P1-Q and as-Advanced Financial Accounting and Reporting- June 2010 Dec 2010 and June 2011

8/18/2019 P1-Q and as-Advanced Financial Accounting and Reporting- June 2010 Dec 2010 and June 2011

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ZAMBIA INSTITUTE OF CHARTERED ACCOUNTANTS

PROFESSIONAL LEVEL

P1: Advanced Financial Accounting and Reporting

June 2010

December 2010

June 2011

QUESTION PAPERS AND SUGGESTED SOLUTIONS


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Table of ontents

JUNE 2010 ADVANCED FINANCIAL ACCOUNTING AND REPORTING ............ 3

SUGGESTED SOLUTIONS.............................................................. 14

DECEMBER 2010 ADVANCED FINANCIAL ACCOUNTING AND REPORTING .......... 32


JUNE 2011 ADVANCED FINANCIAL ACCOUNTING AND REPORTING .......... 66



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CHARTERED ACCOUNTANTS EXAMINATIONS

PROFESSIONAL LEVEL

P1: ADVANCED FINANCIAL ACCOUNTING AND REPORTING

SERIES: JUNE 2010

TOTAL MARKS – 100 TIME ALLOWED: THREE (3) HOURS

INSTRUCTIONS TO CANDIDATES

1. You have ten (10) minutes reading time. Use it to study the examination paper carefully so

that you understand what to do in each question. You will be told when to start writing.

2 There are FIVE questions in this paper. You are required to attempt any FOUR questions.

ALL questions carry equal marks.

3. Enter your student number and your National Registration Card number on the front of the

answer booklet. Your name must NOT appear anywhere on your answer booklet.4. Do NOT write in pencil (except for graphs and diagrams).

5. The marks shown against the requirement(s) for each question should be taken as an

indication of the expected length and depth of the answer.

6. All workings must be done in the answer booklet.

7. Present legible and tidy work.

8. Graph paper (if required) is provided at the end of the answer booklet.


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Attempt any 4 (four) out of 5 (five) questions.

Question 1

The following information relate to the Grape plc group of companies as at 31 October 2009.The summarized statements of financial position of these three companies at 31 October 2009

were as follows:

Non Current AssetsGrape plc

K’m Orange plc

K’m Lemon plc

K’m

Property, plant and equipment 2,140 1,063 720

Investment in subsidiary – at cost 1,452 500

Other investments 200 100

Current assetsInventory 350 212 108

Trade receivables 213 127 82

Cash and bank 234 26 19

Total assets 4,589 2,028 929

Equity shares - K1 shares 500 200 100

Retained earnings 3,215 1,330 510

Total Equity 3,715 1,530 610

Non current liabilitiesDeferred tax 500 300 200

Current liabilities

Trade payables 262 151 92

Taxation payable 112 47 27

Total equity and liabilities 4,589 2,028 929

Additional information

1. On 1 November 2008 Grape plc acquired 160 million of the equity shares and voting rights ofOrange plc.

2. Orange plc acquired 75 million of the equity shares and voting rights of Lemon plc on 1November 2006.

3. At the dates of share purchases the following information is known:


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Company Date Equity shares RetainedEarnings

K’m K’m

Orange plc 1 November 2006 200 560Orange plc 1 November 2008 200 800

Lemon plc 1 November 2006 100 240

Lemon plc 1 November 2008 100

1. With the following exceptions, the fair value of the assets of investee companies closelyapproximated their book value at the relevant acquisition dates:

Company Asset Book value Fair value

K’m K’m

Orange plc Inventory* 147 197

Orange plc Equipment** 200 400

* All of this inventory had been sold by 31 October 2009

**This equipment was purchased in 2007 and is depreciated over its five year

life on a straight line basis. It is still held by Orange plc.

2. During 2009, the following intra group trading took place:

Selling company Buying company Sales at transfer Profit on sales

Price K’m

Orange plc Grape plc 280 40% on cost

25% of these transfers were held as inventory at 31 October 2008.

3. Orange plc has levied a management charge of K10 million per annum on Lemon plc forservices which it provides. In 2009 Lemon plc has neither paid this charge nor accrued it asoutstanding.

4. The dividends payable were declared before the Statement of Financial Position Date andare therefore included as liabilities. No dividends receivable have been accrued by parentcompanies.

5. In the year of purchase, a full year’s depreciation is provided in respect of non current assets

and no depreciation is provided in the year of disposal.Required:

(a) Prepare a Consolidated Statement of Financial Position of Grape plc as at 31 October2009. (20 marks)

(b) Explain why the fair value of a company’s assets is used in the preparation ofconsolidated financial statement. (5 marks)

(Total 25 marks)


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Question 2

The following group draft financial statements relate to Chiteta plc:

Draft group statements of financial position as at 31 October2009 2008

K’m K’m

Non Current Assets

Property, plant and equipment 10,340 8,220

Goodwill 240 260

Investment in Associate 120

Current Assets

Inventories 5,300 4,600

Trade receivables 4,800 3,000Cash and cash equivalents 280 600

Total Assets 21,080 16,680

Equity shares 800 740

Other reserves 240 160

Retained earnings 2,500 2,200

Shareholders’ funds 3,540 3,100

Non controlling interest 400 360

Non Current liabilities

Long term borrowings 6,200 5,400Deferred tax 800 600

Current liabilities

Trade payables 9,400 5,600

Interest payable 140 80

Current tax payable 600 1,540

Total equity and liabilities 21,080 16,680

Draft Group Statement of Comprehensive Income for the year 31 October 2009

K’m

Revenue 35,000

Cost of sales (29,200)

Gross profit 5,800

Distribution expenses (3,740)

Administrative expenses (980)

Finance costs (296)

Gain on disposal of subsidiary 16


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Profit before tax 800

Tax (320)

Profit for the year 480

Attributable to:Owners of the parent 400

Non Controlling Interest 80

Profit for the year 480Draft Statement of Changes in Equity of the parent for the year ended 31 October 2009

EquityShares

Other reserves RetainedEarnings

Total

K’m K’m K’m K’m

Balance at 31 October 2008 740 160 2,200 3,100

Profit for the year 400 400

Dividends (100) (100)

Issue of share capital 60 60 120

Share options issued 20 20

Balance at 31 October 2009 800 240 2,500 3,540

The following information relates to the draft group financial statements of Chiteta plc:

(i) There had been no disposal of property, plant and equipment during the year. Thedepreciation for the period included in cost of sales was K520 million. Chiteta plc had issued

share options on 31 October 2009 as consideration for the purchase of plant. The value ofthe plant purchased was K18 million at 31 October 2009 and the share options issued had amarket value of K20 million. The market value had been used to account for the plant andshare options.

(ii) Chiteta plc had acquired 25% of Kasaji plc on 1 November 2008. The purchaseconsideration was 50 million equity shares of Chiteta plc valued at K100 million and Cash ofK20 million. Chiteta plc has significant influence over Kasaji plc. The investment is stated atcost in the draft group statement of financial position. The reserves of Kasaji plc at the dateof acquisition were K40 million and at 31 October 2009 were K64 million. Kasaji plc has soldinventory in the period to Chiteta plc at a selling price of K32 million. The cost of inventory

was K16 million and the inventory was still held by Chiteta plc at 31 October 2009. Therewas no goodwill arising on the acquisition of Kasaji plc.

(iii) Chiteta plc owns 60% of a subsidiary Ndumba plc. The goodwill attributable to the parentcompany arising on acquisition was K180 million. The carrying value of Ndumba plc’sidentifiable net assets (excluding goodwill arising on acquisition), in the Group ConsolidatedFinancial Statements is K480 million at 31 October 2009. The recoverable amount ofNdumba plc is expected to be K520 million and no impairment loss has been recorded up to31 October 2008.


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(iv) On 30 April 2009 a wholly owned subsidiary, Musole plc was disposed of. Musole Plcprepared interim financial statements on that date which are as follows:

K’m

Property, plant and equipment 20

Inventory 16

Trade receivables 8

Cash and cash equivalents 10

54

Equity Shares 20

Retained earnings 8

Trade payables 12

Current tax payables 1454The consolidated carrying value of the assets and liabilities at that date were the same as above.

The group received cash proceeds of K64 million and the carrying amount of goodwill was K20

million. The non controlling interest is not measured at fair value.

