KASNEB Financial Reporting - Question 4c

Comment on the changes between the two years as reflected in the ratios calculated in (b) above. ... [Click to view full question and step-by-step solution]

FRA December 2022 Past Paper & PDF Solutions

1a

Accounting for Assets and Liabilities

In the context of financial assets and financial liabilities:

(i) Provide an overview of what comprises a “financial asset” and a “financial liability”.

(ii) With reference to the measurement and recognition of financial assets, recommend guidance to preparers of financial statements who reclassify financial assets under the following categories:

Reclassification of a financial asset out of the amortised cost measurement category and into the face value through profit or loss measurement category.
Reclassification of a financial asset out of the amortised cost measurement category and into the fair value through other comprehensive income measurement category.

1b

Accounting and Financial Statements for Interests in Other Entities

With reference to International Financial Reporting Standard (IFRS) 11 – Joint Arrangements:

(i) Summarise TWO characteristics of a joint arrangement.

(ii) Describe the TWO types of joint arrangements.

(iii) Explain the salient provisions on what a joint operator recognises in relation to its interest in a joint operation.

1c

Public Sector Accounting Standards Accounting for Assets and Liabilities

With reference to International Public Sector Accounting Standard (IPSAS) 19 – Provisions, Contingent Liabilities and Contingent Assets:

(i) Distinguish between “provisions” and “contingent liabilities”.

(ii) Summarise the circumstances for recognition of a provision.

(iii) Indicate the accounting treatment for “contingent liabilities” and “contingent assets”

2

Preparation of Financial Statements for different entities/Transaction

Marula Farmers Cooperative Society Ltd. deals in the marketing of two brands of coffee; Safi and Mzuri on behalf of the members. As per the society’s bylaws, the society is allowed to retain 20% of sales from Safi and Mzuri for operations and pay the balance to the members.

The following trial balance was extracted from the books of the society as at 31 December 2021:

	Sh.“000”	Sh.“000”
Safi - Marketing expenses	640
Safi - Processing materials	860
Safi - Processing wages	900
Mzuri - Marketing expenses	150
Mzuri - Processing materials	320
Mzuri - Processing wages	30
Loans to members	972,340
Dividends from investments		470
Accrued rent		4,950
Sundry provision		8,930
Appropriation account		6,050
Revaluation reserve		750
Statutory reserve fund		13,740
Entrance fee		300
Share capital		900,000
Members’ deposits		64,650
Sundry creditors		3,410
Bank overdraft		6,150
Interest on loans to members		35,890
Travelling expenses - Staff	80
Travelling expenses - Committee members	100
Bank charges	200
Bank interest	810
Salaries and wages	2,290
Committee education	1,000
Committee sitting allowance	1,110
Printing and stationery	2,050
General meeting expenses	500
Members’ education	1,500
Entertainment	50
Legal fees	400
Cash in hand	540
Wakulima Bank Ltd. savings	6,780
Investment in Wakulima Bank Ltd.	26,550
Receivables - Members	2,690
Receivables - Non-members	22,500
Office equipment	900
	1,045,290	1,045,290

Additional information:

1.	Bora Limited markets Safi and Mzuri brands for Marula Society. On 31 December 2021, Bora Limited sold Safi and Mzuri brands for 175,000 United States (US) dollars and 115,300 US dollars respectively. Bora Limited remitted the above amounts to Marula Farmers’ Wakulima Bank account on 15 January 2022. Marula Farmers Cooperative Society does not maintain a US dollar account in Wakulima Bank.
2.	The exchange rates for the two currencies were as shown below on the respective dates:

		Sh./1 US dollar
	31 December 2021	105
	15 January 2022	100
3.	Audit fee of Sh.6,000,000 is to be provided for.

4.	Staff salaries and wages amounting to Sh.3,200,000 had not been paid as at 31 December 2021.
5.	Interest on members deposits is to be provided at Sh.6,086,000.
6.	As per the relevant Ministry regulations, cooperative societies are required to transfer 20% of their net earnings to a statutory reserve.
Required: Prepare the following financial statements for Marula Cooperative Society Ltd. for the year ended 31 December 2021:
(a)	Safi brand marketing account, showing the profit or loss.
(b)	Mzuri brand marketing account, showing the profit or loss.
(c)	Statement of profit or loss for the year ended 31 December 2021.
(d)	Statement of financial position as at 31 December 2021.

