CPA Advanced Financial Reporting and Analysis December 2025 Past Paper with Answers (PDF)

1

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

(a) In the context of IPSAS 22 (Disclosure of Financial Information about the General Government Sector (GGS)), highlight SIX disclosures that should be made in respect of the GGS.

(b) With reference to IAS 24 (Related Party Disclosures), explain TWO reasons why it is important to disclose related party relationships and transactions in financial statements.

(c) With reference to the Conceptual Framework for Financial Reporting, explain TWO constraints that might hinder the achievement of the fundamental qualitative characteristics of financial information.

(d) In the context of IFRS 3 (Business Combinations), describe THREE factors that should be considered when determining which entity is the acquirer.

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2

Preparation of Financial Statements for Interests in Other entities

Pete Limited, a public limited company, is the parent company in a group that operates in the money market industry.

The following completed statements of profit or loss and other comprehensive income were extracted from the financial records of Pete Limited and its investment companies, Dave Limited and Elly Limited for the year ended 31 October 2025:

Statements of profit or loss and other comprehensive income for the year ended 31 October 2025:

	Pete Limited	Dave Limited	Elly Limited
	Sh.“million”	Sh.“million”	Sh.“million”
Revenue	5,340	4,780	3,520
Cost of sales	(2,860)	(2,570)	(1,080)
Gross profit	2,480	2,210	2,440
Distribution costs	(590)	(480)	(580)
Administrative expenses	(870)	(720)	(720)
Profit from operations	1,020	1,010	1,140
Finance costs	(230)	(180)	(220)
Profit on disposal of subsidiary	220	-	-
Profit before tax	1,010	830	920
Income tax expense	(310)	(250)	(280)
Profit for the year	700	580	640
Other comprehensive income:
Gain on property revaluation	190	150	-
Total comprehensive income	890	730	640

Additional information:

Pete Limited acquired an 80% controlling interest in Dave Limited on 1 November 2020 when the retained earnings of Dave Limited amounted to Sh.430 million. Dave Limited had in issue 200,000, Sh.10 ordinary shares. The acquisition consideration comprised of an immediate cash payment of Sh.2,740 million on 1 November 2020.
The fair value of net assets of Dave Limited at the date of acquisition exceeded their carrying amounts by Sh.720 million. This excess related to an item of plant whose remaining useful life on 1 November 2020 was eight (8) years.
Pete Limited acquired a 70% controlling interest in Elly Limited on 1 August 2021 for cash consideration of Sh.1,120 million. Elly Limited had in issue 100,000 Sh.10 ordinary shares and retained earnings of Sh.360 million at the date of acquisition. The fair value of net assts of Elly Limited approximated their carrying amounts at the date of acquisition.
Pete Limited values the non-controlling interest at fair value. The fair value of non-controlling interests in Dave Limited and Elly Limited amounted to Sh.610 million and Sh.420 million respectively at the dates of acquisition.
Pete Limited disposed of 20% of the ordinary shares in Elly Limited on 1 August 2025 for cash proceeds of Sh.540 million. The retained earnings of Elly Limited at 1 November 2024 were Sh.980 million. The fair value of the retained interest in Elly Limited was estimated at Sh.1,220 million on 1 August 2025. The disposal of shares in Elly Limited has been accounted for in the individual financial statements of Pete Limited.
Impairment tests performed on 31 October 2025 revealed that goodwill arising on acquisition of Dave Limited had been impaired to the extent of 15% until 31 October 2024 and a further 5% during the year ended 31 October 2025. No impairment was reported with respect to Elly Limited.
Profit and losses of the group companies accrued evenly over the year.

Required:

(a) Calculate the gain or loss arising from disposal of shares in Elly Limited to be presented in the consolidated statement of profit or loss and other comprehensive income.

(b) Pete Group Limited’s consolidated statement of profit or loss and other comprehensive income for the year ended 31 October 2025.

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3a

Accounting for Assets and Liabilities

Uzuri Limited, a public limited company whose financial year ends on 30 September, offers stock options to its full time employees.

On 1 October 2021, the company directors offered 5,000 stock options to each of its 300 employees on condition that they remain in employment until 30 September 2025.

The fair value of each option was Sh.16 at 1 October 2021. At the grant date, it was estimated that 10% of the employees would leave the company over the vesting period.

At 30 September 2022, ten (10) employees had left the company and the estimate of the leavers remained the same.

At 30 September 2023, another fifteen (15) employees left the company and the estimate of the possible leavers was revised to 15% over the vesting period.

At 30 September 2024, another eight (8) employees left the company and the estimate of leavers remained at 15% of the employees over the vesting period.

At the vesting date of 30 September 2025, additional seven (7) employees had left the company and therefore forfeited their stock options.

Required:

Analyse the accounting treatment of the above share-based payment transactions in the financial statements of Uzuri Limited for each of the years ended 30 September: 2022, 2023, 2024 and 2025 in line with International Financial Reporting Standard (IFRS) 2 “Share-based payments”.

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3b

Accounting for Assets and Liabilities

bonds are repayable on 31 December 2026 and the effective rate of interest is 8%. Amasa Ltd.’s business model is to collect the contractual cash flows over the life of the asset.