(Ignore the taxation effects of any adjustments required to the group financial statements

and round off all calculations to the nearest K million).

Required:

(a) Prepare a Group Statement of Cash Flows using the indirect method for Chiteta group for theyear ended 31 October 2009 in accordance with IAS 7 Statement of Cash Flows after makingany necessary adjustments required to the draft Group Financial Statements of Chiteta plc asa result of the information above. (20 marks)

(b) Discuss the usefulness of Group Statement of Cash Flows in corporate reporting. (5 marks)(Total 25 marks)


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Question 3

In the year ended 31 March 2009, Kayombo plc carried out the following two transactions:

(a) Transaction 1

On 1 May 2008 Kayombo began to lease some land. The lease was for 50 years and wascorrectly assessed by Kayombo to be an operating lease. The annual lease rentals were

K4 million, payable on 30 April 2009 in arrears. However, during its negotiations with

Kayombo, the lessor agreed to a two year rent free period at the start of the lease. Therefore

the first payment is not due until 30 April 2011 and Kayombo will make only 48, rather than 50

payments.

Kayombo intended to build a factory on this land and on 1 June 2008 borrowed K80 million at

an annual interest rate of 9% to partly finance its construction. Construction commenced on 1

July 2008 and Kayombo incurred the following costs from that date:

(i) Construction materials purchased totalled K55 million. They should have only neededmaterials costing K50 million but materials costing K5 million were wasted during theconstruction period due to an error by the construction team.

(ii) The construction team were paid at the rate of K8 million per month throughout theconstruction period.

(iii) It is the policy of Kayombo to allocate general administrative costs to all projects toensure that their profitability can be accurately assessed. The amount of such coststhat were allocated to the factory construction was K2.5 million per month, usingKayombo’s standard cost allocation model.

(iv) The factory was completed on 31 October 2008 and began production on 1 January2009. In the two month period from 31 October 2008 to 1 January 2009 Kayombospent K5 million publicizing the new factory and arranged for an opening ceremony totake place on 1 January 2009 at a cost of K1 million. The directors estimate that thefactory will generate economic benefits for Kayombo until 30 April 2058.

Required:(a) Compute the amounts that will be included in the Income Statement for the year ended

31 March 2009 in respect of the lease of the land. Your figures should be supported byappropriate explanations. (4 marks)

(b) Compute the carrying amount of the factory in the Statement of Financial Position at 31

March 2009. Your figures should be supported by appropriate explanations, both foramounts you include and for amounts you exclude. (12 marks)


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(b) Transaction 2

On 1 December 2008 Kayombo plc opened a new factory in an area designated by

government as an economic development area. On that day the government provided

Kayombo plc with a grant of K300 million to assist it in the development of the factory. Thisgrant was in three parts:

(i) K60 million of the grant was a payment by the government as an inducement toKayombo to begin developing the factory. No conditions were attached to this part ofthe grant.

(ii) K150 million of the grant related to the construction of the factory at a cost ofK600 million. The land was leased so the whole of the K600 million is depreciable overthe estimated 40 year useful life of the factory.

(iii) The remaining K90 million was received subject to keeping at least 200 employeesworking at the factory for a period of at least five years. If the number drops below 200

at any time in any financial year in this five year period, then 20% of the grant isrepayable in that year. From 1 December 2008, workers employed at the factory were220 and estimates are that this number is unlikely to fall below 200 over the relevantfive year period.

Required:

Explain how the grant of K300 million should be reported in the Financial Statements ofKayombo plc for the year ended 31 March 2009. (9 marks)

(Total 25 marks)


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Question 4

Related party relationships and transactions are a normal feature of business. Enterprises often

carry on their business activities through subsidiaries and associates and it is inevitable that

transactions will occur between group companies. Until recently, the disclosure of related partyrelationships and transactions has been regarded as an area which has a relatively low priority.

However, financial scandals have emphasized the importance of an accounting standard in this

area.

Required:

(a) (i) Justify why the disclosure of related party relationships and transactions is animportant issue in corporate reporting. (6 marks)

(ii) Discuss the view that small companies should be exempt from the disclosure of relatedparty relationships and transactions on the ground of size. (4 marks)

(b) Assess whether the following events would require disclosure in the financial statements ofPande, a merchant bank, and its group of companies. During the financial year to 31October 2009, the following events occurred:

(i) The company agreed to finance a management buyout of a group company, Shimalimited. In addition to providing loan finance, the company has retained a 25% equityholding in the company and has a key Director on the main board of Shima limited.Pande received management fees, interest payments and dividends from Shima Ltd..

(6 marks)

(ii) On 1 July 2009, Pande sold a wholly owned subsidiary, Mbuji limited, to Musole plc.During the current financial year Pande supplied Mbuji limited with second handoffice equipment and Mbuji limited leased its factory from Pande. The transactionswere all contracted for at market rates. (4 marks)

(iii) The retirement benefit scheme of the group is managed by another merchant bank. An investment manager of the group retirement benefit scheme is also a nonexecutive director of the Pande group and received an annual fee for his services ofK5 million which is not material in the group context.

(iv) The company pays K3,200 million per annum into the scheme and occasionally

transfers assets into the scheme. In 2009, non current tangible assets of K2,000million were transferred into the scheme and a recharge of administrative costs ofK600 million was made. (5 marks)

(Total 25 marks)


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Question 5

The directors of Mufuka plc had discussed a report from Environmental Council of Zambia (ECZ)

which indicated that over 40% of the world’s big corporations ar e voluntarily releasing green

reports to the public to promote corporate environmental performance and to attract customers andinvestors. They have heard that their main competitors are applying the “Global Reporting

Initiative” (GRI) in an effort to develop a worldwide format for corporate environmental reporting.

However, the directors are unsure as to what this initiative actually means.

Required:

Prepare a report suitable for presentation to the directors of Mufuka plc in which you discuss the

following:

(a) Current reporting requirements and guidelines relating to environmental reporting.(10 marks)(b) The key reasons for environmental reporting. (5 marks)(c) The advantages of social responsibility reporting for a company. (10 marks

(Total 25 marks)END OF PAPER


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JUNE 2010


SUGGESTED SOLUTIONS


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Question 1

Shareholding %

(a) (i) Grape plc in Orange plc =200

160

× 100

= 80%

(ii) Orange plc and Lemon plc =100

75× 100

= 75%Group structure

Grape plc

80%

Orange plc

75%

Lemon plc

Grape plc’s effective interest in Lemon plc

= 80% 75%

= 60%

Non controlling interest

= 100% 60%

= 40%


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Analysis of equity of Lemon plc 60%

Total Pre Post NCI

K’m K’m K’m K’m

Share capital 100 100 40Profits: Pre 320 320 128

Post 190 114 76

420 114 244

Consideration (80% × 500) 400

NCI 40% × 420 168

568

Net assets 420

Goodwill 148Analysis of equity of Orange plc 80%

Total Pre Post NCIK’m K’m K’m K’m

Share capital 200 200 40Profits: pre 800 800 160

Post 530 424 106Fair value:Inventory (197 – 147) 50 50 10Equipment (400 – 200) 200 200 401,250 424 356Consideration 1,452NCI 20% 1,250 250

1,702Net assets 1,250Goodwill 452Cost of investment adjustment (20% 500) (100)lemon plc – profits and NCI 114 244Inventory realized $50m (40) (10)

Additional depreciation on equipment200/5yrs 2yrs = 80 (64) (16)

URP on inventory 280 40/140 x 25% = 20 (16) (4)Management charge $10m (8) (2)Grape plc – profits 3,215 Total for consolidation 3,625 468½ a mark for each correct value – 12 marks

Grape plc group of companies


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Consolidated statement of financial position as at 31 October 2009

Non current assets: K’m

Property, plant and equipment:

Grape plc 2,140Orange plc 1,063

Lemon plc 720

Fair value 200

Additional dep on equipment (200/5yrs × 2yrs) (80)

4,043

Goodwill (148 + 452) 600

Other investments (200 + 100) 300

4,943

Current assets:

Inventory (350 + 212 + 108 – 20 /URP) 650

Trade Receivables (213 + 127 + 82 – 10 mgt charge) 412

Cash and bank (234 + 26 + 19) 279

Total assets 6,284

Equity Shares 500

Retained earnings 3,625

Shareholders’ funds 4,125

Non controlling interest (356 + 112) 468

Non current liabilities:

Deferred tax (500 + 300 + 200) 1,000

Current liabilities:

Trade payables ( 262 + 151 + 92) 505

Taxation payable (112 + 47 + 27) 186

Total equity and liabilities 6,284

½ a mark for each correct value, maximum 8 marks

(b) Fair values are used in the preparation of the consolidated financial statements as:

(i) They represent the cost to the group of the acquired company. Both the considerationfor the acquisition and the assets acquired are stated at their fair value.

