(iv) On 1st December 2010, Banzoka opened a school at a cost of TZS.5 million.

The
estimated useful life of the school was 25 years. On 30th November 2016, the
school was closed because number of students using the school declined
unexpectedly. The school is to be converted for use as a library, and there is no
expectation that the building will be reopened for use as a school. The current
replacement cost for a library of equivalent size to the school is TZS.2.1 million.
Because of the nature of the non-current asset, value-in-use and net selling price are
unrealistic estimates of the value of the school. The change in use would have no
effect on the estimated life of the building. (3 marks)

REQUIRED:

Discuss how the above events should be independently accounted for in the
financial statements of Banzoka.
(Total: 20 marks)

________________  _______________

SUGGESTED SOLUTIONS
C1 – CORPORATE REPORTING
NOVEMBER 2022

ANSWER 1

(a) Mawazo group Consolidated Statement of Cash flows for the financial year
ended 30 April 2022
Cash flows from operating activities TZS. (Mill) TZS. (Mill)
Questions & Answers November, 2022 Page 15 of 101
 Profit before taxation 3,898
Adjustments for:
Depreciation 3,037
Impairment of goodwill (W1) 304
Amortization of intangibles (W3) 140
Interest-expense 772
Profit on disposal of associate (45)
Share of profit of associate (20)
Retirement benefit expense (W4) 60
Cash paid to defined benefit plan(W4) (100)
Operating profit before working capital changes 8,046
Increase in inventories (7961-7322-135) (504)
Decrease in receivables (6950-7005) 55
Increase in payables (8039-7704) 335
Cash generated from operations 7,932
Interest paid (W5) (585)
Income taxes (W6) (1,247)
Net cash from operating activities 6,100
Cash flows from investing activities
Purchase of property, plant & equipment (W7) (7,376)
Purchase of intangibles (W3) (41)
Proceeds from sale of associate (W8) 270
Cash paid to acquire subsidiary (150)
Dividend received from associate (W8) 5
Net cash used in investing activities (7,287)
Cash flows from financing activities
Proceeds from issue of share capital
(6450 - 5400) 1,050
Dividends paid to non-controlling interests (W9) (131,)
Net cash from financing activities 919
Net decrease in cash and cash equivalents (268)
Cash and cash equivalents at the beginning of the period (630)
(282-912)
Cash and cash equivalents at the end of the period (898)

WORKINGS
1. Goodwill impairment
TZS.(Mill)
Balance b/fwd. (2,798)
On Acquisition (W2) (20)
Balance c/d 2514
Impairment (balancing figure) (304)

Questions & Answers November, 2022 Page 16 of 101

 2. Goodwill on acquisition of Mazao
TZS.(Mill)
Consideration 150
Cash
Deferred cash 38
Total consideration 188
Share of fair value of net assets acquired (70% x 240) (168)
Goodwill 20

3. Intangibles
TZS.(Mill)
Balance b/fwd. 559
Amortization (559 x 25%) (140)
Purchase of patent (balancing figure) 41
Balance c/fwd. 460

4. Defined benefit liability

TZS.(Mill) TZS. (Mill)
Defined benefit liability b/fwd. 330
Service costs (current and past service costs) 150+30 180
Net interest on defined benefit asset (120)
Defined benefit expenses in profit or loss 60
Remeasurement (actuarial) loss in OCI 90
Contributions paid (Balancing figure (100)
Defined benefit liability c/fwd. 380

5. Interest
Date Balance Interest at Interest paid Balance b/fwd.
b/fwd. 7% at 5%
TZS.(Mill) TZS.(Mill) TZS.(Mill) TZS.(Mill)
30/04/2021 8,850 620 (450) 9,020
30/04/2022 9,020 *631 (450) 9,201
30/04/2023 9,201 644 (450) 9,395
30/04/2022 9,395 658 (450) 9,603
30/04/2025 9,603 672 (450) 9,825
TZS.(Mill)

Total finance cost in income statement 772

Less: Interest (unwinding of discount) on long-term borrowings *(631)
Less: Interest on deferred consideration (44-38) (6)
Balance = Interest on overdrafts 135
Total cash outflows in respect of interest: (135 + 450) = 585

6. Income taxes

Questions & Answers November, 2022 Page 17 of 101

 TZS.(Mill)
Balance b/fwd. 1,327
Income statement: provision 1,086
Paid (balancing figure) (1,247)
Balance c/fwd. 1,166

7. Property, plant, equipment and depreciation

TZS.(Mill)
Net book value b/fwd. 28,999
Depreciation (3,037)
Acquisition of subsidiary 105
Additions (balancing figure) 7,376

Net book value c/fwd. 33,443

8. Investment in associate
TZS.(Mill)
Balance b/fwd. 210
Share of profit from associate 20
230
Disposal (CV) (270-45) (225)
Dividend paid (balancing figure) (5)
Balance b/fwd. -

9. Non-Controlling Interest
TZS.(Mill)

Balance b/fwd. 2,806

TCI attributable to NCI 341
On acquisition of subsidiary (30% x 240m) 72
Dividend paid (balancing figure) (131)
Balance b/fwd. 3,088

ANSWER 2

(a) Reorganization/Reconstruction Methods

(i) Internal reconstruction

It is the form of company restructuring which focuses on the internal
reorganization of the company’s financial position, without dissolving the
company itself. In internal reconstruction the company’s legal existence
remains and no new company is formed.

