December 2023

1a

Public Sector Accounting Standards

International Public Sector Accounting Standard (IPSAS) 20 “Related Party Disclosures”, requires the disclosure of the existence of related party relationships where control exists and the disclosure of information about transactions between the entity and its related parties in certain circumstances.

Required:

Highlight SIX disclosures about related party transactions that would need to be disclosed to meet the objectives of IPSAS 20.

1b

Accounting for Assets and Liabilities

Titans Ltd. which is a wholly owned subsidiary of Venus Ltd. is a cash generating unit in its own right. The value of property, plant and equipment of Titans Ltd. as at 31 October 2023 was Sh.6 million and purchased goodwill was Sh.1 million before impairment loss. The company had no other assets or liabilities. An impairment loss of Sh.1.8 million had occurred as at 31 October 2023. The directors wish to know how the impairment loss will affect the deferred tax liability for the year. Impairment losses are not an allowable expense for taxation purposes. The tax base of the property, plant and equipment as at 31 October 2023 was Sh.4 million.

Required:

Assuming a corporate tax rate of 30%, discuss with suitable computations how the above situation will impact on accounting for deferred tax under IAS 12 (Income Taxes) in the group financial statements of Venus Group.

1c

Saruji Ltd. operates a defined benefit scheme which had a net obligation of Sh.120 million as at 31 December 2021. The following details relate to the scheme for the financial year ended 31 December 2022:

	Sh.“million”
Current service cost	55
Cash contribution to the scheme	100
Benefits paid during the year	80
Net loss on curtailment	11
Gain on remeasurement of liability as at 31 December 2022	9

The rate of interest applicable to corporate bonds was 5% as at 31 December 2021. The cash contributions to the scheme have been correctly accounted for in the financial statements for the year ended 31 December 2022. This is the only adjustment that has been made in respect of the scheme.

Required:

Recommend to the directors of Saruji Ltd. the correct accounting treatment of the above transactions in the financial statements for the year ended 31 December 2022, including financial statements extracts in accordance with IAS 19 (Employee Benefits).

2

Preparation of Financial Statements for Interests in Other entities

H Limited, a public limited company whose functional currency is the Kenya Shilling (KSh.) operates in the digital economy sector. The company has recently diversified its operations by acquiring shares in a foreign entity, S Limited. The functional currency of S Limited is the Krona (Kr.).

The following statements of financial position were extracted from the financial records of the two companies as at 30 September 2023:

	H Limited	S Limited
	Ksh.“million”	Ksh.“million”
Assets:
Non-current assets:
Property, plant and equipment	8,500	3,000
Investment in S Limited	3,000	-
Other intangible assets	1,600	510
	13,100	3,510
Current assets:
Inventory	2,500	1,960
Trade receivables	2,300	1,320
Cash and cash equivalents	1,650	640
	6,450	3,920
Total assets	19,550	7,430
Equity and liabilities:
Equity:
Ordinary share capital (Ksh.1/Kr.1 par value)	5,000	1,560
Share premium	2,000	200
Retained earnings	5,900	1,442
Total equity	12,900	3,202
Non-current liabilities:
10% loan stock	1,300	1,360
Deferred tax	650	1,268
	1,950	2,628
Current liabilities:
Trade payables	3,800	1,160
Current tax	900	440
	4,700	1,600
Total equity and liabilities	19,550	7,430

Additional information:

1.	On 1 October 2022, H Limited acquired an 80% controlling interest in S Limited for a cash consideration of Ksh.3,000 million when the retained earnings of S Limited stood at Kr.540 million. The fair values of the identifiable net assets of S Limited were Kr.2,700 million. The excess of the fair value over the carrying value was due to an increase in value of plant whose remaining economic useful life approximated five (5) years at acquisition.
2.	H Limited uses the fair value method to measure the non-controlling interests in subsidiaries. The fair value of the non-controlling interest in S Limited on 1 October 2022 amounted to Kr.900 million.
3.	On 1 October 2022, H Limited exported goods worth Ksh.180 million on account to S Limited. This transaction has been recorded by both entities. However, the account payable is still recorded at the rate of exchange that prevailed at the date of the transaction, in the financial statements of S Limited. All these goods had been sold to third parties by S Limited as at 30 September 2023.
4.	Goodwill arising on acquisition of S Limited had not been impaired since acquisition.

