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TOPIC 1
ACCOUNTING FOR ASSETS AND LIABILITIES
QUESTION 1
December 2023 Question One B and C
b) Titans Ltd. which is a wholly owned subsidiary of Venus Ltd. is a cash generating unit in its own right. The value of property, plant and equipment of Titans Ltd. as at 31 October 2023 was Sh.6 million and purchased goodwill was Sh.1 million before impairment loss. The company had no other assets or liabilities. An impairment loss of Sh.1.8 million had occurred as at 31 October 2023. The directors wish to know how the impairment loss will affect the deferred tax liability for the year. Impairment losses are not an allowable expense for taxation purposes. The tax base of the property, plant and equipment as at 31 October 2023 was Sh.4 million.
Required:
Assuming a corporate tax rate of 30%, discuss with suitable computations how the above situation will impact on accounting for deferred tax under IAS 12 (Income Taxes) in the group financial statements of Venus Group. (8 marks)
(c) Saruji Ltd. operates a defined benefit scheme which had a net obligation of Sh.120 million as at 31 December 2021. The following details relate to the scheme for the financial year ended 31 December 2022:
Sh.“million”
Current service cost 55
Cash contribution to the scheme 100
Benefits paid during the year 80
Net loss on curtailment 11
Gain on remeasurement of liability as at 31 December 2022 9
The rate of interest applicable to corporate bonds was 5% as at 31 December 2021. The cash contributions to the scheme have been correctly accounted for in the financial statements for the year ended 31 December 2022. This is the only adjustment that has been made in respect of the scheme.
Required:
Recommend to the directors of Saruji Ltd. the correct accounting treatment of the above transactions in the financial statements for the year ended 31 December 2022, including financial statements extracts in accordance with IAS 19 (Employee Benefits). (6 marks)
ANSWER
b) The imparement loss in the financial statement of Titans ltd reduces the carrying value PPE but is not tax allowable.
This is the tax base of PPE is different from its carrying value and there is a temparary difference
Under IAS 36, impairement of assets is first allocated to goodwill and then other asset.
Asset Cost Impairment Carrying value
Identifiable 6,000 (800) 5,200
Goodwill 1,000 1,000 0
7,000 1,800 5,200
IAS 12 provides that no deffered tax should be recognized on goodwill and therefore, only the impairment loss relating to PPE affects tax as follows:
Before impairment After Difference
Carrying amount 6,000 5,200
Tax base (4,000) (4,000)
Temporary difference 2,000 1,200
Tax liability 30% 600 360 240
Impairment loss thus reduces deffered tax liability by Sh 240,000
c) Defined plan liability
The defined benefit scheme for the year should have been recorded as follows
Sh million
Net obligation b/d (31 Dec 2021) 120
Add: Current service cost 55
Loss on curtailment 11
Interest cost 5%x120 6
Less: Benefit paid (80)
112
Measurement gain/Acturial gain (9)
Net person liability as at 31 Dec 2022 103
The cash contribution to the scheme do not affect the net liability for the year. The cost incurred i.e. service cost, interest cost and loss on curtailment should be expressed to profit and loss then measurement gain to other comprehensive income.
Income statement extract for the year ended 31 December 2022
Expenses Sh Million Sh Million
Current service cost 55
Less on curtailment 11
Finance cost 6 (72)
Other Comprehensive income
Measurement gain 9
63
Statement of financial position extract
as at 31 December 2022
Equity and liabilities Sh Million
Reameasurement component 9
Non current liabilities
Net defined obligation 103
QUESTION 2
December 2023 Question Three B and C
(b) The purpose of the statement of profit or loss and other comprehensive incomes is to show an entity’s financial performance in a way that is useful to a wide range of users. However, the accounting treatment and guidance with respect to other comprehensive incomes has been criticised recently.
