CHARTERED ACCOUNTANTS EXAMINATIONS

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LICENTIATE LEVEL
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L1: FINANCIAL REPORTING

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MONDAY 15TH DECEMBER 2014

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

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INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) 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. This paper is divided into TWO sections:

Section A: Two (2) Compulsory Questions.

Section B: Three (3) Optional Questions. Attempt any Two (2) questions.

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.
Section A

There are two (2) Compulsory questions in this section. Attempt both questions.

QUESTION ONE

The following are drafts statements of financial position of Zena Limited, Yena Limited and
Wena Limited as at 30th September 2014.

Zena Yena Wena

Limited Limited Limited

K’million K’million K’million

Assets

Non-current

Property, plant & equipment 56.25 36.75 31.50

Investments (i) 37.00 nil nil

93.25 36.75 31.50
Current
Inventory 15.00 13.50 7.50
Trade receivables 9.75 2.25 4.50
Bank 3.00 1.80 1.20
Total assets 121.00 54.30 44.70
Equity and liabilities
Equity
Equity shares of K0.60 each 22.50 7.20 4.50
Share premium 18.00 nil nil
Retained earnings:
At 30th September 2013 18.00 19.10 7.90
For the year to 30th September 2014 5.50 6.00 9.00
Total Equity 64.00 32.30 21.40

Liabilities
Non – current 30.00 10.00 9.80
Current 27.00 12.00 13.50
Total equity and liabilities 121.00 54.30 44.70

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The following information is relevant in the preparation of consolidated statement of financial
position:

(i) Zena Limited acquired 80% of the equity shares of Yena Limited on 1st January 2014 for
a total cost of K40 million. Of this, 60% was paid on 1st January 2014 and the balance
payable on 31st December 2015.

Zena Limited acquired 40% of the equity shares of Wena Limited on 1st January 2014
for a cash price of K3.30 per acquired share.

The investments figure includes, in addition to the cash paid to acquire equity shares in
Yena Limited and Wena Limited, 15% equity shares in Lena Limited acquired two years’
ago for K2.6 million. This investment is classified as ‘financial asset through profit or
loss’ and the amount shown in the statement of financial position represents its fair
value at 30th September 2013.

There have been no significant changes in the fair values of the investments in Yena
Limited and Zena Limited since the date of acquisition. However, the fair value of
investment in Lena Limited at 30th September was K3.4 million.

Zena Limited’s cost of capital is 12% per annum.

Discount factor at 12%.

Year 1 0.893

Year 2 0.797

Year 3 0.712

(ii) The fair values of the assets of Yena Limited at the date of acquisition were equal to
their carrying amounts with the exception of two items:

 Non – depreciable land fair value exceeded its carrying amount by K0.25 million.

 The fair value of an item of plant was below its carrying amount by K0.32
million. This plant had a remaining useful economic life of four (4) years at the
date of acquisition.

Yena Limited has not incorporated these fair value changes in its financial statements.

(iii) After acquisition, Zena Limited sold goods to Yena Limited and Wena Limited for K3
million and K1 million respectively. These goods were sold at a margin of 20%. A
quarter of the goods sold to Yena Limited and half of the goods sold to Wena Limited
were still in the inventories of Yena Limited and Wena Limited at 30th September 2014.

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(iv) The current account balances relating to transactions between Zena Limited and Yena
Limited did not agree at 30th September 2014. The balance in Zena Limited statement of
financial position was K0.7 million. This was less than that in Yena Limited statement of
financial by K0.36 million. The figures are included in the above statements of financial
position in trade receivables and current liabilities in Zena Limited and Yena Limited
respectively. The difference was due to the cheque issued by Yena Limited which was
credited to Zena Limited’s bank account on 4th October 2014.

(v) Impairment test carried out on 30th September 2014 revealed that investment in Wena
Limited was impaired by K0.8 million. However, goodwill in Yena Limited had not been
impaired.

