KC-01 Practice Revision Kit

PRACTICE & REVISION KITCA SRI LANKA CURRICULUM 2015 In this pdf version word ‘Colombo’ has misspelled as ‘Columbo’ and has uploaded for your reference purpose until we upload the pdf version with corrections done. We do apologize for the inconvenience First edition 2015 ISBN 9781 4727 1065 9 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Published by BPP Learning Media Ltd BPP House, Aldine Place 142-144 Uxbridge Road London W12 8AA www.bpp.com/learningmedia The copyright in this publication is owned by BPP Learning Media Ltd. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of the copyright holder. The contents of this book are intended as a guide and not professional advice and every effort has been made to ensure that the contents of this book are correct at the time of going to press by CA Sri Lanka, BPP Learning Media, the Editor and the Author. Every effort has been made to contact the copyright holders of any material reproduced within this publication. If any have been inadvertently overlooked, CA Sri Lanka and BPP Learning Media will be pleased to make the appropriate credits in any subsequent reprints or editions. We are grateful to CA Sri Lanka for permission to reproduce the Learning Outcomes and past examination questions, the copyright of which is owned by CA Sri Lanka, and to the Association of Chartered Certified Accountants for use of past examination questions in which the Association holds the copyright © BPP Learning Media Ltd 2015 ii Contents Page Question Index iv Introduction vi How to use this Practice & Revision Kit vii Exam techniques ix Action verbs xi Questions 3 Answers 69 Mock exam 189 iii Contents Question index Title Marks allocated Time allocated (Minutes) Page Question Answer Part A: Interpretation and Application of Sri Lanka Accounting Standards 1 Accounting queries 25 45 3 69 2 Prochain 25 45 4 73 3 Panel 25 45 6 76 4 Ambush 25 45 8 80 5 Engina 25 45 9 84 6 Masham 25 45 11 86 Part B: Preparation and Presentation of Consolidated Financial Statements 7 Glove 25 45 14 91 8 Angel 25 45 16 96 9 Ejoy 25 45 17 102 10 Memo 25 45 19 108 11 Swing 25 45 22 115 Part C: Analysis, Interpretations and Communication of Financial Results 12 Ghorse 25 45 24 117 13 Commonsizing 25 45 26 121 Part D: Corporate Governance and Recent Developments in Financial Reporting 14 Calcula 25 45 28 125 15 Glowball 25 45 29 129 iv KC1 Corporate Financial Reporting Title Marks allocated Time allocated (Minutes) Page Question Answer Part E: Case study questions covering multiple syllabus areas 16 Johan 50 90 31 133 17 Carpart 50 90 35 138 18 Mica 41 74 39 145 19 Robby 50 90 43 152 20 Ashanti 50 90 49 161 21 Rose 50 90 54 171 22 Warrburt 50 90 58 180 v Question Index Introduction Welcome to this first edition Practice & Revision Kit for the Institute of Chartered Accountants of Sri Lanka professional examinations for curriculum 2015. One of the key criteria for achieving exam success is question practice. There is generally a direct correlation between candidates who revise all topics and practise exam questions and those who are successful in their real exams. This Practice & Revision Kit gives you ample opportunity for such practice in the run up to your exams. The Practice & Revision Kit is structured to follow the modules of the Study Text, and comprises banks of non-complex mini scenario and functional scenario questions as appropriate. Suggested solutions to all questions are supplied. We welcome your feedback. If you have any comments about this Practice & Revision Kit, or would like to suggest areas for improvement, please e-mail [email protected]. Good luck in your exams! BPP LEARNING MEDIA vi KC1 Corporate Financial Reporting How to use this Practice & Revision Kit This Practice & Revision Kit comprises banks of practice questions of the style that you will encounter in your exam. It is the ideal tool to use during the revision phase of your studies. Questions in your exam may test any part of the syllabus so you must revise the whole syllabus. Selective revision will limit the number of questions you can answer and hence reduce your chances of passing. It is better to go into the exam knowing a reasonable amount about most of the syllabus rather than concentrating on a few topics to the exclusion of the rest. You should at all costs avoid falling into the trap of question spotting, that is trying to predict what are likely to be popular areas for questions, and restricting your revision and question practice to those. Practising as many exam-style questions as possible will be the key to passing this exam. You must do questions under timed conditions and ensure you write full answers to the discussion parts as well as doing the calculations. Planning your revision When you begin your course you should make a plan of how you will manage your studies, taking into account the volume of work that you need to do and your other commitments, both work and domestic. In this time, you should go through your notes to ensure that you are happy with all areas of the syllabus and practise as many questions as you can. You can do this in different ways, for example:  Revise the subject matter a module at a time and then attempt the questions relating to that module; or  Revise all the modules and then build an exam out of the questions in this Practice & Revision Kit. Using the practice questions The best approach is to select a question and then allocate to it the time that you would have in the real exam. All the questions in this Practice & Revision Kit have mark allocations, so you can calculate the amount of time that you should spend on the question. Using the suggested solutions Avoid looking at the answer until you have finished a question. It can be very tempting to do so, but unless you give the question a proper attempt under exam conditions you will not know how you would have coped with it in the real exam scenario. vii How to use this Practice & Revision Kit When you do look at the answer, compare it with your own and give some thought to why your answer was different, if it was. If you did not reach the correct answer make sure that you work through the explanation or workings provided, to see where you went wrong. If you think that you do not understand the principle involved, go back to your own notes or your study materials and work through and revise the point again, to ensure that you will understand it if it occurs in the exam. Our suggested solutions are comprehensive, but in some discursive questions it may be that you have made points that are not included in the suggested solution that are equally valid. In the real exams you should be given credit for such points. viii KC1 Corporate Financial Reporting Even if you cannot do all of the calculation elements. Here are a few pointers: 1. especially a long case study. you will still be able to gain marks in the discussion parts. 4. but you can attempt the questions in any order that you like. During the 20 minute reading time at the start. rather than what you might like the question to be asking you. 3. You will then find yourself considering the requirement as ix Exam techniques . Some candidates like to attempt the easiest questions first. 5. you will build up your confidence right at the start. Make sure that you understand what the question wants you to do. and then read it again to ensure that you have picked everything up. Answer all parts of the question. allocate the time available to the questions and work out at what time you will need to stop working on one question and move on to the next. 2. which will help to calm you if you are nervous and set the tone for the rest of the exam. Read the question. Read it carefully once. When you reach the end of the allocated time for the question that you are working on. If you select a question on a topic area about which you feel confident. read through the questions and decide in what order you are going to attempt the exam. STOP. and do that first. Having established the order that you are going to do the exam. It is much easier to gain the straight forward marks for the next question than to spend a long time working on the previous question in the hope of gaining one or two final marks. on the basis that will enable them to gain the easiest available marks quickly.Exam techniques Using the right technique in the real exam can make all the difference between success and failure. read the requirement first. and build up their confidence. but you will still be able to gain credit for correct application in the later parts of the question. You have to write your answers in the order set out in the question and answer booklet. When starting to read a question. You should decide what approach is best for you. 6. even if you are using the wrong figure. You will not earn the mark for that particular part. Don’t worry if you think that you have made a mistake in a computational part of a question. If you finish the exam with time to spare. x KC1 Corporate Financial Reporting . so your answer is as relevant as possible.you read the data in the scenario. This will help you to focus on the requirements of the question and to avoid irrelevance. make sure that you do that. helping you to focus on exactly what you have to do. Try to make sure that your answer relates to the specifics of the question itself. 8. Plan your answer before you start to write your response. 7. If you are asked to consider the impact of the scenario on someone named in the question. 