ADVANCED FINANCIAL ACCOUNTING - PAPER 8

AUGUST 2015 SOLUTIONS

Question 1
Baliwo Africa Transporters Ltd (BATL)
(a) Statement of profit or loss and other comprehensive income for year ended 31
May 2015:
Note Shs ‘000’ Shs ‘000’
Revenue W2 2,990,000
Cost of sales W3 (1,679,281)
Gross profit 1,310,719
Operating expenses:
Administration expenses W4 (672,938)
Selling & distribution (162,000)
Provision for damages N4 (46,000) (880,938)
Profit before interest & tax 429,781
Interest W1 (100,381)
Profit before tax 329,400
Increase in tax provision N6 (23,270)
Profit after taxation 306,130
(b) Statement of changes in equity for year ended 31 May 2015:
Accumulated Revenue
Share capital profits reserve Total
Shs ‘000’ Shs ‘000’ Shs ‘000’ Shs ‘000’
Balance b/ d 1,400,000 644,200 143,200 2,187,400
Profit for the year . . 306,130 . . 306,130
Balance c/ d 1,400,000 950,330 143,200 2,493,530
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(c) Statement of financial position as at 31 May 2015:

Particulars Note Shs ‘000’ Shs ‘000’

Non-current assets (NCA):
Property plant and equipment 1,830,681
Investments 624,000 2,454,681
Current assets:
Receivables N2 828,650
Cash at bank 587,300
Inventory 242,800
Prepaid expenses 206,000
Sub-total 1,864,750
Assets held for sale 420,600 2,285,350
Total assets 4,740,031
Equity and liabilities:
Equity:
Share capital 1,400,000
Accumulated profits 951,080
Revaluation reserve 143,200 2,494,280
Non-current liabilities:
Long term debt 1,634,020
Deferred income N1 4,500 1,638,520
Current liabilities:
Trade payables 298,500
Accrued expenses 45,030
Deferred income N1 1,500
Interest payable N3 114,381
Provisions N4 49,000
Current tax N6 98,820 607,231
Total equity and liabilities 4,740,031
Notes to the financial statements:
N1 An assignment of rights for a fixed fee or non-refundable guarantee under a
non-cancellable contract, which permits the licensee to exploit those rights
freely, and the licensor has no remaining obligation to perform, is in
substance a sale. This contract therefore amounts to revenue to BATL.
But the money paid by Manga Ltd is to cover future periods; therefore it is
treated as deferred income to BATL

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Shs Shs
Dr: Revenue 6,000,000
Cr: Deferred income (current) 1,500,000
Cr: Deferred income (NCL) 4,500,000
N2 The fact that the commercial court ruled in favour of Talkers’ Party before
the year end and there was no intentions of appeal by BATL, the judgment
can be treated as an event that existed on the reporting date and which calls
for adjusting the financial statements.
(i) For the Shs 3 million deposit:
Shs Shs
Dr: Bank 3,000,000
Cr: Receivables 3,000,000
(ii) For the Shs 7 million in the receivables:
Shs Shs
Dr: Revenue 10,000,000
Cr: Receivables 7,000,000
Cr: Provision 3,000,000
The 3 million awarded as damages is a non-adjusting event because it
happened after reporting date.
N3 All borrowing costs attributable to a qualifying asset should be recognised.
Capitalisation of borrowing costs should be suspended during extended
periods when active development of the asset is suspended.
Construction was stopped after the fuel pump had consumed Shs 200
million in costs.
Total borrowing costs on the fuel pump was Shs (200 million x 7%) = Shs
14 million.
Workings:
W1 Interest charge for the year:
Total payable Shs (7% x 1,634,020,000) = Shs 114,381,400
Shs Shs
Dr: Fueling pump under construction 14,000,000
Dr: Statement of comprehensive incomes 100,381,400
Cr: Interest payable 114,381,400
N4 A provision is a liability of an uncertain timing and amount. A provision
is recognized when an entity has a legal or constructive present obligation
as a result of past events, which is expected to lead to an outflow of
resources.