(vi) Zena Limited’s policy is to measure non – controlling interest at its proportionate share
of Yena Limited‘s identifiable net assets.

(vii) Unless otherwise stated, assume all profits and losses accrue evenly throughout the
year.

Required:

Prepare a consolidated statement of financial position of Zena Group as at 30th September

2014. [Total: 30 marks]

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QUESTION TWO

The following trial balance relates to Mofya Ltd as at 30th September 2014.

K’million K’million
Revenue 760.00
Cost of sales 493.60
Distribution costs 34.80
Administrative expenses 101.00
Loan interest paid 2.00
Investment income 7.00
Bank 16.00
Freehold property – at cost 1st October 2005 126.00
Plant and equipment – at cost 84.40
Brand – at cost 1st October 2010 60.00
Accumulated depreciation – at 1stOctober 2013:
Buildings 16.00
Plant and equipment 39.40
Current tax 4.20
Accumulated amortization – brand 1stOctober 2013 18.00
Trade payables 81.80
Investment property 53.00
Inventory at 30th September 2014 76.00
Trade receivables 89.00

Equity shares K1:30th September 2014 104.00

Equity option 3.98
Share premium 30th September 2014 10.00
5% convertible loan 36.90
Retained earnings 1st October 2013 52.12
Deferred tax _ - 10.80
1,140.00 1,140.00

The following additional information is relevant:

(i) The non-current assets have not been depreciated for the year ended 30thSeptember
2014.

Mofya has a policy of revaluing its freehold property at the end of each accounting year.
A qualified surveyor has valued the property at 30th September 2014 at K114 million.
(See note (vi)).

The freehold property has a land element of K26 million. The buildings element is being
depreciated on straight line basis at a rate of 8% per annum. While plant and equipment
is depreciated at 40% per annum using the reducing balance method.

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(ii) Mofya’s brand in the trial balance relates to a product line that received bad publicity
during the year which led to falling sales revenue. An impairment review was conducted
on 1st April 2014 which reviewed that, the brand is now expected to generate net cash
flows of K9.313 million per annum for the next three years. On the same date, Mofya
received an offer to purchase the brand for K30 million.

The brand is amortized using straight line method over a 10 year life.

Depreciation, amortization and impairment charges are all charged to cost of sales.

An appropriate annual discount rate is 8%.

Discount Factor @8%

Year 1 0.926

Year 2 0.857

Year 3 0.794

Cumulative for 3 years 2.577

(iii) Included in Mofya’s revenue is K32 million for goods sold to a customer on 1st October
2013. The terms of the sale are that Mofya will incur after sale service costs of K2.4
million per annum for four years. Mofya Ltd normally makes a gross profit margin of
40% on such servicing work.

Note: Ignore discounting.

(iv) Administrative expenses include an equity dividend of 10.5 ngwee per share paid during
the year, after the rights issue in (v).

(v) On 1 February 2014, there was a fully subscribed rights issue of one new share for
every four held at a price of K1.40 each. The proceeds of the issue have been received
and the issue has been correctly accounted for in the above trial balance.

(vi) The balance on current tax represents the under/over provision of the tax liability for the
year ended 30th September 2013. The directors have estimated the provision for income
tax for the year ended 30th September 2014 to be K32.4 million. At 30th September
2014, the carrying amount of Mofya’s net assets exceeded their tax base by K26 million.
The deferred tax on 30th September 2014 includes K3.6 million tax relating to revalued
non-current assets in (i) above. The income tax rate for Mofya is 30%.

(viii) Mofya uses the fair value model of IAS 40 ‘Investment properties’. The fair value of the
investment property at 30th September 2014 was K65 million.

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(ix) The 5% convertible loan note was issued for proceeds of K40 million on 1st October
2012. It is a four year loan with an annual effective interest rate of 8% due to the value
of its conversion option.

(x) In August 2014, before the financial statements were authorized for issue, Directors of
Mofya discovered a material error in which K0.75 million worth of electricity invoices
paid for the period to 30th September 2013 had been overlooked and omitted from the
accounting records of the same period.

