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Financial Reporting Revision Kit – Past exam questions and answers for kasneb CPA course.
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This revision kit consists of kasneb past paper questions and their suggested answers to act as a revision guide for those students taking kasneb courses.
 

CONTENT

 
Topic 1: Accounting for Assets and Liabilities – View Questions
Topic 2: Preparation of Financial Statements for Interests in Other entities – View Questions
Topic 3: Preparation of Financial Statements for other entities – View Questions
Topic 4: Analysing Financial Statements – View Questions
Topic 5: Public Sector Accounting Standards – View Questions
Topic 6: Other Reports and Emerging Issues in Financial Reporting – View Questions

 

 TOPIC 1

ACCOUNTING FOR ASSETS AND LIABILITIES

 

TOPIC 1

 

ACCOUNTING FOR ASSETS AND LIABILITIES

 

QUESTION 1

April 2024 Question One A and D

1. a) The objective of International Accounting Standard (IAS) 2 – Inventories, is to prescribe the accounting treatment for inventories for various types of business organisations.

 

Required:

Summarise the key requirements of IAS 2 for manufacturing entity under the following headings:

(i) Scope of the term “inventories”.                                                                     (2 marks)

(ii) Measurement of inventories.                                                                          (3 marks)

(iii) Disclosure requirements.                                                                               (3 marks)

 

ANSWER

(i)  Scope of the term inventories

Inventory is an asset heed for sale in the normal course of the business. This includes raw materials, work in progress or finished goods. Inventory also includes material and supplies that are consumed in production.

(ii) Measurement of inventories

Inventory should be stated based on the lower of cost and the net realized value (NRV). The cost shall comprise

1. Cost of purchase – This comprise purchase price, import duties and other non refundable taxes, transport cost handling and other direct costs.
2. Cost of conversion – This comprise the direct labour cost, variable production overheads and fixed production overhead.
3. Administrative cost, selling cost, abnormal losses shortage cost etc.

(ii) Disclosure requirements

1. Method adopted in determining the cost
2. The carrying amount of inventories suitably classified into raw materials WIP and finished goods
3. Inventory that was valued at net realizable value
4. Circumstances leading to written down inventories to net realizable value
5. Inventories pledged as securities
6. Accounting policy of the inventory

(d) With reference to International Financial Reporting Standard (IFRS) 9 – Financial instruments, explain the requirement for derecognition of financial instruments.

(3 marks)

ANSWER

Requirement for derecognition of financial instruments as per IFRS 9

De-recognition is the removal of a previously recognized financial instrument from entity’s financial statement de-recognition shall happen when:

• When the entity contractual rights or the assets cash flows have expired or
• The asset have been transferred to a third party along with the risks of ownership (when sold)

 

 

QUESTION 2

April 2024 Question Two

(a) The following trial balance was extracted from the books of Kaleb Ltd. as at 31 March 2024:

	Sh.“000”	Sh.“000”
Ordinary share capital		475,00
Share premium		95,000
Retained profit (1 April 2023)		184,600
8% loan note		120,000
Revenue		1,783,800
Cost of sales	1,300,500
Distribution costs	209,900
Administrative costs	258,600
Inventory (31 March 2024)	308,000
Trade receivables	382,400
Trade payables		388,300
Bank balance		27,500
Deferred tax	33,000
Property at cost (Land Sh.87 million)	457,000
Plant and equipment at cost	360,000
Motor vehicles at cost	82,000
Fixtures and fittings at cost	64,000
Accumulated depreciation (1 April 2023):
– Building		162,800
– Plant and equipment		119,400
– Motor vehicles		41,000
– Fixtures and fittings		25,600
Interest paid	9,600
Suspense account	________	42,000
	3,465,000	3,465,000

 

Additional information:               

1. During the year ended 31 March 2024, the company sold of an item of plant with a carrying amount of Sh.46,200,000 for cash proceeds of Sh.42,000,000. The disposal proceeds were credited to the suspense account.

Plant and equipment is depreciated at the rate of 12.5% per annum on reducing balance basis. Full year depreciation is provided in the year of asset purchase and none in the year of disposal. Depreciation and any gain or loss on disposal of plant and equipment should be classified under the cost of sales.

