KASNEB Advanced Financial Reporting and Analysis - Question 3b

The following is an extract of the statement of financial position of Birika Limited as at 31 August 2024: Equity:Sh. “000”Ordinary share capit... [Click to view full question and step-by-step solution]

December 2024

1a

Accounting for Assets and Liabilities

Big Ltd. agrees to guarantee Sh.100 million bank loan taken by its subsidiary, Small Ltd. There are no current indications that Small Ltd. will default on the loan and it is forecasted to generate sufficient cash flows to service its debt in the next year.

Required:

Analyse whether or not a liability should be recognised by Big Ltd. with reference to the Conceptual Framework.

1b

Accounting for Assets and Liabilities

Almasi Ltd., a company, which explores for mineral resources, acquired a project to research and develop a new mining process as part of a business combination. It does not intend to complete the project, as the completed process would compete with one of its own developed processes. Instead, Almasi Ltd. will stop the project and prevent competitors from accessing it.

Required:

Discuss how fair value may be determined with reference to highest and best use, in order to apply the requirements of International Financial Reporting Standard (IFRS) 13 “Fair Value Measurement”.

1c

Preparation of Financial Statements for other entities

An entity may determine that a fair value may not be achieved by compliance with International Financial Reporting Standards (IFRSs). If compliance would be misleading, departure from the requirements of a standard is permitted. However, this is extremely rare.

Required:

Describe FOUR disclosure requirements in relation to the departure in order to achieve fair presentation.

1d

Other Reports and Emerging Issues in Financial Reporting

to an understanding of the changes in financial position and performance of the entity since the end of the last annual reporting period.

Required:

Describe FIVE disclosures required as per interim reporting.

1e

Other Reports and Emerging Issues in Financial Reporting

The choice of measurement basis should reflect the characteristics of the element and reduce measurement uncertainty. Measurement of insurance contracts affects the amount presented in the income statement and statement of financial position.

Required:

Evaluate THREE methods of measuring insurance contracts in the initial and subsequent measurements.

2

Preparation of Financial Statements for Interests in Other entities

H Limited, a public limited company which operates in the manufacturing sector has made investments in other companies. The following draft statements of profit or loss and other comprehensive income for the year ended 30 September 2024 relate to H Limited and its investment companies:

	H Limited	S Limited	R Limited
	Sh. “million”	Sh. “million”	Sh. “million”
Revenue	6,200	2,840	2,120
Cost of sales	(4,680)	(1,640)	(1,180)
Gross profit	1,520	1,200	940
Other income	315	105	60
	1,835	1,305	1,000
Distribution costs	(330)	(165)	(180)
Administrative expenses	(240)	(140)	(80)
Other expenses	(195)	(120)	(60)
Operating profit	1,070	880	680
Finance costs	(80)	(65)	(50)
Finance income	90	70	110
Profit before tax	1,080	885	740
Income tax expense	(285)	(145)	(140)
Profit for the year	795	740	600
Other comprehensive income:
Gain on property revaluation	160	50	80
Total comprehensive income for the year	955	790	680

Additional information:

1.	H Limited had acquired a 25% equity interest in R Limited several years ago for a cash consideration of Sh.1,800 million when the retained earnings of R Limited stood at Sh.2,040 million and had no other reserves. On 1 April 2024, H Limited acquired a further 50% equity holding in R Limited for a cash consideration of Sh.3,500 million. The retained earnings of R Limited as at 1 October 2023 amounted to Sh.3,940 million. The original 25% interest in R Limited was considered to be fairly valued at the equity-accounted value as at 1 April 2024. The fair values of net assets of R Limited which approximated their carrying amounts were Sh.4,900 million as at 1 April 2024.
2.	H Limited had also acquired 80% of 500 million equity shares in S Limited on 1 October 2022. This acquisition involved a cash consideration of Sh.2,300 million and a share exchange on the basis of 2 shares in H Limited for every 3 shares acquired in S Limited. The market price of one H Limited’s share at 1 October 2022 was Sh.15 per share. The carrying amount of net assets of S Limited at acquisition was Sh.5,100 million, but the fair value of net assets at 1 October 2022 was Sh.5,300 million. The fair value increase was due to an unrecognised customer list which had a remaining economic useful life of five (5) years at the date of acquisition.
3.	The group policy is to measure the non-controlling interests at their fair values at the date of acquisition. The fair value of non-controlling interests in S Limited was Sh.800 million and in R Limited was Sh.540 million at the respective dates of acquisition.
4.	Assume that all incomes, expenses, gains and losses accrued evenly throughout the year.
5.	No impairment on goodwill was reported during the year ended 30 September 2024.
Required:
(i)	Goodwill arising on acquisition of S Limited and R Limited.
(ii)	Consolidated statement of profit or loss and other comprehensive incomes for the year ended 30 September 2024.

