trade receivables	1,720	520	125
Cash and bank balances	460	130	80
	3,530	1,110	580
Total assets	12,840	3,960	2,360
Equity and liabilities:
Equity:
Equity share capital (Sh.1.00 par value)	5,000	1,500	800
Revaluation surplus	3,000	1,200	500
Retained earnings	1,790	1,000	950
	9,790	3,700	2,250
Current liabilities:
Trade payables	1,430	100	70
Taxation	940	120	40
Dividends proposed	680	40	-
	3,050	260	110
Total equity and liabilities	12,840	3,960	2,360

Additional information:

Patana Ltd. bought 900 million shares in Salama Ltd. On 1 January 2024 at a cost of Sh.2.50 per share paid in cash.On that date, the balance on the retained earnings of Salama Ltd. Stood at Sh.600 million and the revaluation surplus was zero. At the date of acquisition, the net assets of Salama Ltd. Were equal to their carrying values except for certain items of property, plant and equipment which had a fair value of Sh.400 million in excess of their carrying value.Patana Ltd. has had a policy of carrying property, plant and equipment at fair values. This policy is implemented across all group companies from the date of acquisition. Hence, the fair values were incorporated into the books of Salama Ltd. At the acquisition date and depreciation provided for appropriately.
Patana Ltd. Bought 640 million shares in Fundi Ltd. On 1 January 2025. The consideration for the purchase was Sh.3.00 per share in cash. In addition, it was agreed that a further payment of Sh.1.00 per share would be made on 31 December 2026 provided certain profit targets were met. The fair value of this component of the consideration was Sh.400 million on 1 January 2025 and Sh.520 million on 31 December 2025. The cash payment was recorded in the books of Patana Ltd., but no entry was made to record the contingent elements of the purchase price. On 1 January 2025, the retained earnings of Fundi Ltd. stood at Sh.830 million and the revaluation surplus at Sh.450 million. Fundi Ltd. has always had a policy of measuring property, plant and equipment at fair value, hence the carrying values of these assets were equal to their fair values at the acquisition date. Fundi Ltd. controls a famous brand name, not recognised in its books, which had a fair value of Sh.50 million or 1 January 2025. This brand was estimated to have a useful economic life of 20 years from that date.
Patana Ltd. wishes to use the fair value method to measure the non-controlling interest in Salama Ltd. at the acquisition date. The share price of Sh.2.50 should be used for this purpose. Patana Ltd. wishes to use the proportion of net assets method to measure the non-controlling interest in Fundi Ltd. at the acquisition date.
As at 31 December 2025, goodwill was assessed for impairment and the results showed that an impairment loss of Sh.200 million would be recognised in the case of Salama Ltd. and Sh.150 million in the case of Fundi Ltd.No impairment losses had been recognised in the year to 31 December 2024.
During the year ended 31 December 2025, Salama Ltd. bought goods from Fundi Ltd. for a total sum of Sh.20 million.These goods had cost Fundi Ltd. Sh.15 million. 60% of these goods remained unsold by Salama Ltd. as at 31 December 2025.
The dividends by both companies were proposed on 31 December 2025. No dividend was paid by any company during the year ended 31 December 2025. Patana Ltd. has not recognised its share of Salama Ltd.’s proposed dividend.
All workings and solutions should be shown to the nearest Sh.0.1 million.

Required:

Consolidated statement of financial position for the Patana Ltd. group for the year ended 31 December 2025 in accordance with IFRS.

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3a

Accounting for Assets and Liabilities

Wanga Autos is a major car dealer in the country. The company is currently preparing its financial statement for the year ended 31 March 2026. The company sells cars in three different regions across the country. At the reporting date, the company has 300 cars (same type, model and age) whose fair value the company’s directors would like to estimate.

The directors believe that the fair value should be based on inputs from the market which provides the highest net benefits from car sales.

Information about the three regions as follows:

Region	Total Market Volume (Number of cars)	Wanga Autos’ sales volume (Number of cars)	Selling price per car (Sh.)	Transportation costs per car (Sh.)	Transaction costs per car (Sh.)
Northern Region	6,500	960	2,700,000	200,000	150,000
Southern Region	9,800	608	2,800,000	310,000	190,000
Western Region	5,000	800	2,500,000	250,000	250,000
Total	21,300	2,368	-	-	-

Required:

Determine, with appropriate computations, what fair value should be placed on the 300 cars at 31 March 2026 in line with the requirements of IFRS 13 (Fair Value Measurements).

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3b

Accounting for Assets and Liabilities

On 1 January 2022, Maiyo Ltd. granted 700 share appreciation rights (SARs) to each of its 400 employees. All of the rights vested on 31 December 2023 and could be exercised from 1 January 2024 up to 31 December 2025.

At the grant date, the value of each SAR was Sh.15 and it was estimated that 5% of the employees of Maiyo Ltd. would leave during the vesting period.

The fair values of the SARs were as follows:

Date	Fair Value of SARs (Sh.)
31 December 2022	14
31 December 2023	16
31 December 2024	17

At the employees who were expected to leave the employment did leave the company as expected before 31 December 2023. On 31 December 2024, 80 employees exercised their options when the intrinsic value of the right was Sh.15.5 and were paid in cash.

Required:

Advise Maiyo Ltd., with appropriate computations, on how the above transactions should have been accounted for in its financial statements up to 31 December 2024 in conformity with IFRS 2 (share - based Payment).