9. use the rest of the time to review your answers and to make sure that you answered every requirement for every question. especially for longer case studies. establish or select after consideration List Write the connected items one below the other Relate To establish logical or causal connections State Express something definitely or clearly Tier – 2 Comprehension Calculate/Compute Make a mathematical computation Explain important information Discuss Examine in detail by argument showing different aspects. using knowledge or contextual experience Record Enter relevant entries in detail Summarise Give a brief statement of the main points (in facts or figures) xi Action verbs . for the purpose of arriving at a conclusion Explain Make a clear description in detail revealing relevant facts Interpret Present in understandable terms or to translate Recognise To show validity or otherwise. scope or meaning Recall important information Draw Produce (a picture or diagram) Identify Recognise.Action verbs checklist Knowledge Process Verb List Verb Definitions Tier – 1 Remember Define Describe exactly the nature. especially with examples Graph Represent by means of a graph Prepare Make ready for a particular purpose Prioritise Arrange or do in order of importance Reconcile Make consistent with another Solve To find a solution through calculations and/or explanations Analyse Examine in detail in order to determine the solution or outcome Compare Examine for the purpose of discovering similarities Contrast Examine in order to show unlikeness or differences Differentiate Constitute a difference that distinguishes something Outline Make a summary of significant features Tier – 4 Analysis Draw relations among ideas and to compare and contrast/solve open-ended problems xii KC1 Corporate Financial Reporting . nature. ability or quality Demonstrate Prove.Knowledge Process Verb List Verb Definitions Tier – 3 Application Apply Put to practical use Use knowledge in a setting other than the one in which it was learned/solve closeended problems Assess Determine the value. ideas. perfect or unfold a plan or idea Propose To form or declare a plan or intention for consideration or adoption Formation of judgments and decisions about the value of methods. discover.Knowledge Process Verb List Verb Definitions Tier – 5 Evaluate Advise Offer suggestions about the best course of action in a manner suited to the recipient Convince To persuade others to believe something using evidence and/or argument Criticise Form and express a judgment Evaluate To determine the significance by careful appraisal Recommend A suggestion or proposal as to the best course of action Resolve Settle or find a solution to a problem or contentious matter Validate Check or prove the accuracy Compile Produce by assembling information collected from various sources Design Devise the form or structure according to a plan Develop To disclose. people or products Tier – 6 Synthesis Solve unfamiliar problems by combining different aspects to form a unique or novel solution xiii Action verbs . KC1 | Corporate Financial Reporting xiv KC1 Corporate Financial Reporting . . KC1 | Corporate Financial Reporting 2 CA Sri Lanka . five staff were made redundant. Ignore taxation. and an extra Rs. Current service costs as provided by the actuary are Rs.680 Yield on corporate bonds at end of year 8% 9% 3 .860 Benefits paid out 1.KC1 | Practice Questions PART A: INTERPRETATION AND APPLICATION OF SRI LANKA ACCOUNTING STANDARDS Questions 1 to 6 cover Interpretation and Application of Sri Lanka Accounting Standards.000 2. Required Design extracts from the statement of financial position as at 31 December 20X9 and the statement of comprehensive income for the year ended 31 December 20X9 to illustrate the relevant presentation and disclosures for this plan. You have been asked to assist some of your clients with their accounting queries. The opening plan assets were Rs 3.974 2.000. 1 Accounting queries You are a manager with a medium-sized firm of accountants.54 Mn.000. The following details relate to the plan. During the year. 330. 40m at 1 January 20X8. 58.000 in total was added to the value of their pensions.000 40.800 Market value of plan assets at end of the year 43. as was the market value of plan assets.500 2.6 Mn on 1 January 20X9 and plan liabilities at this date were Rs 4.200 Present value of obligation at end of the year 46. 275. (1) Penn Co has a defined benefit pension plan and wishes to recognise the full deficit in its statement of financial position. The actuary valued the plan liabilities at 31 December 20X9 as Rs 4. The yield on high quality corporate bonds at 31 December 20X9 was 8% and the actual return on plan assets was Rs.000 35.000 in the year.3 Mn. (9 marks) (2) CA Sri Lanka Sion Co operates a defined benefit pension plan for its employees. 20X8 20X9 Rs'000 Rs'000 Current service cost 2. Pensions paid to former employees amounted to Rs.000. 550. 295. The present value of the obligation was Rs.200 Contributions paid by entity 2. Company contributions to the plan during the year amounted to Rs. Required Analyse the recognition and measurement of the net defined liability at the end of 20X8 and 20X9. Interest will be receivable at maturity together with the principal and Bed has the intention of holding the investment until this time.1. The present value of the defined benefit obligation transferred was Rs. (9 marks) (3) Bed Investment Co entered into a contract on 1 July 20X9 with Em Bank. Prochain pays for all the costs of the 'model 4 CA Sri Lanka . Bed's functional currency is the rupee. Sion Co divested part of its business and. The company sells its products in department stores throughout the world. 400. 10. On the final day of 20X9. The resulting increase in the present value of the defined benefit obligation was Rs. Assume that all transactions occur at the end of the year. the benefits available under the plan were improved.4 million and the fair value of plan assets transferred was Rs. Sion also made a cash payment of Rs. a public limited company. 1. Prochain is allocated space in the department store where it can display and market its fashion goods.1. which are called 'model areas'. operates in the fashion industry and has a financial year-end of 31 May 20X6. The contract consisted of a deposit of a principal amount of Rs.5% per annum and with a maturity date of 30 June 20Y1. Required Advise how Bed should classify the above investment in the financial statements for the year ended 31 December 20X9. (7 marks) (LO 1. 10 million.15 to RKR 1. as part of the sale agreement.000 to the buyer in respect of the plan. Prochain insists on creating its own selling areas within the department stores. 2 million.8 million.2) (Total = 25 marks) 2 Prochain Prochain.KC1 | Practice Questions During 20X8.1. The company feels that this helps to promote its merchandise. transferred the relevant part of its pension fund to the buyer. carrying an interest rate of 2. In addition. 1. 11. a further 3% interest per annum will be payable by Em Bank if the exchange rate of the rupee against the Ruritanian Kroner (RKR) exceeds or is equal to Rs. 108 million to Rs. The current accounting practice followed by Prochain is to charge the full cost of the 'model areas' against profit or loss in the year when the area is dismantled.X5 1. Prochain did not feel at any time since acquisition that the actual profits would meet the forecast profit levels. on 31 May 20X7.KC1 | Practice Questions areas' including design.X6 1.X6 – 30. The company has estimated that the average age of the 'model areas' is eight months at 31 May 20X6.X6 CA Sri Lanka Expenditure type Research as to the extent of the market Prototype clothing and goods design Employee costs in refinement of products Development work undertaken to finalise design of product Production and launch of products Rs Mn 3 4 2 5 6 20 5 . on 1 June 20X5.6. Badex.9.11. 25 million in two years. 125 million based upon profit forecasts which assumed significant growth in the demand for the 'Badex' brand name. (8 marks) After the acquisition of Badex. 16 million and the actual profits in the year to 31 May 20X6 were Rs.12.X5 – 31. 15 million if the actual profits during this two-year period from the sale of Badex clothing and goods exceed the forecast profit. The costs of dismantling the 'model areas' are normally 20% of the original construction cost and the elements of the area are worthless when dismantled. This further payment comprises a guaranteed payment of Rs.2.X5 – 30.1. Prochain started developing its own sports clothing brand 'Pro'.X5 1.5. decoration and construction costs. The expenditure in the period to 31 May 20X6 was as follows: Period from 1. The shareholders of Badex valued the company at Rs. Prochain had taken a more conservative view of the value of the company and measured the fair value as being in the region of Rs.X5 – 31. (7 marks) Prochain acquired 100% of a sports goods and clothing manufacturer. Prochain intends to develop its own brand of sports clothing which it will sell in the department stores.4. a private limited company. 20 million relates to the brand name 'Badex'.X6 – 31. 112 million of which Rs.8. 20 million. The accumulated cost of the 'model areas' shown in the statement of financial position at 31 May 20X6 is Rs. The agreed purchase price was Rs.5.X6 1. The forecast profit on Badex goods and clothing over the two year period is Rs. Prochain is only prepared to pay the full purchase price if profits from the sale of 'Badex' clothing and sports goods reach the forecast levels. 10 million with no performance conditions and a further payment of Rs. 100 million plus a further payment of Rs. 4 million. The areas are used for approximately two years after which the company has to dismantle the 'model areas'. 1 million). (5 marks) (2) Explain the basis for the calculation of the deferred taxation liability on first time adoption of SLFRS including the provision in the opening SLFRS statement of financial position.5% where necessary and work to the nearest Rs100. market research costs (Rs.000. are reviewing the procedures for the calculation of the deferred tax liability for their company. 