August 2024

1a

Public Sector Accounting Standards

Five years ago, the Ministry of Tourism constructed a public picnic facility to promote domestic tourism at a highly subsidised fee. The original cost of the facility was Sh.750 million and it was expected to provide services to one million tourists each year over its estimated 25-year useful life.

Due to economic hardships suffered by the citizenry, the number of tourists visiting the picnic facility drastically reduced. The revised estimate of the number of local tourists expected to continue with the visits approximated 14 million tourists over the remaining 20 years.

The current replacement cost of a new picnic facility is Sh.900 million. The facility is depreciated using the straight-line method.

Required:

Calculate the impairment loss on the picnic facility (if any) using the service unit approach in accordance with International Public Sector Accounting Standard (IPSAS) 21 “Impairment of non-cash generating assets”.

1b

Accounting for Assets and Liabilities

Kivu Ltd. had the following statement of financial position and tax bases as at 30 June 2024, before providing for any deferred tax for the year ended 30 June 2024:

	Carrying values		Tax bases
	Sh.“000”	Sh.“000”	Sh.“000”	Sh.“000”
Non-current assets:
Factory building		100,500		22,500
Plant and equipment		156,000		39,000
Investment in Mina Ltd.: Cost		1,977		1,977
Long-term quoted investments		198,000		198,000
		456,477
Current assets	45,000		45,000
Current liabilities:
Trade payables	(40,500)		(40,500)
Provision for repairs	(900)		NIL
	(41,400)	3,600
		460,077
Equity:
Equity capital		30,000		30,000
Revaluation reserves		73,500		-
Retained profit		298,047
Shareholders funds		401,547
Non-current liabilities:
Long-term loans	30,000		33,000
Deferred tax at beginning	27,030	57,030	27,030
Deferred income - grant		1,500
		460,077

Additional information:

1.	Kivu Ltd. acquired 100% of the equity shares of Mina Ltd. on 30 June 2024. The net assets at acquisition were as follows:

1.		Fair value	Carrying value	Tax value
		Sh.“000”	Sh.“000”	Sh.“000”
	Factory buildings	1,500	1,900	300
	Plant and equipment	120	90	45
	Inventory	372	342	342
	Accounts receivable	330	330	330
	Current liabilities	(495)	(495)	(315)
		1,827	1,167	702
	• Mina Ltd. had no deferred tax.

2.	During the year ended 30 June 2024, Kivu Ltd. directors decided to revalue buildings at Sh.150 million and the plant and equipment to Sh.180 million. Investments were not to be revalued. Kivu Ltd.’s buildings had cost Sh.135 million and plant and equipment Sh.210 million.
3.	The corporate tax rate for the year was 30%.
4.	During the year ended 30 June 2024, directors of Kivu Ltd. agreed to provide Sh.900,000 for future repairs to the buildings. The expense is allowed for when paid for tax purposes.
5.	The grant received was from the International Monetary Fund (IMF) and was not taxable.
6.	Goodwill on acquisition is not allowed for tax purposes.
7.	During the year ended 30 June 2024, Kivu Ltd. acquired a long-term loan of Sh.33million and recorded it net of transaction costs. The transaction cost of Sh.3million is allowable for tax purposes.

Required:

Calculate the deferred tax expense that would appear in the financial statements of Kivu Ltd. for the year ended 30 June 2024.

2

Preparation of Financial Statements for Interests in Other entities

Pata Limited, a quoted company, which operates in the agricultural sector, has investments in a number of companies.

The following financial information relates to Pata Limited and its investment companies:

Statements of profit or loss and other comprehensive income for the year ended 30 June 2024:

	Pata Limited	Soma Limited	Jana Limited
	Sh.“million”	Sh.“million”	Sh.“million”
Revenue	7,750	4,260	2,860
Cost of sales	(5,380)	(2,050)	(1,480)
Gross profit	2,370	2,210	1,380
Distribution costs	(495)	(290)	(200)
Administrative expenses	(760)	(650)	(400)
Profit from operations	1,115	1,270	780
Finance costs	(90)	(80)	(60)
Profit before tax	1,025	1,190	720
Income tax expense	(340)	(370)	(220)
Profit for the year	685	820	500
Other Comprehensive income:
Items that will not be recycled:
Gain on property revaluation	265	80	-
Total Comprehensive income	950	900	500

Extract of equity as at 30 June 2024:

Equity as at 30 June 2024:	Pata Limited	Soma Limited	Jana Limited
	Sh.“million”	Sh.“million”	Sh.“million”
Ordinary share capital	1,000	500	300
Revaluation reserve	265	80	-
Retained profit brought forward	5,480	3,730	1,450
Profit for the year	685	820	500
	7,430	5,130	2,250

Additional information:

