CHARTERED ACCOUNTANTS EXAMINATIONS

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LICENTIATE LEVEL
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L1: FINANCIAL REPORTING

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MONDAY 3 MARCH 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 Compulsory Questions.

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

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) questions in this section. Attempt both questions.

QUESTION ONE

Below are the summarized statements of financial position for three companies as at
31 March, 2013:

ASSETS Zammeat Zamfish Zamveg

Non current assets K’000 K’000 K’000
Property, Plant & Equipment 18,750 12,250 10,500
Investments 21,750 nil nil
40,500 12,250 10,500
Current assets
Inventory 5,000 4,500 2,500
Trade receivables 3,250 750 1,500
Total assets 48,750 17,500 14,500
EQUITY AND LIABILITIES
Equity
Equity shares of K1 each 12,500 4,000 2,500
Share premium 9,900 nil nil
Retained earnings 13,600 8,750 10,500
Shareholder’s funds 36,000 12,750 13,000
Non current liabilities
12% loan note 7,250 1,000 nil
Current liabilities
Contingent consideration 1,350 nil nil
Other current liabilities 4,150 3,750 1,500
Total equity and liabilities 48,750 17,500 14,500

The following additional information is relevant:

(i) On 1 April 2012, Zammeat acquired 3 million shares in Zamfish in a share exchange
of three shares in Zammeat for every two shares in Zamfish. The market prices of
Zammeat’s and Zamfish’s shares at the date of acquisition were K3.2 and K4.5
respectively. Zamfish’s retained earnings at the date of acquisition were K8.25
million.

In addition, Zammeat agreed to pay a further amount on 1 April 2013 that was
contingent upon the post-acquisition performance of Zamfish. At the date of
acquisition, Zammeat assessed the fair value of this contingent consideration to be at
K1.35 million. By 31 March 2013, it was clear this would be the amount to be paid.
(ignore discounting). Zammeat has recorded the share exchange and has provided
for the initial estimate of K1.35 million contingent consideration.

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(ii) On 1 October 2012, Zammeat also acquired 1 million shares in Zamveg paying K4 in
cash per acquired share and issuing at par one K100 12% loan note for every 50
shares acquired in Zamveg. This consideration has also been recorded by Zammeat.
Zamveg’s retained earnings as at 1 April 2012 were K7.5 million.

Zammeat has no any other investments.

(iii) At the date of acquisition, the fair value of Zamfish’s Property, Plant and Equipment
was equal to its carrying amount with the exception of Zamfish’s item of Plant and
Equipment which had a fair value of K1 million above its carrying amount. It has
been established that Zamfish has not adjusted the carrying amount of this item of
Plant and equipment following this fair value exercise. At that date, the item of plant
and Equipment had a remaining life of twenty years and nil residual value. Zamfish
uses straight line depreciation for Plant and Equipment.

Furthermore, at the date of acquisition, Zamfish had licenses recognized in its

statement of financial position amounting to K0.25 million. Zammeat Directors
believed the licenses to have no recoverable value at the date of acquisition and
Zamfish wrote it off shortly after acquisition.

(iv) Zammeat’s policy is to value the non controlling interest at fair value at the date of
acquisition. For this purpose, Zamfish’s share price at that date can be deemed to
be representative of the fair value of the shares held by the non controlling interest.

(v) Zammeat’s current account with Zamfish was K1.7 million debit as at 31 March 2013.
This was in disagreement with the equivalent balance in Zamfish current account
with Zammeat. The disagreement was due to some goods-in-transit invoiced at K0.9
million that were sent by Zammeat on 27 March 2013, but had not been received by
Zamfish until 5 April 2013. Zammeat sold all these goods at cost plus 50%.

(vi) Impairment tests carried out on 31 March 2013 revealed the investment in Zamveg
was impaired by K0.3 million and that due to poor trading performance, consolidated
Goodwill was equally impaired by K1.9 million.

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

Required:

(a) Prepare the consolidated statement of financial position for Zammeat as at 31

March 2013. (25 marks)

(b) Zammeat Board Chairman has approached you as a financial accountant to

outline the features to be fulfilled for an investment to be classified as
Associate besides shareholding and voting power. He understands that the
investor company should have significant influence over the investee
company.

Required:
What factors must exist to fulfill the criterion of significant influence?
(5 marks)
[TOTAL: 30 marks]

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QUESTION TWO

Quinos Plc. is a listed company on the local stock Exchange and the following trial balance
relates to it as at 31 October 2013.

