ADVANCED FINANCIAL REPORTING AND ANALYSIS
CPA ADVANCED LEVEL
MONDAY: 22 April 2024. Afternoon Paper. Time Allowed: 3 hours.
Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings. Do NOT write anything on this paper.
QUESTION ONE
(a) The International Financial Reporting Standard (IFRS) for SMEs Accounting Standard offers relief from compliance with full IFRS Accounting Standards. It provides an alternative framework which can be applied by eligible entities in place of the full IFRS Accounting Standards.
Required:
Explain FOUR objectives of the IFRS for SMEs Accounting Standard. (4 marks)
(b) The conceptual framework refers to two main measurement bases; historical cost and current value. Management should refer to the fundamental qualitative characteristics of relevance and faithful representation when selecting a measurement basis.
Required:
Discuss FOUR factors to be considered when choosing a measurement basis. (4 marks)
(c) Q Ltd. holds the following assets measured at fair value:
1. Listed equity shares measured at quoted price.
2. Land held for sale which is measured at fair value by reference to sales prices of comparable land in a similar location (price per square metre) adjusted for key attributes such as land size.
3. Investment properties whose fair value is measured using an income approach based on discounted estimated rental income to reflect current market rates per square metre.
Required:
Identify the inputs used in each measurement of the above assets and explain how the valuation corresponds to the fair value hierarchy of International Financial Reporting Standard (IFRS) 13 “Fair Value Measurement”. (6 marks)
(d) JK Ltd. has access to two markets when selling its inventory. The markets are: Country A and Country B. Information about these markets is provided below:
Country A Country B
Total units sold (in “millions”) 16 13
Sales (Sh.“million”) 6 7
Sales price per unit (Sh.) 9 10
Transaction costs per unit (Sh.) 4 3
Transport cost per unit (Sh.) 1 1
Required:
With reference to International Financial Reporting Standard (IFRS) 13 “Fair Value Measurement” determine the:
(i) Principal market. (2 marks)
(ii) Most advantageous market. (2 marks)
(iii) Fair value of one unit of inventory. (2 marks)
(Total: 20 marks)
QUESTION TWO
(a) In the context of International Financial Reporting Standard (IFRS) 5 “Non-Current Assets Held for Sale and Discontinued Operations”, explain how non-current assets held for sale should be measured. (4 marks)
(b) P Limited, a public limited entity, is a holding company of a group of companies. During the year ended 31 March 2024, P Limited acquired a controlling interest in S Limited and disposed of part of its shareholding in A Limited.
The following draft financial statements relate to P Limited and its investment companies:
Statements of financial position as at 31 March 2024:
P Limited
Sh.“million” S Limited
Sh.“million” A Limited
Sh.“milion”
Assets:
Non-current assets:
Property, plant and equipment 4,400 4,050 1,980
Investments: S Limited
A Limited 1,300
900
6,600 4,050 1,980
Current assets 1,500 1,250 680
Total assets 8,100 5,300 2,660
Equity and liabilities:
Equity:
Ordinary share capital (Sh.10 each) 2,000 1,000 400
Share premium 800 200 100
Retained earnings 3,280 2,670 1,440
Total equity 6,080 3,870 1,940
Non-current liabilities 1,300 800 200
Current liabilities 720 630 520
Total equity and liabilities 8,100 5,300 2,660
Statements of profit or loss for the year ended 31 March 2024:
P Limited Sh.“million” S Limited Sh.“million” A Limited Sh.“million”
Revenue 4,660 3,080 1,680
Cost of sales (2,520) (1,260) (620)
Gross profit 2,140 1,820 1,060
Distribution costs (510) (400) (260)
Administrative expenses (760) (680) (360)
Profit from operations 870 740 440
Finance costs (130) (80) (20)
Profit before tax 740 660 420
Income tax expense (150) (120) (100)
Profit for the year 590 540 320
Additional information:
1. On 1 October 2023, P Limited acquired an 80% equity interest in S Limited for a cash consideration of Sh.1,300 million. Additionally, P Limited issued its ordinary shares to the owners of S Limited on the basis of three (3) shares of P Limited for every four (4) shares acquired in S Limited. The market value of the ordinary shares of P Limited as at 1 October 2023 was Sh.40 per share. This share issue has not yet been recorded in the financial statements of P Limited.
2. The fair values of the identifiable net assets of S Limited approximated their carrying values as at the acquisition date, with the exception of an item of plant whose fair value exceeded its carrying value by Sh.700 million. The plant had a remaining economic useful life of five (5) years as at 1 October 2023.