3 million). (4 marks) CA Sri Lanka . The apartments are let at below the market rate.) (LO 1. Currently an intangible asset of Rs.KC1 | Practice Questions The costs of the production and launch of the products include the cost of upgrading the existing machinery (Rs. Required 6 (1) Explain how changes in accounting standards are likely to have an impact on the deferred tax liability under LKAS 12 Income taxes. which it leases to famous persons who are under a contract of employment to promote its fashion clothing. Panel is adopting Sri Lanka Financial Reporting Standards for the first time as at 31 October 20X5 and the directors are unsure how the deferred tax provision will be calculated in its financial statements ended on that date including the opening provision at 1 November 20X3.3) (Total = 25 marks) 3 Panel The directors of Panel. 20 million is shown in the financial statements for the year ended 31 May 20X6. (4 marks) Required Analyse the information provided in order to recommend how the above items should be dealt with in the financial statements of Prochain for the year ended 31 May 20X6 under Sri Lanka Financial Reporting Standards. (Assume a discount rate of 5. They are quite surprised at the impact on the liability caused by changes in accounting standards such as SLFRS 1 First time adoption of International Financial Reporting Standards and SLFRS 2 Share-based payment. The leases terminate when the contracts for promoting the clothing terminate. (6 marks) Prochain owns a number of prestigious apartments. 2 million) and staff training costs (Rs. The lease terms are short and are normally for six months.1. a public limited company. Prochain wishes to account for the apartments as investment properties with the difference between the market rate and actual rental charged to be recognised as an employee benefit expense. 1 million before any impairment loss. The asset was recorded at the present value of the minimum lease payments of Rs. plant and equipment of Nails at 31 October 20X5 was Rs. The annual lease payments are Rs. Panel had paid Rs. 16 million and at 31 October 20X5 was Rs. The options were exercised at 31 October 20X5. The tax base of the property. the company had granted ten million share options subject to a two year vesting period. a limited liability company. plant and equipment of Nails was Rs. sold goods costing Rs. The directors do not understand how this transaction should be dealt with in the financial statements of the subsidiary and the group for taxation purposes. The directors have not leased an asset under a finance lease before and are unsure as to its treatment for deferred taxation. a limited liability company. The directors are unsure how to account for deferred taxation on this transaction for the years ended 31 October 20X4 and 31 October 20X5. The value of the property. The directors wish to know how CA Sri Lanka 7 .KC1 | Practice Questions Additionally the directors wish to know how the provision for deferred taxation would be calculated in the following situations under LKAS 12 Income taxes: (i) On 1 November 20X3. The options had a fair value of $40million on the grant date and all are expected to vest. Pins pays tax locally at 30%. and is a cash generating unit in its own right. 9 million for these goods. The intrinsic value of the ten million share options at 31 October 20X4 was Rs. 46 million. Pins. The company can claim a tax deduction for the annual rental payment as the finance lease does not qualify for tax relief. 12 million at the inception of the lease which was 1 November 20X4. 6 million and purchased goodwill was Rs. (iv) Nails. (ii) Panel is leasing plant under a finance lease over a five-year period. 1. and these goods had not been sold by Panel before the year end of 31 October 20X5.8 million had occurred at 31 October 20X5. (iii) A wholly owned subsidiary. 3 million payable in arrears on 31 October and the effective interest rate is 8% per annum. The increase in the share price in the year to 31 October 20X5 could not be foreseen at 31 October 20X4. An impairment loss of Rs. 4 million as at 31 October 20X5. is a wholly owned subsidiary of Panel. 7 million to Panel on 1 September 20X5. The asset is depreciated on a straight-line basis over the five years and has no residual value. The company had no other assets or liabilities. Local tax law allows a tax deduction at the exercise date of the intrinsic value of the options. 6 On average 31. At 30 November 20X5.1. Interest is payable by Bromwich at the end of each year and the loan is repayable on 30 November 20X7. The financial year-end of Ambush is 30 November 20X5. Balance Cash expected Due date Rs Mn Rs Mn 4 4. Impairment losses are not an allowable expense for taxation purposes.1 30 November 20X6 Tray 2 2. (4 marks) The impairment of trade receivables has been calculated using a formulaic approach. one of the credit customers. The directors feel that it is likely that they will only receive Rs. 100. how the situations (i) to (iv) above will impact on the accounting for deferred tax under LKAS 12 Income taxes in the group financial statements of Panel. The effective and stated interest rate for this loan was 8%. with suitable computations. the directors of Ambush have heard that Bromwich is in financial difficulties and is undergoing a financial reorganisation. (The situations in (i) to (iv) above carry equal marks.1) (Total = 25 marks) 4 Ambush Ambush loaned Rs.7 8 CA Sri Lanka .000 on 30 November 20X7 and no future interest payment.1.0 31 January 20X5 Milk 5 4. has come to an arrangement with Ambush whereby the amount outstanding of Rs.) (16 marks) (LO 1. Required (1) Compare the approaches of LKAS 39 and SLFRS 9 as regards the impairment of financial assets.X5 Other receivables 11 10. Tray. Interest for the year ended 30 November 20X5 had been received. 11 million including the amount owed by Tray.000. which is based on a specific percentage of the portfolio of trade receivables.KC1 | Practice Questions the impairment loss will affect the deferred tax liability for the year. Assume a tax rate of 30%. The total amount of trade receivables outstanding at 30 November 20X5 was Rs. The general provision approach has been used by the company at 30 November 20X5.000 to Bromwich on 1 December 20X3. The following is the analysis of the trade receivables. (6 marks) (2) Recommend the accounting treatment under LKAS 39 of the loan to Bromwich in the financial statements of Ambush for the year ended 30 November 20X5. At 30 November 20X5. 4 million from Tray will be paid on 30 November 20X6 together with a penalty of Rs. 200. (3) Required Advise. 100. 000 against trade receivables which represents the difference between the cash expected to be received and the balance outstanding plus a 2% general allowance. They are being depreciated on a straight-line basis to a nil residual value. 10. Required (4) Advise the appropriate treatment for Ambush's property resulting from these changes in value. 1. a foreign company. has approached a partner in your firm to assist in obtaining a local Stock Exchange listing for the company.2. At this date the remaining useful life was unchanged.KC1 | Practice Questions Ambush has made an allowance of Rs. The partner in your firm has requested a list of all transactions with parties connected with the company and the directors of Engina have produced the following summary: (a) CA Sri Lanka Every month. 520.000. At 30 November 20X5 the fair value of the buildings had risen to Rs. The buildings had originally cost Rs. it could cause significant problems politically and culturally to disclose such transactions. The directors of Engina are reluctant to disclose the nature of their related party transactions as they feel that although they are a normal feature of business in their part of the world. The company uses the revaluation model for its buildings. The buildings were revalued downwards on 30 November 20X4 to Rs. the Finance Director at cost price. (8 marks) Ambush is reviewing the accounting treatment of its buildings.000 of goods per month to Mr Satay. (Use a discount rate of 5% in any calculations. 11 million.1.1. 50. Engina is registered in a country where transactions between related parties are considered to be normal but where such transactions are not disclosed. Additionally Mr Satay has purchased his car from the company for 9 . 10 million on 1 December 20X3 and had a useful economic life of 20 years. which is to be included in the financial statements. You should work to the nearest Rs. which was the buildings' recoverable amount.1.1. 1. Milk has a similar credit risk to the 'other receivables'. and recommend an alternative acceptable approach if required.3) (Total = 25 marks) 5 Engina Engina.) Required (3) Advise Ambush as to the acceptability of its approach towards the impairment of trade receivables under LKAS 39. 8 million. (7 marks) (LO 1. The company is unsure how to treat the above events. 300 million. The annual turnover of Engina is Rs. Engina sells Rs. property prices were falling rapidly.KC1 | Practice Questions Rs. Wheel Ltd paid a dividend to its shareholders.1.5 million (net of selling cost of Rs. (20 marks) (2) During the year. The market value of the property was Rs. 500. The carrying amount of the hotel in the books of Engina was Rs.1. 1. Mr Satay. (5 marks) (LO 1.7) 10 (Total = 25 marks) CA Sri Lanka . Wheel and Exhaust agreed that an unwanted property would be transferred from Wheel to Exhaust in lieu of a Class B share cash dividend. The director. Required (1) Evaluate the information provided and apply the requirements of LKAS 24 to identify whether a related party transaction exists and advise on the disclosures to be made in respect of related parties in Engina's financial statements. Outline the appropriate accounting treatment for this transaction. There was an oversupply of hotel accommodation due to government subsidies in an attempt to encourage hotel development and the tourist industry. 80. Mr Satay's 80% ownership of Wheel Limited is established by his shareholding of 100% of the Class A voting shares in that company.000 at the date of transfer and a fair value of Rs. 45. 5 million and its value in use was Rs. earns a salary of Rs. 3.000. 1.000 (market value Rs. (b) A hotel property had been sold to a brother of Mr Soy. and has a personal fortune of many millions of rupees.1. the Managing Director of Engina. 