3a

Accounting and Financial Statements for Interests in Other Entities

On 1 January 2022, H Limited acquired 80% of the 4 million, Sh.10 ordinary shares of S Limited issued at par value.

The acquisition consideration comprised of three new ordinary shares issued by H Limited in exchange for every five shares acquired in S Limited.

Additionally, H Limited will pay further consideration on 31 December 2022 of Sh.11 per share acquired. H Limited’s cost of capital is 10% per annum and the discount factor at 10% for one year is 0.9091.

At the date of acquisition, the fair values of ordinary shares in H Limited and S Limited were Sh.15 and Sh.12 respectively.

The following statements of profit or loss for the year ended 30 September 2022, relate to the two companies:

	H Limited	S Limited
	Sh.“000”	Sh.“000”
Revenue	546,000	420,000
Cost of sales	(378,000)	(300,000)
Gross profit	168,000	120,000
Distribution costs	(36,000)	(24,000)
Administrative expenses	(42,000)	(28,000)
Profit from operations	98,000	68,000
Investment income	6,000	-
Finance costs	(4,000)	(2,000)
Profit before tax	92,000	66,000
Income tax expense	(30,000)	(24,000)
Profit for the year	62,000	42,000

Additional information:

At the date of acquisition, the fair value of S Limited’s net assets approximated their carrying values with the exception of an item of plant and equipment which had a fair value of Sh.24 million above its carrying amount. The remaining economic useful life of the plant and equipment at the date of acquisition was six years. Depreciation is charged to cost of sales.
Sales from S Limited to H Limited in the post-acquisition period amounted to Sh.30 million. S Limited reported a gross profit margin of 25% on these sales. H Limited’s inventory includes one fifth (⅕) of these goods as at 30 September 2022.
H Limited’s policy is to value the non-controlling interests at fair value at the date of acquisition. For this purpose, S Limited’s share price at acquisition date can be deemed to be representative of the fair value of the shares held by the non-controlling interest.
H Limited’s investment income is dividend received from its investment in a 40% owned associate which it has held for several years. The associate reported a profit after tax of Sh.30 million for the year ended 30 September 2022.
As at 30 September 2022, no impairment of goodwill was considered necessary.
Assume that profits and losses accrued evenly throughout the year.
As at 1 October 2021, the retained earnings of S Limited were Sh.16 million.

Required:

(i) Calculate the goodwill arising on the acquisition of S Limited.

(ii) Consolidated statement of profit or loss for H Group for the year ended 30 September 2022.

Note: All workings should be done to the nearest Sh.“000”.

3b

Accounting for Specialized Transactions

Sayari Limited obtained a 10% loan note amounting to Sh.24 million on 1 January 2021 to finance the construction of a new factory.

As the funds were not all required immediately, Sayari Limited invested Sh.10 million in 6% bonds until 31 May 2021. Construction of the factory began on 1 March 2021. However, due to an unexpected shortage of skilled labour, the project ceased during the months of July and August 2021.

By 31 December 2021, the project was not complete.

Required:

Explain, with suitable calculations, the accounting treatment of interest on costs on the loan note in the financial statements of Sayari Limited for the year ended 31 December 2021 in accordance with International Accounting Standard (IAS) 23 “Borrowing Costs”.

4a

Analysing Financial Statements

Ratio analysis has over time proven to be a useful financial tool for decision making. However, reliance on ratios for decision making has inherent limitations.

Required:

Citing SIX limitations, justify the above statement.