K’000 K’000
Trade payables 385
Trade Receivables 545
Administrative expenses 925
Interest paid(note (i) ) 15

Long term borrowings (note (i) ) 1,000

Cash at bank 1,080
Distribution costs 310
Entertainment expenses 85
Equity dividends paid(note (iii)) 250
Land at cost – 31 October 2012 (note (ii) 3,650
Property, plant & Equipment at cost – 31 October 2012 (note 1,600
(ii) )
Purchase of property, plant and equipment during the year 550
(note (vi) )
Taxation (note (iv) ) 30
Allowance for depreciation of Property, plant and Equipment:
- 31 October 2012(note (vi) ) 960
deferred tax – 31 October 2012 50
Ordinary shares K1 fully paid at 31 October 2013 (note (v) ) 3,150
Share premium at 31 October 2013 495
Retained earnings at 31 October 2012 840
Inventory – 31 October 2013 90
Revenue 3,450
Suspense (note (vii) ) 15
Cost of sales 1,185 _____
10,330 10,330
Additional information provided include:

(i) Long term borrowings consist of a loan taken out on 1 May 2012 at 3% interest per
annum. Six months loan interest has been paid in the year to 31 October 2013.

(ii) At 31 October 2012, the tax base of Quinos Plc’s assets was K450,000. Non of these
assets were fully depreciated at this date. The income tax rate of Quinos Plc is 25%.

(iii) The final dividend for the year to 31 October 2012 of K250,000 was paid on 31
March 2013.

(iv) The balance on the taxation account is the income tax underestimated in the
previous year’s financial statements.

(v) Quinos Plc. issued 1,650,000 equity shares on June 2013 at a premium of 30%.

(vi) Property, Plant and Equipment is depreciated at the rate of 20% per annum using
straight line method. Depreciation of Property, Plant and Equipment is to be charged
to cost of sales. Quinos Plc’s policy is to charge a full year’s depreciation in the year
of acquisition and no depreciation in the year of disposal.

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(vii) Quinos Plc. returned goods invoiced at K15,000 to a supplier in October 2013 which
had been bought in September 2013. At 31 October 2013, the supplier had not
issued a credit note. Quinos had correctly deducted the amount from its purchases
with the corresponding double entry being posted to suspense account.

Required:

(a) A taxation computation to derive the statement of profit or loss charge for the
year ended 31 October 2013. (8 marks)

(b) Quinos Plc’s statement of profit or loss and comprehensive income for the
year ended 31 October 2013. (8 marks)

(c) Quinos Plc’s statement of financial position as at 31 October 2013.

(10 marks)

(d) Quinos Plc’s statement of changes in Equity for the year to 31 October 2013.
(4 marks)
[Total: 30 Marks]

SECTION B

Attempt any two questions in this section.

QUESTION THREE

Dumisan is a publicly listed company. As financial accountant, you have been presented
with the following summarized financial statements of Dumisan.

Statement of profit or loss and comprehensive income for the year ended 30 September
2013.
K’000
Revenue 22,960
Cost of sales (19,360)
Gross profit 3,600
Other income – gains on investments 240
Distribution costs (480)
Administrative expenses (note ii) (1,400)
Finance costs (200)
Profit before tax 1,760
Income tax expense (640)
Profit for the year 1,120
Other comprehensive income:
Gains on property revaluation 400
Total comprehensive income 1,520

Statements of financial position as at;

30 September 2013 30 September 2012
K’000 K’000
ASSETS:

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Non current assets
Property, Plant and Equipment (note (i) ) 11,520 7,440
Investments (note (i) ) 1,680 1,600
Total non current assets 13,200 9,040
Current assets
Inventory 4,840 3,240
Trade receivables 1,920 2, 160
Income tax asset nil 200
Bank 40 nil
Total current assets 6,800 5,600
Total assets 20,000 14,640
EQUITY AND LIABILITIES:
Equity
Equity shares of 20 ngwee each (note (iii) ) 4,000 2,400
Share premium 2,400 nil
Revaluation reserve 600 200
Retained earnings 5,760 5,240
Total shareholders’ funds 12,760 7,840
Non current liabilities
8% loan notes (note (ii) ) nil 1,600
Deferred tax 200 120
Total non current liabilities 200 1,720
Current liabilities
Trade payables 5,640 4,200
Bank overdraft nil 480
Warranty provision 800 400
Current tax payable 600 nil
Total current liabilities 7,040 5,080
Total equity and liabilities 20,000 14,640

(i) Dumisan uses the fair value to measure its investments. The fair value of Dumisan’s
investments at 30 September 2013 was K80,000 more than their fair value 12
months before this date. Dumisan did not buy or sell any investments during the
period to 30 September 2013.