Questions & Answers November, 2022 Page 18 of 101

 Internal reconstruction is generally warranted when:

1. Financial statements misrepresent the financial position; for example,

assets are overvalued or fictitious assets exist on the balance sheet
2. The company is overcapitalized with a complex capital structure.

Internal reconstruction basically involves an overhaul of how its financial

assets and liabilities are valued and reported. It looks to reach compromises
with creditors for reduction in their payables. It also seeks to alter the heavy
capital structure. This can take several forms such as alteration of share
capital, change in dividend rates and other rights of shareholders, reduction of
share capital and surrender of shares etc.

The ultimate intention of internal reconstruction is to generate surplus through

reductions in liabilities such as settlement of creditors and alteration in share
capital etc. Such surplus can be utilized to write off accumulated losses and
overvalued or fictitious assets. This can improve the overall financial health of
the company and keep it from a complete financial breakdown.

(ii) External reconstruction

External reconstruction is a form of company reorganization that involves the
liquidation of the existing company followed by its takeover by a new
company. The existing company that gets liquidated is termed as transferor
company and the new company formed is termed as transferee company.
External reconstruction involves several activities which generally include:
l. Liquidation of the existing company
2. Formation of a new company to take over the business (all assets and
liabilities) of the existing company at agreed values.
3. Issue of shares in new company to shareholders of the existing
company.
4. Financial arrangement can be made for settlement of liabilities of the
existing company by the new company. For example, debenture holders
or creditors can be discharged by way of issue of equity or preference
shares.
5. The new company may take over assets at reduced values which more
accurately represent the true value.

As external reconstruction generally involves modification of the claims of

creditors, debenture holders and lenders, the existing company needs to obtain
their approval.

(b) (i) Journal of Kalambo Engineering

Dr Cr.
TZS. mill TZS. mill
2022 Equity Share Capital A/c (TZS.100) 600,000
Mar. 31 To Capital Reduction A/c 600,000
(Reduction of equity shares of TZS.100 each to
shares of TZS.20 each as per Reconstruction
Questions & Answers November, 2022 Page 19 of 101
 Scheme dated...)
6% Cum. Preference Share Capital A/c (TZS. 100,000
100)
To Capital Reduction A/c 100,000
(Reduction of preference shares of TZS.100
each to shares of TZS.750 each as per
reconstruction scheme)
“ Capital Reduction Account 24,000
To Equity Share Capital Account 24,000
(Arrears of preference dividends satisfied by the
issue of equity shares, 25% of the amount due,
TZS.96,000 mill)
“ Accrued Interest A/c 22,500
To Bank A/c 22,500
(Debenture interest paid)
“ 6% Debentures A/c 120,000
To Freehold Property A/c 120,000
(Claims of debenture-holders, in part, in respect
of principal discharged by transfer of freehold
property vide Scheme of Reconstruction)
2022 Bank A/c 130,000
Mar. 31 To 8% Debentures A/c 130,000
2022 Freehold Property A/c 82,500
Mar. 31 To Capital Reduction A/c (Appreciation in 82,500
the value of property:
Book
value Revalued Figure
‘ 100,000 ‘ 120,000
‘ 325,000 ‘ 387,500
‘ 425,000 ‘ 507,500
Profit o revaluation: TZS.82,500,000
“ Bank A/c 140,000
To Trade Investment A/c 55,000
To Capital Reduction A/c 85,000
(Sale of Trade Investment for TZS.140,000 mill
cost being TZS.55,000 mill; profit credited to
Capital Reduction Account)
“ Directors' Loan A/c 100,000
To Equity Share Capital A/c To Bank A/c 90,000
To Capital Reduction A/c 5,000
(Directors' loan discharged by issue of equity 5,000
shares of TZS.90,000 mill, cash payments off
TZS.5,000 mill and surrender of TZS.5,000 mill,
Questions & Answers November, 2022 Page 20 of 101
 vide Scheme of Reconstruction)