4. since this was more advantageous for tax purposes.2. The remaining 20% of the company is owned by Exhaust Limited (which is not related to Mr Satay). for Rs.2 million). Exhaust Limited holds 100% of the Class B voting shares in Wheel Limited. 520.6 million. 0.000).000 a year. The property had a carrying amount of Rs. (c) Mr Satay owns several companies and the structure of the group is as follows: Mr Satay 100% ownership of Car Limited 80% ownership of Wheel Limited 100% ownership of Engina Limited Engina earns 60% of its profits from transactions with Car and 40% of its profits from transactions from Wheel.3 million but in the foreign country. 450. 3.1. Richard Perera. We are trying to clarify this. The assets in question are as follows: (a) A piece of farm machinery met the criteria to be classified as held for sale at 31 December 20X3. 29. 4. This is a relatively new standard and one that I didn't study at college. 18. so I really am a little lost. The company hasn't yet secured a buyer. In particular I would like to know how to account for the following issues and the effect that they will have on the financial statements.300. however has identified active markets for the machine in India and Thailand. If the machine were sold to a Thai buyer. and I would like some advice on a number of matters. The company has recently employed a new financial accountant.600 and transport costs to Rs. 237. 11 . 244.660. transaction costs would be Rs. who has sent you the following email in your capacity as a senior working on Masham's external audit and advisory team. To: Lucy Da Silva From: Richard Perera Date: 21 January 20X3 Subject: Accounting issues Dear Lucy I am starting to work on the preparation of the financial statements for Masham for the year ended 31 December 20X3. The market price of such a machine is Rs. At that date it had a carrying amount of Rs. transaction costs would amount to Rs. as well as three food processing plants.900 and transport costs Rs. Neither of these markets is greater than the other in terms of the number of sales transactions of similar machines. 3. (b) The company owns land which it accounts for under the LKAS 16 revaluation model. (1) CA Sri Lanka The Finance Director tells me that I must consider the effects of SLFRS 13 when preparing the financial statements and perform a fair value exercise on certain assets.KC1 | Practice Questions 6 Masham Masham is a diversified company that operates in the agricultural and food produce sectors. It operates a number of tea plantations and dairy farms throughout Sri Lanka.800 in Thailand. The land was donated to Masham by a party that specified it must be used for agricultural purposes.680 in India and Rs.000. 220. If the machine were sold to an Indian buyer. Masham is not restricted from selling the land but it is not clear whether the usage restriction would transfer with title. 000 CGU 3 Rs'000 33.000 24. The previous owners retained the other 20% shareholding. That is an accounting standard that I studied at college.150 CGU 2 Rs'000 80.000 13. I've allocated it to CGU 2 on the basis that the carrying amount of that CGU seemed very low.500 CGU 3 Rs'000 16. the carrying amount of each plant was: PPE Goodwill Net current assets Brand CGU 1 Rs'000 30.000 29.000 4. Please could you confirm my CA Sri Lanka .000 The goodwill in CGU 1 arose when an 80% stake in a competitor was acquired. The brand is used across all Masham processed food. The owner of the adjacent property has a legal right of way to access his property via the land – without this right. although as I have never used it in practice I am a little rusty. (10 marks) (3) 12 I think I am correct in saying that both tea bushes and dairy cattle are biological assets and so must be accounted for in accordance with LKAS 41. the land could be used for commercial development and would have a higher market value than it does for the current use. (10 marks) (2) The food processing plants are each classified as a cash-generating unit for the purposes of impairment testing.000 51.950 190 35 79. The Finance Director has asked me to conduct an impairment test as a result of poor market conditions and has provided me with the following information: Fair value Cost of disposal – legal – reorganization Value in use CGU 1 Rs'000 45. At 31 December 20X3.500 I'm not quite sure what to do with this information though – I'd appreciate guidance.000 5.500 74. the land would be worth approximately 5% more.500 200 30 33.KC1 | Practice Questions Without the restriction.000 16. this NCI was measured as a proportion of net assets for the purpose of acquisition accounting.250 250 100 43.000 CGU 2 Rs'000 46. (LO 1.1.2) (Total = 25 marks) CA Sri Lanka 13 .KC1 | Practice Questions understanding that biological assets must be remeasured to fair value with any changes recognised within equity? (5 marks) Thanks very much – I look forward to hearing from you.1.1. 1. Kind regards Richard Required Prepare notes in response to the financial accountant's email in preparation for a telephone conversation to discuss the issues. 8 million and retained earnings were Rs. 4 million and retained earnings were Rs.KC1 | Practice Questions PART B: PREPARATION AND PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS Questions 7 to 11 cover the Preparation and Presentation of Consolidated Financial Statements. 7 Glove The following draft statements of financial position relate to Glove. 60 million at 1 June 20X5. plant and equipment 60 Investment in Body 30 Investment in Fit 10 Investments in equity instruments 65 29 20 Current assets 395 79 46 Total assets Stated capital Other reserves Retained earnings Total equity 150 30 135 315 40 5 25 70 20 8 10 38 Non-current liabilities Current liabilities Total liabilities Total equity and liabilities 45 35 80 395 2 7 9 79 3 5 8 46 The following information is relevant to the preparation of the group financial statements. 39 million. (a) 14 Glove acquired 80% of the 40 million ordinary shares of Body on 1 June 20X5 when Body's other reserves were Rs. 10 million. CA Sri Lanka . 6 million. Body acquired 70% of the 20 million ordinary shares of Fit on 1 June 20X5 when the other reserves of Fit were Rs. Body and Fit. There have been no issues of ordinary shares in the group since 1 June 20X5. all public limited companies. The excess of the fair value over the net assets of Body and Fit is due to an increase in the value of non-depreciable land of the companies. Glove Body Fit Rs Mn Rs Mn Rs Mn Assets Non-current assets 260 20 26 Property. The fair value of the net assets of Fit at that date was Rs. as at 31 May 20X7. The fair value of the net assets of Body was Rs. 6 million. Glove does not wish to account for the loan stock at fair value through profit or loss.000. The land had a carrying amount of Rs. In the financial statements at 31 May 20X7. (c) On 1 June 20X5. (g) It is the group's policy to measure the non-controlling interest at acquisition at its proportionate share of the fair value of the subsidiary's identifiable net assets. The valuation of the trade names is not included in the fair value of the net assets of Body above. the supplier received land. 5 million and this valuation had been taken into account by Glove when offering Rs. None of the trade names has been acquired externally and. The loan stock was issued at par with a nominal value of Rs. During the year to 31 May 20X7. Glove acquired plant with a fair value of Rs. In exchange for the plant.000 convertible loan stock with a three-year term repayable at par. a firm of valuation experts valued the trade names at Rs. Interest is payable annually in arrears at a nominal interest rate of 6%. (e) On 31 May 20X7. (h) Ignore any taxation effects. from Glove. 4 million from land to plant in respect of this transaction. Loan stock can be converted after 3 years into 300 shares of Glove. which was currently not in use. 7 million. therefore. the costs have not been capitalised in the statement of financial position of Body. (d) Glove has issued 30. 900. The loan stock was issued on 1 June 20X6 when the market interest rate for similar debt without the conversion option was 8% per annum. The loan stock has been included in non-current liabilities at its nominal value of Rs. loss on re-measurement on the defined benefit obligation was Rs 1 Mn. Group policy is to amortise intangible assets over ten years. 1.000 per bond. Body has invested a significant amount in marketing these trade names and has expensed the costs.KC1 | Practice Questions CA Sri Lanka (b) Body owns several trade names which are highly regarded in the market place. These have not yet been accounted for and need to be treated in accordance with LKAS 19. 60 million for the investment in Body. On the acquisition of Body by Glove. The net defined benefit liability is included in noncurrent liabilities. Glove had made a transfer of Rs. 30 million. (f) Goodwill has been tested for impairment at 31 May 20X6 and 31 May 20X7 and no impairment loss occurred. The interest has been paid and accounted for in the financial statements. 15 . Glove introduced a defined benefit retirement plan. 4 million and an fair value of Rs. and gain on re-measurement on the plan assets was Rs. 000. plant and equipment 120 – Investment in Shane Co 320 80 890 140 Current assets 1.000 on 1 January 20X6. 120. 10. At that date Shane Co's retained earnings stood at Rs.210 220 Equity 500 100 Stated capital 400 90 Retained reserves 900 190 310 30 Current liabilities 1.210 220 SUMMARISED STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME 100 20 Profit before interest and tax (40) (8) Income tax expense 60 12 Profit for the year Other comprehensive income (not reclassified to P/L). (LO 2. 