(ii) It allows the amount of goodwill included in the acquisition to be accurately measured.

(iii) It ensures consistency of calculation from acquisition to acquisition.

(iv) Use of fair values ensures that groups are unable to benefit from post acquisitionprofits on subsequent sales of assets included in books at carrying amount rather thanfair value.


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(a) By including non current assets at their fair value, the group depreciation charge will beadjusted accordingly so that the group accounts are charged with a realistic level ofdepreciation.

(b) Assist users to predict future cash flows of an entity, since fair value measurement

represents the PV of future cash flows. They help to show directly the potential contributionof an asset to future cash flows or the claim on future cash flows in the case of a liability1 mark for each valid comment up to maximum 5 marks


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Question 2

Chiteta Group of companies

Consolidated statement of cash flows for the year ended 31 October 2009

K’m K’m

Cash flows from operating activities

Adjusted profit before tax (wxiii) 646

Associate profit (wv) (2)

Impairment of goodwill (wii) 156

Gain on disposal of subsidiary (wxii) (16)

Finance costs 296

Operating profit (5,800 – 3,740 – 980) 1,080Depreciation (wi) 520

Operating profit before working capital changes 1,600

Increase in inventory (5,300 – 4,600 + 16) (716)

Increase in receivables (4,800 – 3,000 + 8) (1,808)

Increase in payables (9,400 – 5,600 + 12) 3,812

Cash generate from operations 2,888

Interest paid (wx) (236)

Income tax paid (wix) (1,046)

Net cash flows from operating activities 1,606Cash flows from investing activities

Purchase of PPE (wi) (2,640)

Disposal of subsidiary (wxi) 54

Purchase of investment in associate (20) (2,606)

Cash flows from financing activities

Issue of shares (wvi) 20

Issue of loans (wviii) 800

Dividends paid to NCI (wvii) (40)

Dividends paid to investment in associate (wvi) (100) 680

Net decrease in cash and cash equivalents (320)

Cash and cash equivalents at start 600

Cash and cash equivalent at the end 280

1 mark for each correct entry up to maximum – 20 marks


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Workings

(i) Property, plant and equipment

K’m K’m

Balance b/d 8,220 Depreciation 520Share options (20 – 2) 18 Disposal of subsidiary 20

Bank 2,640* Balance c/d (10,340 – 2) 10,338

10,878 10,878

(ii) Goodwill K’m K’m

Balance b/d 260 impairment loss 156*

Disposal of subsidiary 20

Balance c/d (240 – 156) 84

260 260

(iii) Impairment loss on AlphaGoodwill Net assets Ttotal

K’m K’m K’m

Carrying values 180 480 660

Notional goodwill (180 40/100)

120 - 120

300 480 780

Recoverable amount (520)

Impairment loss 260

Group share of impairment loss = 60% 260 = K156 millioniv) Investment in Associate K’m K’m

Balance b/d -

Investment 120

Inc/stat 2 balance c/d 122

122 122

(v) Computation of investment in associate

K’m

Cost of investment:

share exchange 100

cash 20

120

Add: post acquisition profits (64 – 40) 25% 6

Less: URP on inventory (32 – 16) 25% (4) 2

Investment in associate 122


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(vi) Equity K’m

Balances c/d 31 October 2009

Share capital 800Other reserves 240

1,040

Less: share options (20)

Investment in Beta (100)

Balances b/d

Share capital (740)

Other reserves (160)

Issue of shares 20

(vii) Non controlling interest K’m K’m

Dividends paid 40* Balance b/d 360

Balance c/d 400 Inc/stat 80

440 440

(viii) Long term borrowings K’m K’m

Balance b/d 5,400

Balance c/d 6,200 Bank 800

6,200 6,200

(ix) Income tax a/c K’m K’m

Deferred tax 800 balance b/d 1,540

Disposal of subsidiary 14 Deferred tax 600

Bank 1,046*

Balance c/d 600 Inc/stat 320

2,460 2,460

(x) Interest payable K’m K’m

Bank 236* Balance b/d 80

Balance c/d 140 Inc/stat 296376 376

(xi) Disposal of subsidiary K’m

Cash proceeds 64

Cash disposed of (10)

Disposal of subsidiary 54


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Question 3

(a) Transaction 1

(i) Computation of charge to income statement in respect of the lease of the land.

The lease is an operating lease so the charge to the statement of comprehensiveincome is based on the lease rentals.

The total lease rentals are (K4m × 48) K192 million

The rentals are charged to income on a systematic basis over the lease term, normallyon a straight line basis.

Therefore the charge to the statement of comprehensive income for the year ended 31

March 2009 is12

11

50

(192) K3.52 million.

1 mark for each valid comment up to maximum 4 marks

Computation of carrying amount of factory

Cost K’m Explanation

Materials 50 only capitalize amounts based onnormal usage.

Costs of construction staff 32 can capitalize staff costs ofconstruction Period (1 July to 31October)

Administrative costs - apportionment of costs not allowedby IAS 16.

Publicity and opening Ceremony - such costs specifically exclude byIAS 16.

Finance costs84.40

2.40 now required to include finance

costs K84.40m Incurred inconstruction period (80 × 9% ×

12

4)

Depreciation depreciation is charged from 1 November2008, the date the factory is completed andavailable for use The useful economic life is594 months (the period 1 November 2008 to30 April 2058)

Charged in the year ( 0.71) (84.40 × 5/594)

Carrying value 83.69

2 marks for each correct entry and valid statement – 12 marks


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(b) Transaction 2

Accounting for government grants is dealt with by IAS 20 – Accounting for Government

Grants and Disclosure of Government Assistance. The basic principle of IAS 20 is that

grants should be recognized as income over the periods necessary to match them with therelated costs for which they are intended to compensate, on a systematic basis.

That part of the grant relating to an inducement to begin developing the factory, K60 million,

was received without any conditions and so can be recognized immediately in the Statement

of Comprehensive Income.

The K15 million grant in respect of the plant and equipment should be recognized over the 40

year life of the factory. IAS 20 allows this to be done in two ways:

(i) The first way is to net the grant off against the cost of the asset and depreciate the net

figure over its useful economic life. In this case only four months depreciation wouldbe charged because the factory was not brought into use until 1 December 2008.

Therefore the depreciation would be K3.75m [K450m (600 – 150) 1/40 4/12].

Property, plant and equipment of K446.25m (K450m – K3.75m) would be shown in the

statement of financial position.

(ii) The second way is to show the grant as a deferred credit and leave the initial carrying

value of the property at K600m. Therefore the depreciation in the current year would

be K5m (K600m 1/40 4/12). Property, plant and equipment of K595m (K600 –

K5m) would be shown in the statement of financial position.The deferred credit would be released to the Statement of Comprehensive Income over the

same 40 year period as the asset is depreciated so the amount included in the Statement of

Comprehensive Income for the current year would be K1.25m (K150m 1/40 4/12). The

remaining deferred credit of K148.75m (K150m – K1.25m) would be shown in the Statement

of Financial Position as deferred income under liabilities. K3.75m (K150 1/40 12/12)

would be in current liabilities and the balance of K145m (K148.75m – K3.75m) would be in

non current liabilities.

The issue of possible repayment hinges on how likely, or otherwise, it is that repayment willoccur. If, as seems to be the case here, repayment is possible, but unlikely, then the

possibility of repayment would be disclosed as a contingent liability. If repayment were

considered probable then a liability would need to be recognized. Any amount repayable

would create a separate liability, with an equal and opposite transfer from deferred income. If

the deferred income balance is insufficient then any excess would be recognized as a cost in

the statement of comprehensive income.