“ Capital Reduction A/c 898,500

To Patents 37,500
To Goodwill 180,000
To Inventory 65,000
To Provision for Doubtful Debts 68,500
To Bank 12,500
To Profit & Loss Account 535,000
(Writing off patents, goodwill, profit and loss
account and reducing the value of stock, making
the required provision for doubtful debts and
payment for cancellation of capital
commitments)

(b) (ii) Kalambo Engineering Statements of Financial position

Particulars Notes
Equity and Liabilities
Shareholders’ funds
Share capital 1 564,000
Non-current liabilities
Long-term borrowings 2 385,000
Current liabilities
Trade Payables 3 300,000
Short term provision 68,500
Total 1,317,500
Assets
Non-current assets
Property, Plant Equipment 4 437,500
Tangible assets Intangible assets 5 -
Current assets
Inventories 6 360,000
Trade receivables 485,000
Cash and cash equivalents 35,000
Total 1,317,500
WORKINGS

1 Share capital
Equity share capital 264,000
132,000 Equity shares of TZS.20 each (of shares
have been issued for consideration other than
cash)
Preference share capital 300,000
4,000 6% Preference shares of TZS.75 each 564,000
Total
2 Long-term borrowings
Secured
6% Debentures 255,000
Questions & Answers November, 2022 Page 21 of 101
 8% Debentures 130,000
Total 385,000
3 Short term provision
Provision for doubtful debt 68,500
4 Tangible assets
Fixed assets
Tangible assets
Freehold property 425,000
Add: Appreciation under Scheme of 82,500
Reconstruction (120,000)
Less: Disposed of Plant Patents 37,500
Less: Written off under Scheme of Reconstruction (37,500) 387,000
Net carrying value
50,000
5 Intangible assets -
Goodwill 130,000 437,000
Less: Written off under Scheme of Reconstruction (130,000)
Net carrying value -
6 Trade receivables
Trade receivables 485,000

(c) Constraints on Relevant and Reliable Information

(i) Timeliness
Information may become irrelevant if there is a delay in reporting it. There is a
balance between timeliness and the provision of reliable information.
(ii) Cost considerations
Balance between benefits and cost — when information is provided, its
benefits must exceed the costs of obtaining and presenting it.
(iii) Balance between qualitative characteristics – a trade-off between qualitative
characteristics is often necessary, the aim being to achieve an appropriate
balance to meet the objective of financial statements. It is a matter for
professional judgement as to the relative importance of these characteristics in
each case. One usual trade-off is between relevance and reliability.
ANSWER 3

(a) The factors that must be considered:

(i) Whether the activities of the foreign operation are carried out as an
extension of the parent, rather than with a significant degree of autonomy.
(ii) Whether transactions with the parent are a high or low proportion of the
foreign operation's activities.
(iii) Whether cash flows from the foreign operation directly affect the cash flows
of the parent and are readily available for remittance to it.
(iv) Whether cash flows from the activities of the foreign operation are sufficient
to service existing debt obligations without funds being made available by
the parent.
(b) Value of Goodwill and Exchange Gain
Net assets of Soso at acquisition date (i.e. 1 October 2021)×
Questions & Answers November, 2022 Page 22 of 101
 UGX
Equity capital 100,000,000,000
Pre-acquisition retained earnings 125,000,000,000
225,000,000,000
Goodwill
UGX
Consideration 250,000,000,000
Less: % of Net assets acquired (75%×UGX 225,000,000) (168,750,000,000)
Goodwill in UGX 81,250,000,000

Goodwill in TZS =UGX 81,250,000,000÷2= TZS 40,625,000,000

(c) Movement of Euro Bank Account and Exchange Gain
Date Transaction € TZS. /€ TZS.
30/1/2021 Deposit to open account 4,000.00 2315 9,260,000.00

12/2/2021 Expenses (2,100.00) 2348 (4,930,800.00)

15/5/2021 Expenses (1,400.00) 2342 (3,278,800.00

30/6/2021 Deposit 3,000.00 2340 7,020,000.00

6/7/2021 Advance of expenses (2,600.00) 2341

(6,086,600.00)
14/8/2021 Return of unused advance 340.00 2343 796,620.00

31/10/2021 Deposit 2,500.00 2344 5,860,000.00

6/11/2021 Expenses (1,800.00) 2346 (4,222,800.00)

30/11/2021 Closing Balance (Actual) 4,417,620.00

Closing Balance to be presented in
30/11/2021 1,940.00 2345 4,549,000.00
SOFP sin closing rate
Exchange Gain 131,680.00

(d )(i)Criteria for recognizing Assets and Liabilities in the SOFP

There are two criteria that should be met for recognition of assets and liabilities in the
statement of financial position, which are:
(a) It is probable that any future economic benefit associated with the item will
flow to or from the entity; and
(b) The item has a cost or value that can be measured with liability.