Required:

a) Prepare the statement of profit or loss and comprehensive income for Mofya Ltd for the
year ended 30th September 2014. (13 marks)

b) Prepare a statement of changes in equity of Mofya for the year ended 30th September
2014. (4 marks)

c) Prepare the statement of financial position as at 30th September 2014. (13 marks)

[Total: 30 marks]

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Section B

Attempt any Two (2) questions in this section.

QUESTION THREE

(a) XYZ a publicly listed company had two loans in existence in the year it commenced
construction of a qualifying asset.

The details of the loans are:

1st January 2013 31st December 2013

K’million K’million

12% bank loan repayable in 2016 500 500

9% bank loan repayable in 2017 750 750

The two loan notes were originally generally obtained but partly applied to the
construction of a qualifying asset. Construction works began on 1st April 2013 with
expenditure of K180 million and K70 million drawn down for the construction on 1st April
2013 and 1st November 2013 respectively, from existing loans. Construction works were
completed on 31st December 2013.

Required:
Explain and quantify how the borrowing costs on the loans and the qualifying asset
ought to be accounted for by XYZ for the year ended 31st December 2013 in accordance
with IAS 23 ‘Borrowing costs’. (8 marks)

(b) Chintu Ltd is a construction company that prepares its financial statements to 31st March
each year. During the year ended 31st March 2014, the company commenced two
construction contracts that are expected to take more than one year to complete.

Required:

Describe the issues of revenue and profit recognition relating to construction contracts
as guided by IAS 11 ‘Construction contracts’. (4 marks)

(c) Mooba Ltd acquired an item of plant on 1st July 2013 with the following costs:

K’ million

List price 240

Trade discount (5% of list price)
Modification cost to enable use 30
Delivery and installation costs 15
1 year warranty cost 2

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 Mooba qualified for a government grant of 25% of acquisition cost of the plant
qualifying for capitalization before the end of the current accounting period. The
grant had not been received by 30th June 2014 though the government had
indicated to Mooba that the grant would be disbursed two weeks after 30th June
2014.

The plant is to be depreciated on straight line basis over three years with a nil
estimated residual value. It is Mooba’s practice to recognize grant as deferred
income.

Required

Explain and quantify how the above transaction should be accounted for when
finalizing financial statements of Mooba for the year ended 30th June 2014.
(8 marks)
[Total: 20 marks]

QUESTION FOUR

The following are the financial statements of Bana Limited:

Statement of profit or loss for the year ended 31st August 2014.

K’million

Revenue 148.80
Cost of sales (104.64)
Gross profit 44.16
Distribution costs (17.28)
Administrative expenses (10.56)
Finance cost (1.92)
Profit before tax 14.40
Income tax (4.80)
Profit for the year 9.60
Other comprehensive income:
Revaluation surplus 6.48
Total comprehensive income 16.08

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Statements of financial position as at:

31st August 2014 31st August 2013

K’million K’million

Assets
Non-current
Property, plant & equipment (i) 52.20 36.36
Investments (iii) 15.00 15.00
Development costs (ii) 4.80 6.00
72.00 57.36
Current
Inventory 15.84 18.24
Receivables (i) 14.16 10.56
Bank 0.24 0.24
30.24 29.04

Total assets 102.24 86.40

Equity and liabilities

Equity

Equity shares @ K2.00 each 41.40 30.00

Share premium 1.40 nil

Revaluation reserve 6.48 nil
Retained earnings 21.00 12.60
Total equity 70.28 42.60
Liabilities
Non – current
16% loan note 12.00 8.04
Deferred tax 8.16 12.96

20.16 21.00
Current
Trade payables 5.80 18.96

Current tax 6.00 3.84

11.80 22.80

Total liabilities 31.96 43.80

Total equity and liabilities 102.24 86.40

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The following information is relevant:

(i) An item of plant with a carrying value of K2 million was sold for K2.4 million to Beka
Enterprises on 31st July 2014. Beka Enterprises paid 75% of the sales value. The balance
is included in receivables’ figure.