2. Depreciation on other non-current assets is provided and allocated as follows:

 

Asset	Rate per annum (%)	Basis	Allocation
Building	2	Straight line	Administration
Motor vehicles	25	Straight line	Distribution
Fixtures and fittings	10	Straight line	Administration

 

3. The 8% loan note was issued on 1 April 2023 and will be redeemable in three years’ time at a substantial premium which gives an effective interest rate of 10% per annum.
4. Tax provision for the year to 31 March 2024 was determined to be a tax credit estimated at Sh.15,700,000. In addition, at 31 March 2024, the tax bases of assets and liabilities exceeded their carrying amounts by Sh.121,000,000.

The income tax rate applicable to Kaleb Ltd. is 30%.

 

Required:

(i)  Property, plant and equipment movement schedule for the year ended 31 March 2024.

(4 marks)

(ii) Statement of profit or loss for the year ended 31 March 2024.                       (6 marks)

 

ANSWER

(i) Property, plant and equipment movement schedule for the year ended 31 March 2024

PPE movement schedule For the year ended 31 March 2024
	Property Sh 000	Plant Machinery	Motor vehicle	Furniture  fittings
Cost as per 1 April 2023	457,000	360,000	82,000	64,000
Less: Accumulated depreciation brought forward	(162,800)	(119,400)	(41,000)	(25,600)
Carrying amount at 1 April 2023 Less: disposal carrying amount	294,200 –	240,600 (46,200)	41,000 –	38,400 –
Less: Depreciation for the year	294,200 (7,400)	194,400 (24,300)	41,000 (21,000)	38,400 (6,400)
Carrying amount at 31 March 2024	286,800	170,100	20,000	32,000

 

(ii) Statement of profit or loss for the year ended 31 March 2024

 

Kalen Ltd Statement Of Profit Or Loss For The Year Ended 31 March 2024
	Sh 000
Revenue	1,783,800
Cost of sales	(1,329,000)
Gross profit	454,800
Expenses
Administrative expenses (258,600 + 7,400 + 6,400)	(272,400)
Distribution expenses (209,900 + 21,000)	(230,900)
Finance cost (W3)	(120,000)
Profit before tax	(60,500)
Tax (W4)	1,900
Profit after tax	(41,500)

 

Workings

W1

Disposal loss of plant item	Sh 000
Disposal proceed	42,000
Carrying amount	(46,200)
Disposal loss —[to cost of sale]	4,200

 

W2

Depreciation of assets

Plant & equipment = 12.5% [360,000 – 119,400 – 462,000] = 24,300

Building = 2% × 370,000 = 7,400             Admin expenses

Motor vehicles = 25% × 82,000 = 21,000              Distribution expenses

Furnitures & fittings = 10% × 64,000 = 6,400              Admin expenses

 

W3

8% of loan note

Balance as at 1 April 2023	120,000
Interest expense 10% × 120,000                   (to P&L)	12,000
Less: Coupon interest paid 8% × 120,000	(9,600)
Balance as at 31 March 2024	122,400

 

W4

Deffered tax asset

 Increase in deferred tax asset

Balance as at 1 April 2023	33,000
Balance as at 31 March 2024	36,300
Increased amount ( Tax income)	3,300

 

Tax expense

For the year [tax credit]	15,700
Deffered tax changes	3,300
	19,000

 

 

 

(b) On 30 June 2022, Fora Ltd. had a credit balance on its deferred tax account of Sh.1,340,600 all in respect of differences between depreciation and capital allowances.

 

During the year ended 30 June 2023, the following transactions took place:

1. Sh.45 million was charged against profit in respect of depreciation. The tax computation showed capital allowances of Sh.50 million.
2. Interest receivable of Sh.50,000 was reflected in profits for the period. However, only Sh.45,000 of interest was actually received during the year. Interest is not taxed until received.
3. Interest payable of Sh.32,000 was treated as an expense for the period. However, only Sh.28,000 of interest was actually paid during the year. Interest is not an allowable expense for tax purposes until it is paid.
4. During the year, Fora Ltd. incurred development costs of Sh.500,600 which it has capitalised. Development costs are an allowable expense for tax purposes in the period in which they are paid.
5. Land and buildings with a net book value of Sh.4,900,500 were revalued to Sh.6 million.
6. The tax rate is 30%.
7. Fora Ltd. has a right to offset deferred tax asset and deferred tax liabilities.