An item of plant that had a carrying amount of K960,000 was sold at a loss of
K360,000 during the year. Depreciation of K1,120,000 was charged to cost of sales
for property, plant and equipment in the year ended 30 September 2013.

(ii) The 8% loan notes were redeemed early incurring a penalty of K80,000 which has
been charged as an administrative expense in the statement of profit or loss.

(iii) Dumisani did not make any bonus issues but an issue of shares for cash on 1 April
2013.

(iv) Dumisan gives a 12 month warranty on some of the products it sells. The amounts
shown in current liabilities as warranty provision are an accurate assessment, based
on past experience, of the amount of claims likely to be made in respect of
warranties at each year end. Warranty costs are included in cost of sales.

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(v) A dividend of 3 ngwee per share was paid in July 2013.

Required:

(a) Prepare a statement of cash flows for Dumisan for the year to 30 September
2013 in accordance with IAS 7: statement of cash flows. (15 marks)

(b) In recent years, many users of financial statements, have expressed varying
views on the usefulness and reliability of information contained in some
companies’ statement of profit or loss.

Required:

Construct a case for and against the usefulness and reliability of a company’s
statement of cash flows as compared to the statement of profit or loss.
(5 marks)

[Total: 20 marks]

QUESTION FOUR

(a) IFRS 5 Non current assets held for sale and discontinued operations sets out the
criteria for recognizing a discontinued operation.

Required:

(i) Define ‘non current assets held for sale’ and state factors that must be present
for assets to be classified as held for sale. (7 marks)

Tondo Ltd became committed to a plan to sale its south operation facility on 1
December 2013, and has already found a potential buyer. The company does
not intend to cease operations right away and will not transfer the operation
facility to the would be buyer until all the workforce at the facility is made
redundant and paid their dues. This is not expected to be done until March
2015. Tondo Ltd management has since classified the facility as ‘non current
asset held for sale’.

Required:
(ii) Discuss the appropriateness of classifying South Operation Facility as ‘non
current asset held for sale’, at 31 December 2013, by Tondo management.
(4 marks)

(b) Tondo Ltd is in the printing and publishing business of various publications ranging
from novels to social magazines, and specific industry learning materials. During the
current year, sales of novels declined dramatically and directors decided at a board
meeting on 10th December 2013 to cease marketing novel publications and sell off
the related non current assets. Just after the meeting, staff engaged in novel
printing and publication were notified of the plans and an announcement was made
in the press. The novel production staff and other associated resources can be
separately identifiable from those of other production lines. The directors of Tondo
ltd wish to show the novel production’s results as a discontinued operation in the
financial statements to 31 December 2013.

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 The following are Tondo Ltd’s summarized statement of profit or loss results for
years ended:

31 December 31 December
2013 2012
Specific
Social
Novels industry Total Total
Magazines
learning
materials
K’000 K’000 K’000 K’000 K’000
Revenue 84,000 138,000 12,000 234,000 240,000
Cost of sales (99,000) (108,000) (9,000) (216,000) (192,000)
Gross profit (15,000) 30,000 3,000 18,000 48,000
Operating (9,000) (7,000) (600) (16,600) (12,000)
expenses
Profit/loss (24,000) 23,000 2,400 1,400 36,000
before tax

The results for the novels for the year ended 31 December 2012 were:
K’000
Revenue 108,000
Cost of sales (90,000)
Gross profit 18,000
Operating expenses (9,000)
Profit before tax 9,000
Required:
(i) Evaluate the appropriateness of the Directors’ wish to classify Novels production
line as a discontinued operation at 31 December 2013. (3 marks)
(ii) Assuming the planned closure of Novels publication is a discontinued operation,
prepare the summarized statement of profit or loss for Tondo Ltd for the year
ended 31 December 2013 with its comparatives. Assume Tondo Ltd discloses the
results of its discontinued operation on the face of the income statement.
(6 marks)
[Total: 20 marks]

QUESTION FIVE

A ‘conceptual framework’ in the context of financial reporting, is a statement of generally

accepted theoretical principles which form the frame of reference for financial reporting.
The danger of not having a conceptual framework is demonstrated in the way some
countries’ standards have been developed, in a haphazard approach. Where an agreed
framework exists, a standard-setting body builds accounting rules on the foundation of
sound, agreed basic principles.
Some of the elements of discussion in the framework include:
(i) The objective of financial statements
(ii) The underlying assumptions
(iii) Qualitative characteristics of financial statements
(iv) Concepts of capital and capital maintenance.