5.	The following foreign exchange rates are relevant:
		Kr. to Ksh.1
	1 October 2022	0.90
	30 September 2023	0.80
	Average for the year to 30 September 2023	0.75

6.	S Limited has not issued any ordinary shares since the date of acquisition.

Required:

(a) The value of goodwill arising on acquisition of S Limited in Kenya Shillings (KSh.).

(b) Consolidated statement of financial position for H Group as at 30 September 2023.

3a

In the context of International Financial Reporting Standard (IFRS) for Small and Medium-sized Entities (SMEs), the SMEs Standard, briefly explain TWO accounting choices that are not allowed under the SMEs Standard.

3b

Other Reports and Emerging Issues in Financial Reporting

The purpose of the statement of profit or loss and other comprehensive incomes is to show an entity’s financial performance in a way that is useful to a wide range of users. However, the accounting treatment and guidance with respect to other comprehensive incomes has been criticised recently.

Required:

Discuss FOUR criticisms that have been raised in respect to the accounting treatment of other comprehensive incomes.

3c

Accounting for Assets and Liabilities

A division of Ziwa Ltd. has the following non-current assets which are stated at their carrying values as at 31 December 2022:

	Sh.“million”	Sh.“million”
Goodwill		70
Property, plant and equipment:
Land and buildings	320
Plant and machinery	110	430
		500

Since the assets are used to produce a specific product, it is possible to identify the cash flows arising from their use. The management of Ziwa Ltd. believes that the value of these assets may have become impaired, because a major competitor has developed a superior version of the same products.

Forecast cash inflows arising from the use of the assets are as follows:

Year ended	Sh.“million”
31 December 2023	185
31 December 2024	160
31 December 2025	130

The following additional information is useful:

The directors are of the opinion that the market would expect a pre-tax return of 12% on an investment in an entity that manufactures a product of this type.
The land and buildings are carried at revaluation. The surplus relating to the revaluation of the land and buildings that remain in the revaluation surplus reserve as at 31 December 2022 is Sh.65 million. All other non-current assets are carried at historical cost.
The goodwill does not have a market value. It is estimated that the land and buildings could be sold at Sh.270 million and the plant and machinery could be sold for Sh.50 million net of direct selling costs.

Required:

(i) Calculate impairment loss to be recognised in the accounts of Ziwa Ltd.

(ii) Explain how the loss will be treated in the financial statements for the year ended 31 December 2022.

4a

Other Reports and Emerging Issues in Financial Reporting

The annual report has evolved from providing information on an entity’s financial performance and position to including wider aspects of performance such as management commentaries, corporate social responsibility reports, corporate governance reports as well as sustainability reporting.

Required:

(i) Explain the term “sustainability reporting” as advanced by the Global Reporting Initiative (GRI).

(ii) Summarise FOUR limitations of financial reporting in the context of reporting the social and environmental impacts of corporate activity to users of financial statements.

4b

Accounting for Assets and Liabilities

On 1 April 2019, M Ltd. granted 500 share appreciation rights (SARs) to each of its 300 employees. All of the rights vested on 31 March 2021 and could be exercised from 1 April 2021 up to 31 March 2023. At the grant date, the value of each SAR was Sh.10 and it was estimated that 5% of the employees would leave during the vesting period. The fair values of the SARs at various dates were as follows:

Date	Fair value of SAR (Sh.)
31 March 2020	9
31 March 2021	11
31 March 2022	12

All the employees who were expected to leave employment, did leave the company as expected before 31 March 2021. On 31 March 2022, 60 employees exercised their options when the intrinsic value of the right was Sh.10.50 and were paid in cash.