Required:
Discuss FOUR criticisms that have been raised in respect to the accounting treatment of other comprehensive incomes. (4 marks)
(c) A division of Ziwa Ltd. has the following non-current assets which are stated at their carrying values as at 31 December 2022:
Sh.“million” Sh.“million”
Goodwill 70
Property, plant and equipment:
Land and buildings 320
Plant and machinery 110 430
500
Since the assets are used to produce a specific product, it is possible to identify the cash flows arising from their use. The management of Ziwa Ltd. believes that the value of these assets may have become impaired, because a major competitor has developed a superior version of the same products.
Forecast cash inflows arising from the use of the assets are as follows:
Year ended Sh.“million”
31 December 2023 185
31 December 2024 160
31 December 2025 130
The following additional information is useful:
1. The directors are of the opinion that the market would expect a pre-tax return of 12% on an investment in an entity that manufactures a product of this type.
2. The land and buildings are carried at revaluation. The surplus relating to the revaluation of the land and buildings that remain in the revaluation surplus reserve as at 31 December 2022 is Sh.65 million. All other non-current assets are carried at historical cost.
3. The goodwill does not have a market value. It is estimated that the land and buildings could be sold at Sh.270 million and the plant and machinery could be sold for Sh.50 million net of direct selling costs.
Required:
(i) Calculate impairment loss to be recognised in the accounts of Ziwa Ltd. (6 marks)
(ii) Explain how the loss will be treated in the financial statements for the year ended 31 December 2022. (6 marks)
(Total: 20 marks)
ANSWER
b) Some of the criticism of other comprehensive income (OCI) are:
• There is no consistent basis across IFRS for determining when a gain or loss and when it is recognized in OCI. This often means that the OCI is not fully understood by the users of the financial statement
• Many users ignores OCI since the gains and losses reported there are not related to operating flows of an entity. As a result, material losses presented in OCI may not be given the attention that they require. Material losses presented in OCI may not be given the attention that they require
• There are differences between IFRS and USGMP in respect of OCI. This reduces the comparability of profit based performance measures.
• The notion of a recycling gains and losses from OCI is unclear.
c)
Impairment loss Sh Million
Carrying amount 500
Recoverable amount (385)
Impairment loss 115
Working
W1
Value in use
Year Cash flows PVIF12% PV
2023 185 0.829 165.19
2024 160 0.7972 127.55
2025 130 0.7118 92.53
385.00
W2
Fair value less cost to sell
Goodwill 0
Freehold 270
Land & building 50
320
ii) Allocation of impairment loss
IAS 36 requires impairment loss to be allocated to various non current in the following order
1. First write of any goodwill
2. Then allocate The balance to other non current asset in their proportion to their carrying amount
Assets Carrying amount Impairment loss
Good will 70 (70) 0
Land and building 320 (33) 287
Plant and machinery 110 (12) 98
500 115 385
Allocation 115 – 70 = 45
Land and building 320 0.74 0.74 × 45 = 33
Plant 110 0.26 0.26 × 45 = 12
430
QUESTION 3
December 2023 Question Four B
On 1 April 2019, M Ltd. granted 500 share appreciation rights (SARs) to each of its 300 employees. All of the rights vested on 31 March 2021 and could be exercised from 1 April 2021 up to 31 March 2023. At the grant date, the value of each SAR was Sh.10 and it was estimated that 5% of the employees would leave during the vesting period. The fair values of the SARs at various dates were as follows:
Date Fair value of SAR (Sh.)
31 March 2020 9
31 March 2021 11
31 March 2022 12
All the employees who were expected to leave employment, did leave the company as expected before 31 March 2021. On 31 March 2022, 60 employees exercised their options when the intrinsic value of the right was Sh.10.50 and were paid in cash.
The Chief Accountant of M Ltd. is, however, confused as to whether to account for the SARs under IFRS 2 (Share-based Payment) or IFRS 13 (Fair Value Measurement) and would like to be advised as to how the SARs should have been accounted for from the grant date up to 31 March 2022.