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On 31 May 2015 BATL did not have a present obligation over the noise
pollution but rather a contingent liability depending on the court ruling.
The Shs 145 million should not be recognised but should be disclosed in
the notes as a contingent liability.
Shs 46 million should be recognised since on the reporting date BATL had
a legal obligation to pay damages to the injured staff.
Shs Shs
Dr: Statement of comprehensive incomes 46,000,000
Cr: Provisions 46,000,000
The total provision to make, therefore, is Shs (46 million + 3 million in
Note 2) = Shs 49 million.
N5 Depreciation:
Buildings: Shs (5% x 400,800,000) = Shs 20,040,000
Shs ‘000’ Shs ‘000’
Dr: Statement of comprehensive incomes (admin exp) 20,040
Cr: Accumulated depreciation on buildings 20,040
Vehicle:
Depreciation is full in year of disposal and apportioned in the year of purchase.
4
Two buses were bought at the end of January 2015 = Shs (400 m x 20% x
12
months) = Shs 26,000,000
The remaining vehicles (1,600,000,000 – 400,000,000) = Shs 1,200,000,000.
Depreciation: (1,200,000,000 x 20%) = Shs 240,000,000.
Total depreciation on motor vehicles = Shs 266 million i.e. (240,000,000 +
26,000,000).
Shs ‘000’ Shs ‘000’
Dr: Statement of comprehensive incomes (admin exp) 266,000
Cr: Accumulated depreciation on vehicles 266,000
Machinery:
Fuel pump under construction Shs 214 million no depreciation.
Other machines: Shs 355,819,000 x 12% = Shs 42,698,280

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Total depreciation for the year:

Shs
Buildings 20,040,000
Machines 42,698,280
Motor Vehicle 266,000,000
Total 328,738,280

N 6 IAS 34: Interim Reporting; requires that end of year estimations are done
with more accuracy since most of the information is now available. A current tax
provision should be more accurate since all the revenues and expenses are now
available.

Shs
Current tax provision (329,400,000 x 30%) 98,820,000
Interim provision 76,300,000
Increase in provision 22,520,000
Other workings:
Shs
W2 Revenue: balance 3,006,000,000
Less deferred income (next 4 years) 6,000,000
Less income from Talkers’ Party 10,000,000
2,990,000,000
W 3: Cost of sales:
Shs
Opening inventory 129,500,000
Direct costs to provide transport service 1,124,000,000
Purchases for garments 668,581,000
1,922,081,000
Less closing inventory (242,800,000)
1,679,281,000
W 4: Administrative expenses:
Shs
Balance 344,200,000
Depreciation 1000 x (20,040 + 266,000 +42,698.28) 28,738,280
Total 672,938,280

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W.5: Non-current assets schedule

Motor
Land Building Machinery vehicles Total
Cost: Shs '000' Shs '000' Shs '000' Shs '000' Shs '000'
Balances b/ d 249,000 400,800 697,500 1,600,000 2,947,300
Borrowing costs . . . . 14,000 . . 14,000
Totals 249,000 400,800 711,500 1,600,000 2,961,300
Accumulated depreciation:
Balances b/d - 100,200 141,681 560,000 801,881
Depreciation for year . . 20,040 42,698 266,000 328,738
Total - (120,240) (184,379) (826,000) (1,130,619)
Net Book value 249,000 280,560 527,121 774,000 1,830,681

Question 2
(a) Conditions that must be satisfied in order for an asset to be classified as ‘held for
sale’ in accordance with IFRS 5:
The following conditions must be met:
 The carrying amount of the asset must be principally recoverable through sale
a transaction rather than through continuous use.
 The management is committed to a plan to sell the asset.
 The asset is available for sale in its present condition without major
modifications being made to the asset.
 An active program to locate a buyer is initiated by management.
 The asset is being actively marketed for sale at a sales price reasonable in
relation to the assets’ fair value.
 It is highly probable that the sale will be completed within 12 month (one year)
subject to limited exceptions.
 Actions required to complete the plan indicate that it is unlikely that the plan
will be significantly changed or withdrawn.
(b) (i) Conditions under which the period required to complete a sale of assets
classified as ‘assets held for sale’ may be extended:
 When the market conditions that existed at the date the asset was
classified initially as held for sale deteriorate and as a result the asset is
not sold by the end of that period.
 When the buyer inspection of the asset identifies environmental damage
not previously known to exist and the entity needs to first make good
the damage which extends the period required to complete the sale.