10 6 net of tax 70 18 Total comprehensive income for the year MOVEMENT IN RETAINED RESERVES Balance at 31 December 20X7 Total comprehensive income for the year Balance at 31 December 20X8 16 330 70 400 72 18 90 CA Sri Lanka .1. Angel Co Shane Co Rs'000 Rs'000 STATEMENTS OF FINANCIAL POSITION Non-current assets 200 80 Property.1) (25 marks) 8 Angel Angel Co bought 70% of the stated capital of Shane Co for Rs.KC1 | Practice Questions Required Compile the consolidated statement of financial position of the Glove Group at 31 May 20X7 in accordance with Sri Lanka Financial Reporting Standards (SLFRS). summarised statements of profit or loss and other comprehensive income to that date and movement on retained earnings are given below. The statements of financial position at 31 December 20X8. No impairment losses have been necessary to date.6. It is the group's policy to measure the non-controlling interest at acquisition at fair value.000 due to a share price rise. No entries have been made in the accounts for the above transaction. (Ignore income taxes on the disposal.000 on 30 June 20X8. the fair value of the 35% holding in Shane was slightly more at Rs. At that date.4 Mn. Rs Mn 600 310 Cost of investment Rs Mn 520 192 % of share capital acquired 80 60 17 . Rs Mn 170 80 Fair value of net assets at acq. Assume that profits and other comprehensive income accrue evenly throughout the year.KC1 | Practice Questions Angel Co sells one half of its holding in Shane Co for Rs. The fair value of the non-controlling interest on 1 January 20X6 was Rs 51. The remaining holding is to be dealt with as an associate. Required Compile the consolidated statement of financial position.) (LO 2. 130. The details of the acquisitions are as follows: CA Sri Lanka Company Date of acquisition Zbay Tbay 1.12.1) (25 marks) 9 Ejoy Ejoy. 120.1. has acquired two subsidiaries.X5 Ordinary share capital Rs Mn 200 120 Reserves at acq. statement of profit or loss and other comprehensive income and a reconciliation of movement in retained reserves for the year ended 31 December 20X8. a public limited company.X4 1 . This does not represent a discontinued operation. KC1 | Practice Questions Any fair value adjustments relate to non-depreciable land.5. 5 million. 18 (a) Tbay was acquired exclusively with a view to sale and at 31 May 20X6 meets the criteria of being a disposal group. it would receive Rs. because of the borrower's financial problems. (c) Zbay has a loan asset which was carried at Rs. 20 million (carrying value Rs. Selling costs increase proportionately with the level of shareholding. The fair value of Tbay at 31 May 20X6 is Rs. the company still expects to receive the same amount on the same date.500 800 Revenue (1. On 1 June 20X5 the company felt that. CA Sri Lanka .800) (1.X5 190 20 15 The following information is relevant to the preparation of the group financial statements. (b) Ejoy entered into a joint arrangement with another company on 31 May 20X6. 6 million) to the joint venture has been included in 'other income'. on 31 May 20X7. The gain on the disposal of the assets (Rs. At 31 May 20X6. 60 million at 1 June 20X5. 14 million). The draft statements of profit or loss and other comprehensive income for the year ended 31 May 20X6 are: Ejoy Zbay Tbay Rs Mn Rs Mn Rs Mn 2. The joint venture is a limited company and Ejoy has contributed assets at fair value of Rs. 20 million in approximately two years. The loan's effective interest rate is 6%.500 1. 344 million and the estimated selling costs of the shareholding in Tbay are Rs. which met the SLFRS 11 definition of a joint venture.200) (600) Cost of sales 700 300 200 Gross profit 70 10 – Other income (130) (120) (70) Distribution costs (100) (90) (60) Administrative expenses (50) (40) (20) Finance costs 490 60 50 Profit before tax (200) (26) (20) Income tax expense 290 34 30 Profit for the year Other comprehensive for the year (not reclassified to profit or loss): 80 10 8 Gain on property revaluation net of tax 370 44 38 Total comprehensive income for the year Total comprehensive income for year 31 . Each party will hold five million ordinary shares of Rs. The loan asset is held at amortised cost. 1 in the joint venture. The recoverable amount of Zbay was Rs.KC1 | Practice Questions (d) On 1 June 20X5. Random has not revalued its assets or issued any share capital since its acquisition by Memo. (g) It is the group's policy to measure the non-controlling interest at its proportionate share of the fair value of the subsidiary's identifiable net assets. 50 million and a fixed interest rate of 5% which was the current market rate. No entries have been made in the statement of profit or loss and other comprehensive income to account for the bond or the hedge. Ejoy has entered into a floating interest rate swap. Ejoy has received Rs. a public limited company which is situated in a foreign country.5 million in net interest payments on the swap at 31 May 20X6 and the fair value hedge has been 100% effective in the period. Ejoy has designated the swap as a fair value hedge of the bond.1. (LO 2. owns 75% of the ordinary share capital of Random. The bond is classified as measured at fair value through profit or loss. Because of the size of the investment. Ejoy purchased a five year bond with a principal amount of Rs. a public limited company. 334 million at 31 May 20X6. Impairment losses on goodwill are charged to cost of sales. At 31 May 20X6. the fair value of the bond has decreased to Rs. As a result. 48.1) (25 marks) 10 Memo Memo. 630 million and the value in use of Tbay was Rs.3 million. (f) Assume that profits accrue evenly throughout the year and ignore any taxation effects. The following financial statements relate to Memo and Random: CA Sri Lanka 19 . 0. market interest rates were 6%. Memo acquired Random on 1 May 20X3 for 120 million crowns (CR) when the retained profits of Random were 80 million crowns. Required Compile a consolidated statement of profit or loss and other comprehensive income for the Ejoy Group for the year ended 31 May 20X6 in accordance with Sri Lanka Financial Reporting Standards. and you should assume any gain/loss on the hedge is the same as the loss/gain on the bond. (e) No impairment of the goodwill arising on the acquisition of Zbay had occurred at 1 June 20X5. 200 (120) 80 (30) 50 4 – 54 (20) 34 Random CR Mn 142 (96) 46 (20) 26 – (2) 24 (9) 15 The following information is relevant to the preparation of the consolidated financial statements of Memo.2m. plant and equipment Investment in Random Loan to Random Current assets Equity Stated capital Retained earnings Non-current liabilities Current liabilities Memo Rs Mn 297 48 5 355 705 110 360 470 30 205 705 Random CR Mn 146 – – 102 248 52 95 147 41 60 248 STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR YEAR ENDED 30 APRIL 20X4 Revenue Cost of sales Gross profit Distribution and administrative expenses Profit from operations Interest receivable Interest payable Profit before taxation Income tax expense Profit/total comprehensive income for the year Memo Rs. 20 (a) Goodwill is reviewed for impairment annually.KC1 | Practice Questions STATEMENTS OF FINANCIAL POSITION AT 30 APRIL 20X4 Property. (b) During the financial year Random has purchased raw materials from Memo and denominated the purchase in crowns in its financial records. the impairment loss on recognised goodwill was CR4. At 30 April 20X4. The details of the transaction are set out below: Date of transaction Purchase price Profit percentage Rs Mn on selling price Raw materials 1 February 20X4 6 20% CA Sri Lanka . 2. (c) Memo had made an interest free loan to Random of Rs.6 2. half of the raw materials purchased were still in the inventory of Random. 100.) (LO2.KC1 | Practice Questions At the year end. 1. (d) The fair value of the net assets of Random at the date of acquisition is to be assumed to be the same as the carrying amount. (You should round their calculations to the nearest Rs. 6 million was made to Memo when the exchange rate was 2. The loan was repaid on 30 May 20X4.000.1) CA Sri Lanka (25 marks) 21 . (f) The following exchange rates are relevant to the financial statements: 30 April/1 May 20X3 1 November 20X3 1 February 20X4 30 April 20X4 Average rate for year to 30 April 20X4 (g) Crowns to Rs. Required Compile a consolidated statement of profit or loss and other comprehensive income for the year ended 30 April 20X4 and a consolidated statement of financial position at that date in accordance with International Financial Reporting Standards. (e) The functional currency of Random is the Crown.5 2. Random had included the loan in non-current liabilities and had recorded it at the exchange rate at 1 May 20X3. 5 million on 1 May 20X3. Any exchange gain or loss arising on the transaction is still held in the current liabilities of Random.5 2.1 2. The intragroup transactions have not been eliminated from the financial statements and the goods were recorded by Random at the exchange rate ruling on 1 February 20X4.5 It is the group's policy to measure the non-controlling interest at acquisition at its proportionate share of the fair value of the subsidiary's identifiable net assets.1.2 crowns to Rs. A payment of Rs. 600 600 400 (300) (200) 4. The statement of financial position of Slide Co at acquisition was as follows: Rs'000 2. 1.000 Equity attributable to owners of the parent Stated capital Revaluation surplus Retained earnings Non-controlling interest Current liabilities Trade payables Income tax payable 22 18.100 6.000 cash and 1.500 25. plant and equipment Inventories Trade receivables Cash Trade payables Income tax payable The consolidated statement of financial position of Swing Co as at 31 December 20X5 was as follows: 20X5 20X4 Rs'000 Rs'000 Non-current assets 35.600 5.KC1 | Practice Questions 11 Swing On 1 September 20X5 Swing Co acquired 70% of Slide Co for Rs.800 7.700 1. 5.500.400 1.900 7.000 Inventories 9.100 50.000 10.100 4.000 comprising Rs.100 350 32.900 33.000 shares of Swing Co.500 Cash 28.000 CA Sri Lanka .000.300 12.550 1.100 44.750 52.900 25.900 – 33.000 10.500 Trade receivables 2.200 19.100 44. plant and equipment 1.000.000 Current assets 16.800 Property.000 65.200 12.400 – Goodwill 36.800 65.000 – 21.000 Property. 