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Question 4

(a) (i) Importance of related parties

Related party relationships are part of the normal business process. Entities operate

separate parts of their business through subsidiaries and associates and acquireinterests in other enterprises for investment or commercial reasons. Thus control or

significant influence can be exercised over the investee by the investing company.

These relationships can have a significant effect on the financial position and operating

results of the company and lead to transactions which would not normally be

undertaken. For example, a company may sell a large proportion of its production to its

parent company because it cannot and could not find a market elsewhere. Additionally

transactions may be effected at prices which would not be acceptable to unrelated

parties.

Even if there are no transactions between the related parties, it is still possible for theoperating results and financial position of an enterprise to be affected by the

relationship. A recently acquired subsidiary can be forced to finish a relationship with a

company in order to benefit group companies. Transactions may be entered into on

terms different from those applicable to an unrelated party. For example, a holding

company may lease equipment to a subsidiary on terms unrelated to market rates for

equivalent leases.

In the absence of contrary information, it is assumed that the financial statements of an

entity reflect transactions carried out on an arm’s length basis and that the entity has

independent discretionary power over its actions and pursues its activitiesindependently. If these assumptions are not justified because of related party

transactions, then disclosure of this fact should be made. Even if transactions are at

arm’s length, the disclosure of related party transactions is useful because it is likely

that future transactions may be affected by such relationships. The main issues in

determining such disclosures are the identification of related parties, the types of

transactions and arrangements and the information to be disclosed.


(ii) Discussion of exemption on grounds of sizeThe disclosure of related party information is as important to the user of the accounts of

small companies as it is to the user of accounts of larger entities. If the transaction

involves individuals who have an interest in the small company then it may have

greater significance because of the disproportionate influence that this individual may

have. The directors may also be the shareholders and this degree of control may affect

the nature of certain transactions with the company. It is argued that the confidential

nature of such disclosures would affect a small company but these disclosures are

likely to be excluded from abbreviated accounts made available to the public. In any


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event, if these disclosures are so significant then it can be argued that they ought to be

disclosed.

It is possible that the costs of providing the information to be disclosed could outweigh

the benefits of reporting it. However, this point of view is difficult to evaluate but thevalue of appropriate related party disclosures is particularly important and relevant

information in small company accounts since transactions with Directors and other

officers’ transactions but these requirements only give limited assurance and therefore

IAS 24 Related Party disclosures extends these requirements and helps produce a

more comprehensive set of regulations in this area. In other countries there is no

legislation in this area and the disclosure of related party transactions is a sensitive

issue. IAS 24 attempts to ensure that some degree of uniformity exists in the

disclosure of such transactions.

1 mark for each valid comment up to 4 marks


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(b) (i) Management buyout

IAS 24 does not require disclosure of the relationship and transactions between the

reporting entity and providers of finance in the normal course of their business even

though they may influence decisions. Thus as Pande is a merchant bank there are norequirements to disclose transactions between Pande and Shima because of this

relationship. IAS 24 states that an associate is a related party. Thus under IAS 28

Investments in Associates if Pande has 20% or more of the voting power it is

presumed that significant influence exists and that Shima is an associate. However, if

it can be demonstrated that significant influence does not exist, then it is not an

associate. Thus the equity holding in Shima may not necessarily mean that Shima is

an associate especially as the remaining 75% of the shares are held by the

management of Shima who are likely to control decisions on strategic issues. Also

merchant banks often do not regard companies in which they have invested as

associates but as an investment. Often if the business of the investor is to provide

capital to the entity accompanied by advice and guidance then the holding should be

accounted for as an investment rather than an associate.

However, IAS 28 presumes that a person owning or able to exercise control over 20%

or more of the voting rights of the reporting entity is a related party. An investor with a

25% equity holding and a director on the board would be expected to have influence

over the financial and operating policies in such a way as to inhibit the pursuit of their

separate interests. If it can be shown that such influence does not exist, then there isno related party relationship. The two entities are not necessarily related parties

simply because they have a main board director on the board of Shima, although IAS

28 does state that significant influence may be evidenced by representation on the

board. Thus the determination of a related party relationship requires consideration of

several issues.

If, however, it is deemed that they are related parties then all material transactions will

require disclosure including the management fees, interest, dividends and the terms of

the loan.



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(ii) Subsidiary A subsidiary is a related party, so transactions between Pande and Mbuji should

certainly be disclosed for the period when Mbuji was a subsidiary. IAS 24 does not

address the situation where an undertaking ceases to be a subsidiary during the year.

However best international practice would seem to indicate that the transactions

between the parties should also probably be disclosed to the extent that they were

taken when Mbuji was not part of the group.

Disclosure should be made of transactions between related parties if they were related

at any time during the financial period. Thus any transactions between Pande and

Mbuji during the year to 31 October 2009 will be disclosed, but transactions prior to 1

July 2009 would have been eliminated on consolidation. There is no related party

relationship between Pande and Musole, as it is simply a business transaction unless

there has been subordinating of interests when entering into the transaction due to

influence or control.


(iii) Retirement benefit schemes for the benefit of employees of the reporting entity are

related parties of the entity according to IAS 24. Additionally, the rendering or receipt

of services is an example given in the IAS as regards a situation which could lead to

disclosure and also the payment of contributions involves the transfer of resources

which has a degree of flexibility attached to it even though IAS 19 (revised) Employee

benefits attempts to regulate the accounting for retirement benefit contributions.

Contributions paid to the scheme must be disclosed under IAS 24 depending upon thenature of the plan and whether or not the reporting enterprise controlled the plan, but it

is the other transactions with Pande which must also be considered.

Thus the transfers of non current assets (K2,000m) and the recharge of administrative

costs (K600m) must be disclosed. The pension scheme’s investment managers would

not normally be considered a related party of the reporting sponsoring company and it

does not follow that related parties of the pension scheme are also the company’s

related parties.

There would however be a related party relationship if it can be demonstrated that the

investment manager can exercise significant influence over the financial and operatingdecisions of Pande through his position as non executive director of that company.

Directors under IAS 24 are deemed to be related parties.

The fact that the investment manager is paid K5 million as a fee and this is not

material to the group does not mean that it should not be disclosed. Materiality is

looked at in the context of its significance to the other related party which in this

instance is the investment manager. It is possible that the fee will be material in this

respect.



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Solution 5

(a) Report to the Directors of Mufuka plc on Environmental Reporting

Introduction

The following report details the current requirements and guidelines relating to environmental

reporting.

Current reporting requirements and guidelines

The initial goal of environmental reporting was simply to demonstrate a company’s

commitment to the environment. However, the debate has moved on and the central

objective of any environmental report is now to communicate environmental performance.

Wider ranging objectives may also be attributed to the report, such as acknowledging shared

responsibility for the environment, differentiating the company from its competitors, obtainingsocial approval for operating practices and demonstrating regulatory compliance. Reports in

practice vary from a simple public relations statement to a detailed examination of the

company’s environmental performance.

Environmental accounting disclosure is an assortment of mandatory and voluntary

requirements. Not all companies report on environmental performance and those that do

report often focus on only selected aspects of performance.

Environmental reports can enhance a company’s reputation and standing. Environmental

reporting is the disclosure of information in the published annual report of the effect that theoperations of the business have on the natural environment.

Environmental reports are concerned with waste management, pollution, intrusion into the

landscape, the effect of an entity’s activities upon wildlife, use of energy and the benefits to

the environment of the entity’s products and services.

There are two ways that companies use to publish information about the ways in which they

interact with the natural environment, i.e through the published annual report or a separate

environmental report.

The contents of an environmental report may include:

1. Environmental issues pertinent to the entity and industry such as:

(a) The entity’s policy towards the environment and any improvements made sinceadopting the policy.

(b) Whether the entity has a formal system for managing environmental risks.

(c) The identity of the director (s) responsible for environmental issues.

(d) The entity’s perception of the risks to the environment from its operations


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2. Financial information relating to the entity’s accounting policies relating toenvironmental costs of provisions and contingencies, amounts of environmentalexpenditure capitalized during the year etc.


(b) An entity may publish an environmental report:

(i) To differentiate it from its competitors. Disclosing the organisation’s environmental,social and economic best practices can give a competitive market edge.

(ii) To acknowledge responsibility for the environment.