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Required:
(a) In relation to ‘the objective of financial statements’, identify three users of financial
information and explain their information needs. (3 marks)

(b) Identify and explain two underlying assumptions in the preparation of financial
statements, giving one illustrative example of application of each in financial
statements. (4 marks)
(c) Explain what is meant by relevance, reliability and comparability as characteristics of
useful financial information, detailing factors that ensure reliability of information.
(9 marks)
(d) Briefly explain the meaning of two commonly used concepts of capital and capital
maintenance. (4 marks)
[Total: 20 marks]

END OF PAPER

L1 SUGGESTED SOLUTIONS

SOLUTION ONE

(a) Consolidated statement of financial position of Zammeat as at 31 March 2013

ASSETS
Non current assets K’000 K’000
Property, Plant and Equipment (18,750 + 12,250 +1,000 – 31,950
50)
Goodwill (w (ii) ) 5,350
Investment in Associate (w (iii) ) 6,300
Total non current assets 43,600
Current assets
Inventory (5,000 + 4,500 + 600 ) (w (vi) ) 10,100
Trade receivables (3,250 + 750 – 1,700) (w (vi) ) 2,300 12,400
Total assets 56,000
EQUITY AND LIABILITIES
Equity
Equity shares of K1 each 12,500
Share premium 9,900
Retained earnings (w (iv) ) 12,700
Total shareholders’ funds 35,100
Non controlling interest (w (vii) 4,200
Total equity 39,300
Non current liabilities
12% loan notes (7,250 + 1,000) 8,250
Current liabilities
Contingent consideration 1,350
Other current liabilities (4,150 + 3,750 -800) (w (vi) ) 7,100 8,450
Total equity and liabilities 56,000

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Workings (figures in brackets are in k’000)

i) Group structure
Zammeat investment in Zamfish (3,000 shares/4,000 shares x 100) = 75%
.‘. NCI 25%. Zamfish being a subsidiary of Zammeat.

Zammeat investment in Zamveg (1,000 shares/2,500 shares x 100) = 40%

Zamveg being an associate of Zammeat.
ii)
Goodwill in Zamfish K’000 K’000
Consideration transferred:
Share exchange (3.000 shares/2shares x 3 shares x 14,400
K3.2)
Contingent consideration 1,350
Fair value of NCI (25% x 4,000 x K4.5) 4,500
20,250
Less net assets acquired:
Equity shares 4,000
Pre-acquisition reserves 8,250
Fair value adjustment:
Plant &equipment 1,000
License (250) (13,000)
Gross goodwill on acquisition 7,250
Less impairment loss (1,900)
Net Goodwill on acquisition 5,350

iii) Investment in Zamveg

K’000
Cash consideration (40% x 2,500 shares x K4) 4,000
12% loan note (40% x 2,500/50 shares x K100) 2,000
Share of post-acquisition profits (w (iv) 600
Zamveg impairment loss (300)
6,300

iv) Consolidated retained earnings

K’000
Zammeat 13,600
Zamfish post acquisition losses (75% x 1,200 see (w (v) ) (900)
Unrealized profit in inventory (w (vi) (300)
Zamveg’s post acquisition profit (40% x 3,000 [10,500 – 7,500]x 600
6/12)
Zamveg’s impairment loss (300)
12,700

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 v) Zamfish’s post acquisition profit/loss

K’000
Post acquisition profit as reported 500
Add back license write off (treated as pre acquisition fair value 250
adj.)
Additional depreciation (50)
Goodwill write off (1,900)
Post acquisition loss (1,200)

vi) Goods in transit and unrealized profit K’000

Intra group current accounts differ by K0.9 million on which Zammeat made a
profit of K0.3 million (50/150 x K0.9 million). Inventory must therefore be
increased by K0.6 million (its cost), K0.3 million is eliminated from Zammeat’s
profit, K1.7 million is deducted from trade Receivables and K0.8 million
(1,700 – 900) is deducted from trade payables through other payables.

vii) Non controlling interest K’000

Fair value on acquisition (w (ii) ) 4,500

NCI post acquisition losses (1,200 x 25%) (w (iv) (300)
Total NCI 4,200
(b)

 Investor company to have representation on the board of directors of the

investee company.
 Participation in the policy making process of the investee
 Material transactions taking place between the investor and the investee
 Interchange of management personnel
 Provision of essential technical information.