3. P Limited had acquired 75% of the ordinary shares of A Limited on 1 October 2019 when the retained earnings of A Limited stood at Sh.240 million. The purchase consideration comprised cash of Sh.30 per acquired share. No fair value adjustments were necessary with respect to the acquisition of A Limited.
4. On 1 October 2023, P Limited disposed of 45% of the ordinary shares of A Limited for cash proceeds of Sh.720 million. The remaining equity interest in A Limited held by P Limited was fair valued at Sh.680 million on 1 October 2023. The disposal of shares in A Limited is yet to be accounted for in the financial statements of P Limited.
5. The group policy is to measure the non-controlling interest in subsidiaries at their fair values at the acquisition date. The fair value of the non-controlling interest was Sh.750 million for S Limited and Sh.200 million for A Limited as at the respective dates of acquisition.
6. During the post-acquisition period, P Limited sold goods worth Sh.1,000 million on cash terms to S Limited. P Limited reported a gross profit margin of 20% on this sale. One quarter (¼) of these goods remained in the inventory of S Limited as at 31 March 2024.
7. Neither goodwill on acquisition nor investment in associate had suffered any impairment.
8. Profits and losses of all the group companies are deemed to accrue evenly throughout the financial year.
9. Neither S Limited nor A Limited had issued any ordinary shares since P Limited acquired shares in the two companies.
Required:
(i) Calculate the gain or loss on the disposal of shares in A Limited to be presented in the consolidated statement of profit or loss. (6 marks)
(ii) Prepare the consolidated statement of financial position as at 31 March 2024. (10 marks)
(Total: 20 marks)
QUESTION THREE
(a) On 1 January 2023, Tunza Ltd. had in issue 43,200,000 ordinary shares of Sh.10 par value each and 12,000,000, 12% convertible redeemable preference shares of Sh.10 par value each. The preference shares are convertible into ordinary shares on the basis of 80 ordinary shares for each Sh.100 of the preference share capital. Tunza Ltd.’s profit after tax from continuing operations for the year ended 31 December 2023 amounted to Sh.201,600,000 and for the year ended 31 December 2022, it was Sh.97,200,000.
The average market value per ordinary share during the year ended 31 December 2023 was Sh.20.
Additional information:
1. On 1 April 2023, the company invited the current ordinary shareholders to subscribe for a rights issue on the basis of 2 new shares for every 3 held at a concessionary price of Sh.15 per share when the market value on cum-rights basis was Sh.20 per share.
2. On 1 July 2023, Tunza Ltd. issued 36,000,000 ordinary shares at their full market price.
3. On 1 September 2023, the company made a 1 for 3 bonus issue of ordinary shares using the share premium account.
4. On 1 October 2023, holders of Sh.80,000,000 12% convertible preference shares exercised their conversion rights.
Required:
(i) Calculate the basic earnings per share for the year ended 31 December 2023. (6 marks)
(ii) Calculate the restated earnings per share for the year ended 31 December 2022. (2 marks)
(iii) Calculate the diluted earnings per share for the year ended 31 December 2023. (6 marks)
(b) Integrated reporting advances the proposition that sustainability reporting and financial reporting are inherently linked and thus would benefit from merging.
Required:
Explain the THREE main aspects of an integrated report. (6 marks)
(Total: 20 marks)
QUESTION FOUR
(a) According to International Public Sector Accounting Standard (IPSAS) 36, “Investments in Associates and Joint Ventures”, an entity with joint control or significant influence over an investee should apply the equity method unless exempted.
Required:
Discuss THREE exemptions to applying the equity method of accounting according to IPSAS 36. (6 marks)
(b) On 1 April 2021, each of the seven directors of Hill Ltd. received 16,000 share options as an award. Hill Ltd. prepares its accounts to 31 March each year. The condition attached to the award of the share options was that the directors must remain in employment for three years. The fair value of each share option as at the grant date was Sh.100. The fair value of each share option as at 31 March 2022, 2023 and 2024 was Sh.105, Sh.110 and Sh.115 respectively.
As at 31 March 2022, it was estimated that two directors would leave before the end of three years. Due to an economic upturn, the estimate of the number of directors who were going to leave as at 31 March 2023 was revised to one director. The expense for the year as regards the share options had not been included in the statement of profit or loss for the current year and no director had left by 31 March 2023. However, one director eventually left the company by 31 March 2024.
Required:
Demonstrate the accounting treatment of the above share option transactions in the financial statements of Hill Ltd. for the years ended 31 March 2022, 2023 and 2024. (8 marks)
(c) On 1 January 2023, Kauma Limited issued 10,000 bond instruments with a face value of Sh.100 each at a market price of Sh.95 per instrument. Bond brokers charged fees totaling Sh.18,000 in relation to the bond issue. The bonds carry a coupon rate of 5% and are redeemable in 3 years at face value.
