KASNEB Advanced Financial Reporting and Analysis - Question 3a

Explain four differences between an internal reconstruction and an external reconstruction. ... [Click to view full question and step-by-step solution]

KASNEB Advanced Financial Reporting and Analysis - Question 3b

The following is the summarised statement of financial position of P Ltd. as at 30 June 2016: Sh.'million'Sh.'million'Sh.'million'Non-current assets:Tangibl... [Click to view full question and step-by-step solution]

KASNEB Advanced Financial Reporting and Analysis - Question 4b

The following information relates to Jambo Ltd: 1Net profit after tax:Year ended 31 December:201320142015Sh. 'million'3038452On 1 February 2014, a rights i... [Click to view full question and step-by-step solution]

KASNEB Advanced Financial Reporting and Analysis - Question 5a

Functions of International Financial Reporting Interpretations Committee (IFRIC)... [Click to view full question and step-by-step solution]

November 2016

Q: KASNEB Advanced Financial Reporting and Analysis - Question 5b

(i) Define the term 'social responsibility accounting'. (ii) Explain three advantages of social responsibility accounting. ... [Click to view full question and step-by-step solution]

1

Preparation of Financial Statements for Interests in Other entities

H Ltd., a public limited company based in Kenya, owns 75% of the ordinary share capital of S Ltd., a public limited company based in Rwanda. H Ltd. acquired S Ltd. on 1 May 2015 for 1,200 million Rwandan Francs (RWF) when the retained profits of S Ltd. were 800 million RWF. The functional currency of H Ltd. is the Kenya shilling (KSh). The functional currency of S Ltd. is the Rwandan Franc (RWF). S Ltd. has not revalued its assets or issued any share capital since its acquisition by H Ltd. The following financial statements relate to H Ltd. and S Ltd.

Statement of financial position as at 30 April 2016:

	H Ltd. KSh. "million"	S Ltd. RWF "million"
Assets:
Property, plant and equipment	2,970	1,460
Investment in S Ltd.	480
Loan to S Ltd.	50
Current assets	3,550	1,020
Total assets	7,050	2,480
Equity and liabilities:
Ordinary shares of KSh.10/RWF 10	600	320
Share premium	500	200
Retained earnings	3,600	950
Total equity	4,700	1,470
Non-current liabilities	300	410
Current liabilities	2,050	600
Total equity and liabilities	7,050	2,480

Income statement and other comprehensive income

	H Ltd. KSh. "million"	S Ltd. RWF "million"
Revenue	2,000	1,420
Cost of sales	(1,200)	(960)
Gross profit	800	460
Distribution and administration expenses	(300)	(200)
Profit from operations	500	260
Interest receivable	40	-
Interest payable	-	(20)
Profit before tax	540	240
Income tax expense	(200)	(90)
Profit for the year	340	150

Additional information:

1	Goodwill is reviewed for impairment annually. As at 30 April 2016, the impairment loss on recognised goodwill was RWF 42 million.
2	During the year ended 30 April 2016, S Ltd. purchased raw materials from H Ltd. and denominated the purchase in RWF in its financial records. The details of the transaction are as shown below:

	Nature of goods	Date of transaction	Selling price KSh. "million"	Profit percentage on selling price
	Raw materials	1 February 2016	60	20%

	As at 30 April 2016, half of the raw materials purchased were still in the inventory of S Ltd.
3	H Ltd. issued an interest-free loan to S Ltd. of KSh.50 million on 1 May 2015. The loan was repaid on 31 May 2016. S Ltd. included the loan in its non-current liabilities.
4	The fair value of the net assets of S Ltd. as at the date of acquisition is assumed to be the same as the carrying value.
5	H Ltd. paid a dividend of KSh.80 million during the year ended 30 April 2016. This dividend had not been included in the company's income statement.
6	The corporation tax rate is 30%.
7	It is the group's policy to value the non-controlling interest at acquisition at its proportionate share of the fair value of the subsidiary's identifiable net assets.
8	The following exchange rates are relevant to the financial statements:

		RWF to KSh.
	30 April 2015/1 May 2015	2.5
	I November 2015	2,6
	I February 2016	2.0
	30 April 2016	2.1
	Average rate for the year ended 30 April 2016	2.0

Required:

Prepare the following statements in accordance with the applicable International Financial Reporting Standards (IFRSs):

(a) Consolidated income statement for the year ended 30 April 2016.

(b) Consolidated statement of financial position as at 30 April 2016.