SOLUTION TWO

(a)
K’000
Accounting profit before tax 485
Add back: entertainment expenses 85
Accounting depreciation (w1) 430
Less: tax depreciation (w3) (388)
Taxable profit 612
Tax charge @ 25% 153

Income tax account

K’000 K’000
Balance b/f: current 30 Balance b/f: deferred 50
Balance c/d: current tax 153 Profit or loss statement 170
deferred tax (w4) 37
220 220

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(b) Quinos Plc.’s
Statement of profit or loss and comprehensive income for the year ended
31 October 2013.

K’000
Revenue 3,450
Cost of sales (1,185 +430) w1 (1,615)
Gross profit 1,835
Administrative expenses (925)
Distribution costs (310)
Entertainment expenses (85)
Profit from operations 515
Finance costs (w2) (30)
Profit before tax 485
Income tax expense (153 +30+37-50) w4 (170)
Profit for the year 315
Total comprehensive income for the year 315

(c) Quinos Plc’s

Statement of financial position as at 31 October 2013
K’000 K’000
ASSETS:
Non current assets
Property, plant and equipment (w5) 4,410
Current assets
Inventory 90
Trade receivables 545
Cash at bank 1,080
Total current assets 1,715
Total assets 6,125
EQUITY AND LIABILITIES:
Equity
Equity shares of K1 each(ans (d) ) 3,150
Share premium (ans (d) ) 495
Retained earnings (ans (d) ) 905
Shareholders funds 4,550
Non current liabilities
Long term borrowing 1,000
Deferred tax (w 4) 37
1,037
Current liabilities
Trade payables (385 – 15) 370
Current tax payable (w4) 153
Interest payable (w2) 15
Total current liabilities 538
Total equity and liabilities 6,125

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(d) Quinos Plc’ statement of changes in equity as at 31 October 2013
Equity Share Retained Total
shares premium earnings
K’000 K’000 K’000 K’000
Balances b/f(bal) 1,500 0 840 2,340
Equity issues 1,650 495 - 2,145
Profit for the year - - 315 315
Dividends paid - - (250) (250)
Balances c/f 3,150 495 905 4,550

WORKINGS
K’000
1. Depreciation of PPE = 20% x (1,600 + 550) = 430

2. Finance cost = 3% x 1,000 = 30

Paid ½ x 30 = 15
Accrued ½ x 30 = 15
3. Tax depreciation:
50% x 550 =275
Add 25% x 450 =113
388
4.
Carrying amount tax base
Balances b/f 31 October 2012: cost 1,600 -
Accumulated depreciation 960 -
640 450
Additions 550 550
1,190 1,000
Depreciation charge for the year (430) -
Tax depreciation (w3) - (388)
Balances at 31 October 2013 760 612

Deferred tax at 31 October 2013 = (760 – 612) x 25% = 37

Deferred tax @ 31 October 2012 50
Decrease (13)
Deferred tax @ 31 October 2013 37

Property, Plant and Equipment

Land PPE Total

K’000 K’000 K’000
Cost b/f 31 October 2012 3,650 1,600 5,250
Additions - 550 550
Cost c/f 31 October 2013 3,650 2,150 5,800
Depreciation b/f 31.10.12 - 960 960
Annual charge - 430 430
Depreciation c/f 31.10.13 - 1,390 1,390
Carrying amount c/f 3,650 760 4,410