Depreciation of K13.44 million was charged to cost of sales for property, plant and
equipment in the year ended 31st August 2014.

(ii) This relates to development expenditure that met capitalisation criteria in accordance
with IAS 38’ Intangible assets’. During the year to 31st August 2014, the company
incurred and paid for development expenditure amounting to K0.20 million.The amount
shown in the statement of financial position is after deducting amortisation for the
period to 31st August 2014. Amortisation was charged to cost of sales.

(iii) This relates to shares classified as ‘financial assets through profit or loss’. During the
year to 31st August 2014, Bana limited acquired additional shares for cash consideration
of K6 million. Further, the company disposed of shares with a carrying value of K4
million for K5.8 million cash.

There were no other acquisitions and disposals of shares. Any variance on investments’
account is attributable to changes in fair value taken to cost of sales.

(iv) Bana Limited issued additional equity shares for cash on 1st July 2014.

(v) The dividends paid on 1st August 2014 for the year to 31st August 2014 have been taken
into account correctly in the above financial statements.

Required

Prepare a statement of cash flow of Bana Limited using the indirect method for the year ending
31st August 2014 in accordance with IAS 7 ’Statement of cash flows’.

[Total: 20 marks]

QUESTION FIVE

(a) IAS 41 ‘Agriculture’ provides guidance on how biological assets are to be accounted for
in the financial statements.

(i) State, with reason the only acceptable measurement basis of biological assets in
subsequent years. (3 marks)

(ii) Leticia Ltd farm owns some bearer biological assets that were acquired on 1st
January 2010 for K1.8 million and depreciated on straight line basis with nil scrap
value at an annual rate of 10%. An impairment review at 31st December 2010

11
 revealed that they had been impaired by K0.04 million. At 31st December 2013,
their fair value less estimated point of sale costs was estimated at K0.71 million.

The experts could not determine the assets’ fair value on 31st December 2010 as market
determined prices were not available.

Required:
Explain and quantify the biological assets value in Leticia farm’s financial statements on
the following dates:

31 December 2010
31 December 2013 (7 marks)

(b) The IASB conceptual framework for financial reporting requires financial statements to
be prepared on the basis that they comply with certain accounting assumptions and
qualitative characteristics.

Required:
Explain the meaning of each of the following assumptions or characteristics of accruals,
going concern, materiality and comparability, detailing how each applies to accounting
for tangible non-current assets.
(10 marks)

[Total: 20 marks]

END OF PAPER

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 L1 SUGGESTED SOLUTIONS

SOLUTION ONE

Zena Group
Consolidated statement of financial position as at 30th September 2014

K’million

Assets
Non-current
Property, plant and equipment 56.25+36.75+0.25-0.32+0.06W6 92.99
Goodwill W2 14.57
Investment in associate W3 11.76
Financial asset through profit or loss 3.40
122.72

Current
Inventory 15+13.5-0.15W6 28.35
Trade receivables 9.75+2.25-0.7 Intra group 11.30
Bank 3+1.8+0.36 5.16
Total assets 167.53

Equity and liabilities

Equity
Equity shares at K0.60 each 22.50
Share premium 18.00
Retained earnings W6 28.01
68.51
Non-controlling interest W7 6.46
Total equity 74.97
Liabilities
Non-current 30+10 +13.90W5 53.90
Current 27+12- (0.7-0.36) intra group 38.66
Total equity and liabilities 167.53

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Workings

W1 Group structure

Zena

80% 40%

Yena Wena

W2 Goodwill
K’m K’m
Consideration:
Cash 60% x K40m 24.00
Deferred (40% x K40m) x 1/(1.12)^2 12.75
NCI at acquisition 20% x K27.73m 5.55
Fair value of net assets at acquisition:
Share capital 7.20
Retained earnings 19.1+(3/12 x 6) 20.6
Fair value adjustments:
Land 0.25
Plant (0.32)
(27.73)
Goodwill 14.57