000.300 Total comprehensive income for the year attributable to 11.800 Total comprehensive income for the year Profit attributable to: 11. The group made no disposals of property. It is the group's policy to measure the non-controlling interest at acquisition at its proportionate share of the fair value of the subsidiary's identifiable net assets. 900.1) CA Sri Lanka (25 marks) 23 .200) Income tax expense 11. plant and equipment.1. No notes are required.450 Owners of the parent 350 Non-controlling interest 200 + (500 × 30%) 11. Required Compile the consolidated statement of cash flows of Swing Co for the year ended 31 December 20X5.500 Profit before tax (5. (LO 2.000.300 Profit for the year Other comprehensive income (not reclassified to P/L) 500 Revaluation surplus 11.800 Notes: 1 Depreciation charged for the year was Rs. 2 Dividends paid by Swing Co amounted to Rs.800.KC1 | Practice Questions The consolidated statement of profit or loss and other comprehensive income of Swing Co for the year ended 31 December 20X5 was as follows: 20X5 Rs'000 16. 5.100 Owners of the parent 200 Non-controlling interest 11. which it had decided to dispose of in a single transaction. for classification as held for sale had been met for Cee and Gee at 30 September 20X7. As a result the following events occurred. Cee. Cee and Gee. and a change in government legislation. had been impaired prior to the financial year end on 30 September 20X7 and it had been written down to its recoverable amount of Rs. The tax base and the carrying amounts after the revaluation are as follows: Carrying Tax base at 31 Tax base at 31 amount at 31 October 20X7 after October 20X7 before October 20X7 revaluation revaluation Rs Mn Rs Mn Rs Mn Property 50 65 48 Vehicles 30 35 28 CA Sri Lanka . (a) Ghorse identified two manufacturing units. (7 marks) (b) 24 As a consequence of the re-organisation. The criteria in SLFRS 5 Non-current assets held for sale and discontinued operations. operates in the fashion sector and had undertaken a group re-organisation during the current financial year to 31 October 20X7. One of the units. the tax authorities have allowed a revaluation of the non-current assets of the holding company for tax purposes to fair value at 31 October 20X7. 95 million for Gee. INTERPRETATIONS AND COMMUNICATION OF FINANCIAL RESULTS Questions 12 to 13 cover Analysis. These units comprised noncurrent assets only. 35 million. There has been no change in the carrying amounts of the non-current assets in the financial statements. Interpretations and Communication of Financial Results.KC1 | Practice Questions PART C: ANALYSIS. The following information related to the assets of the cash generating units at 30 September 20X7: Depreciated Fair value less costs to sell Carrying amount historical cost and recoverable amount under SLFRS Rs Mn Rs Mn Rs Mn 50 35 35 Cee 70 90 70 Gee 120 125 105 The fair value less costs to sell had risen at 31 October 20X7 to Rs. 12 Ghorse Ghorse. 40 million for Cee and Rs. a public limited company. The increase in the fair value less costs of disposal had not been taken into account by Ghorse. 8137.2 2. was held on an operating lease over eight years. (6 marks) (c) A subsidiary company had purchased computerised equipment for Rs. other than the head office. The lease relates to buildings rather than land.KC1 | Practice Questions Other taxable temporary differences amounted to Rs.3 2. 35 million and its remaining economic life is thirteen years. 2. 4 million on 31 October 20X6 to improve the manufacturing process. The directors of Ghorse propose to write down the non-current asset to the new selling price of Rs. The deferred tax liability at 31 October 20X7 had been calculated using the tax values before revaluation. Ghorse had discovered that the manufacturer of the computerised equipment was now selling the same system for Rs. The fair value of the property is Rs. 2 million. The projected cash flows from the equipment are: Cash flows Rs. other reserves and retained earnings. CA Sri Lanka 25 .5 million. The factor to be used for an annuity at 10% for 12 years is 6. (5 marks) (d) The manufacturing property of the group. Year ended 31 October 20X8 20X9 20Y0 1. the lease has been renegotiated and the new term is twelve years from that date at a rent of Rs. ROCE is defined as operating profit before interest and tax divided by share capital. Based on the draft financial statements (before any adjustments are made in respect of the issued above). The company uses a discount rate of 10%. 5 million at 31 October 20X7.5 million. The directors think that the fair value less costs to sell the equipment is Rs. 2. The company's policy is to depreciate its computerised equipment by 25% per annum on the straight-line basis. 5 million per annum paid in arrears. the directors have calculated ROCE to be 13. 220 million).3 The residual value of the equipment is assumed to be zero. Assume income tax is paid at 30%.6% (being Rs. 30 million divided by Rs. (5 marks) The directors are worried about the impact that the above changes will have on its key performance indicator which is 'Return on Capital Employed' (ROCE). On re-organisation on 31 October 20X7. At 31 October 20X7. 695 109. 20X1 20X0 Rs'000 Rs'000 127.062) (4.936) Cost of sales 35.436) Tax 8. supporting your analysis by any additional appropriate ratios.1) (Total = 25 marks) 13 Commonsizing The following are the statements of profit or loss of a company for the years ended 31 December 20X1 and 20X0.720 33.484 Profit before tax (4.574 3.705) (2.223 Revenue (91.975) (75. (9 marks) (3) Outline the limitations of using a common size statement approach to the analysis of a company's performance over a ten-year period.065 16.048 Retained profit for the financial year Dividends paid 3. (2 marks) Required Advise on an appropriate accounting treatment of the above transactions and the impact that the resulting adjustments to the financial statements would have on ROCE.581) (1. Your answer should include appropriate calculations where necessary and a discussion of the accounting principles involved.033 Operating profit (2.418 Required 26 (1) Prepare common size statements for the years ended 31 December 20X1 and 20X0. (6 marks) (2) Assess the financial performance of the company as illustrated by the common size statements.484 14.950) (14.384) Distribution costs (16.287 Gross profit (3.422 10.870) Administrative expenses 15. using total revenue for each year as 100%.KC1 | Practice Questions Formation of opinion on impact on ROCE.549) Interest payable 12. (LO 3. Note.2. (5 marks) CA Sri Lanka . (5 marks) (LO 3. (ii) A high gearing ratio is advantageous to shareholders.2.1) CA Sri Lanka (Total = 25 marks) 27 . because they benefit from the income produced by investing the money borrowed. Therefore the higher these ratios are the better placed the company is.KC1 | Practice Questions (4) Criticise the following statements: (i) The current ratio and the quick ratio help to assess whether a company is able to meet its debts as they fall due. 14 Calcula Asha Alexander has recently been appointed as the CEO of Calcula. During this time there have been significant senior management changes. The most successful companies have been particularly focused on enhancing their offering to customers through creating innovative products and investing heavily in training and development for their employees. simply to report on things people do not care about. The board were keen on her appointment as she is renowned in the industry for her creativity and willingness to introduce 'fresh ideas'. During the company's last board meeting. Asha was dismayed by the finance director's reaction when she proposed introducing integrated reporting at Calcula. Future direction In response to the confusion surrounding the company's strategic direction. 28 CA Sri Lanka . In her previous role Asha oversaw the introduction of an integrated approach to reporting performance. The last CEO introduced an aggressive cost-cutting programme aimed at improving profitability. requiring a lot more work.KC1 | Practice Questions PART D: CORPORATE GOVERNANCE AND RECENT DEVELOPMENTS IN FINANCIAL REPORTING Questions 14 to 15 cover Corporate Governance and Recent Developments in Financial Reporting. This is something she is particularly keen to introduce at Calcula. which resulted in confusion among shareholders and employees as to the strategic direction of the company. At the beginning of the financial year the annual staff training and development budget was significantly reduced and has not been reviewed since the change in management. It is common for competitors to drop out of the market place. The specialist software market is particularly dynamic and fast changing. a public limited company. Asha was appointed as the CEO having undertaken a similar role at a competitor. The Finance Director made it clear that he was not convinced of the need for such a change. The company develops specialist software for use by accountancy professionals. Shareholders are only interested in the bottom line'. arguing that 'all this talk of integrated reporting in the business press is just a fad. One investor complained that the annual accounts made it hard to know where the company was headed. Turbulent times Calcula has been through a turbulent time over the last three years. the primary focus of which centres on making Calcula the market leader of specialist accountancy software. Asha and the board published a new mission. but the directors are worried that any sustainability report produced by the company may detract from its image if the report does not comply with recognised standards. They are unsure of the extra requirements of a sustainability report. (6 marks) (3) Advise the directors of Calcula as to what should be included in the company's integrated report. The company purchased its main competitor during the year and found that there were environmental liabilities arising out of the restoration of many miles of farmland that had been affected by the laying of a pipeline.3) (Total = 25 marks) 15 Glowball The directors of Glowball. The events are as follows.KC1 | Practice Questions Required (1) Advise how integrated reporting may help Calcula to communicate its strategy and improve the company's strategic performance.1. Your answer should make reference to the concerns raised by the finance director. Further the directors have collected information in respect of a series of events which they consider to be important and worthy of note. but are not sure as to how they would be incorporated in the sustainability report. There was no legal obligation to carry out the work but the company felt that there would be a cost of around Rs. 150 million if the farmland was to be restored. It has produced environmental reports in the past and it wishes to produce a sustainability report for 20X2. have discovered that their main competitors are applying the 'Global Reporting Initiative' (GRI) "G4" guidelines and producing sustainability reports alongside their annual reports. referencing the eight key content elements required by the <IR> Framework (8 marks) (LO 4. 