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SOLUTION THREE

(a) Dumisani
Statement of cash flows for the year ended 30 September 2014
K’000 K’000
Cash flows from operating activities
Profit before tax 1,760
Add back:
Loss on sale of plant 360
Depreciation 1,120
Early redemption penalty 80
Interest expense 200
Gains on investments (240)
Increase in warranty provision 400
Cash generated from operations before working capital 3,680
m/ments
Increase in inventory (4,840 – 3,240) (1,600)
Decrease in receivables (2,160 – 1,920) 240
Increase in payables (5,640 – 4,200) 1,440
Cash generated from operations 3,760
Interest paid (200)
Tax refund received (w1) 240
Net cash from operating activities 3,800
Cash from investing activities
Proceeds from sale of plant (w3) 600
Purchase of plant (w2) (5,760)
Income received from investments (240 – 80) 160
Net cash used in investing activities (5,500)
Cash flows from financing activities
Share issues (4,000 – 2,400) + 2,400 4,000
Loan notes repaid (1,600)
Early redemption penalty (80)
Dividends paid (K0.03 x (4,000,000/K0.20) (600)
Net cash from financing activities 1,720
Net increase in cash and cash equivalents 520
Cash and cash equivalents at 1 October 2013 (480)
Cash and cash equivalents at 30 September 2014 40
Workings

1. Income tax payable account

K’000 K’000
Balance b/f: current tax 200 Balance b/f: deferred tax 120
Balance c/d: current tax 600 Profit or loss statement 640
deferred tax 200 Tax refund received (bal 240
fig)
1,000 1,000
Balance b/f: current tax 600
deferred tax 200
2. Property, plant and equipment account

K’000 K’000

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 Carrying amount b/f: 7,440 Disposal 960
Revaluation surplus (600-200) 400 Depreciation 1,120
Additions (bal figure) 5,760 Balance c/f 11,520
13,600 13,600

3. Proceeds from disposal of plant:

Carrying amount 960

Less loss on disposal (360)
Proceeds 600

(b) There is general understanding that statements of cash flow are more useful and
reliable than statement of profit or loss. This is supported by the fact that cash, and,
not profit is the life blood of a company.

Points for cashflow usefulness and reliability:

 Without cash, the business cannot grow, repay its borrowings, service its
finance, or pay a dividend.
 Without cash, a business will eventually fail as a going concern
 Cash flow accounting provides better means of comparing the results of
different companies than traditional profit reporting
 Cash can be audited more easily than profits hence reliable.
 Cash is not subjective, but a question of fact, hence reliable
 Accruals used in profit or loss statements is confusing whereas cash flows are
easily understood and hence reliable
Points against cash flow usefulness and reliability

 Cash flows can be boosted by cutting back investment and delaying paying
account payables. This gives an illusion of success in the short run, but is
bottling up investment expense and supplier badwill for the future.
 By matching income and expenditure, the statement of profit or loss gives the
reader a better understanding of the long term profitability of the company.
Conclusion

Statement of cash flows and statement of profit or loss are meant to complement
each other. The quality of profits claimed in the income statement can be assessed
by comparing them with the cash generated from operations in the statement of
cash flow. The sustainability of dividends can also be assessed with reference to the
statement of cash flows.

SOLUTION FOUR

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(a) (i) IFRS 5 defines ‘non current asset held for sale’ to be those non current assets
whose carrying amount will be recovered principally through a sale
transaction rather than through continuing use.

Factors to be present
 The asset must be available for immediate sale in its present condition.
 Its sale must be highly probable (i.e more likely than not to take place)
For a sale to be highly probable, the following factors must apply:
 The sale should be expected to take place within one year from the
date of classification
 The asset must be actively marketed at a reasonable price in relation
to its fair value.
 Management must be committed to a plan to sale the asset.
 There must be an active program to locate the buyer.
 It is unlikely that the plan will be withdrawn or that significant
changes to it will take place.

(ii) While Tondo Ltd’ management were committed to a plan to sale the non
current asset by the reporting date, and a potential customer was found, not
all IFRS 5 criteria had been met. The standard requires that the asset is
available for immediate sale and the sale to take place within one year from
classification date. This later condition had not been met in Tondo as sale
would only take place 15 months from classification. The condition of
employee redundancies equally entails the facility was not available for
immediate sale.

(b) (i) The novel publication may be classified as a discontinued operation if it meets
certain criteria. IFRS 5 requires a qualifying operation to be separate major
line of business and the scenario states that this production line can be
separately identified from others in terms of staff and other resources

Additionally, termination was decided upon before the financial statements

were approved and within two weeks of the year end. The interested parties
were notified at that time and an announcement was made in the press,
making the decision irrevocable. All this meets IFRS 5 criteria for recognizing
Novels as a discontinued operation.