Kauma Limited wishes to account for the bonds using IFRS 9 “Financial Instruments” specifically the amortised cost method. However, there was some confusion about how the bonds should be accounted for. The cash received from the bond issue of Sh.950,000 has been recognised as a non-current liability. The broker fees of Sh.18,000 were deducted from the non-current liability carrying amount and the coupon payment of Sh.50,000 has been expensed in arriving at profit before tax. The effective rate of interest is 7.62%.
Required:
The necessary accounting treatment, with justification, of the above transaction in conformity with the requirements of IFRS 9 “Financial Instruments” for the year ended 31 December 2023. (6 marks)
(Total: 20 marks)
QUESTION FIVE
The following draft financial statements relate to Bustani Group:
Consolidated statements of financial position as at 31 December:
2023 2022
Sh.“million” Sh.“million”
Assets:
Non-current assets:
Property, plant and equipment 7,510 5,180
Goodwill 1,540 1,160
Interest in joint venture 400 290
Total non-current assets 9,450 6,630
Current assets:
Inventory 1,360 1,290
Trade receivables 1,430 1,250
Cash and cash equivalents 1,060 880
Total current assets 3,850 3,420
Total assets 13,300 10,050
Equity and liabilities:
Equity:
Ordinary share capital (Sh.10 par value) 4,000 2,000
Share premium 400 200
Revaluation surplus 800 440
Exchange reserve (losses) (570) (330)
Retained earnings 1,240 1,170
Equity attributable to group owners 5,870 3,480
Non-controlling interests 2,160 1,800
Total equity 8,030 5,280
Non-current liabilities:
Long term loan 2,070 1,590
Deferred tax 990 1,020
Total non-current liabilities 3,060 2,610
Current liabilities:
Trade payables 1,600 1,690
Current tax 610 470
Total current liabilities 2,210 2,160
Total equity and liabilities 13,300 10,050
Consolidated statement of profit or loss and other comprehensive income for the year ended 31 December 2023: Sh.“million”
Revenue 5,640
Cost of sales (4,160)
Gross profit 1,480
Distribution costs (340)
Administrative expenses (480)
Profit from operations 660
Finance costs (160)
Share of profit of joint venture 240
Profit before tax 740
Income tax expense (220)
Profit for the year 520
Other comprehensive income/losses:
Items that will not be reclassified to profit or loss:
Gain on revaluation of property 360
Items that may be reclassified to profit or loss:
Loss on retranslation of foreign subsidiary (300)
Total comprehensive income for the year 580
Profit for the year:
Attributable to the owners of the parent 440
Attributable to the non-controlling interest 80 520
Total comprehensive income for the year:
Attributable to the owners of the parent 560
Attributable to the non-controlling interest 20 580
Additional information:
1. During the year ended 31 December 2023, Bustani Limited acquired 75% of the 100 million ordinary shares of Sh.10 par value each of Kesho Limited, a local subsidiary. The acquisition consideration comprised cash of Sh.880 million and a share exchange of two (2) ordinary shares in Bustani Limited for every three (3) shares acquired in Kesho Limited. The market value of Bustani Limited’s ordinary shares as at the date of acquisition was Sh.12 per share.
The fair values of the identifiable net assets of Kesho Limited as at the date of acquisition were determined as follows:
Sh.“million”
Property, plant and equipment 820
Inventory 350
Trade receivables 320
Cash and cash equivalents 70
Trade payables (210)
Current tax (40)
1,310
The fair value of the non-controlling interest in Kesho Limited as at the acquisition date was Sh.340 million.
2. Depreciation on property, plant and equipment for the year ended 31 December 2023 charged to profit or loss amounted to Sh.310 million.
3. During the year ended 31 December 2023, Bustani Limited revalued its property for a gain of Sh.360 million. Bustani Limited does not make an inter-reserve transfer for the excess depreciation upon revaluation.
4. The group policy is to measure the non-controlling interest in all subsidiaries, including the foreign subsidiary, at their fair values at acquisition dates.
5. The movement in the exchange reserve (losses) relates to the retranslation of net assets and goodwill of an 80% owned foreign subsidiary and comprises the following elements:
Sh.“million”
Property, plant and equipment (210)
Goodwill (45)
Inventory (60)
Trade receivables (80)
Trade payables 70
Current tax 25
(300)
6. Ignore deferred tax consequences on the acquisition of the subsidiary and on the revaluation of property.
Required:
Consolidated statement of cash flows for Bustani Group for the year ended 31 December 2023 using the indirect method in accordance with International Accounting Standard (IAS) 7 “Statement of Cash Flows”.
(Total: 20 marks)
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