2

Preparation of Financial Statements for Interests in Other entities

The following are the group income statement and group statement of financial position of Kijiko group of companies for the financial year ended 31 October 2016:

Kijiko Group

Income statement for the year ended 31 October 2016.

		Sh."million"	Sh."million"
Revenue (from credit sales)			25,530
Cost of sales			(18,140)
Gross profit			7,390
Other incomes:	Investment income	250
	Share of associate company's profit	200	450
			780
Expenses:
Distribution costs		1,250
Administrative expenses		2,640
Finance costs		750	4,640
Profit before tax			3,200
Income tax expense			1,400
Profit for the year			1,800
Profit attributable to:	Holding company		1,650
	Non-controlling interest		150
			1,800

Kijiko Group

Statement of financial position as at 31 October:

	2016 Sh."million"	2015 Sh."million"
Non-current assets:
Property, plant and equipment	3,800	3,050
Intangible assets (including goodwill)	2,500	2,000
Investments: In associate company	650	500
Others		250
	6,950	5,800
Current assets:
Inventories	1,500	1,020
Trade receivables	3,900	3,150
Short-term investments	500	-
Cash balance	20	10
Total assets	12,870	9,980
Equity and liabilities:
Ordinary share capital	2,000	1,200
Revaluation reserve	1,010	910
Retained profits	1,740	1,200
Share premium	1,600	1,500
	6,350	5,110
Non-controlling interest	500	300
Non-current liabilities:
Loan notes	1,700	500
Current liabilities:
Trade payables	2,270	1,990
Bank overdraft	850	980
Current tax	1,200	1,100
Total equity and liabilities	12,870	9,980

Additional information:

1	An item of plant with an original cost of Sh.850 million and with a net book value of Sh.450 million was sold for Sh.320 million during the year ended 31 October 2016.
2	Other investments were sold for Sh.300 million during the year ended 31 October 2016.
3	During the year ended 31 October 2016, Kijiko Ltd. acquired 80% of the share capital of Sahani Ltd. The assets of Sahani Ltd. were as follows as at the date of acquisition.

		Sh."million"
	Property, plant and equipment	600
	Inventories	400
	Trade receivables	300
	Loan notes	(250)
	Trade payables	(400)
	Bank balance	(100)
	Tax	(50)
	Net assets	500

4	The following information relates to property, plant and equipment as at:

	31 October 2016 Sh."million"	31 October 2015 Sh."million"
Cost	7,200	5,950
Accumulated depreciation	(3,400)	(2,900)
Net book value	3,800	3,050

	The cost of property, plant and equipment of Sahani Ltd. on the date of acquisition was Sh.1,000 million and the accumulated depreciation on the property, plant and equipment was Sh.400 million. During the year ended 31 October 2016, there was a revaluation gain of Sh.100 million attributable to the holding company's property, plant and equipment.
5	The total purchase consideration of S Ltd. was Sh.450 million paid by issuing Sh.100 million worth of ordinary shares at par. The balance was paid in cash.
6	Depreciation and loss on sale of plant are included in the cost of sales.

Required:

Group statement of cash flows in conformity with IAS 7 (Statement of Cash Flows) for the year ended 31 October 2016 using the direct method of presentation.

3a

Preparation of Financial Statements for other entities

Explain four differences between an internal reconstruction and an external reconstruction.

3b

Preparation of Financial Statements for other entities

The following is the summarised statement of financial position of P Ltd. as at 30 June 2016:

	Sh."million"	Sh."million"	Sh."million"
Non-current assets:
Tangible: Freehold property			680
Plant			80
			760
Intangible: Patents		244
Goodwill		224	468
			1,228
Current assets:
Inventory	680
ccounts receivable	776
Investment (market value Sh.224 million)	88	1,544
Current liabilities:
Accounts payable	400
Bank overdraft	312
Debenture interest payable	36
Accruals	80
Directors' loans	160	(988)	556
			1,784
Financed by:
Share capital:
120 million ordinary shares of Sh.10 each			1,200
6% 64 million cumulative preference shares of Sh.10 each			640
			1,840
Revenue reserves:
Accumulated losses			(656)
			1,184
Non-current liabilities:
6% debentures			600
			1,784

The court approved a scheme of reorganisation submitted by the debenture holders and agreed upon by other interested parties to take effect on 1 July 2016. Details ofthe approved scheme are as follows:

1. The 6% debenture holders were to have their interest paid in cash and to take over part of the freehold property (book value Sh.160 million) at a valuation of Sh. 192 million in part repayment of their holding. The 6% debenture holders are also to provide additional cash of Sh.208 million secured by a floating charge on the company's assets at an interest rate of 12% per annum.