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 Where part of the asset classified as held for sale is highly regulated and
the sale requires regulatory approval which could extend the period.
 When the conditions are beyond the entity’s control
Assets held for sale are presented separately from other assets and thus Pombo
Ltd should have shown the motor vehicles separately on the face of the balance
sheet under assets as held for sale
(ii) Redrafted statement of financial position 31 December 2014:

Shs ‘000’
Property , plant & equipment 532,000
Less held for sale (75,000)
457,000
Accumulated depreciation (30,000)
427,000
Intangible non-current assets: 30,000
Investments 40,000
497,000
Assets held for sale( motor vehicles) 75,000
Current assets 120,000
195,000
Total assets 692,000
Share capital 120,000
Reserves 213,102
Retained earnings 87,654
Adjusted depreciation on assets held for sale 7,500
428,256
Long term liabilities 168,600
Current liabilities 95,144
263,744
Total equity & liabilities 692,000
 An extension of the period required to complete a sale does not preclude
an asset from being classified as held for sale if the delay is caused by
events or circumstances beyond the entity’s control and there is
sufficient evidence that the entity remains committed to its plan to sell
the asset.
 Pombo Ltd having not completed the sale of the motor vehicles by 31
December 2014 does not qualify the reclassification of motor vehicles.
Therefore by 31 December 2014; the extension of the period of sale of
motor vehicles is beyond management’s control and thus they should
remain classified as held for sale and shown separately.

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 Once any depreciation has been charged on assets classified as held for
sale due to its reclassification and it is found out that the reclassification
was not necessary, the previously recognised depreciation is reversed
with all its effect.

Question 3
Kameme Health Centre IV
Financial statement for first quarter of the year ending 2015
Annual Actual Estimate
Estimate Quarter Quarter
Code Income: Shs'000 Shs'000 Shs'000
201 Hospitalisation fee 790,000 200,000 197,500
202 User fee collection 250,000 50,000 62,500
203 Student training fees 489,000 150,000 122,250
204 Government grant 250,000 18,000 62,500
Total income 1,779,000 418,000 444,750
Expenses:
710 Medical drugs 429,000 112,600 107,250
720 Medical tools 130,000 25,600 32,500
730 Medical equipment 148,000 30,400 37,000
740 Beds 50,000 8,540 12,500
741 Beddings 12,000 2,800 3,000
750 Foodstuffs 320,000 72,150 80,000
760 Fire wood 19,500 5,320 4,875
780 Consultancy charges 14,300 4,565 3,575
230 Salaries 376,500 76,401 94,125
103 Electricity & power 121,500 25,790 30,375
105 Water & sanitation 24,600 3,773 6,150
302 Repairs & maintenance 60,040 13,586 15,010
304 Office supplies 6,900 1,725 1,725
500 Capital expenditure 18,900 4,725 4,725
661 Staff training 13,800 2,750 3,450
662 Rent & rates 30,000 7,500 7,500
663 Bank charges 3,960 575 990
Total expenditure (1,779,000) (398,800) (444,750)
Excess of income over expenditure Nil . 19,200 Nil .

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Monthly receipts & payments return for January 2015

Code Receipts: Shs ‘000’
Balance b/ f from previous month 32,250
201 Hospitalisation fees 66,667
202 User fees collection 16,667
203 Student training fees 50,000
204 Government grant 6,000
Total receipts 171,583
Payments:
710 Medical drugs 37,533
720 Medical tools 8,533
730 Medical equipment 10,133
740 Beds 2,847
741 Beddings 933
750 Foodstuffs 24,050
760 Firewood 1,773
780 Consultancy charges 1,522
230 Salaries 25,467
103 Electricity 8,597
105 Water and sanitation 1,258
302 Repairs & maintenance 4,529
304 Office supplies 575
500 Capital expenditure 1,575
661 Staff training 917
662 Rent & rates 2,500
663 Bank charges 192
Total payments (132,933)
Balance carried c/f to next month 38,650

Question 4
(a) Distinction ‘fixed price’ and ‘cost plus’ contracts as per in IAS 11:
A fixed price contract under IAS 11 is one in which the parties to the contract
agree to a fixed contract price or a fixed rate per unit of output which in some
cases is subject to cost escalation clauses. For example, a contract may be entered
into in such a way that for every house built, the construction company is paid Shs
200 million.