(iii) To demonstrate compliance with regulations – commitment to reporting on currentimpacts and identifying ways to improve environmental performance can improverelationships with regulators, and could reduce the potential threat of litigations.

(iv) To obtain social approval for its activities. Communicating the efforts being made to

improve social and environmental performance can foster community support for abusiness and can also contribute towards its reputation as a good corporate citizen.

(v) Attraction to investors – investors, financial analysts and brokers increasingly askabout the sustainability aspects of operations. A high quality report shows themeasures the organization is taking to reduce risk and will make the entity moreattractive to investors.

(vi) Evaluating environmental performance can highlight inefficiencies in operations andhelp to improve management systems. The firm could identify opportunities to reduceresources use, waste and operating costs.

(vii) The international trend towards improved corporate sustainability is growing andaccess to international markets will require increasing transparency, and this will helpto improve corporate image.


(c) Corporate reporting is the process of communicating the social and environmental effects oforganisation’s economic actions to particular interest groups within society and to society atlarge.

It is concerned with business ethics and the company’s accountability to its stakeholders, and

about the way it meets its wider obligations.

The advantages of social responsibility reporting are that:

(i) Employee satisfaction leads to improved customer awareness.

(ii) Improved stakeholder satisfaction leads to increased financial performance.

(iii) Investors want to see a company adopt practices that are more environmentally andsocially sustainable.

(iv) Abuses of the environment/human rights can damage reputations and hence shareprices.


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(v) It reduces corporate risk, which may reduce financing costs and broaden the image ofinvestors.

(vi) It may improve access to lists of ‘preferred suppliers’ of buyers with greenprocurement policies.

(vii) Effective self regulation minimizes risk of regulatory intervention.

(viii) Improves profitability.

(ix) Target setting and external reporting drives continual environmental and socialimprovement.

(x) It strengthens stakeholder relations.

(xi) It demonstrates coherence of overall management strategy to important externalstakeholders.



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CHARTERED ACCOUNTANTS EXAMINATIONS

PROFESSIONAL LEVEL


SERIES: DECEMBER 2010

TOTAL MARKS – 100 TIME ALLOWED: THREE (3) HOURS

INSTRUCTIONS TO CANDIDATES

1. You have ten (10) minutes reading time. Use it to study the examination paper carefully so

that you understand what to do in each question. You will be told when to start writing.

2 There are FIVE questions in this paper. You are required to attempt any FOUR questions.

ALL questions carry equal marks.

3. Enter your student number and your National Registration Card number on the front of the

answer booklet. Your name must NOT appear anywhere on your answer booklet.

4. Do NOT write in pencil (except for graphs and diagrams).5. The marks shown against the requirement(s) for each question should be taken as an

indication of the expected length and depth of the answer.

6. All workings must be done in the answer booklet.

7. Present legible and tidy work.

8. Graph paper (if required) is provided at the end of the answer booklet.


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Attempt any four (4) out of five (5) questions.

Question 1

The E Group carries on business as a distributor of agricultural equipment in all the nine provinces

of Zambia.

Accounts for all companies are made up to 31 March.

The draft Income Statements for E plc, F plc and G plc for the year ended 31 March 2010 are asfollows:

E plc

K’000

F plc

K’000

G plc

K’000

Sales revenue 121,200 49,400 45,600

Cost of sales ( 66,100) ( 10,926) ( 10,640)

Gross profit 55,100 38,474 34,960

Distribution costs ( 6,650) ( 4,274) ( 3,800)

Administrative expenses ( 6,950) ( 1,900) ( 3,800)

Operating profit 41,500 32,300 27,360

Interest paid (650) nill nill

Profit before tax 40,850 32,300 27,360

Income tax (16,600) (10,780) ( 8,482)

Profit for the year 24,250 21,520 18,878

Statement of changes in equity for the year ended 31 March 2010.

E plcK’000

F plcK’000

G plcK’000

Retained earnings b/f 40,026 26,630 20,918Proposed dividend (19,000) nill nill

Profit for the year 24,250 21,520 18,878

Retained earnings c/f 45,276 48,150 39,796


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The draft Statements of Financial Position as at 31 March 2010 are as follows:

E plc F plc G plc

K’000 K’000 K’000 Non current assets

Property, plant and Equipment 70,966 48,546 66,126

Investments

Shares in F plc 53,300

Shares in G plc 47,600

Current assets 3,136 18,050 17,766

Total assets 127,402 114,196 83,892E plc F plc G plc

K’000 K’000 K’000

Share capital - K1 shares 56,000 46,000 44,000

Accumulated profits 45,276 48,150 39,796

Shareholders funds 101,276 94,150 83,796

Current liabilities 26,126 20,046 96Total equity and liabilities 127,402 114,196 83,892

The following information is available relating to E plc, F plc and G plc:

1. On 1 April 2005, E plc acquired 41,400,000 K1 ordinary shares in F plc for K53,300,000when the revenue reserves of F plc were K2,850,000. No shares have been issued by F plcsince E plc acquired its interest.

2. On 1 April 2005, F plc acquired 35,200,000 K1 shares in G plc for K47,600,000 when therevenue reserves were K1,900,000. No shares have been issued by G plc since

F plc acquired its interest.3. During the financial year, G plc made inter company sales to F plc of K10,960,000 making a

profit of 25% on cost. Of these goods, K10,150,000 were in inventory at 31 March 2010.

4. During the accounting year, F plc had made inter company sales to E plc of K10,520,000making a profit of 33 1 /3 % on cost and K10,120,000 of these goods were in inventory at 31March 2010.

5. On 1 February 2010 E plc sold an agricultural equipment to F plc for K10,480,000 frominventory. F plc has included this equipment in its non current assets.


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The equipment had been purchased on credit by E plc for K10,400,000 in February 2010 andthis amount is included in its current liabilities as at 31 March 2010.

6. F plc charges depreciation on its agricultural equipment at 20% on cost. It is company policyto charge a full year’s depreciation in the year of acquisition to be included in the cost ofsales.

7. E group’s policy is to value non controlling interests using the proportion of net assetsmethod.

Required:

(a) Prepare a Consolidated Income Statement for the year ended 31 March 2010. (14 ½ marks)

(b) Prepare an extract of the Consolidated Statement of Changes in Equity for the year ended31 March 2010 showing the group retained earnings column only. (2½ marks)

(c)

Prepare a Consolidated Statement of Financial Position as at 31 March 2010. (8 marks).(Total: 25 marks)


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Question 2

Lizu plc, a public limited company, operates a funded defined benefit plan for its employees. Thedirectors of the company have provided the following information about the defined plan for thecurrent year ended 30 April 2009.

(a)

The present value of the obligations to provide benefits to current and former employees wasK13,500 million at 1 May 2008 and K15,189 million at 30 April 2009.

(b) The fair value of the plan assets was K13,050 million at 1 May 2008 and K14,736 million(including the contributions owed by Lizu plc) at 30 April 2009. The actuarial gainsunrecognized at 1 May 2008 amounted to K1,650 million.

(c) The actuarial cost of providing benefits in respect of employees’ service for the year to 30 April 2009 was K180 million. This is the present value of the pension benefits earned by theemployees in the year.

(d) Lizu plc should have paid contributions to the defined benefit plan of K126 million, but

because of liquidity problems, K36 million of this amount had not been paid at the financialyear end of 30 May 2009.

(e) The pension benefits paid to former employees in the year amounted to K189 million.

(f) The yield on high quality corporate bonds and the long term expected return on schemeassets was 8% and 10% respectively at 1 May 2008 and 9% and 11% at 30 April 2009respectively.

Existing employees participating in the plan have an average remaining working life of 20 years.This tends to remain static as employees leave and join the plan.

On 1 May 2008, the plan was amended to provide additional benefits with effect from that date

subject to a minimum employment period of 12 years. The present value of the additional benefitswas calculated by actuaries at K60 million with respect to employees who had already completedthe minimum service requirements and K120 million for employees who on average had worked forthe company for four years.

Lizu plc’s accounting policy is to use the 10% corridor approach to recognition of actuarial gains

and losses. Assume contributions and benefits were paid on 30 April 2009.