As at 31 December 2023, the bonds were considered to be low risk and as a result, the 12-month expected credit losses were expected to be Sh.10,000. On 31 December 2024, Jamii Ltd. paid the coupon interest. However, as at that date, the risks associated with the bonds were deemed to have increased significantly.

The present value of the cash shortfall for the year ending 31 December 2025 was estimated to be Sh.462,963 and the probability of default is 3%. On 31 December 2024, it was also anticipated that no further coupon payments would be received during the year ending 31 December 2026 and only a portion of the nominal value of the bonds would be repaid. The present value of the bonds was assessed to be Sh.6,858,710 with a 5% likelihood of default in the year ended 31 December 2026.

Required:

With reference to the IFRS 9 (Financial Instruments), demonstrate the financial reporting treatment of the bonds, including any impairment losses, in the financial statements of Amasa Ltd:

(i) As at 31 December 2023.

(ii) For the year ended 31 December 2024.

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4a

Other Reports and Emerging Issues in Financial Reporting

The adoption of sustainable practices at the corporate level could help companies to make a positive contribution towards the attainment of Sustainable Development Goals (SDGs).

Required:

(i) Explain the meaning of “corporate sustainability”.

(ii) Describe the THREE impact areas of corporate sustainability that companies which adopt corporate sustainable practices are required to report on.

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4b

Kasuku Ltd. issued a Sh.5,000,000, 18% convertible loan note at par on 1 November 2022 with interest payable annually in arrears. Three years later, on 31 October 2025, the loan note becomes convertible into equity shares on the basis of Sh.100 of loan note for 50 equity shares or it may be redeemed at par in cash at the option of the loan note holder.

Kasuku Ltd.’s accountant has observed that the use of a convertible loan note was preferable to a non-convertible loan note as the latter would have required an interest rate of 24% in order to make it attractive to investors.

The present value of Sh.1.00 receivable at the end of the year, based on discount rates of 18% and 24% are given

below:

Year	18%	24%
1	0.847	0.806
2	0.718	0.650
3	0.609	0.524

Required:

The accounting treatment for Kasuku Ltd.’s convertible loan note in the:

(i) Statements of profit or loss for the years ended 31 October 2023, 2024 and 2025.

(ii) Statement of financial position as at 31 October 2023, 2024 and 2025.

(Assume that the share option is taken on 31 October 2025).

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5

Preparation of Financial Statements for other entities

Delight Limited, a private limited company started business during the last quarter of the year ended 31 August 2024 and prepared its financial statements based on the traditional historical cost convention. However, the directors are concerned that the values of the company assets may be substantially understated and profit overstated especially in times of changing prices.

The following draft historical cost financial statements relate to the company:

Opening statement of financial position as at 1 September 2024:

Assets:	Sh.“000”
Non-current assets:
Property at cost (Land: Sh.20 million)	45,000
Office equipment at cost	4,000
	49,000
Current assets:
Inventory	22,500
Accounts receivable	14,400
Cash and cash equivalents	6,200
Total assets	92,100
Equity and liabilities:
Equity:
Ordinary share capital (Sh.10 par value)	60,000
Non-current liabilities:
Long-term loans	16,800
Current liabilities:
Accounts payable	13,600
Current tax	1,700
Total equity and liabilities	92,100

Statement of profit or loss for the year ended 31 August 2025:

	Sh.“000”
Revenue	121,600
Cost of sales	(79,200)
Gross profit	42,400
Distribution costs	(14,200)
Administrative expenses	(22,800)
Operating profit	5,400
Finance costs	(600)
Profit before tax	4,800
Income tax expense	(1,420)
Profit for the year	3,380

Additional information:

1.

The inventory at 31 August 2025 was valued at a cost of Sh.23,400,000 and was purchased when the retail price index averaged 200.

2.

On 1 January 2025, the company acquired a new motor vehicle at a cost of Sh.4,200,000 and paid in cash.

3.

Finance costs, distribution costs and administrative expenses other than depreciation, were paid for in cash during the year ended 31 August 2025.

4.

Depreciation on non-current assets has been provided based on cost at the provided rates and allocated as follows:

Asset	Rate per annum	Allocation
Building	2%	Administrative expense
Office equipment	10%	Administrative expense
Motor vehicles	20%	Distribution cost

5.

The company paid the tax obligation relating to the year ended 31 August 2024.

6.

Sales and purchases for the year ended 31 August 2025 were on credit basis. During the year ended 31 August 2025, cash received from credit customers amounted to Sh.118,000,000 while cash paid to credit suppliers was Sh.81,200,000.

7.

On 1 May 2025, the company invited the current ordinary shareholders to subscribe for a rights issue at par value on the basis of one (1) new share for every five (5) held.

8.

The general retail price indices (R.P.I.s) were as follows:

1 September 2024	112.5
1 January 2025	150
1 March 2025	180
1 May 2025	200
31 August 2025	225

9.

Assume all cash income and expenses accrued evenly over the year.

Required:

(a) Inflation-adjusted statement of profit or loss for the year ended 31 August 2025.

(b) Inflation-adjusted statement of financial position as at 31 August 2025.

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CPA Advanced Financial Reporting and Analysis – December 2025 Past Paper & Answers

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CPA Advanced Financial Reporting and Analysis – December 2025 Past Paper & Answers

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