(ii) Tondo Ltd

Statement of profit or loss for the years ended:

31 December 2013 31 December 2012

Continuing operations K’000 K’000
Revenue 150,000 132,000
Cost of sales (117,000) (102,000)
Gross profit 33,000 30,000
Operating expenses (7,600) (3,000)

Profit from continuing operations 25,400 27,000

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 Profit or loss from discontinued (24,000) 9,000
operations
Profit for the year 1,400 36,000

Discontinued operation
Statement of profit or loss for the years ended:

31 December 2013 31 December 2012

K’000 K’000
Revenue 84,000 108,000
Cost of sales (99,000) (90,000)
Gross profit/(loss) (15,000) 18,000
Operating expenses (9,000) (9,000)
Profit/(loss) from discontinued operation (24,000) 9,000

SOLUTION FIVE

(a) Investors – may include shareholders who provide risk capital. These users require
financial information for the following purposes:

 To make decisions about buying or selling shares or taking up rights issues

 Knowledge about level of dividends in the past, present and future including
changes in share price so as to make investment decisions.
 Establishing the efficiency with which management has been running the
affairs of the company so as to make voting/investment decisions.
Employees

 They need financial information to establish the security of employment and

future prospects for jobs in the company as well as facilitating collective pay
bargaining.
Lenders

 They need financial information to help them decide whether to lend to a

company or not.
 They also need to ascertain how secure the value of any security is.
Suppliers

 They need financial information to ascertain if the company continues to be a

good customer with reasonable ability to pay debts.
Customers

 They require financial information to ascertain whether or not the company

will be able to continue producing and supplying goods to them.
Government

 They may need the financial information for the same reason as creditors and
customers. However, in addition, it is concerned with compliance with tax

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 and company law, ability to pay tax and the general contribution of the
company to the economy.

The public
 They need to have the information for all the reasons mentioned above.
(b) Accruals
Means the effects of transactions and other events are recognized when they occur
(and not as cash is received or paid) and are recorded in the accounting records and
reported in the financial statements of the period to which they relate.

Financial statements prepared under the accruals basis show users past transactions
involving cash and also obligations to pay cash in the future and resources which
represent cash to be received in the future.

Illustrative example

A company pays K1.5million of an expense of K5million and recognizes K5 million as

an expense in statement of profit or loss while the K3.5 million is recognized as a
liability in the statement of financial position.

Going concern

The entity is normally viewed as continuing in operation (going concern) for the
foreseeable future unless it can be demonstrated by indicators that it is not. Going
concern entails that the entity has neither the intention nor the necessity of
liquidation or of curtailing materially the scale of its operations.

Illustrative example

Non current assets recognized at depreciated or amortized cost unlike at their

realizable values (with an exception of impaired assets)

(c) Relevance

The relevance of information must be considered in terms of the decision-making

needs of users. It is relevant when it can influence their economic decisions or allow
them to reassess past decisions and evaluations

Past performance gives information on expected future performance and this is

enhanced by the provision of comparatives, so that users can see the direction in
which the company is moving. The manner of showing information will enhance the
ability to make predictions e.g. the separate presentation of discontinued operations
show how much profit or loss is attributable to that part of the operation which will
not be there in the future.

Another aspect of relevance is materiality. An item is material if its omission or

misstatement could influence the economic decision of the users. Relevance would
not be enhanced by the inclusion of immaterial items.

Reliability

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 To be useful, information must be reliable. Reliable information is that, which is free
from material error and bias and can be depended upon by users to represent
faithfully that which it either purports to represent or could reasonably be expected
to represent.

For instance, financial statements in which provision had not been made for known
liabilities or in which asset values had not been correctly stated could not be
considered reliable.

Additionally, if transactions whose commercial view differs from legal view are not
accounted for in accordance with their economic substance, financial statements are
then unreliable.

Factors ensuring reliability of information

i) Faithful representation – information in financial statements must represent

factually the transactions it purports to represent in order to be reliable.
Faithful representation may lack due to inherent difficulties in identifying the
transactions or finding an appropriate method of measurement or
presentation.

ii) Substance over form – reliability is enhanced if economic substance is used in

measuring transactions and not legal form, e.g in leases.

iii) Neutrality – information must be free from bias to be reliable. Neutrality is

lost if the financial statements are prepared so as to influence the user to
make a decision in order to achieve a pre determined outcome.

iv) Prudence – ensures assets whose recoverability is doubtful are written down
to recoverable amounts to avoid overstating, and, liabilities are not
understated by making provisions for uncertainties.

v) Completeness – financial statements must be complete. Omissions may

cause information to be misleading.