2. Patents and goodwill are to be written off, Sh.120 million is to be written off inventory and Sh.93.6 million is to be provided for bad debts. The remaining freehold property is to be revalued at Sh.620 million. The investment was sold at the prevailing market value.

3. The directors were to accept settlement of their loans as to 90% thereof by allotment of ordinary shares at par and as to 5% in cash. The balance of 5% was to be waived.

4. The trade payables are to be paid Sh.0.10 in every shilling to maintain and obtain an extension of the credit period.

5. The bank has sanctioned an overdraft limit of Sh.10 million to provide working capital.

6. The 6% preference dividends are four years in arrears of which three-quarters are to be waived and ordinary shares are to be allocated at par for the balance.

7. The 6% preference shares are to be written down to Sh.7.50 each and the existing ordinary shares to Sh.2 each. All the ordinary shares are to be consolidated into shares of Sh.10 each. The rate of dividends on preference shares is to be increased to 10%.

8. There are capital commitments amounting to Sh.600 million which are to be cancelled on payment of 3/% of the contract price as a penalty.

Required:

(i) The capital reduction account to record the scheme of capital reorganisation.

(ii) The statement of financial position of P Ltd. as at the close of business on 1 July 2016 immediately after effecting the scheme of reorganisation.

4a

Accounting for Assets and Liabilities

With reference to International Accounting Standard (IAS) 24 (Related Parties), explain three examples of related party relationships.

4b

Analysing Financial Statements

The following information relates to Jambo Ltd:

1	Net profit after tax:

	Year ended 31 December:	2013	2014	2015
	Sh. "million"	30	38	45

2	On 1 February 2014, a rights issue of one new share for each five shares outstanding was made at an exercise price of Sh.5.
3	Before the rights issue, the number of shares outstanding was 5,000,000.
4	The last date to exercise the rights was I March 2014.
5	The fair value of one ordinary share immediately before exercise of the rights on 1 March 2014 was Sh.11.

Required:

Earnings per share (EPS) for each of the years ended 31 December 2013, 2014 and 2015.

4c

Other Reports and Emerging Issues in Financial Reporting

As part of its staff motivation programme, Better Ltd. decided to grant each of its 600 employees 100 options to purchase the company's shares effective from 1 April 2016. These options were conditional upon one still being in employment as at 31 March 2020.

The following additional details were provided with respect to the scheme:

Year ended	Number of employees expected to terminate or leave employment	Fair value of each option Sh.
31 March 2017	25	20
31 March 2018	15	16
31 March 2019	10	16
31 March 2020	10	12

The fair value of the option was Sh.25 as at 1 April 2016. The exercise price of the option will be Sh.12 and the par value of the company's share is Sh.6. The average market price of the share over the four years to 31 March 2020 is expected to be Sh.25.

Required:

Show how Better Ltd. should report the transactions of the above scheme as per the requirements of IFRS 2 (Sharebased Payment) over the four years ending 31 March 2020. Assume that all the eligible employees will exercise their rights on 31 March 2020.

5a

Other Reports and Emerging Issues in Financial Reporting

Functions of International Financial Reporting Interpretations Committee (IFRIC)

5b

Other Reports and Emerging Issues in Financial Reporting

(i) Define the term "social responsibility accounting".

(ii) Explain three advantages of social responsibility accounting.

5c

Public Sector Accounting Standards

The following summary of receipts and payments was extracted from the records of a hypothetical Ministry of Finance for the fiscal year ended 30 June 2016:

Receipts:	Original budget Sh."billion"	Actual Sh."billion"
Taxation revenue	320	300
Borrowings - foreign	180	180
Aid from international agencies	100	90
Disposal of assets	90	100
Trading activities	200	190
Other receipts	40	30
Payments:
Education	180	170
Health	160	170
Defence	140	120
Housing	80	100
Internal security	120	120
Others	170	180

Additional information:

1	The Minister for Finance presented the following supplementary finance bills which were approved and effected: Disposal of a parastatal - Sh. 20 billion. Domestic borrowings - Sh.30 billion. Increase in expenditure for defence - Sh.10 billion. Reduction in expenditure for health - Sh.15 billion.
2	All the other receipts and payments remained as budgeted.

Required:

The statement of comparison of budget and actual amounts for the fiscal year ended 30 June 2016 in accordance with International Public Sector Accounting Standard (IPSAS) 24 (Presentation of Budget Information in Financial Statements).

November 2016

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