(ii) The stages of recognition

Questions & Answers November, 2022 Page 23 of 101
 The recognition of assets and liabilities falls into three stages:
(a) Initial recognition (e.g., of a non-current asset by purchase transaction)
(b) Subsequent remeasurement (e.g., revaluation of the above asset
(c) Derecognition (e.g., sale or destruction of the asset)

(e)(i) Financial Capital Maintenance

Under this concept a profit is earned only if the financial (or money) amount of
the net assets at the end of a period exceeds the financial (or money) amount of
net assets at the beginning of the period.
(ii) Physical Capital Maintenance
Under this concept a profit is earned only if the physical productive capacity of
the business at the end of the period exceeds the physical productive capacity at
the beginning of the period. The physical capital maintenance concept requires
the adoption of the current cost basis of measurement.

ANSWER 4

(a) Criteria for Recognizing Provisions

(a) First criterion - present obligation as a result of a past event.
The present obligation may be:
(i) a legal obligation, or
(ii) constructive obligation,
where exist when the enterprise has no realistic alternative to settling the
obligation created by the event.

A legal obligation is an obligation that arises from a contract (through its

explicit or implicit term), legislation or other operation of law, and the
obligation arises only when the legislation is virtually certain to be enacted as
drafted.

A present obligation arising other than from a contract, legislation or other

operation of the law is called a constructive obligation. Such obligation arises
from an enterprise’s actions only, for example, by an established pattern of
past practice or published policies. The enterprise has indicated to other
parties that it will accept certain responsibilities, as a result, the enterprise has
created a valid expectation on the part of those other parties (e.g., customers,
suppliers, employees) that it will discharge those responsibilities.

The past event that leads to a present obligation is called an obligating event,
i.e., it creates a legal or constructive obligation that results in an enterprise
having no realistic alternative to settling that obligation. Only those
obligations arising from past events existing independently of an enterprise's
future actions that are recognized as provisions.

(b) Second criterion – probable outflow of economic resources embodying

economic benefits
An outflow of resources is regarded as probable if the outflow is more likely
than not to occur (i.e., having a probability greater than 50%).

Questions & Answers November, 2022 Page 24 of 101

 (c) Third criterion – reliable estimate of the obligation amount
IAS 37 states that a sufficiently reliable estimate of the amount of obligation
can be made, a provision is to be recognized. Only in extremely rare cases will
it be genuinely impossible to make a. reliable estimate and a provision exists
that cannot be recognized. In this case, that liability should be disclosed as a
contingent liability.

(b) Evaluation of whether Momoo should recognize a Provision for each given
scenario
(i) No provision for the overhaul costs should be recognized. Even a legal
requirement to overhaul does not make the costs of overhaul a liability,
because no obligation exists to overhaul the aircraft independently of the
enterprise's future actions. The overhaul expenditure can be avoided by
Momoo Ltds’ future actions, say by selling the aircraft, so there is no present
obligation for the future expenditure.

(ii) Present obligation as a result of a past obligating event – The obligating event
is the contamination of the land because of the virtual certainty of legislation
requiring cleaning up. An outflow of resources embodying economic benefits
in settlement - Probable. Conclusion – A provision is recognized for the best
estimate of the costs of the clean-up.

(iii) There is no present, constructive, obligation at 31 September 2022, since the

decision was not communicated to any of those affected and also the decision
has not yet been implemented before the balance sheet date. Conclusion – No
provision is recognized.

(iv) Dhahabu has a legal obligation to pay lease rentals for the remaining lease
period to the landlord, as a result of a lease signed before the year end.
Therefore, an onerous contract exists and must be provided for.

(v) In the past, provisions have sometimes been recognized for future operating
losses on the grounds of prudence. Now, no provisions should be recognized
for future operating losses. Those costs could be avoided by the enterprise's
future actions; thus, they do not meet the definition of a liability and the
general recognition criteria for a provision.

(c) Suitable Extracts/Computations-The Accounting Treatment in the books of

Nana Plc
Under IAS37 ‘Provisions, Contingent Liabilities and Contingent Assets’ a provision
should be made at the reporting date for the discounted cost of the removal of the
extraction facility because of the following reasons:
(i) The installation of the facility creates an obligating event
(ii) The operating licence creates a legal obligation which is likely to occur
(iii) The costs of removal will have to be incurred irrespective of the future
operations of the company and cannot be avoided
(iv) A transfer of economic benefits (i.e. the costs of removal) will be required to
settle the obligation

Questions & Answers November, 2022 Page 25 of 101

 (v) A reasonable estimate of the obligation can be made although it is difficult to
estimate a cost which will be incurred in twenty years’ time (IAS 37 says that
only in exceptional circumstances will it not be possible to make some
estimate of the obligation).