W3 investment in associate – Wena

K’m
Cost of investment (40% x K4.5m/K0.6) x K3.30 9.90
Share of retained earnings 40% x (9/12 x K9m) 2.70
Impairment (0.80)
Unrealised profit 40% x (20% x K1m x ½) (0.04)
11.76

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W4 Financial asset through profit or loss
K’m K’m

Investment as per statement of financial position 37.00

Investments in:
Yena 60% x K40m 24.00
Wena W3 9.90
(33.90)
Financial asset through profit or loss 3.10

W5 Deferred consideration
K’m
st
Balance at 1 January 2014 W2 12.75
Add: unwinding of interest 12% x K12.75m x 9/12 1.15
Balance at 30th September 2014 13.90

W6 Retained earnings

K’m
As per question – Zena 23.5
Share in:
Yena 80%x{(K25.1m-K20.6m)+(1/4xK0.32mx9/12)} 3.65
Wena (K2.7m- K0.04m) W3 2.66
Increase in fair value of FATPL K3.4m-K3.1m 0.30
Unrealised profit 20%x K3m x ¼ (0.15)
Impairment of investment in Wena (0.80)
Unwinding of interest W5 (1.15)
28.01

W7 Non-controlling interest
K’m
At acquisition W2 5.55
Share of post acquisition retained earnings 20%x K4.56m 0.91
6.46

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SOLUTION TWO
a) MofyaLtd’s statement of profit or loss and comprehensive income
for the year ended 30 September 2014.
K’million
Revenue (760– 12) (w1) 748.00
Cost of sales (w4) (536.60)
Gross profit 211.40
Distribution costs (34.80)
Administrative expenses (w2) (90.08)
Investment income 7.00
Gain on investment property (65 – 53) 12.00
Operating profit 105.52
Finance cost (w3) (36.9 x 8%) (2.95)
Profit before tax 102.57
Income tax (w7) (30.00)
Profit for the year 72.57
Other comprehensive income:
Revaluation surplus on PPE (w5) 12.00
Less deferred tax charge (w7) (3.60)
8.40
Total comprehensive income 80.97

b) MofyaLtd’s statement of changes in equity for the year ended 30

September 2014.

Share Equity Share Revaluation Retained Total

Capital Option Premium Reserve earnings

K’m K’m K’m K’m K’m K’m

Balances b/f (w8) 83.20 3.98 1.68 - 52.12 140.98

Prior period adj. - - - (0.75) (0.75)
83.20 3.98 1.68 - 51.37 140.23
Rights issues (w8) 20.80 8.32 29.12
Dividends paid(w9) (10.92) (10.92)
TCI(a) - - 8.40 72.57 80.97
Balances c/f 104.00 3.98 10.00 8.40 113.02 239.40

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c) MofyaLtd’s Statement of financial position as at 30th September
2014

K’million

Assets

Non- current
Property, plant and equipment (w5) 141.00
Intangible assets – brand (w6) 25.00
Investment property at fair value 65.00
231.00

Current
Inventory 76.00
Receivables 89.00
Bank (16 – 0.75) 15.25
180.25
Total assets 411.25

Equity and liabilities

Equity
Equity shares K1 each 104.00
Share premium 10.00
Revaluation reserve 8.40
Equity option 3.98
Retained earnings 113.02
Total equity 239.40

Liabilities
Non-current
5% convertible loan note (w3) 37.85
Deferred tax 7.80
Deferred revenue income (w1) 8.00
53.65
Current
Trade account payables 81.80
Current tax payable 32.40
Deferred revenue income (w1) 4.00
118.20

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Total liabilities 171.85
Total equity and liabilities 411.25

WORKINGS

1. When revenue includes an amount for after sale services costs, IAS 18
Revenue requires the proportion amount of such costs to be deferred. The
amount to be deferred should cover the cost and a profit loading on the same
cost. In Mofya’s case, 40% on services. As the servicing is for a period of
four years and date of sale was 1 October 2013, revenue relating to three
years’ servicing provision must be deferred.
This amounts to: K2.4million x 3 years x 100/60 = K12million. The break-up
of this amount into current and non-current liabilities is K4million and
K8million respectively.