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A cost-plus contract, on the other hand, is one in which the contractor is

reimbursed for all allowances and/ or defined costs plus a percentage of these
costs or a fixed fee. For example, for every Shs 1 million incurred the company
can be reimbursed an extra Shs 200,000.
(b) Revenue realisable by ZAM Ltd from the whole construction process:
Revenue realisable from the contract:
Shs
Revenue: fixed price contract 400,000,000
Revenue: demolition and site preparation contract(W 1) 4,600,000
Total revenue from the contracts 404,600,000

(c) Financial statements extracts:

Statement of profit or loss extract
Shs
Depreciation of plant and equipment 16,827,848

Statement of financial position loss extract

Shs
Plant, plant and equipment 650,000,000
Depreciation (W 2) (8,227,848)
641,772,152
Share capital and reserves:
Revaluation reserve (W 3) 4,600,000

Workings
W1
Shs
Estimated cost of demolition 20,000,000
Actual cost incurred 23,000,000
Revenue is 20% for every 5 million spent on demolition
For the first Shs 20 million = 20% x 5,000,000 x 4 4,000,000
3
For the last Shs 3 million = (20% x 5,000,000) x 600,000
5
Total 4,600,000

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W 2: Depreciation of plant and equipment

Shs
Cost 860,000,000
Depreciation per year Shs 860, 000,000 ÷ 50 = 17,200,000
By 30 June 2013, the plant and equipment had been depreciated for a period of 10
years i.e. Shs 172,000,000 ÷ 17,200,000
Depreciation for the year will be calculated in two parts for the first six months
and the last six months.
Depreciation from 1 July to 31 December 2013 = Shs (860,000,000 ÷ 50) x 0.5 =
Shs 8,600,000
Depreciation from 1 January to 30 June 2014 = Shs (650,000,000 ÷ 39.5) x 0.5 =
Shs 8,227,848.
Total depreciation for the year; Shs (8,600,000 + 822,785) = Shs 16,827,848
By the time the revaluation was done the asset’s remaining useful life was 39.5
years
W3
The carrying amount of plant and equipment on 31 December 2013 was Shs
679,400,000 i.e. (688,000,000 - 8,600,000). The asset was revalued to Shs
650,000,000 on the same date. There was a revaluation loss to be recognized of
Shs 29,400,000. Since a revaluation surplus had been recognised in respect of the
same assets for the previous years, this loss will be offset against the revaluation
surplus in the revaluation reserve.
Thus writing off the loss on revaluation against the revaluation reserve leaves the
revaluation reserve at a value of Shs 4,600,000 i.e. Shs (34,000,000 - 29,400,000).

Question 5
(a) Meaning of the following concepts in line with IFRS 4: Insurance Contracts:
(i) Guaranteed benefits
(ii) Cedant
(iii) Policy holder
(iv) Financial guaranteed contract
(v) Insured event

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Guaranteed benefits: are payments or other benefits to which a particular