Comparability
Users must be able to compare an entity’s financial statements in two ways:

 Of the same entity with its own past performance

 With other entity’s statements to evaluate their relative financial position,
performance and changes in financial position

This means that financial statements must be prepared on the same basis from one
year to the next and that, where a change of accounting policy takes place, the
results for the previous year must also be restated so that comparability is
maintained.

Comparability with other entities is made possible by use of International Financial

Reporting Standards.

(d) The two concepts are:

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  Financial concept of capital – it states that capital is synonymous with net
assets or equity of the entity. If net assets at the end of a reporting period
are more than net assets at the beginning, a profit has been earned. This is
after distributions if any to or from owners.

 Physical concept of capital – states that capital is regarded as productive

capacity of an entity. A profit is therefore earned only if the physical
productive capacity of the entity at the end of the period exceeds the physical
productive capacity at the beginning of the period. This is after distributions
to or from owners if any.

Under both concepts, a profit cannot be recognized until capital has been
maintained. The framework does not prescribe which of the two concepts should be
adopted by an entity. This will depend on the needs of users of financial statements
of an entity.

MARKING SCHEME

This marking scheme is given as a guide in the context of the suggested answers. Markers
are therefore given the scope to award marks for alternative approaches to a question,
including relevant comment, and where well reasoned conclusions are provided. This is
particularly the case for written answers where there may be more than one acceptable
solution.

SOLUTION ONE

a) Consolidated statement of financial position marks

Property, plant and equipment 2
Goodwill 6
Investment in associate 3
Inventory 1½
Receivables 1½
Equity shares ½
Share premium ½
Retained earnings 5
Non controlling interest 2
12% loan note 1
Contingent consideration 1
Other current liabilities 1
25
b) 1 mark per relevant point 5
Total 30

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SOLUTION TWO

marks

a) Accounting profit ½
Add back: entertainment expenses 1½
Add back of accounting depreciation 2
Less tax depreciation 2
Deferred tax at 31 October computed 2
8
b) Revenue ½
Cost of sales 1
Distribution costs ½
Administrative expenses ½
Entertainment expenses ½
Finance costs 2
Income tax expense 2½
Total comprehensive income ½
8
c) Property, plant and equipment 2½
Current assets 1½
Share capital ½
Share premium ½
Retained earnings ½
Long term borrowing ½
Deferred tax 1
Trade payables 1
Current tax payable 1
Interest payable 1
10
d) Share capital 1
Share premium 1
Retained earnings 1
Presentation of statement 1
4
Total 30 marks
SOLUTION THREE

marks

a) operating activities:
Profit before tax ½
Depreciation ½
Loss on disposal of PPE ½
Warranty adjustment ½
Adjustment for investment income ½
Adjustment for redemption penalty 1

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 Working capital items 1½
Finance costs 1
Income tax received 2
Investing activities:
Proceeds from sale of PPE 1
Purchase of PPE 1
Income from investments 1
Financing activities:
Issue of shares 1
Redemption of loan 1
Dividend paid 1
Cash and cash equivalents b/f and c/f 1
Total marks15
b) 1 mark for each valid point comprising ( 3 points ‘for’ and 2 points ‘against’ 5
Total 20
SOLUTION FOUR marks

a) i. definition 2
factors for recognition criteria 5
7
ii. discussion whether ‘asset held for sale’ 4
b) i. discussion whether a discontinued operation 3
ii. Revenue:
continuing operation (2012 &2013) 1
discontinued operation (2012 & 2013) 1
cost of sales:
continuing operation (2012 & 2013) 1
Discontinued operation (2012 & 2013) 1
Profit/loss:
Continuing operation (2012 & 2013) 1
Discontinued operation (2012 & 2013) 1
6
Total 20
SOLUTION FIVE
marks

a) 1 mark per user + information need up to 3 users only 3

b) Identification of each assumption (1/2 mark x 2 assumptions) 1
Explanation of each assumption (1 ⅟2 marks x 2 assumptions) 3
4
c) 2 marks each characteristic explained (x 3 characteristics0 6
1 mark each factor determining reliability explained (max 3 factors) 3
9
d) 2 marks each concept explained (x 2 concepts) 4
Total 20

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