2. Administrative expenses K’million

Per question 101.00
Less dividends paid (w9) (10.92)
To profit or loss account 90.08

3. Finance costs K’million

8% x 36.90million 2.95
Less finance costs paid (2.00)
Finance costs accrued 0.95

Total liability to statement of financial position = 36.90 + 0.95 = K37.85m

The finance cost of the convertible loan note is based on its effective rate of
8% applied to carrying amount of the loan of K36.90million, on 1 October
2013 which amounts to K2.95million. The finance cost paid in the period as
per trial balance is K2million leaving an accrual of K0.95million. The accrual
to be added to carrying amount of loan to derive the figure for the statement
of financial position.

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4. Cost of sales K’million
Per question 493.60
Depreciation charges:
Buildings 8%x(126 -26) 8.00
Plant and equipment 18.00
Brand amortization (3 +5+9) 17.00
To profit or loss account 536.60

5. Property, plant and equipment:

Freehold Plant Total
Property and Equipment
K’million K’million K’million

Cost/Valuation b/f 126.00 84.40 210.40

Less accumulated dep’n (16.00) (39.40) (55.40)
110.00 45.00 155.00
Depreciation charge:
Buildings (16/8yrs) (8.00) (8.00)
Plant &Eq{0.4 x(84.4-39.40)} (18.00) (18.00)
102.00 27.00 129.00
Revaluation surplus 12.00 - 12.00
Carrying amount c/f 114.00 27.00 141.00

6. Intangible assets: Brand

K’million
Cost b/f 1 October 2013 60.00
Amortization b/f 1 October 2013 (18.00)
Carrying amount b/f 1 Oct 13 42.00
Amortization charge upto date
Of impairment (K18m/3yrs x 6/12) (3.00)
Carrying amount at 31 March 2014 39.00
Amortization charge upto 30.9.14
(K30m/3yrs x 6/12) (5.00)
Impairment loss (9.00)
Carrying amount c/f on 30 Sept 14 25.00

At date of impairment review:

Carrying amount of Brand 39.00

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 Value in use of brand (9.313 x 2.577) 24.00
Fair value (offer price) 30.00

The recoverable amount should be the higher of fair value and value in use. In
this case, it is K30million. As the carrying amount of brand at date of review is
K39million, it is impaired by K9million. Its to be restated to K30million at this
date.

Further amortization after impairment review is K30m/3years x 6/12.

7. Income tax charge for the year

K’million
Deferred tax b/f 10.80
Current tax b/f (4.20)
Deferred tax c/f (30% x K26m) – K3.60 (4.20)
Current tax c/f (32.40)
To profit and loss account 30.00

8. Rights issues
1/5 x 104million shares = 20.8million shares:
To share capital – 20.8million shares x K1 = K20.8million
To share premium – 20.8million shares x K0.40 = K8.32million

9. Dividends paid; K104million /K1 = 104million shares x K0.105

=K10.92million

QUESTION THREE

a) IAS 23 Borrowing costs requires that borrowing costs incurred for the
acquisition or construction of qualifying asset be capitalized commencing
when expenditure and borrowing costs on qualifying asset are being incurred,
and activities in progress to prepare the asset for intended use.

In XYZ’s case, where entity used existing borrowing on construction of asset,

a weighted average capitalization rate is used to calculate borrowing costs for
capitalization. The balance of the finance costs are to be expensed as shown
by the workings below.