policyholder or investor has an unconditional right and is not subject to the
contractual discretion of the issuer.
Cedant: is a policyholder under a reinsurance contract. The ceding company or
and the insurer enters into a reinsurance agreement which details the conditions
upon which the reinsurer would pay a share of the claims incurred by the ceding
company. The reinsurer is paid a reinsurance premium by the ceding company
which issues the insurance policies to its own policyholders
Policyholder: is the person who holds an insurance policy usually the client in
whose names an insurance policy is written. The policyholder has a right to
compensation under an insurance contract if an insured event occurs.
Financial guaranteed contract: a contract that requires the issuer to make
specified payment to reimburse the holder for loss it incurs because a specified
debtor fails to make payment when due in accordance with the original or
modified terms of a debt instrument.
Insured event: this is an uncertain future event that is covered by an insurance
contract and creates insurance risk. It may be an accident, an expected or
unforeseen event covered by the insurance contract.
(b) Advising on the treatment of costs incurred in exploration of resources in
accordance with IFRS 6: Exploration for and Evaluation of Minerals Resources:
1. The method of the measuring the cost for exploration for and evaluation of
minerals resources is at cost according to IFRS 6.
2. All the costs incurred by the company after the acquisition of the legal rights to
explore a specific area that is Kaloke oil well Bukiki district should be
considered in the preparation of the books of account by Atlas (U) Ltd
according to the standard.
3. All the costs incurred by Atlas (U) Ltd before the acquisition of the legal rights
to explore a specific area that is Kaloke oil well Bukiki district should not be
considered in the preparation of the books of account by Atlas (U) Ltd. This
includes the technical feasibility study of Shs 250 million, geological studies of
Shs 360 million, hire of machines of Shs 150 million, and workers costs of Shs
300 million.
4. Atlas (U) Ltd has purchased drilling machines and rigs and amounting to Shs
120 million. For the purchased drilling machines and rigs, IAS 16: Property,
Plant and Equipment shall apply.
5. Atlas (U) Ltd leased excavation machines at Shs 270 million. Atlas (U) Ltd
shall apply IAS 17 Leases.
6. Atlas (U) Ltd acquired drilling rights estimated at Shs 300million due to the
experience. Atlas (U) Ltd shall apply IAS 38: Intangible Assets for the drilling
rights when recording drilling rights at Shs 300million

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7. Atlas (U) Ltd acquired drilling rights estimated at Shs 300million due to the
experience. However after the first year of exploration, drilling rights were
estimated to be Shs 235 million. In this case, Atlas (U) Ltd shall apply IAS 36:
Impairment of Assets to recognise the impairment loss.

Question 6
(a) Steps in the implementation of the Financial and Information Management
Systems (FMIS):
1. Complete the design of the system
2. Installation of the system
3. Implement the change management and communication plan
4. Review of manuals/ guidelines
5. Training of the staff on new software
6. Pilot the system alongside the current system
7. Make adjustments required that have been indentified
8. Rollout of the system
9. Strengthen M & E systems
10. Carry out any reviews or modifications needed
(a) Explaining, under public sector accounting, the importance of:
(i) Vote book
(ii) Abstracts
Vote books:
1 Ensure that no extra expenditures are made outside the budget
2 Shows the available balance at any point in time
3 Ensure the right expenditure lines are spent in the right vote account
4 Quicken the process of preparing financial statements
5 Help in the preparation of budgets
6 Help in the planning

Abstracts:
1 Help in indicating the sources of the revenue and expenditure
2 Help to analyse all revenue and expenditure
3 Quicken the process of preparing financial statements
4 Help to compare entries in the ledgers and cash books
5 Aid the preparation of ledgers

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Question 7
(i) How the statement of cash flows facilitates decision making for external users:
1. It shows the cash available at the end of the period for operations, financing
and investing activities.
2. External users can use a company's statements of cash flows from several
accounting periods to determine trends. A positive trend of steady or
increasing cash flows indicates financial health. A declining trend could
indicate a fundamental weakness, although low cash flows are not necessarily
bad.
3. Lenders, rating agencies and credit analysts use cash flow ratios to assess risk.
4. Auditors can also use these cash flow ratios to identify discrepancies between
the statement of cash flows and other financial statements, and plan their audits
around these differences.
5. Investors may use the statement of cash flows to assess the reliability of
dividend payments and the company's ability to survive any sharp economic
downturns.
6. Tax authorities use statements of cash flows for determining the credibility of
the tax returns filed on behalf of the company.
(ii) Why the direct method of ascertaining cash flows from operating activities is
preferred to the indirect method:
1. It is easy to compute
2. Helps to show the inflows into the company
3. Helps identify the total cash outflows
4. Its more realistic because it does not follow the working capital items
5. Its less time consuming
6. Provides information which may be useful in estimating future cash flows
which is not available under indirect method
7. Easily understood by non-accountants.

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