The cost to be incurred will be treated as part of the cost of the facility to be
depreciated over its production life. However, the costs relating to the damage
caused by the extraction should not be included in the provision, until the gas is
extracted which in this case would be 20% of the total discounted provision. The
accounting for the provision is as follows:

Balance Sheet (Extract) as at 30 September 2022

TZS.(Mill)
Tangible Non-Current Assets
Cost of extraction facility 2,000
Provision for decommissioning(W1) 400
2,400
Less: Depreciation (2400 m/20 yrs) (120)
Carrying Value 2,280
Other Provisions
Provision for decommissioning 400
Unwinding of discount (400m X 5%) 20
420
Provision for damage (W2) 13.33
433.33
Income Statement (extract) for the year ending 30 September 2022

TZS. (Mill)
Depreciation (120)
Provision for damage (13.33)
Unwinding of discount (finance cost) (20)

WI. Provision for Decommissioning

TZS.(Mill)
Present value of obligation 1 October 2021 500
Provision for decommissioning (80%X 500m) 400

W2. Provision for damage through extraction

20% X TZS.500m X 1.0520 /20=13.33 mill.

A simple straight-line basis has been used to calculate the required provision for
damage.

(d) Disclosure

Questions & Answers November, 2022 Page 26 of 101

 Disclosure requirements for inclusion in financial statements for year ended 30
September 2021.
Directors' Remuneration
The total remuneration comprised:
2021 2020
TZS ‘000’ TZS ‘000’
Emoluments 601,879 551,172
Long-term incentive scheme payments 46,000 -
Pension contributions 84,300 47,300
732,179 598,472
Three directors were members of a money purchase pension scheme during the
year.

The remuneration of the highest paid director comprised:

2021 2020
TZS ‘000’ TZS ‘000’
Emoluments 326,102 247,553
Long-term incentive scheme payments 25,200 15,200
351,302 262,753

The board authorized a payment for compensation for loss of office of TZS.
29,000,000 to a director who resigned during the year.

WORKINGS:
2021 2020
TZS '000' TZS '000'
l. Total remuneration
- Emoluments – Fees 14,000 15,000
Salary 489,479 489,372
Bonus 96,900 45,600
Fee from subsidiary 1,500 1,200
601,879 551,172

Remember that fees, salaries etc from subsidiaries require to be included within the
totals. Otherwise amounts could be “hidden” from the group shareholders. Bonuses
relating to performance in a single year are included in emoluments. Payments in
respect of long-term incentive schemes are based on the performance of a longer
period.

ANSWER 5

(a) (i) The building

The building would have been recognized on 1st July 2018 at cost of TZS.6,000
million (TZS.5,800 m + 200 m legal fees). Recoverable capital gain tax is excluded

Questions & Answers November, 2022 Page 27 of 101

 from the cost of the property, plant and equipment. General administrative costs of
TZS.400 million will have been expensed to profit or loss as incurred.
• Depreciation of TZS.120 million (6,000m/50 years) would have been charged to
profit or loss in each years ended 30th June 2018, 2019, 2020, and 2021.

• Prior to revaluation on 30th June 2021, the carrying amount of the building was
TZS.5,520 million (46/50 * 6,000 million). In the year ended 30th June 2021, a
gain on revaluation of TZS.3, 680m (TZS.9,200m-TZS.5,520m) would have
been recognized in revaluation reserve through other comprehensive income
held within equity.
• In the year ended 30th June 2022, the building would have been depreciated over
its remaining useful life of 46 (50-4) years. The depreciation charge in the year
ended 30th June 2022 would therefore, been TZS.200 m (9,200 m/46) leaving a
carrying amount of TZS. 9,000 million (9,200m- 200m).

• On 30th June 2022, a profit on disposal of TZS. 1,000m (10,000m-9,000m)

would be recorded in the statement of profit or loss.

• The revaluation gains previously recognized within OCI and held within equity
are not reclassified to profit or loss on the disposal of the asset. However,
SwCala could do a transfer within equity as follows:
TZS.
Dr other components of equity 3,680 million
Cr Retained earnings 3,680 million

The Machine
• The machine would be recognized on 1st January 2020 at TZS.200 million and
depreciated over 10 years. Depreciation of TZS.20 million (200,000,000/10)
will be charged in the years ended 30th June 2020 and June 2021.

• On 1st July 2022, Swala changes its estimates of the machine’s useful life.
This is a change in accounting estimate and therefore dealt with prospectively.
The carrying amount of the asset at the date of the estimate change is TZS.160
million (8/10 * 200 million). This remaining carrying amount will be written off
over the revised life of 4 years. This means that the depreciation charge is
TZS.40 million (TZS.160 m/4) in the year ended 30th June 2022.