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4a

Athumani Ltd. has identified seven (7) divisions as operating segments. The following information is available in relation to the revenue, profit/loss and assets of these segments and other businesses for the year ended 31 December 2025:

Operating segment	External sales	Inter-segment sales	Profit/loss	Assets
	Sh.“000”	Sh.“000”	Sh.“000”	Sh.“000”
Motor spares	3,500	6,200	1,560	6,350
Farming equipment	2,990	0	(390)	3,300
Home appliances	2,450	0	(110)	2,960
Furniture	3,560	950	250	4,330
Plumbing materials	1,600	1,100	310	3,240
Glassware	4,880	3,970	1,080	7,600
Sporting goods	3,940	0	(130)	4,980
	22,920	12,220	2,570	32,760
Other businesses	5,600	0	940	6,100
	28,520	12,220	3,510	38,860

The management of Athumani Ltd. has determined that the operating segments do not have similar economic characteristics and share a majority of the aggregation criteria of IFRS 8 (Operating Segment). Both the “Motor Spares” and “Plumbing Materials” segments did not meet the quantitative thresholds in the previous year ended 31 December 2024.

Required:

Determine with suitable computations which of the segments should be deemed as reportable segments of the Athumani Ltd. for the year ended 31 December 2025 in accordance with the requirements of IFRS 8.

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4b

Accounting for Assets and Liabilities

Saikati Ltd. has three cash generating units (CGUs), a head office and a research facility. The carrying amounts of the assets and their recoverable amounts are as follows:

	Unit X	Unit Y	Unit Z	Head office	Research facility	Saikati Ltd.
	Sh.“million”	Sh.“million”	Sh.“million”	Sh.“million”	Sh.“million”	Sh.“million”
Carrying value amount	500	700	1,000	750	250	3,250
Recoverable amount	645	820	1,355	-	-	2,920

The assets of the head office can be reasonably allocated to the three CGUs as follows:

Unit X: Sh.95 million

Unit Y: Sh.280 million

Unit Z: Sh.375 million

The assets of the research facility cannot be reasonably allocated to the CGUs.

Required:

Assuming that all assets can be adjusted for impairment, show how the adjusted carrying values of the assets of Saikati Ltd. should be determined in line with IAS 36 (Impairment of Assets) after taking into account any impairment losses in the above scenario. Show the relevant financial statements extracts.

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5a

Analysing Financial Statements

The following information relates to Dakika Ltd. for the year ended 31 December 2025:

Extract statement of profit or loss for the year ended 31 December 2025:

	Sh.“million”
Profit before interest and tax	60
Finance cost	(12)
Taxation	(16)

Extract statement of financial position as at 31 December 2025:

Equity	Sh.“million”
Equity share capital (Sh. 0.5 par value)	100
Share premium	85
Retained earnings	40

Additional information:

On 1 April 2025, Dakika Ltd. issued 50 million equity shares for Sh.2 per share. This price represents the market value of Dakika Ltd.’s equity shares on that date.
On 1 July 2025, Dakika Ltd. made a bonus issue of 15 million equity shares to its shareholders at par. It utilised its share premium for this issue.
The company has offered 10 of its directors an option to buy 1 million equity shares each at a price of Sh.1.80 per share. The option to buy the shares will vest on 1 January 2027. The company’s shares have a market value of Sh.2 per share.
Dakika Ltd. has Sh.100 million 10% convertible loan. The loan will be converted into shares on 1 January 2029. The terms of conversion are 2,000 shares for every Sh.1,000 of convertible loan.
The shares issued under note (1) and note (2) above have been accounted for correctly.
The income tax rate applicable to Dakika Ltd. is 30%.

Required:

(i) Basic earnings per share (EPS) for Dakika Ltd. for the year ended 31 December 2025. (4 marks)

(ii) Diluted earnings per share (DEPS) for Dakika Ltd. for the year ended 31 December 2025.

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5b

Accounting for Assets and Liabilities

Zamba Ltd. manufactures equipment for lease or sale and makes up its financial statements at 31 December.

On 31 December 2025, Zamba Ltd., leased out equipment under a 10-year finance lease. The selling price of the leased item was Sh.50 million and the present value of the minimum lease payments was Sh.47 million. The carrying value of the leased asset was Sh.40 million and the present value of the residual value of the equipment when it reverts back to Zamba Ltd. at the end of the term is Sh.2.8 million.

Zamba Ltd. has shown sales of Sh.50 million and cost of sales of Sh.40 million in its financial statements.

Required:

Show how the above transaction should be correctly accounted for in the financial statements of Zamba Ltd. for the year ended 31 December 2025 in accordance with IFRS 16 (Leases).

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5c

Accounting for Assets and Liabilities

On 1 January 2025, Jamago Ltd. raised finance by issuing a two-year deeply discounted 2% bond with a nominal value of Sh.20 million. This bond was issued at a discount of 5% and was redeemable at a premium of Sh.2.15 million.

There were no issue costs and the bond has an effective rate of 10%. Jomago Ltd.’s year end is 31 December.

Required:

Show how the above transaction should be accounted for in the financial statements of Jomago Ltd. for the year ended 31 December 2025 in accordance with IFRS 9 (Financial Instruments)

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CPA Advanced Financial Reporting and Analysis – April 2026 Past Paper & Answers

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