3a

Accounting for Assets and Liabilities

With regards to International Financial Reporting Standard (IFRS) 9 “Financial Instruments: Recognition and Measurement”:

(i) Describe TWO characteristics of derivatives.

(ii) Explain how derivatives are measured in the financial statements of an entity.

3b

Analysing Financial Statements

The following is an extract of the statement of financial position of Birika Limited as at 31 August 2024:

Equity:	Sh. “000”
Ordinary share capital (Sh.10 par value)	94,500
Share premium	4,000
Retained profit	21,960
Total equity	120,460
Non-current liabilities:
14% convertible loan note	40,000
9% bank loan	60,000
	100,000

Additional information:

The company reported a total profit of Sh.31,810,000 for the year ended 31 August 2024, which included a loss of Sh.4,160,000 from an independent business operation that was discontinued during the year.
On 1 November 2023, the company issued 3,150,000 new ordinary shares at fair value as a consideration for the acquisition of new property.
On 1 January 2024, the current ordinary shareholders were invited to subscribe for a rights issue on the basis of one (1) new share for every two (2) held at a price of Sh.15 per share, when the market price per share on cum rights basis was Sh.24.
The 14% convertible loan note in issue is convertible into ordinary shares at the holder’s option on the basis of fifty (50) ordinary shares for each Sh.100 of the loan note. On 1 March 2024, holders of Sh.20,000,000 of the convertible loan note exercised their conversion option.
The corporate tax rate applicable to Birika Limited is 30%.

Required:

(i) Calculate the basic earnings per share (BEPS) for the year ended 31 August 2024.

(ii) Calculate the diluted earnings per share (DEPS) for the year ended 31 August 2024.

4

Preparation of Financial Statements for Interests in Other entities

The following are the consolidated financial statements of Ndovu Group for the year ended 30 September:

Consolidated statements of financial position as at:

	30 September 2024	30 September 2023
Assets:	Sh.“million”	Sh.“million”
Non-current assets:
Property, plant and equipment	15,900	10,150
Goodwill	12,060	11,560
Investment in associate	3,875	3,375
	31,835	25,085
Current assets:
Inventory	2,970	2,780
Accounts receivable	2,440	2,060
Cash and cash equivalents	1,310	875
Total assets	38,555	30,800
Equity and liabilities:
Equity:
Ordinary share capital (Sh.10 par value)	10,000	8,000
Share premium	1,500	1,200
Revaluation surplus	4,680	3,280
Retained earnings	10,090	6,780
Equity attributable to group owners	26,270	19,260
Non-controlling interests	1,940	2,000
Total equity	28,210	21,260
Non-current liabilities:
Bank loans	2,500	1,875
Deferred tax	940	650
Current liabilities:
Accounts payable	4,375	4,530
Current tax	2,530	2,485
Total equity and liabilities	38,555	30,800

Consolidated statement of profit or loss and other comprehensive incomes for the year ended 30 September 2024:

	Sh.“million”
Revenue	13,060
Cost of sales	(3,970)
Gross profit	9,090
Operating expenses	(3,250)
Profit from operations	5,840
Gain on disposal of subsidiary	350
Finance costs	(220)
Share of profit of associate	720
Profit before tax	6,690
Income tax expense	(1,400)
Profit for the year	5,290
Other comprehensive income:
Gain on property revaluation	1,400
Total comprehensive income for the year	6,690
Profit for the year:
Attributable to the group owners	4,690
Attributable to the non-controlling interests	600
	5,290
Total comprehensive income for the year:
Attributable to the group owners	6,090
Attributable to the non-controlling interests	600
	6,690

Additional information:

1.	Depreciation of Sh.2,400 million was charged during the year ended 30 September 2024. Plant with a carrying amount of Sh.1,560 million was sold for Sh.1,720 million. The gain on disposal was recognised in operating costs. Property was revalued during the year resulting in a revaluation gain of Sh.1,400 million being recognised.
2.	During the year ended 30 September 2024, Ndovu Limited acquired 75% of the ordinary share capital of Simba Limited paying cash consideration of Sh.9,400 million. The non-controlling interest (NCI) was measured at its fair value of Sh.2,125 million at the date of acquisition. The fair value of Simba Limited’s net assets at acquisition was made up as follows:

2.		Sh. “million”
	Property, plant and equipment	8,000
	Inventory	940
	Accounts receivable	1,500
	Cash and cash equivalents	500
	Accounts payable	(1,375)
	Current tax	(250)
	Net assets at acquisition	9,315

3.