(ii) Government grants should be recognized when there is reasonable assurance that:
• the entity will comply with any conditions attached, and
• the grant will be received

The only condition attached to the grant is the purchase of the new building.
Therefore, the grant should be accounted for on 1st December 2021. A receivable
will be recognized for TZS.200 million due from the local government. Swala
could then choose to either:

A. Reduce the cost of the building by 200 million

Questions & Answers November, 2022 Page 28 of 101

 In this case, the building would have a cost of TZS.18 billion (20b-2b). This
would be depreciated over its useful life of 50 years. The depreciation charge in
the profit or loss for the year ended 31st December 2021 will be TZS.30 million
(18b/50 years * 1/12) and the building would have a carrying amount of TZS.
17,970 million (18,000m – 30m) at 31st December 2021.
B. Recognize deferred income of 200 million
In this case the building is recognized at its cost of 20,000 million. This will be
depreciated over its useful life of 50 years. The depreciation charge in the profit or
loss for the year ended 31st December 2021 will be TZS. 33.334 million
(20,000m/50 years * 1/12) and the building would have a carrying value of TZS.
19,967 million (TZS. 20,000m-TZS.33m) as at 31st December 2021.

The deferred income will be amortized to profit or loss over the building’s useful
life. Therefore, income of TZS.0.33 million will be recognized in the profit or loss
for the year ended 31st December 2021. The carrying amount of the deferred
income balance within liabilities in the statement of financial position will be
TZS.199.67 million (200m-0.33m) as at 31st December 2021.

(iii) An entity must capitalize borrowing costs that are directly attributable to the
production of qualifying asset. The new office building is a qualifying asset
because it takes a substantial period of time to get ready for its intended use.
Swala should start capitalizing borrowing costs when all of the following
conditions have been met:

• It incurs expenditure on the asset - 1st September 2021

• It incurs borrowing costs - 1st October 2021
• It undertakes activities necessary to prepare the asset for intended use 1 st July
2021

Capitalization of borrowing costs should therefore, commence on 1st October 2021.

Capitalization of borrowing cost ceases for the month of January 2022 because
active development was suspended. In total, 8 months’ worth of borrowing costs
should be capitalized in the year ended 30th June 2022.

The total borrowing costs to be capitalized are TZS. 666,666,667 (10 billion * 10%
*8/12). These will be added to the cost of the building, giving a carrying amount of
TZS. 24,666,666,667 as at 30th June 2022. The building is not ready for use, so no
depreciation is charged.

(iv) Expenditure on research, market research and employee training cannot be

capitalized and so must be written to off to profit or loss. In relation to development
activities TZS.600 (4/12 * 1,800) was incurred before the product was known to be
commercially viable. This amount also must be written to profit or loss.

In total TZS. 2,800m (TZS. 1,000 + 800 + 400 +600) m

Dr Profit or loss 2,800m
Cr Intangible asset 2,800m

Questions & Answers November, 2022 Page 29 of 101

 Intangible asset recognized on the statement of financial position will be TZS. 1,200
(4,000 -2,800). No amortization will be charged because the product is not yet
complete.

(b) (i) Statement of Financial Position

Tharamisa Ltd should recognize non-current liability (deferred tax) of
TZS.28,125,000 and current lability (current tax) of TZS. 15,187,500.

Statement of Profit or Loss

Recognize income tax of TZS. 43,312,500 (i.e TZS. 15,187,500 + TZS.28,125,000).

W1

Carrying amount of plant TZS.“000”

Cost at 31/12/20 1,125,000
Depreciation (l,125,000/5yrs) (225,000)
Carrying amount at 31/12/20 900,000
W2 Tax base of plant TZS.“000”
Cost at 31/12/20 1,125,000
Capital allowance (1,125,000 x 30%) (337,500)
Tax base at 31/12/20 787,500
W2 Temporary difference TZS.“000”
Carrying amount 900,000
Tax base at 31/12/20 (787,500)
Taxa le temporary difference 112,500
Therefore, deferred tax (temporary dif. x tax rate)
(25% x TZS.112,500,000) = 28,125,000

Journal Entry
Debit: Income tax expense TZS. 28,125,000
Credit: Deferred Tax liability TZS. 28,125,000

(ii) Temporary differences

IAS 12 defines temporary differences as the difference between the tax base of an asset
or liability and its carrying amount in the statement of financial position.
Temporary differences may arise in the following circumstances:
• Accounting depreciation does not equal tax-allowable depreciation (capital
allowances).
• An item of income or expense is included in the accounting profit in one period
but included in the taxable profit in another. For example, capitalized
development costs are amortized over several years in the financial statements,
but tax relief is given as the costs are incurred (on a cash basis).