Required:

(a) Explain the key distinguishing differences between a defined benefit plan and defined

contribution plan. (6 marks)(b) Produce the extracts for the financial statements for the year ended 30 April 2009. (Show all

your workings). (12 marks)

(c) IAS 39 Financial instruments – Recognition and measurement has identified three types ofhedges.

(i) Explain each of the three hedges mentioned in IAS 39 and indicate what each hedgehedges against and the appropriate accounting treatment.

(ii) Explain the three criteria for hedge accounting. (7 marks)(Total 25 marks)


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Question 3

Wana plc prepares financial statements under IFRSs. During the year ended 31 March 2009 the

following transactions occurred:

Transaction (a)

On 1 April 2008 Wana plc began the construction of a new production line. Costs to the line are as

follows:

Costs of the basic materials amounted to K400 million (list price K500 million less a 20% trade

discount). Recoverable sales taxes were K40 million incurred not included in the purchase price.

Employment costs of the construction staff for the three months to 30 June 2008 amounted to K48

million. Other overheads directly related to the construction amounted to K36 million. Payments to

external advisors relating to the construction were K20 million and expected dismantling and

restoration costs were K80 million.

The production line took two months to make ready for use and was brought into use on 31 May

2008. The other overheads were incurred in the two months ended 31 May 2008. They included

an abnormal cost of K12 million caused by a major electrical fault.

The production line is expected to have a useful economic life of eight years.

At the end of that time Wana plc is legally required to dismantle the plant in a specified manner and

restore its location to an acceptable standard. The figure of K80 million included in the cost

estimates is the amount that is expected to be incurred at the end of the useful life of the

production plant. The appropriate rate to use in any discounting calculations is 5%.

Four years after being brought into use, the production line will require a major overhaul to ensure

that it generates economic benefits for the second half of its useful life. The estimated cost of the

overhaul, at current prices is K120 million. Wana plc computes depreciation charge on a monthly

basis. No impairment of the plant has occurred by 31 March 2009. (8 marks)

Transaction (b)

Wana plc is an entity that regularly purchases new subsidiaries. On 30 September 2008, the entity

acquired all the equity shares of Zangi plc for a cash payment of K10,800 million. The net assets

of Zangi plc on 30 September 2008 were K7,600 million.

On 31 March 2009 Wana plc carried out a review of the goodwill on consolidation for Zangi plc for

evidence of impairment. This review was carried out despite the fact that there were no obvious

indicators of adverse trading conditions for Zangi plc. The review involved allocating net assets of

Zangi plc into three cash generating units and computing the value in use of each unit. The

carrying values of the individual units before any impairment adjustments are given below:


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Alpha Omega Gamma

Km Km Km

Patents 200

Property, plant and equipment 2,400 1,200 1,600

Net current assets 800 1,000 800

3,400 2,200 2,400

Value in use of unit 2,880 2,400 2,600

It was not possible to meaningfully allocate the goodwill on consolidation to the individual cash

generating units but all the other net assets of Zangi plc are allocated in the table shown above.

The patents of Zangi plc have no ascertainable market value but all the current assets have a

market value that is above carrying value. The value in use of Zangi plc as a single cashgenerating unit at 31 March 2009 is K8,200 million.

(8 marks)

Transaction (c)

On 31 December 2008 the directors decided to dispose of a property that was surplus to

requirements. They instructed selling agents to find a suitable purchaser and advertised the

property at a commercially realistic price.

The property was being measured under the revaluation model and had been revalued at K1,800

million on 31 March 2008. The depreciable element of the property was estimated at K960 million

at 31 March 2008 and the useful economic life of the depreciable element was estimated at 25

years from that date.

On 31 December 2008 the directors estimated that the market value of the property was K1,920

million, and that the costs incurred in selling the property would be K60 million. The property was

sold on 30 April 2009 for K1,932 million. Wana plc incurred selling costs of K66 million. The actual

selling price and costs to sell were consistent with estimated amounts as at 31 March 2009.

(7 marks)

Required:

Explain the accounting treatment and illustrate the impact these transactions will have on the

financial statements of Wana plc for the year ended 31 March 2009.

(Total 25 marks)


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Question 4

In January 2008 the International Accounting Standards Board issued IFRS 3 Business

combinations which replaced a previous standard of the same name and revised and amended

IAS 27 Consolidated and Separate Financial Statements.

These changes radically alter the basis of reporting business combinations and transactions with

non controlling interests.

Required:

(a) Discuss how the changes introduced above will fundamentally affect the existingaccounting practices for business combinations. (7 marks)

(b) Briefly discuss why companies wish to disclose social and environmental information in

their financial statements. (6 marks)(c) The IASB has published a discussion paper on Management commentary.

Discuss the objectives, content and benefits of a Management Commentary to a businessorganisation. 12 marks)

(Total 25 marks)


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Question 5

The following information relates to Womba plc, a Zambian company, for the year ended 30 April2009.

An investor in Womba plc upon receipt of a set of comparative financial statements as given belowbecame concerned about the directors having a conflict of interest and that the financial statementsfor the year 2009 may have been manipulated.Income statement for the years ended

30 April 2009 30 April 2008

K’m K’m

Sales revenue (50,200) (48,800)

Cost of sales 47,080 45,800

Gross profit 3,120 3,000Operating expenses (840) (1,160)

Operating profit 2,280 1,840

Finance cost ( 400) (400)

Profit before tax 1,880 1,440

Tax ( 560) ( 520)

Profit for the year 1,320 920

Statement of Changes in Equity extract for the years ended:

30 April 2009 30 April 2008K’m K’m

Opening balance 11,040 10,440

Profit for the year 1,320 920

Dividends (320) (320)

Retained profit c/f 12,040 11,040

Statement of Financial Position as at:

30 April 2009 30 April 2008

K’m K’m

Non current assets

Property, plant and equipment 23,200 23,000

Goodwill 4,000 4,000

Current assets

Inventories 1,880 1,840

Trade receivables 480 520


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Cash 1,840 480

Total assets 31,400 29,840

Share capital 6,000 6,000

Accumulated profits 6,040 5,040Shareholders’ funds 12,040 11,040

Non current liabilities

Interest bearing borrowings 5,680 5,600

Deferred tax 1,000 840

Current liabilities

Trade and other payables 11,880 10,920

Short term borrowings 800 1,440

Total equity and liabilities 31,400 29,840Additional information:

(a) Six new divisions have been opened during the year 2009, bringing the total to forty two.

These divisions operate in two provinces, namely Copperbelt and Lusaka.

(b) Four key ratios for Womba Plc’s industry/sector based on the latest available financial

statements of twelve listed entities in this industry or sector are as follows:

National Average in Womba Plc’s industry

(i) Annual sales per division – K1,104 million

(ii) Gross profit margin – 5.9%

(iii) Net profit margin – 3.9%

(iv) Non current asset turnover (including both tangible and intangible non current assets)

1.93

(c) Womba plc’s directors have undertaken a reassessment of the useful lives of non current

tangible assets during the year. In most cases, they estimate that the useful lives haveincreased and the depreciation charges in 2009 have been adjusted accordingly.

Required:

(i) Prepare a report, addressed to the investor, analyzing the performance and position of

Womba plc on the financial statements and supplementary information providedabove.