29 . Glowball has a reputation for ensuring the preservation of the environment in its business activities. a public limited company. (11 marks) (2) Outline the likely implications of introducing 'integrated reporting' which Calcula should consider before deciding to proceed with its adoption. (a) CA Sri Lanka Glowball is a company that constructs pipelines and pipes gas from offshore gas installations to major consumers. (c) The company produced statistics that measure their improvement in the handling of emissions of gases that may have an impact on the environment.2) 30 (Total = 25 marks) CA Sri Lanka . which specify limits to the substances that can be discharged to the air and water. The emissions have been reduced by 84% over five years due to the closure of old plants. (12 marks) (3) Advise Glowball how the issues above should be addressed in the sustainability report. Suggest suitable performance measures in each case. In 20X2 the company was prosecuted five times and in 20X1 11 times for infringement of the law. In particular it aims to minimise the impact on wildlife and human beings. (9 marks) (LO 4. they are dismantled rather than sunk into the sea. During the year the company was prosecuted for infringements of an environmental law in the USA when toxic gas escaped into the atmosphere. These limits vary according to local legislation and tests are carried out by the regulatory authorities. and the directors have asked for your advice on the compilation of their first sustainability report. Accurate measurement of these emissions is not possible but the company is planning to spend Rs. (1) Contrast the information that might be contained in an environmental report with that required in a sustainability report. The current provision for the decommissioning of these installations is Rs. Additionally when the installations are at the end of their life.KC1 | Practice Questions (b) Most of the offshore gas installations are governed by operating licenses. The emissions are down by 51% on 20W8 levels.1. 70 million on research in this area. 215 million. 5 million. The gas escape occurred over the sea and it was considered that there was little threat to human life. (iii) Measurement of emissions to water that removes dissolved oxygen and substances that may have an adverse effect on aquatic life. (4 marks) (2) Recommend disclosures that might be made by Glowball in its sustainability report in relation to each of the key areas of performance and impact. (ii) Measurement of emissions of substances potentially hazardous to human health. The final amount of the fine/costs to be imposed by the courts has not been determined but is expected to be around Rs. (d) The company tries to reduce the environmental impact associated with the siting and construction of its gas installations. The statistics deal with: (i) Measurement of the release of gases with the potential to form acid rain. You are a consultant with Sustainability Matters Co. When the CA Sri Lanka 31 . Network Division The Network Division of Johan operates telephone networks throughout Sri Lanka and other South-East Asian countries. The process to install a new mast and base station is as follows: (1) Johan works with external advisers to identify a general location within a geographical area for a new base station and masts. the Retail Division and the Dealer Division. and is continually striving to develop its network and improve coverage in certain areas through the installation of new masts and base stations. 16 Johan Preseen Johan. The division operates a number of masts and base stations throughout the countries in which it operates. (3) The company then applies for planning permission and negotiates with the owner of that land in order to achieve access or acquire the land.KC1 | Practice Questions PART E: CASE STUDY QUESTIONS Questions 16 to 22 are case study questions. The dealer can return the handset up to the point when a service contract in respect of the handset has been signed by a customer. a public limited company. Retail Division The Retail Division of Johan purchases telephone handsets from a manufacturer and sells them directly to customers together with call credit. Dealer Division The Dealer Division of Johan sells handsets to dealers and invoices the dealers for those handsets. The industry is capital intensive with heavy investment in licences and network infrastructure. operates in the telecommunications industry. Operations of Johan The company is operated through three divisions: the Network Division. (2) After this the company pays third party consultants to identify an exact location within the general area where signal quality and coverage will be optimised. each one covering a variety of syllabus areas. Hash has reported a strong growth in profits since its acquisition by Johan and continues to expand. Johan allows the dealer a commission on the connection of a customer to the network. Cash salaries are competitive and. The management of Johan intend to start using Hash to build new base stations for the Network Division in the future. Hash has a number of commercial building contracts in place and is currently engaged in the construction of an office block in Columbo and a hotel complex on the west coast of Sri Lanka. Staff are also entitled to medical benefits and receive a holiday allowance in excess of the statutory minimum. As extra incentive. 32 CA Sri Lanka . Recently completed projects include a regional airport. The company has expanded its network substantially and this has translated into increased revenue and profits. the customer receives the handset free of charge. Hash Johan purchased the whole of the stated capital of Hash on 1 June 20X6. The handset cannot be sold separately by the dealer. Johan also operates share-option schemes whereby employees are awarded options that vest over a three-year period. This acquisition signaled a diversification of the operations of Johan. The whole of the stated capital of Hash was formerly owned by the five directors of Hash. They also benefit from in-house childcare facilities and a heavily subsidised staff canteen and snack bar.KC1 | Practice Questions customer signs a service contract. Financial statements Johan prepares consolidated financial statements to a reporting date of 31 May in accordance with Sri Lankan Financial Reporting Standards. a length of motorway and a multi-storey car park. as Hash operates in the construction sector. with all divisions reporting strong profits and a healthy financial position. The company has also seen an increase in the number of handsets sold through both its Retail and Dealer Divisions. Employees Johan values its employees highly and its remuneration packages are structured in order to retain and reward excellent staff. bonuses are regularly awarded based on the performance of the individual and the company as a whole. Financial performance Johan's recent performance has been described as 'exceptional' by its directors. The Dealer Division sells handsets (to dealers) for Rs. 150 if they purchase call credit (call card) in advance on what is called a prepaid phone. The internal costs of this study were Rs. The service contract lasts for a 12 month period. and Johan receives monthly revenue from the service contract. 150) deducted from the commission (Rs. The customers using a prepaid phone pay Rs. 150. the five directors of Hash were to receive a total of three million ordinary shares of Johan on 1 June 20X6 (market value Rs. Following the feasibility study. The costs of selling the handset are estimated at Rs. 200 each.000 and the external costs were Rs. Under the terms of the purchase agreement for Hash.000 a month to the government of the region for access to the land upon which the base station will be situated. 150.000 for the study. CA Sri Lanka 33 . including handsets. The third party consultants have charged Rs. The dealers act as agents. 1 per set. 60. 130 by Johan to the dealer. and sells the handsets direct to customers for Rs. Additionally Johan has paid Rs. Call cards expire six months from the date of first sale. Johan proposes to build a base station on the recommended site on which planning permission has been obtained. Johan's Retail Division purchases telephone handsets from a manufacturer for Rs. The design and planning department of Johan identified five possible geographical areas for the extension of its network.000 as a single payment together with Rs. There is an average unused call credit of Rs. 50. Johan chose a geographical area where it was going to install a base station for the telephone network. There is no right of renewal of the contract and legal title to the land remains with the government. 