• A right of use asset and lease liability may be recognized under IFRS 16 with the
lease payments being a chargeable deduction in the period paid under the tax
legislation of the relevant jurisdiction (meaning that the asset and liability would

Questions & Answers November, 2022 Page 30 of 101

 not be recognized under that tax rules).

ANSWER 6

(a) (i) IAS41:Biological assets or agricultural produce, state an entity recognizes a

biological asset or agriculture produce only when
• The entity controls the asset as a result of past events.
• It is probable that future economic benefits will flow to the entity, and
• The fair value or cost of the asset can be measured reliably.

Measurement
Biological assets within the scope of IAS 41 are measured on initial recognition and at
subsequent reporting dates at fair value less estimated costs to sell, unless fair value cannot
be reliably measured.

Agricultural produce is measured at fair value less estimated costs to sell at the point of
harvest because harvested produce is a marketable commodity, there is no 'measurement
reliability' exception for produce.

The gain on initial recognition of biological assets at fair value less costs to sell, and
changes in fair value less costs to sell of biological assets during a period, are included in
profit or loss.

A gain on initial recognition (e.g. as a result of harvesting) of agricultural produce at fair

value less costs to sell are included in profit or loss for the period in which it arises.

All costs related to biological assets that are measured at fair value are recognised as
expenses when incurred, other than costs to purchase biological assets.

The standard assume that the fair value of a biological assets or agricultural produce can be
measured reliably unless market determined price or value are not available and for which
alternative measures of fair value are clearly unreliable.

(a) (ii)

Profit or Loss and Other Comprehensive Income for year ended 30 September 2018
TZS TZS
Change in fair value cattle (w1)
- Increase due to price change 4,500,000
- Increase due to physical change 4,500,000 9,000,000
Change in fair value –Milk -1,000× (TZS 550 – TZS 0) 550,000
Maintenance costs (500,000)
Breeding fees (300,000) (800,000)
Net income 8,750,000
Other comprehensive income

Questions & Answers November, 2022 Page 31 of 101

Surplus on valuation of land (24,0000,000-20,0000,000) 4,000,000
Total comprehensive income 12,750,000

Statement of Financial Position as at 30 September 2018

TZS TZS
Property Plant and Equipment(PPE)
- Land 24,000,000
Biological Assets

- Cattles(w1)
109,500,000
Current Assets
Inventories-milk 550,000

W1) Fair value of cattle

TZS TZS
st
Fair value at 1 October 2017 (Dairy cows 1,000 × TZS 90,000) 90,000,000
New born at 1st April 2018 (Calves 500× TZS 21,000) 10,500,000 100,500,000

Increase due to price change

Dairy cows - 1,000 × (TZS 94,000 – TZS 90,000) 4,000,000
Calves - 500 × (TZS 22,000 – TZS 21,000) 500,000 4,500,000

Increase due to physical change

Dairy cows - 1,000 × (TZS 97,000 – TZS 94,000) 3,000,000
Calves - 500 × (TZS 25,000 – TZS 22,000) 1,500,000 4,500,000

Fair value less estimated point-of sale costs at 30th September

2018
Dairy cows - 1,000 × TZS 97,000) 97,000,000
Calves - 500 × TZS 25,000) 12,500,000 109,500,000

(b) (i) Investment property

IAS 40 Investment Property applies to the accounting for property (land and/or
buildings) held to earn rentals or for capital appreciation or both. Examples of
investment property given in the standard include, but are not limited to:
• Land held for long-term capital appreciation
• Land held for undetermined future use

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 Assets which IAS 40 states are not investment property, and which are therefore not
covered by the standard include:
• Property held for use in the production or supply of goods or services or for
administrative purposes.
• Property held for sale in the ordinary course of business or in the process of
construction of development for such sale

Owner-occupied property, property being constructed on behalf of third parties and

property leased to a third party under a finance lease are also specifically excluded
by the IAS 40 definition. (Note that finance leases still exist for lessors, though not
for lessees.)