The report should also include comparisons with the key industry sector ratios, and itshould address the investor’s concerns about the possible manipulation of the 2009financial statements. (20 marks)

(ii) Explain the limitations of the use of sector comparatives in financial analysis. (5 marks)

Total 25 marksEND OF PAPER


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DECEMBER 2010

P1: Advanced Financial Accounting and Reporting

Suggested Solutions


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Solution 1Shareholding percentageE plc in F plc = 5,400/6,000 x 100 = 90%F plc in G plc = 3,200/4,000 x 100 = 80%

Group structureE plc

F plc

G plc

E plc effective interest in G plc = 90%

80% = 72%Non controlling interest(NCI) = 100% 72%= 28%

Analysis of equity of G plc 72%Total Pre Post NCIK’000 K’000 K’000 K’000

Share capital 44,000 31,680 ½ - 12,320Profits: pre 1,900 1,368 ½ 532

Post (39,796 – 1,900) 37,896 27,285 10,610- 33,048 27,285 23,462

Purchase Consideration47,600 90% 42,840 ½Goodwill 9,792 ½2 marks for goodwill calculation

Analysis of Equity of F plc 90%Total Pre Post NCIK’000 K’000 K’000 K’000

Share capital 46,000 46,000 ½ - 4,600Profits: pre 2,850 2,850 ½ 285

Post (48,150 – 2,850) 45,300 40,770 4,530- 48,850 40,770 9,415

Consideration transferred 53,300NCI 10% 48,850 4,885

58,185 ½Less: net assets 48,850Goodwill 9,335 ½Cost of investment adjustment10% 47,600 (4,760)


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G plc profit and NCI 27,285 23,463URP on inventory G plc (10,150 25/125 =2,0 30 x 0.72)

(1,462) (568)

URP on inventory F plc (10,120 ¼

=2,5 30 x 0.90)

(2,277) (253)

URP on sale of equipment (10,480 – 10,400)

(80)

Add back additional depreciation onequipment (20% 80)

16

E plc – profits 45,276 -Total for consolidation 109,528 27,297

2 marks for goodwill calculation and 2 marks for NCI.(1/2 mark for each item)


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E plc Group of companies

Consolidated Income Statement for the year ended 31 March 2010

K’000 K’000

Sales revenue:

E plc 121,200 ½

F plc 49,400 ½

G plc 45,600 ½

Intra group sales (10,960 +10,520) (21,480) ½

Sale of equipment (10,480) ½

Net sales revenue 184,240

Cost of sales

E plc 66,100 ½

F plc 10,926 ½

G plc 10,640 ½

Intra group sales or purchases [10,960 +10,520] (21,480) ½

Sale of equipment (10,400) ½

Additional depreciation on equipment (20% 80) (16) ½

URP on inventory (2,030 +2,5 30) 4,560 ½

Total cost of sales (60,330)

Gross profit 123,910

Distribution costs (6,650 + 4,274 + 3,800) (14,724) ½

Administrative expenses (6,950 + 1,900 + 3,800) (12,650) ½

Operating profit 96,536

Interest paid (650) ½

Profit before tax 95,886

Income tax (16,600 +10,780 + 8,482) (35,862) ½

Profit for the year 60,024

Profit attributable to:

Owners of the parent 53,406

Non controlling interests (w1) 6,618

60,024


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Working 1: Non controlling interests

F plc G plc

Profit for the year 21,520 18,878

Less: URP (2,530) (2,030) Add: additional depr 16 -

19,006 16,848

Total NCI (10% 19,006) + (28% 16,848) = 6,618 ½E plc group of companies

Consolidated Statement of Changes in Equity (extract) for the year ended 31 March 2010

Group retained earnings

K’000 Retained earnings b/f:

E plc 40,026 ½F plc (26,630 – 2,850) 90% 21,402 ½G plc (20,918 – 1,900) x 72% 13,693 ½

Total retained earnings b/f 75,121Group profit for the year 53,407 ½Dividends (19,000) ½Retained earnings c/f 109,528

E plc group of companies

Consolidated Statement of Financial Position as at 31 March 2010

K’000 K’000

Non current assets

E plc 70,966 ½

F plc 48,546 ½

G plc 66,126 ½

URP on equipment (80) ½

Additional depreciation on equipment 16 ½

Goodwill (9,792+9,335) 19,127 ½Total non current assets 204,701

Current assets

E plc 3,136 ½

F plc 18,050 ½

G plc 17,766 ½

URP on inventory (2,530 + 2,030) (4,560) ½ 34,392

Total assets 239,093


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Share capital 56,000 ½

Accumulated profit 109,528 ½

Shareholders’ funds 165,528Non controlling interest 27,297 ½Total equity 192,825

Current liabilitiesE plc 26,126 ½F plc 20,046 ½G plc 96 ½ 46,268Total equity and liabilities 239,093

Total 25 marks


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Question 2 (a)

Defined benefit Plan Defined contribution plan

1 This is a scheme where the benefits to be paidare defined in terms of the employee’s final

salary

1 This is a scheme where the employerpays a fixed amount or percentage of

pay to the plan

2 The benefits to be paid are defined in Terms of

the employee’s final salary and the number of

years worked.

2 The pension benefits to be paid to

employees will depend upon the

funds available from those

contributions and investment earnings

generated. (Performance of the fund).

3 The employer is expected to make additional

contributions should there be a deficit in the

pension fund.

3 The employer will have no obligation

to pay further contributions if the Plan

does not have sufficient assets to pay

all employee benefits.

4 This type of scheme is common in big

Enterprises.

4 Such schemes are common in small

businesses.

5 The actuary calculates amounts that may be

charged to profit or loss after taking into accounta number of factors e.g Current service cost,

interest and rate of return on plan asserts, costs

of settlement or curtailments etc.

5 The charge in the profit or loss will be

the contributions accruing during theyear. This will be estimated by the

contributing firm.

6 The risks related to the scheme are borne by the

employer.

6 The risks associated with such a plan

are primarily with the employees and

not the employer

7 The scheme deals with estimates of future cash

flows which may not be easy to quantify and the

plan is complex to manage and plan for.

7 The cost to the employer can be

measured with reasonable certainty

and the scheme is easy to undertake.

1 mark for each valid point – sub total 6 marks


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(b)

PV of plan obligations K’m Marks

Balance b/d 1 May 2008 13,500Interest cost (13,500 + 180) 0.08 1,095 ½

Current service cost 180 ½

Past service cost:

Vested benefits 60 ½

Non vested benefits 120 ½

Benefits paid (189) ½

Actuarial loss 423 ½Balance c/d 30 June 2008 15,189

Fair value of Plan assets

Balance b/d 1 May 2008 13,050

Expected return on plan assets (0.10 x 13,050) 1,305 ½

Contributions 90 ½

Benefits paid (189) ½

Actuarial gain 444 ½Balance c/d 30 June 2008 (14,736 – 36) 14,700

Corridor limit – the greater of:

10% of plan obligations (10% 13,500) 1,350

10% of plan assets (10% 13,050) 1,305

Therefore the corridor limit is the greater of the two, which is K1,350 million ½

Excess actuarial gain

Unrecognised gains b/d 1,650Corridor limit 1,350 ½

Excess actuarial gain 300

Actuarial gain to be recognised

= Excess actuarial gain Average remaining working lives

= 300/20 years

= 15 ½ mark


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Cumulative actuarial gains K’m

Unrecognised gains b/d 1,650

Loss on plan obligation (423) ½

Gain on plan assets 444 ½

Gain recognised (15) ½

Unrecognised gains c/d 1,656

Income Statement – note

Current service cost 180 ½

Interest cost 1,095 ½

Expected return plan assets (1,305) ½

Past service cost:

Vested benefits 60 ½

Non vested benefits (120/(12 -4)) 15 ½

Recognised actuarial gains (15) ½

30

Statement of financial position – note

PV of plan obligations at 30 April 2009 15,189

Fair value of plan assets 14,700

489

Unrecognised actuarial gains 1,656 ½

Unrecognised past service costs [120 – (120/(12-4)] ( 105) ½

Net liability 2,040

(c) (i) IAS 39 identifies three types of hedges which determine their accounting treatment.(1) Fair value hedge. This hedges changes in fair value of a recognised asset or

liability or an unrecognised firm commitment (or portion of either) that could affect

profit or loss. The gain or loss on the instrument is recognised in profit or loss.

(2) Cash flow hedge. This protects exposure to variability in cash flows attributable

to a risk associated with a recognised asset or liability that could affect profit or

loss. The gain or loss on effective portion of instrument is recognised directly in


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equity (and recognised in profit or loss) when the asset or liability affects profit or

loss e.g. by interest income.

(3) Hedge of net investment in a foreign operation. This hedges variability in value of

the net investment in a foreign operation or monetary items accounted for as partof that net investment. The gain or loss is accounted for as for a cash flow

hedge.

1 mark for each valid comment – 4 marks

(ii) Hedge accounting is mandatory where a transaction qualifies as a hedge. Thefollowing criteria must all be met:

(a) The hedge must be designated at inception as a hedge.

(b) The hedge effectiveness can be reliably measured.

(c)

The hedge should be highly effective.