Required:
Advise the Chief Accountant of M. Ltd. on how the above transactions should be accounted for in its financial statements with reference to the relevant International Financial Reporting Standards (IFRSs). (12 marks)
ANSWER
M Ltd will account for this transaction under the provisions of IFRS 2 share based payment). IFRS 13 (fair value measurement) applies when another IFRS require or permits fair value measurements. IFRS 13 excludes transactions covered by certain other standards including share based payment transactions with the scope of IFRS and leasing transaction with scope IFRS 16 (leases)
Therefore share based payment transaction are outside the scope of IFRS 13. Far cash settle share – based payment transactions, the fair value of the liability is measured in accordance with FRS 2 initially, at each reporting date and at the date of settlement using an option pricing model. Unlike equity settled transactions, the measurement reflects all conditions and outcome on weighted average basis.
Period Liability Expenses
2020 300 × 95 × 500 × 9 × ½ = 641,250 641,250
2021 300 × 95% × 500 × 11 × 2/2 = 1,567,500 926,250
2022 (285-60) × 500 × 12 = 135,000 = 97,500.00 97,500 (W1)
Working 1
• Cash paid is 60 × 500 × 10.5 = 315,000
• The liability has reduced by 217,500 (1567500 – 1350,000)
• Expenses difference therefore sold be 315,000 – 217500 = 97,500
PAPER NO. 14 ADVANCED FINANCIAL REPORTING AND ANALYSIS
UNIT DESCRIPTION
This paper is intended to equip the candidate with knowledge, skills and attitudes that will enable him/her to account for more complex transactions, prepare advanced financial statements and reports in the private and public sectors and demonstrate awareness of trends in accounting practice.
LEARNING OUTCOMES
A candidate who passes this paper should be able to:
• Prepare financial statements for subsidiaries, associates and jointly controlled entities in compliance with International Financial Reporting Standards (IFRSs) and International Public Sector Accounting Standards (IPSASs) as applicable
• Analyse financial statements for public and private sector entities
• Account for complex accounting transactions
• Apply ethical standards in accountancy work and practice
CONTENT
1. Accounting for Assets and Liabilities
1.1 (Assets and Liabilities as covered in Financial Accounting and Financial Reporting are also relevant here)
1.2 Leases Including Sale and leaseback and dealers in leased assets
1.3 Deferred Tax (With group aspects)
1.4 Employee Benefits
1.5 Share Based Payments
1.6 Financial Assets and Financial Liabilities (Impairment, Hedging, Embedded Derivatives and Disclosures)
1.7 Fair Value Measurement
1.8 Impairment of Assets
2. Preparation of Financial Statements for Interests in Other entities
2.1 Subsidiaries (Including foreign subsidiaries, piecemeal acquisitions, reduction in shareholding and disposals as well as statement of cash flows)
2.2 Accounting for Associates and Joint Ventures (Including foreign entities)
2.3 Disclosures of interests in other entities
3. Preparation of Financial Statements for other entities
3.1 Financial Statements for Banks
3.2 Financial Statements for Insurance Companies
3.3 Interim Financial Statements
3.4 Financial Statements in a hyperinflationary economy (including the preparation of financial statements)
3.5 Financial Statements complying with IFRS for SMEs.
4. Analysing Financial Statements
4.1 Earnings Per Share
4.2 Related Party Disclosures
4.3 Operating Segments
4.4 Financial Reorganisations and reconstructions
5. Public Sector Accounting Standards
5.1 Segment Reporting
5.2 Related Party Disclosures
5.3 Impairment of cash generating assets and non-cash generating assets
5.4 Disclosure of information about the general government sector
5.5 Consolidated Financial Statements
5.6 Investments in Associates and Joint Ventures
6. Other Reports and Emerging Issues in Financial Reporting
6.1 The conceptual Framework and the process of developing new accounting standards
6.2 Proposals to revise/update existing standards and recommendations to issue new ones (Discussions Papers and Exposure drafts)
(The Examinations Board shall provide guidelines on which Discussion Papers and Exposure drafts are examinable for specific years)
6.3 Management Commentary (Management Discussion and Analysis)
6.4 Capital Markets Authority Corporate Governance Reporting Requirements
6.5 Global Reporting Initiatives Guidelines on Sustainability Reporting
6.6 Integrated Reporting
6.7 Materiality Guidelines for Financial Reporting
6.8 Legal and Ethical issues in Financial Reporting.