 

Required:

Determine the deferred tax liability on 30 June 2023.                                         (10 marks)

(Total: 20 marks)

 

 

 

 

 

 

ANSWER

(Income Tax IAS 12

Income statement items

	Taxable items	Accounting per item	Temporary differences
Depreciation & capital allowance	50,000,000	45,000,000	5,000,000
Interest income	(45,000)	(50,000)	5,000
Interest expenses	28,000	32,000	(4,000)
			5,001,000

 

NB: Expenses are recognized as positive and income as negative

    Statement of financial positions items

	Carrying amount	Tax base	Temporary differences
Development cost	500,600	0	500,600
Interest income	6,000,000	4,900,500	1,099,500
			1,600,100

 

Deffered tax liability as 30 June 2023

 Deffered tax account

		Balance b/d	1,340,600
		Revaluation of land
Balance c/d	1,980,330	30% × 1,099,500	329,850
	________	To profit or loss a/c	309,880
	1,980,330		1,980,330

 

 

QUESTION 1

December 2023 Question One B and C

1. 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

1. 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

1. 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

1. 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

 

1. 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

 

QUESTION 4

August 2023 Question Three A

B Limited purchased a loan note for Sh.2,000,000 on 1 April 2021 and intends to hold it until maturity. The effective interest rate is 10% per annum which was the same as the nominal rate.

 

The loan note will mature on 31 March 2024 and annual payments are in arrears. On 31 March 2022, B Limited received interest of Sh.200,000. B Limited estimated that no further interest would be received and only half of the initial capital would be repaid on 31 March 2024. The probability of default on the loan note within the next 12 months was 0.5% and the credit risk as at 31 March 2022 was low.

The 10% present value factors are as follows:

Year	1	2	3
Present value factor	0.91	0.83	0.75

 

Required:

Illustrate the accounting treatment of the investment in the loan note as at 31 March 2022 in accordance with International Financial Reporting Standard (IFRS) 9: “Financial Instruments”.

(8 marks)

ANSWER

• The credit risk on the loan has not significantly increased. A loss allowance should be made equal to 12 months expected credit loss. The loss allowance should factor in a range of possible outcomes as well as the time value of money.
• Annual interest 10% × 2,000,000. Half of this would not be received on maturity i.e. sh 1,000,000 which would be also a shortfall

Year to	Short (sh)	PV(Factor)	PV(sh)
31/3/2023	200,000	0.91	182,000
31/3/2024	200,000	0.83	166,000
31/3/2024	1,000,000	0.83	830,000
			1,178,000

Expected credit loss (12 months)0.5%x1178,000=5890

• A loss allowance of sh 5890 and a similar amount charged as a loss in the P&L for the year ended 31 March 2022.

 

   Net carrying amount

	Sh
Gross amount	2,000,000
Loss allowance	(5,890)
Net carrying amount	1,994,110

 

 

QUESTION 5

August 2023 Question Four

(a) (i) With reference to International Financial Reporting Standard (IFRS) 2 “Share based Payments” and citing examples, explain the impact of a non-market based performance condition on accounting for an equity-settled share based payment transaction.                                                                  (4 marks)

 

(ii) On 1 January 2020, Tabora Limited  granted  each  of its  180  employees  1,000  share  options.  These options would vest if the employees remained in the employment of the company until 31 December 2022.

 

On the grant date, the fair value of the share options was Sh.15 each.

 

Twenty five (25) employees left the company during the year ended 31 December 2020 and a further thirty (30) employees were expected to leave in each of the two years ended 31 December 2021 and 31 December 2022.

 

During the years ended 31 December 2021 and 31 December 2022, twenty (20) employees and eighteen (18) employees terminated their employment contracts respectively.

 

Required:

Show the extracts of financial statements for Tabora Limited for each of the three years ended 31 December 2020, 31 December 2021 and 31 December 2022 to record the above transactions.

(6 marks)

ANSWER

1. i) A non market performance condition is not related to market price of the entity’s equity instruments

• Examples of non- market performance conditions include EPS and profit targets
• Non market based performance conditions must be taken into account in determining whether an expense should be recognized in a reporting period

ii

Period	Equity	Expenses
2020	(180-25-60)×1,000×15 × 1/3 = 475,000	475,000
2021	(180-25-20-30)×1,000×15 × 2/3 = 1,050,000	575,000
2022	(180-25-20-18)×1,000×15 × 3/3 = 1,755,000	705,000

 

Income statement extract
Expenses :	2020	2021	2022
Employee Remuneration Expenses	475,000	575,000	705,000

 

Statement OF Financial Position Extract
Equity:	2020	2021	2022
Share based payment reserve	475,000	1,050,000	1,755,000

 

(b) Waigwa Limited is a public limited company quoted on the securities exchange. The company’s capital structure comprises both equity and debt financing. On 1 August 2019, the company raised additional finance by issuing Sh.24,000,000 four-year deep discount bonds.