The Chief Accountant of M Ltd. is, however, confused as to whether to account for the SARs under IFRS 2 (Share-based Payment) or IFRS 13 (Fair Value Measurement) and would like to be advised as to how the SARs should have been accounted for from the grant date up to 31 March 2022.

Required:

Advise the Chief Accountant of M. Ltd. on how the above transactions should be accounted for in its financial statements with reference to the relevant International Financial Reporting Standards (IFRSs).

5

Preparation of Financial Statements for other entities

For a number of years now, A Ltd. has been reporting operating losses, principally due to competition from firms operating in the same sector. A Ltd. is now considering reorganising its operations and financial structure to allow it to obtain new funding required to develop and launch a new product. Technical experts have indicated that the new product will do well in the market once it is launched.

The statement of financial position of A Ltd. as at 31 October 2023 is as follows:

	Sh.“million”	Sh.“million”
Assets:
Non-current assets:
Tangible assets		5,000
Financial instruments		1,000
Current assets		4,125
Total assets		10,125
Equity and liabilities:
Equity:
Ordinary share capital (Sh.1 par value)		4,000
20% cumulative preference share capital (Sh.1 par value)		1,500
Retained earnings		(2,918)
		2,582
Non-current liabilities:
20% bonds		750
Current liabilities:
Trade payables	1,968
Bank overdraft (secured on tangible assets)	3,900
Loan from finance institution	925	6,793
Total equity and liabilities		10,125

Additional information:

1.	Preference dividends have been in arrears for three years.
2.	The retained earnings balance is to be eliminated.
3.	The following details relate to the assets: Tangible assets: 15% of the book value is to be transferred to the bondholders for an agreed value of Sh.720 million in full settlement of the debt and the remaining book value of these assets marked up to 110%. Inventories include obsolete items worth Sh.540 million below their book value of Sh.680 million. A bond investment (having 10 months to maturity date) is to be revised to Sh.280 million from its carrying value of Sh.370 million. Receivables with a carrying value of Sh.1,200 million are to be factored out for 70% advance under terms that will allow for refund of any difference between actual collections and the upfront payment from the factor. One customer who owes Sh.828 million is in serious financial difficulty. Only 50% is expected to be received from this customer in one year’s time.
4.	The bank has demanded repayment of the bank overdraft, while the finance institution has accepted to receive 92% of their existing loan in new ordinary shares as full settlement. Upon successful completion of the reorganisation process, however, the finance institution is ready to immediately buy 15% Sh.900 million debentures in the reconstructed entity’s debts provided that the directors will attach the right to convert the debt into shares at maturity. The finance institution will also require 10% discount on the convertible debt at issue and repayment period of three years. The effective rate of interest on this convertible debt, if the discount is granted, is estimated to be 18.7% and the effective rate of interest on an equivalent non-convertible instrument will be 22.5%.
5.	Existing ordinary shareholders are prepared to inject Sh.4,200 million for 840 million new ordinary shares, while preference shareholders have pledged to finance new production equipment whose estimated fair value is Sh.1,350 million. Each of these shares currently has a value of Sh.5.
6.	Half of the trade payables (suppliers) have agreed to be paid using ordinary shares in the reconstructed firm.
7.	The directors have projected annual profit before interest and tax in the reconstructed entity to be Sh.650 million.
8.	A firm order has been received from BB Ltd., a competitor, to buy all the business assets for Sh.7,200 million. 60% of these proceeds related to tangible assets. Closure costs are estimated at Sh.50 million.
9.	Assume a discount rate of 15%, unless a different rate is more appropriate.
10.	The present value of Sh.1 receivable at the end of the year for different discount rates is provided below:

10.	Year	Discount Rate
		10%	15%	18.7%	22.5%
	1	0.91	0.87	0.84	0.82
	2	0.83	0.76	0.71	0.67
	3	0.75	0.66	0.60	0.54

Required:

Suggest a scheme of capital reorganisation that would be acceptable to all stakeholders, including a revised statement of financial position.

December 2023

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