1 mark for each valid comment – sub total 3 marksTotal 25 marks


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Solution 3

Transaction (a)

Cost of production plant – All reasons come from IAS 16 – Property, Plant and Equipment

Component Amount Reason

K’000

Basic costs 400,000 Purchase costs included

Sales taxes Recoverable sales taxes not included

Employment costs (2/3 48,000) 32,000 Employment costs in period of getting theplant ready for use

Other overheads 24,000 Abnormal costs excluded

Payment to advisors 20,000 Directly attributable cost

Dismantling costs 54,147 Recognised at PV where an obligationexists

530,147½ for each correct amount plus the total – 3 marks

Depreciation charge for the Income Statement

Per IAS 16, the asset is split into two depreciable components:

K120 million with a useful life of four years

K410,147,000 (the balance) with a useful life of eight years

So the charge for the year ended 31 March 2009 is (120,000 x1/4 x 10/12) + (410,147 1/8 10/12) = 67,724

1 mark for the split of K530,147,000 into K120 million and K410.147 million

Carrying value of asset for the Statement of Financial Position

K’000 MarksNon current assetCost 530,147 ½Depreciation 67,724 1Carrying value 462,423

Non current liabilitiesProvision for dismantling costs (54,147 +2,256) 56,403 1Income statement extractFinance cost – unwinding of discount (54,147 5% 10/12) 2,256 1

Dismantling costs = 80,000 1 = 54,147 ½ mark1.05 8

Sub total 8 marks


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Transaction (b)

The goodwill on consolidation is the difference between the fair value of the consideration givenand the fair value of the identifiable net assets acquired. The fair value of the consideration givenis K10,800 million and the net assets on acquisition were K7,600 million.

The goodwill on consolidation is K3,200m (K10,800m – K7,600m). Under the provisions of IFRS 3 – Business combinations – goodwill is not amortised but reviewed annually for impairment. Thusat 31 March 2009 goodwill will be measured at its cost of K3,200m less any necessary impairment.It can never be revalued. 1 mark

The total impairment loss in Alpha is K520m (K3,400m – K2,880m). This is allocated in thefollowing order:

(a) To any assets that have suffered obvious impairment – none indicated here ½

(b) To any goodwill in the unit – none specifically allocated here ½

(c)

To other assets, on a pro rata basis. ½ markIn this case the ‘other assets’ are:

Patents (carrying value K5m) and property, plant and equipment (carrying value K60m) andnet current assets (carrying value K20m).

The net current assets cannot be written down because no current assets have a resalevalue that is below carrying value. ½ mark

This means that the impairment loss is K13m is allocated:

5/65 K13m = K1m to the patent ½ mark

60/65

$13m = K12m to the property, plant and equipment. ½ markBecause goodwill on consolidation cannot be allocated to individual units the impairmentreview needs to be performed in two parts. The first stage is to review the individual units forimpairment. In this case we see that the assets in Alpha have suffered impairment. 1 mark

After providing for this loss the intermediate carrying value of the net assets of Zangi,including goodwill, is as follows:

K’m Goodwill 3,200 ½ Alpha 2,880 ½Omega 2,200 ½

Gamma 2,400 ½Total 10,680

Since the value in use of the whole business is only K8,200 there is an additional impairmentloss of K2,480 that needs to be provided for. This is first allocated to goodwill and so thecarrying value of the goodwill is reduced to K720m. 1 mark

Sub total 8 marks


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Solution 4

(a) Under previous accounting practice the objective of acquisition accounting was to reflect thecost of the acquisition. To the extent to which it was not represented by identifiable assets

and liabilities (measured at their fair value), goodwill arises and is reported in the financialstatements

These new standards adopt a different perspective and require the financial statements to

reflect the fair value of the acquired business. The recognition of the acquired business at

fair value will mean that any existing interest owned by the acquirer before it gained control

will be re measured at fair value at the date of acquisition with any gain or loss recognised in

the statement of comprehensive income.

The new accounting treatment treat the group as a single economic entity and any outside

equity interest in a subsidiary is treated as part of the overall ownership interest in the group. As a consequence, transactions with non controlling interest shareholders are to be treated

as equity transactions. No gain or loss will be recognised in the statement of comprehensive

income.

Accounting for business combinations was previously based on the ‘parent entity’ concept

where the extent of non controlling interests and transactions with non controlling interest are

separately identified in the primary financial statements.

Under the new standards goodwill can be recognised in full even if control is less than 100%.

IFRS 3 previously required that goodwill arising on acquisition should only be recognisedwith respect to the part of the subsidiary undertaking that is attributable to the interest held by

the parent entity.

Costs incurred in connection with an acquisition are not to be accounted for as part of the

cost of the investment but will be charged in the statement of comprehensive income. There

are also changes to the way in which some assets and liabilities acquired in a business

combination are recognised and measured.

The new IFRS requires assets and liabilities acquired to be measured and recognised at fair

value at the acquisition date. Previously estimated fair values were used and guidance was

given as to how to measure ‘fair value’ in the old standard. This guidance often resulted in

the measurement of assets and liabilities in a manner which was inconsistent with fair value

objectives.

1 mark for each valid point – up to 7 marks


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(b) Environmental reporting is the disclosure of information in the published annual report of theeffect that the operations of the business have on the natural environment

Environmental reports are concerned with:

(i) Waste management

(ii) Pollution

(iii) Intrusion into the landscape

(iv) The effect of an entity’s activities upon wildlife

(v) Use of energy

The benefits to the environment of the entity’s product and services.

Environmental Reporting in practice

There are two ways that companies use to publish information about the ways in which they

interact with the natural environment:

(i) The published annual report

(ii) A separate environmental report

No mandatory guidelines, so Global Reporting Initiative (GRI) guidelines tend to be used.

The IASB encourages the presentation of environmental reports if management believe that

they will assist users in making economic decisions.

Contents of an environmental Report

(a) Environmental issues pertinent to the entity and industry

(i) The entity’s policy towards the environment and any improvements made sincethe first adopting the policy.

(ii) Whether the entity has a formal system for managing environmental risks.

(iii) The identity of the director (s) responsible for environment issues.

(iv) The entity’s perception of the risks to the environment from its operations.

(v) The extent to which the entity would be capable of responding to a majorenvironmental disaster and an estimate of the full economic consequences ofsuch a future major disaster.

(vi) The effects of, and the entity’s response to, any government legislation orregulation on environmental matters.

(vii) Details of any significant infringement of environmental legislation or regulations.

(viii) Material environmental legal issues in which the entity is involved.


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(ix) Details of any significant initiatives taken, if possible linked to amounts infinancial statements.

(x) Details of key indicators (if any) used by the entity to measure environmentalperformance. Actual performance should be compared with targets and withperformance in prior periods.

(b) Financial information

(i) The entity’s accounting policies relating to environmen tal costs provisions andcontingencies.

(ii) The amount charged to the statement of comprehensive income during theaccounting period in respect of expenditure to prevent or rectify damage to theenvironment caused by the entity’s operations. This could be analysed betweenthat the entity was legally obliged to incur and other expenditure.

(iii) The amount charged to the income statement during the accounting period inrespect of expenditure to protect employees and society in general from theconsequences of damage to the environment caused by the entity’s operations.This could be analysed between compulsory and voluntary expenditure.

(iv) Details (including amounts) of any provisions or contingent liabilities relating toenvironmental matters.

(v) The amount of environmental expenditure capitalized during the year.

(vi) Details of fines, penalties and compensation paid during the accounting period inrespect of non compliance with environmental regulations.

Reasons for environmental reporting

An entity may publish an environment report:

(a) To differentiate it from its competitors. Disclosing the organisation’s environmental,social and economic best practices can give a competitive market edge.

(b) To acknowledge responsibility for the environment.

(c) To demonstrate compliance with regulations.

(d) Commitment to reporting on current impacts and identifying ways to improveenvironmental performance can improve relationships with regulators, and could

reduce the potential threat of litigations.

(e) To obtain social approval for its activities. Communicating the efforts being made toimprove social and environmental performance can foster community support for abusiness and can also contribute towards its reputation as a good corporate citizen

(f) Attraction to investors – investors, financial analysts and brokers increasingly askabout the sustainability aspects of operations. A high quality report shows themeasures the organization is taking to reduce risk and will make the entity moreattractive to investors.


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(g) Evaluating environmental performance can highlight ine

Documents

P1-Q and as-Advanced Financial Accounting and Reporting- June 2010 Dec 2010 and June 2011