If the entity provides ancillary services to the occupants of a property held by the
entity, the appropriateness of classification as investment property is determined by
the significance of the services provided. If those services are a relatively
insignificant component of the arrangement as a whole (for instance, the building
owner supplies security and maintenance services to the lessees), then the entity
may treat the property as investment property. Where the services provided are
more significant (such as in the case of an owner managed hotel), the property
should be classified as owner-occupied.
Applying IAS 40 to Banzoka’s properties, the land owned for capital appreciation
and which may be sold any time in the future will qualify as investment property.
Likewise, the land whose use has not yet been determined is also covered by the
IAS 40 definition of investment property: as it has no current purpose it is deemed
to be held for capital appreciation.
Investment property should be recognized as an asset where it is probable that the
future economic benefits associated with the property will flow to the entity and the
value can be measured reliably. IAS 40 permits an entity to choose between the cost
model and the fair value model. Where the fair value model applies, the property is
valued in accordance with IFRS 13 Fair Value Measurement. Gains or losses
arising from changes in the fair value of investment property are recognized in
profit or loss for the year.
The houses routinely bought and sold by Banzoka in the ordinary course of its
operations will not qualify as investment property, but will be treated under IAS 2
Inventories.
The part of the housing inventory not held for sale but used to provide housing to
low-income employees does not qualify as investment property either. The
properties are not held for capital appreciation, and because the rent is below
market rate and only covers the maintenance costs, they cannot be said to be held
for rentals. The rental income is incidental to the purposes for which the property is
held, which is to provide housing services. As with the example of the owner-
managed hotel above, the services are significant, and the property should be
classified as owner occupied. Further indication that it is owner occupied is
provided by the fact that it is rented out to employees of the organization. It will be
accounted for under IAS 16 Property, Plant and Equipment.

(ii) Lease
Questions & Answers November, 2022 Page 33 of 101
 The issue here is whether the arrangement with the private sector provider Waste
and Co is, or contains, a lease, even if it does not take the legal form of a lease. The
substance of the arrangement should be considered in connection with the IFRS 16
Leases. Key factors to consider are as follows.
i) Is there an identifiable asset?
ii) Does the customer have the right to obtain substantially all the economic
benefits from use of the asset throughout the period of use?
iii) Who has the right to direct how and for what purpose the asset is used?
iv) Does the customer have the right to operate the asset throughout the period of
use without the supplier having the right to change those Operating
instructions?
The answer in each case is yes.
(i) The vans are an identifiable asset. Although Waste and Co can substitute
another vehicle if one of the existing vehicles needs repairing or no longer
works, this substitution right is not substantive because of the significant costs
involved in fitting out the vehicle for use by Banzoka.
(ii) Banzoka can use the vehicles and uses them exclusively for waste collection
for nearly all their life. It therefore has a right to obtain substantially all the
economic benefits from the use of the asset.
(iii) Banzoka controls the vehicles, since it stipulates how they are painted, and
ostensibly owns them because they must be painted with Banzoka’s name. It
therefore has the right to direct how and for what purpose the asset is used.
(iv) As indicated in (ii) above, Banzoka has the right to operate the asset
throughout the period of use, although it has outsourced the driving to Waste
and Co.
The arrangement is a lease. A right-of-use asset should be recorded, and a lease
liability set up, equal to the present value of the future lease payments. The service
element relating to the waste collection must be considered as a separate component
and charged to profit or loss.
(iii) Provision
Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, provisions
must be recognized in the following circumstances, and must not be recognized if
they do not apply.
(i) There is a legal or constructive obligation to transfer benefits as a result of
past events.
(ii) It is probably that an outflow of economic resources will be required to settle
the obligation.
(iii) A reliable estimate of the amount required to settle the obligation can be
made.
A legal or constructive obligation is one created by an obligating event. Here the
obligating event is the contamination of the land, because of the virtual certainty of
legislation requiring •the clean-up. As Banzoka has no recourse against Chemco or
its insurance company this past event will certainly give rise to a transfer of
economic benefits from Banzoka.

Questions & Answers November, 2022 Page 34 of 101

 Consequently, Banzoka must recognize a provision for the best estimate of the
clean-up costs. It should not set up a corresponding receivable, since no
reimbursement may be obtained from Chemco or its insurance company.
(iv) Impairment of building
The basic principle of IAS 36 Impairment of Assets is that an asset should be
carried at no more than its recoverable amount, that is, the amount to be recovered
through use or sale of the asset. If an asset's value is higher than its recoverable
amount, an impairment loss has occurred. The impairment loss should be written
off against profit or loss for the year.

Entities must determine, at each reporting date, whether there are any indications
that impairment has occurred. In this case, impairment is indicated because the use
to which the building is to be put has changed significantly (from a school to a
library), a situation which will continue for the foreseeable future.
The recoverable amount is defined as the higher of the asset's fair value less costs to
sell and the asset's value in use. However, these values are unavailable because of
the specialized nature of the asset, and the only information available is depreciated
replacement cost. Using a depreciated replacement cost approach, the impairment
loss would be calculated as follows.

Cost/replacement Accumulated Carrying

Asset cost depreciation 6/25 amount/
replacement cost
TZS. “000” TZS. “000” TZS. “000”
School 5,000 (1,200) 3,800
Library 2,100 (504) (1,596)
Impairment loss 2,204
Banzoka should therefore recognize an impairment loss of TZS'2.204 million in
profit or loss for the year.

______________  ______________

Questions & Answers November, 2022 Page 35 of 101