Statement of profit or loss extracts K’million

Finance costs (w1) 112.54

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 Statement of financial position Extract
Property, plant and equipment(w2&w3) 264.96

WORKINGS

1. Total borrowing costs on the loans: K’million

12% x 500,000 60.00
9% x 750,000 67.50
Total 127.50
Amount to be capitalized (w2) (14.96)
Total to be expensed 112.54
2. Weighted average rate=[12%x500/500 +750] + [9%x 750/500 +750]
= 0.048 + 0.054 = 0.102
= 10.2%

Borrowing costs for capitalization: K180m x 10.2 x 9/12months=K13.77m

K70m x 10.2 x 2/12 = K1.19m

14.96

3. Total cost of PPE

Drawn expenditure on PPE (K180m +70m) 250.00
Capitalized borrowing costs (w2) 14.96
264.96

Note: Expenditure of K180million was drawn 3 months into the current

accounting period hence borrowing cost prorated for 9 months and that of
K70million drawn 10 months into the accounting period hence prorated for 2
months.

An alternative answer is one without extracts from financial

statements but mere explanation of treatment with appropriate
quantification.

b) Since construction contracts can span several accounting periods, if no

revenue were recognized until the end of the contract, it would be against the
accruals concept which states that incomes earned to be recognized in the
same period as associated expense in order to calculate profit for the year.

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 Outcome of contract not reasonably certain
Revenue recognized should be equal to costs incurred. Thus nil profit is
recognized.
Outcome reasonably certain
Profit is recognized based on percentage of completion while a loss is
recognized in full.

c) IAS 20 Accounting for government grants and disclosure of government

assistance requires that a grant be recognized when the following criteria are
met;
 The entity will comply with any conditions attached to the grant
 The entity will actually receive the grant.

In the case of Mooba Limited, the fact that it qualified for grant is evident of
compliance with conditions and the government has disbursed money there by
confirming second criterion.

Mooba Ltd therefore needs to recognize the grant as deferred income in the
statement of financial position and make an equal transfer to profit or loss per
annum for three years, the estimated life of granted asset. The figures for the
extracts are as follows:

K’million

Cost of plant (95% x K240m) 228.00

Modification costs 30.00
Delivery and installation 15.00
Total cost for capitalization 273.00

Note that the warranty cost of K2millionis excluded as this is revenue, and not
capital expenditure.

Annual depreciation over three years for the plant will be: K273million/3
years =K91million.

Government grant will be (25% x K273m) = K68.25million

Statement of profit or loss extract

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 K’million
Grant 22.75
Depreciation charge 91.00

Statement of financial position extract

K’million

Non-current assets

Plant (273m – 91m) 182

Non-current liabilities

Deferred grant income 22.75

Current liabilities

Deferred grant income 22.75

SOLUTION FOUR

Bana Limited
Statement of cash flow for the year ended 31st August 2014.
K’million K’million
Cash flow from operating activities
Profit before tax 14.40
Adjustments for:
Interest expense 1.92
Depreciation charge 13.44
Decrease in fair value of financial assets W4 2.00
Amortisation 6+0.2 – 4.8 1.40
Profit on sale of plant 2.4 – 2 (0.40)
Profit on sale of financial assets 5.8 – 4 (1.80)
16.56
30.96

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 Changes in working capital
Decrease in inventory 18.24 – 15.84 2.40
Increase in receivables 14.16 – 10.56 – 0.6(25% x 2.40) (3.00)
Decrease in trade payables 18.96 – 5.8 (13.16)
Cash generated from operations 17.20
Interest paid (1.92)
Tax paid W1 (7.44)
Net cash inflow from operating activities 7.84
Cash flow from investing activities
Proceeds from disposal of plant 75% x 2.4 1.80
Proceeds from the disposal of financial asset 5.80
Cash paid for development expenditure (0.20)
Cash paid to acquire financial assets (6.00)
Cash paid to acquire property, plant and equipment W2 (24.80)
Net cash outflow from investing activities (23.40)
Cash flow from financing activities
Proceeds from issue of shares 41.4+1.4 – 30 12.80
Proceeds from loan issue 12 – 8.04 3.96
Dividends paid W3 (1.20)
Net cash inflow from financing activities 15.56
Increase/decrease in cash and cash equivalents -
Opening cash and cash equivalents 0.24
Closing cash and cash equivalent 0.24