During the year ended 30 September 2024, Ndovu Limited also disposed of its entire 80% ordinary shareholding in Kifaru Limited for cash proceeds of Sh.5,300 million. This subsidiary was not considered as a separate unit of operation. Kifaru Limited had been acquired several years ago for cash consideration of Sh.3,750 million.

The NCI of 20% was measured at its fair value of Sh.2,000 million at acquisition and the fair values of Kifaru Limited’s net assets were Sh.4,600 million at that date. Goodwill had not suffered any impairment.

At the date of disposal, the net assets of Kifaru Limited were carried in the consolidated statement of financial position as follows:

3.		Sh. “million”
	Property, plant and equipment	4,530
	Inventory	1,030
	Accounts receivable	750
	Cash and cash equivalents	300
	Accounts payable	(510)
	Net assets at disposal	6,100

Required:

A consolidated statement of cash flows for Ndovu Group for the year ended 30 September 2024 using the indirect method in accordance with International Accounting Standard (IAS) 7 “Statement of Cash Flows”.

5a

Accounting for Assets and Liabilities

On 1 July 2020, Mariana Manufacturers entered into a four-year lease of factory equipment from a supplier. The annual lease payment of Sh.2,662,000 was payable at the beginning of each year, starting on 1 July 2020. At the inception of the lease, the factory equipment’s remaining economic useful life was seven (7) years and the lease contract contained a bargain purchase option which was reasonably certain to be exercised at the expiry of the lease term. The interest rate implicit in the lease was determined at 10% per year.

The initial direct costs incurred by Mariana Manufacturers at the inception of the lease amounted to Sh.280,000.

Required:

With suitable calculations, demonstrate the accounting treatment of the above lease transactions in the financial statements of Mariana Manufacturers (lessee) for the years ended 30 June 2021, 2022, 2023 and 2024.

5b

Other Reports and Emerging Issues in Financial Reporting

Kristal Limited was established on 1 January 2023. The company prepares its financial statements based on historical cost basis as follows:

Opening statement of financial position

As at 1 January 2023:

Non-current assets:	Sh.“000”
Land at cost	105,000
Plant and equipment at cost	108,000
	213,000
Current assets:
Inventory	87,000
Cash at bank	60,000
Total assets	360,000
Equity and liabilities:
Ordinary share capital (Sh.10 par value)	270,000
Non-current liabilities:
Bank loan	90,000
Total equity and liabilities	360,000

Statement of profit or loss

For the year ended 31 December 2023:

	Sh.“000”	Sh.“000”
Revenue		175,000
Cost of sales:
Opening inventory	87,000
Add purchases	131,250
Goods available for sale	218,250
Less closing inventory	(161,875)	(56,375)
		118,625
Expenses:
Staff salaries	21,875
Depreciation	17,010
Other expenses	26,250	(65,135)
		53,490
Income tax expenses		(12,250)
Profit for the year		41,240

Additional information:

1.	On 1 April 2023, Kristal Limited purchased a new motor vehicle at a cost of Sh.5.4 million and paid in cash.
2.	On 30 September 2023, the company issued new ordinary shares at par value with cash proceeds being Sh.18 million.
3.	Staff salaries and other expenses were paid for in cash during the year ended 31 December 2023.
4.	During the year ended 31 December 2023, cash receipts from customers amounted to Sh.130 million while suppliers were paid Sh.100 million.
5.	Depreciation is provided as follows: Plant and equipment 15% per annum, reducing balance basis. Motor vehicles 20% per annum, straight line basis.
6.	The inventory held on 31 December 2023 was purchased when the retail price index averaged 185.
7.	The relevant general retail price indices (RPI) were as follows: Date RPI 1 January 2023 120 1 April 2023 135 30 June 2023 175 30 September 2023 180 31 December 2023 220
8.	Assume that incomes and expenses accrued evenly throughout the year and that all sales and purchases were made on credit basis during the year ended 31 December 2023.

Required:

(i) Inflation-adjusted statement of profit or loss for the year ended 31 December 2023.

(ii) Inflation-adjusted statement of financial position as at 31 December 2023.

December 2024

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