4b

Analysing Financial Statements

The following draft financial statements were extracted from the books of Mrima Limited as at 31 December:

Statement of profit or loss for the year ended 31 December:

	2021	2020
	Sh.“000”	Sh.“000”
Sales	1,167,800	972,600
Operating profit	41,340	34,476
Finance cost	(3,968)	(3,968)
Profit before tax	37,372	30,508
Taxation	(14,052)	(11,468)
Profit for the period	23,320	19,040
Dividends paid	(4,800)	(4,480)
Retained profit for the year	18,520	14,560
Retained profit brought forward	61,640	47,080
Retained profit brought forward	80,160	61,640

Statement of financial position as at 31 December:

	2021	2020
Non-current assets:	Sh.“000”	Sh.“000”
Equipment	25,400	9,990
Current assets:
Inventory	100,910	80,290
Trade receivables	86,740	80,420
Bank balances	11,580	24,184
	199,230	184,894
Total assets	224,630	194,884
Equity and liabilities:
Capital and reserves:
Shares of Sh.20 each	19,840	19,840
Retained earnings	80,160	61,640
	100,000	81,480
Non-current liabilities:
10% debentures	39,680	39,680
Current liabilities:
Trade payables	74,460	65,208
Taxation	6,520	4,946
Accruals	3,970	3,570
	84,950	73,724
Total equity and liabilities	224,630	194,884

Required:

Calculate for each year, TWO ratios for each of the following user groups, which are of particular significance to them:

(i) Shareholders.

(ii) Trade payables.

(iii) Internal management.

4c

Analysing Financial Statements

Comment on the changes between the two years as reflected in the ratios calculated in (b) above.

5

Preparation of Published Financial Statements

The following draft financial statements were extracted from the financial records of Maalum Limited, a public limited entity, as at 30 April 2022 with comparatives for the year ended 30 April 2021.

Statements of financial position as at 30 April:

	2022	2021
Assets:	Sh.“000”	Sh.“000”
Non-current assets:
Property, plant and equipment	36,300	27,450
Intangible assets	6,750	6,150
	43,050	33,600
Current assets:
Inventory	13,300	11,445
Trade receivables	9,230	7,080
Cash and cash equivalents	900	410
Total assets	66,480	52,635
Equity and liabilities:
Share capital and reserves:
Ordinary share capital (Sh.10 par value)	7,500	6,000
Share premium	1,350	1,050
Revaluation surplus	2,550	-
Retained earnings	28,065	25,980
Total equity	39,465	33,030
Non-current liabilities:
10% loan notes (2025)	8,250	5,250
Government grants	3,150	2,400
Deferred tax	1,920	810
Current liabilities:
Trade payables	10,200	7,770
Current tax	2,685	2,775
Government grants	810	600
Total equity and liabilities	66,480	52,635

Statement of profit or loss and other comprehensive income for the year ended 30 April 2022:

	Sh.“000”
Revenue	54,975
Cost of sales	(43,860)
Gross profit	11,115
Other operating income – government grant	750
	11,865
Other operating expenses	(2,970)
Profit from operations	8,895
Finance costs	(705)
Profit before tax	8,190
Income tax expense	(2,655)
Profit for the year	5,535
Other comprehensive income:
Gain on property revaluation	2,550
Total comprehensive income for the year	8,085

Additional information:

Maalum Limited acquired some new plant during the year to 30 April 2022 at a cost of Sh.1,800,000 from a finance company. An arrangement was made at the date of acquisition for the liability for the plant to be settled by Maalum Limited issuing at par a 10% loan note dated 2025 to the finance company. The value by which the loan note exceeded the liability for the plant was received from the finance company in cash.
The company’s motor vehicle haulage fleet with a cost of Sh.2,630,000 and accumulated depreciation of Sh.1,165,000 was disposed of during the year for cash proceeds of Sh.1,810,000. The profit on disposal has been included in the other operating expenses.
Depreciation charged on property, plant and equipment during the year was Sh.5,490,000 and was included in the cost of sales.
Intangible assets were amortised during the year and amortisation charged to profit or loss amounted to Sh.540,000.
During the year ended 30 April 2022, Maalum Limited made a bonus issue of ordinary shares of one new share for every ten shares held utilising the share premium account.

Required:

A statement of cash flows for Maalum Limited for the year ended 30 April 2022 using the indirect method in accordance with International Accounting Standard (IAS) 7 “Statement of Cash Flows”.

December 2022

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