Workings

W1 Taxation
K’m
Opening balance 3.84+12.96 16.80
Statement of profit or loss 4.80
Cash paid (bal.fig) (7.44)
Closing balance 6+8.16 14.16

W2 Property, plant and equipment

K’m
Opening balance 36.36
Revaluation surplus 6.48
Disposal (2.00)
Depreciation charge (13.44)

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 Cash acquisition (bal.fig) 24.80
Closing balance 52.20

W3 Retained earnings
K’m
Opening balance 12.60
Profit for the period 9.60
Dividends paid (bal. fig) (1.20)
Closing balance 21.00

W4 Investments
K’m
Opening balance 15.00
Acquisition 6.00
Disposal (4.00)
Decrease in fair value (bal.fig) (2.00)
Closing balance 15.00

SOLUTION FIVE

a) i) IAS 41 Agriculture requires that a biological asset is measured at fair value

less point of sale costs. This applies to initial measurement and
measurement subsequent to initial recognition. The standard states further
that biological assets would be measured at their depreciated cost less
impairment in an event that market determined prices are not available. The
alternative however applies only to initial measurement. For all subsequent
years, biological assets should be measured at fair value less point of sale
costs. This enhances greater relevance, reliability, comparability and
understandability as a measure of future economic benefits.

ii) On 31st December 2010

As market determined prices were not available, which is the basis for fair
value, the biological assets would be measured at their depreciated cost less
impairment which would be:
K’million
Cost 1.80
Less depreciation (10% x K1.80m) (0.18)
Less impairment (0.04)
Carrying amount 1.580

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 On 31 December 2013

The alternative measurement basis does not apply to measurement

subsequent to initial recognition. Therefore, at 31st December 2013, only fair
value is applicable which is as follows:
Fair value less point of sale costs K0.71million

b) Accruals (or matching) concept

Is an accounting assumption that dictates that the effects of transactions and
other events are recognized in the financial statements in the period in which
they occur, rather than in the period when cash is received or paid.

Application to tangible non-current assets

Expenditure on acquiring tangible non-current assets is incurred once as a

lump sum but asset would normally be used to generate economic benefits
for more than one year. Recognizing the entire expenditure in the year
incurred would mean expenses will be overstated and profit understated.
Accruals concept entails the cost would be spread over the years an entity
expects to enjoy economic benefits from the asset in a systematic manner,
that is, by charging depreciation each year throughout the asset’s life.

Going concern

It is an assumption that the entity has neither the intention nor the necessity
to liquidate or curtail major operations in the next twelve months from the
reporting date. In short, it is expected to continue with its operations in the
foreseeable future.

Application to tangible non-current assets

Tangible non-current assets will be recognized at their carrying amounts in

the financial statements. This entails the entity plans to continue using up
the assets in their continued operations where the remaining carrying value
would be consumed. If it was asserted otherwise, the non-current assets
would be recognized at their break up basis (sales value).
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Materiality

An item of information is material if omitting it or misstating it could

negatively influence the decisions that users make on the basis of the
financial statements. An item can be material on account of its nature or its
magnitude.

Application to tangible non-current assets

Non-current assets of small value such as stapler, money clips etc. are usually
not included in non-current assets, even though they would be used for more
than one accounting period, but are instead expensed as incurred. Their
value is usually too small to warrant any concern about their exclusion and
hence have immaterial effect on financial statements. Even their omission
from accounting records would not mislead users of financial statements.

Comparability

This is a characteristic of financial statements that requires consistent

application of accounting policies and adequate disclosure in order that the
financial statements of an entity can be compared with either financial
statements of previous accounting periods or financial statements of other
entities.

Application to tangible non-current assets

Similar tangible non-current assets to be depreciated on similar basis from

one year to another. The change may be acceptable only if it entails more
relevant and reliable financial information following some developments or
another standard initiating the change.

END OF SUGGESTED SOLUTIONS

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