On 1 July 2021, Pata Limited acquired 75% of the ordinary shares of Soma Limited for a cash consideration of Sh.4,500 million, when the retained earnings of Soma Limited stood at Sh.2,100 million. At the date of acquisition, the fair values of the identifiable net assets approximated their carrying values with the exception of an item of plant whose fair value exceeded its carrying amount by Sh.600 million. The plant had a remaining economic useful life of six years at acquisition date.
On 1 January 2022, Pata Limited entered into a joint arrangement with another entity to establish joint control over net assets and operations of Jana Limited. Pata Limited acquired 50% of the ordinary shares of Jana Limited for a cash consideration of Sh.700 million when the retained earnings of Jana Limited amounted to Sh.1,300 million. Pata Limited equity-accounted for its share of interest in Jana Limited in line with International Accounting Standard (IAS) 28, “Investment in Associates and Joint Ventures”.
On 1 January 2024, Pata Limited acquired an additional 30% shareholding in Jana Limited for a cash consideration of Sh.500 million. The fair value of the original investment in Jana Limited as at 1 January 2024 was Sh.950 million. No fair value adjustments were necessary in respect of the identifiable net assets of Jana Limited.
The group policy is to measure the non-controlling interests in subsidiaries at their proportionate share of net assets at the date of acquisition.
During the year ended 30 June 2024, Pata Limited sold goods to Soma Limited for Sh.340 million at fair value. Pata Limited reported a loss of Sh.55 million on this transaction. Soma Limited still had one half (1/2) of these goods in its inventory at 30 June 2024.
Impairment review at 30 June 2024 revealed that goodwill on acquisition had not suffered any impairment.
All incomes and expenses of the group companies are deemed to have accrued evenly throughout the year.

Required:

(a) Calculate the value of goodwill arising on acquisition of:

(i) Soma Limited.

(ii) Jana Limited.

(b) Prepare the consolidated statement of profit or loss and other comprehensive income for the year ended 30 June 2024.

3

Preparation of Financial Statements for Interests in Other entities

Ziwa Limited has been experiencing trading difficulties for the past five years. A formal reconstruction of the company was agreed by the board of directors. On 30 June 2024, Ziwa Ltd. was taken over by Baraka Ltd.

The following is Ziwa Ltd.’s statement of financial position as at 30 June 2024:

Statement of financial position as at 30 June 2024:

Assets:	Sh.“million”	Sh.“million”
Non-Current assets:
Land and buildings	820
Motor vehicles	680
Goodwill	350
Furniture and equipment	435
Patents	185	2,470
Current assets:
Inventory	380
Accounts receivable	280	660
Total assets		3,130
Equity and liabilities:
Equity:
Ordinary share capital (Sh.10 each)		2,000
10% Preference shares (Sh.10 each)		1,000
Share premium		400
Retained earnings		(850)
Total equity		2,550
Non-current liabilities:
8% debentures		400
Current liabilities:
Accounts payable	150
Bank overdraft	30	180
Total equity and liabilities		3,130

Additional information:

1.	Baraka Ltd. was formed with an authorised share capital of 300 million ordinary shares of Sh.10 each.
2.	The 10% preference shareholders received four ordinary shares in Baraka Ltd. for every five preference shares held in Ziwa Ltd. Each ordinary shares from Baraka Ltd. was credited at Sh.8 per share. Shareholders were to pay the difference in cash to Baraka Ltd. to make their shares fully paid immediately upon receipt of the shares.
3.	The ordinary shareholders of Ziwa Ltd. received three ordinary shares for every five shares held in Ziwa Ltd. The shares from Baraka Ltd. were credited at Sh.6 per share. The shareholders were to pay the difference in cash to make the shares fully paid immediately after receiving the shares.
4.	The debenture holders of Ziwa Ltd. accepted 25 ordinary shares for every Sh.200 of the debenture, the shares being credited at Sh.8 each. The debenture holders would introduce cash to make the shares fully paid on receipt of the shares.
5.	Dividends of the preference shares were four years in arrears as at 30 June 2024. Baraka Ltd. accepted to pay the amount by issuing two fully paid ordinary shares and Sh.100, 6% debenture for every Sh.800 of the dividend in arrears.
6.	Baraka Ltd. paid Sh.30 million to Ziwa Ltd. for dissolution. This amount was treated as preliminary expenses and was to be written off against profit in the next three years.
7.	Immediately after acquisition, Baraka Ltd. purchased inventory worth Sh.60 million in cash and settled Sh.50 million of the accounts payable.

8.	Assets were transferred to Baraka Ltd. at the following values:
	Assets	Sh.“million”
	Land and buildings	620
	Motor vehicles	550
	Furniture and equipment	430
	Patents	140
	Inventory	280
	Accounts receivable	250
Goodwill was presumed to have no value and was to be written off.

Required:

Prepare:

(a) The necessary accounts to close Ziwa Ltd.

(b) Journal entries in the books of Baraka Ltd. to record the acquisition of Ziwa Ltd.

(c) Opening statement of financial position for Baraka Ltd.

4

Preparation of Financial Statements for Interests in Other entities

The following financial statements were extracted from the books of Rahisi Group:

Consolidated statement of financial position as at 31 December:

	2022	2023
Assets:	Sh. “million”	Sh. “million”
Non-current assets:
Property, plant and equipment	3,400	4,570
Goodwill	650	1,010
Other intangible assets	1,630	1,440
Investment in associate	-	770
	5,680	7,790
Current assets:
Inventories	1,830	1,490
Accounts receivable	1,750	1,220
Cash and cash equivalents	340	450
	3,920	3,160
Total assets	9,600	10,950
Equity and liabilities:
Equity:
Ordinary share capital (Sh.10 par value)	1,000	3,000
Revaluation surplus	210	270
Retained earnings	2,370	2,390
	3,580	5,660
Non-controlling interest	720	860
Total equity	4,300	6,520
Non-current liabilities:
Long-term loans	1,530	1,990
Deferred tax	820	600
	2,350	2,590
Current liabilities:
Accounts payable	2,170	1,420
Current tax	780	420
	2,950	1,840
Total equity and liabilities	9,600	10,950

Statement of profit or loss and other comprehensive income for the year ended 31 December 2023:

	Sh. “million”
Revenue	4,530
Cost of sales	(3,380)
Gross profit	1,150
Distribution costs	(380)
Administrative expenses	(430)
Operating profit	340
Finance costs	(140)
Share of profit of associate	180
Profit before tax	380
Income tax expense	(150)
Profit for the year	230
Other comprehensive income:
Gain on property revaluation	70
Total comprehensive income for the year	300
Profit for the year:
Attributable to owners of the parent	140
Attributable to the non-controlling interests	90
	230
Attributable to owners of the parent	210
Attributable to the non-controlling interests	90
	300

Additional information:

1.	During the year ended 31 December 2023, Rahisi Group acquired 60% of the ordinary share capital of Kibo Ltd. for a cash consideration of Sh.720 million. The fair values of the identifiable net assets of Kibo Ltd. at the date of acquisition were as follows:

		Sh. “million”
1.	Property, plant and equipment	280
	Inventories	160
	Trade receivables	110
	Cash and cash equivalents	80
	Trade payables	(120)
	Current tax	(30)
	Net assets at acquisition	480

1.	Rahisi Group measures the non-controlling interests at their fair values at acquisition date. The fair value of the non-controlling interest in Kibo Ltd. at the date of acquisition amounted to Sh.220 million.

2.	The group’s property, plant and equipment comprised the following:
		Sh. “million”
	Carrying amount at 1 January 2023	3,400
	Additions at cost including assets acquired in Kibo Ltd.	1,640
	Gain on property revaluation	70
	Disposals	(330)
	Depreciation	(210)
	Carrying amount at 31 December 2023	4,570

	The disposal proceeds of property, plant and equipment amounted to Sh.540 million and the gain on disposal has been netted off against the administrative expenses. It is also the group policy to make inter-reserve transfer of excess depreciation upon revaluation of property, plant and equipment.
3.	During the year ended 31 December 2023, Rahisi Group acquired a 30% interest in an associate for a cash consideration. The associate reported a profit of Sh.600 million and paid dividend of Sh.200 million out of the profit during the year.
4.	An impairment review carried out on 31 December 2023 revealed that goodwill and other intangible assets were impaired.
5.	Ignore deferred tax effects on the acquisition of new subsidiary and on the revaluation of property, plant and equipment.

Required:

A consolidated statement of cash flows for Rahisi Group for the year ended 31 December 2023 using the indirect method in accordance with the International Accounting Standards (IAS) 7 “Statement of Cash Flows”.

5a

Public Sector Accounting Standards

With reference to International Public Sector Accounting Standard (IPSAS) 18 “Segment Reporting”, identify FOUR disclosure requirements for reportable segments of public sector entities.

5b

Other Reports and Emerging Issues in Financial Reporting

International Accounting Standard (IAS) 29 “Financial reporting in hyperinflationary economies”, identifies characteristics of hyperinflation in an economic environment.

Required:

Describe FIVE characteristics of the economic environment of a country which indicate the existence of hyperinflation.

5c

Other Reports and Emerging Issues in Financial Reporting

International Accounting Standard (IAS) 34 “Interim Financial reporting” prescribes the events and transactions for which disclosures are required if they are significant.

Required:

Highlight FIVE such events and transactions.

5d

Other Reports and Emerging Issues in Financial Reporting

Integrated Reporting helps companies shift the focus of their reporting from historical financial performance to longer-term value creation.

Required:

In light of the above statement, discuss SIX contents of an integrated report.

August 2024

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