280 on the connection of a customer and the transaction with the dealer is settled net by a payment of Rs.000 during the year to 31 May 20X7. on to customers. being the cost of the handset to the dealer (Rs.000 shares per director on 31 May 20X7. The contract with the government is for a period of 12 years and commenced on 1 May 20X7. Dealers do not sell prepaid phones. if they were still employed by Johan on that date. selling phone packages. 3 per card after six months and the card is activated when sold. A further independent study has been carried out by third party consultants in an attempt to provide a preferred location in the area.KC1 | Practice Questions Unseen Johan's Network Division has carried out a feasibility study during the year to 31 May 20X7 to extend its network. 280). Johan allows the dealer a commission of Rs. 6 million) and a further 5. 21 for each call card at the purchase date. 300. The location of the base station was dependent upon getting planning permission. 100. All of the directors were still employed by Johan at 31 May 20X7. 4 in six months.5 million shares of the company. Hash does not intend to recognise a provision in respect of the accident nor disclose any related contingent liability or a note setting out the nature of the accident and potential claims in its financial statements for the year ended 31 May 20X7. This right has been granted because of the performance of the director during the year and is unconditional at 31 May 20X7. The settlement date is 1 July 20X8 and the company estimates the fair value of the share alternative is Rs. 3. 34 CA Sri Lanka .000 shares at the settlement date. and if the director chooses the share alternative. One of Hash's building contracts was for a regional airport. in order to determine the cause of the accident and to assess the respective responsibilities of the various parties involved. however.50 in three months and Rs. The accident did.3 million shares. The shares issued had a market value of Rs. During the financial year to 31 May 20X7. Investigation into the accident and reconstruction of the section of the airport damaged is still in progress and no legal action has yet been brought in connection with the accident. but these shares were given as a bonus because of the company's exceptional performance over the period. The directors of Hash feel that at present. 2. Johan purchased property. If any compensation is eventually payable to the airport operator. plant and equipment for its fair value of Rs. Luckily the collapse happened in the early hours of the morning and the airport was closed at the time. It is expected that Johan's share price will rise to Rs.KC1 | Practice Questions Johan granted and issued fully paid shares to its own employees on 31 May 20X7. It is estimated that the share price will be Rs. is expected in 20X8. 6 per share over the next three years. one of the directors recently appointed to the board has been granted the right to choose either 50. The expert report that is to be presented to the civil courts. to be issued in six months. Therefore. The directors of Hash feel that the conditions for recognising a provision or disclosing a contingent liability have not been met. plant and equipment either in cash or in shares.50 per share at 31 May 20X7. they must be kept for a period of four years.50 per share) for the year ended 31 May 20X7. The supplier can choose to receive either 1. this is expected to be covered by Hash's insurance policies. a section of an airport collapsed. 3 per share) on 31 May 20X7 and an average fair value of Rs. On 31 May 20X7.5 million (one million ordinary shares at Rs. 3 per share. meaning that no-one was hurt. 4 million. Normally share options issued to employees would vest over a three-year period. there is no requirement to record the impact of the accident in the financial statements. or a cash payment in three months equivalent to the market value of 1. Additionally. at 31 May 20X7. The share price of Johan at 31 May 20X7 is Rs. 2. result in the closure of the airport terminal. 2. The supplier has agreed to accept payment for the property. 3 million (one million ordinary shares at Rs.000 shares of Johan or receive a cash payment equal to the current value of 40. The business gradually grew and was incorporated. The business was established 50 years ago.1. Additional storage facilities are acquired as necessary by way of shortterm leases.1. all of which are owned rather than leased. Parts were priced competitively.2) (Total = 50 marks) 17 Carpart Preseen Carpart is a public limited company based in Sri Lanka and listed on the Columbo Stock Exchange. (18 marks) (6) Evaluate the information provided to identify whether a provision needs to be made in the financial statements of Hash for the year ended 31 May 20X7. plant and equipment.KC1 | Practice Questions Required (1) Analyse the information provided to determine whether the costs of extending the network may be recognized as property. (10 marks) (LO 1. and establishing Carpart joined his hobby with his entrepreneurial spirit. Luis had held an interest in motor vehicles since a young age. 1. Its core business is twofold: • • It is a vehicle part manufacturer. He initially bought and sold spare motor parts. by Luis Karava. (2 marks) (4) Analyse how Johan should recognise revenue on the sale of call cards to customers and revenue on sales to dealers. quality parts. Luis realised that he could improve profitability by manufacturing as well as distributing motor components. After ten years of trading. CA Sri Lanka 35 . (7 marks) (2) Analyse the information provided so as to determine whether the payments to the government may be treated as a finance lease. The company still operates from these properties. and soon the company built up a reputation for providing low cost. acquiring a further five factories over the next 40 years. On the back of this reputation. the company continued to expand. (4 marks) (3) Advise the basis of measurement of the handsets purchased by the Retail Division. and It sells vehicles purchased from the manufacturer to retail customers. Carpart duly acquired its first factory on the outskirts of Columbo. (9 marks) (5) Assess the amounts to be included in Johan's financial statements for the year ended 31 May 20X7 in respect of share-based payments. and critically analyse the amounts to be capitalised.1. The subsidiaries operate in a variety of business areas. now runs the business and is particularly wary of overreliance on a few customers. all of which are held under lease agreements. The Carpart Group Since taking over as the Managing Director of Carpart. This has resulted in the acquisition of investments in several companies and the diversification of the business. exhaust pipes. the biggest are with the following companies: • • • Vehiclex – for the supply of car seats Autoseat – for the supply of car seats Venue – for the supply of exhausts Carpart also supplies goods to a number of mid-size and small customers. When the demonstration vehicles are no longer required. Mikey Karava has pursued an aggressive acquisition strategy. Mikey. The Carpart Group now includes (as well as Carpart itself): four subsidiaries. These allow customers to 'try out' a variety of cars before deciding on an appropriate make and model. Carpart also holds a number of demonstration vehicles from each manufacturer that it represents. The company operates from four showrooms. Vehicle sales Carpart sells vehicles to final customers on two or four year contracts. Carpart moved into vehicle sales 15 years ago. These are areas in which Mikey has a personal interest and that he 36 CA Sri Lanka . These include car seats. Core operations Vehicle parts Carpart makes a number of spare parts that are integral to a motor vehicle. The company has a number of supply contracts in place. which management believes is the result of continually high levels of customer service. an investment in an associate and a number of trade investments. The customer base is broad and there is a high level of repeat business.KC1 | Practice Questions Having forged excellent relationships with a number of car manufacturers over the years. The customer base for these products is made up of a large number of customers. Carpart has agreements with three international car manufacturers to supply their cars to the general public. gearboxes and batteries. The vehicle parts division also distributes vehicle-testing systems for use by car service centres and garages. Luis Karava's son. including health clubs and fashion retail. they are sold at a reduced price. the customer has the right to ask Carpart to repurchase the vehicle for 70% of its original purchase price. There is no intragroup trade due to the disparate nature of the subsidiaries. which will require the construction of machinery for the purpose. If the option is not exercised. CA Sri Lanka 37 . Financial reporting Carpart prepares financial statements in accordance with Sri Lanka Financial Reporting Standards to a reporting date of 30 April. Carpart retains the ownership of the machinery and wishes to recognise part of the revenue from the contract in its current financial statements to cover the cost of the machinery that will be constructed over the next year. This acquisition was made as a result of Luisa's business needing a capital injection and Carpart having funds to invest. It is thought that the buyers will exercise the option. and are held for capital growth. The associate company is run by Mikey's wife. the fair value of the vehicle is expected to be 55% of the original purchase price. The trade investments are in a number of stock exchange listed companies. At the end of two years. Under this option.KC1 | Practice Questions felt would complement the core Carpart activities in terms of generation of profits. then the buyer keeps the vehicle. It operates two health and beauty salons. This price is expected to be significantly less than its fair value. 20. the car is repurchased by Carpart at 20% of its original selling price. Vehicle sales Carpart sells vehicles on a contract for their market price (approximately Rs. The price of each car seat has been agreed so that it includes an amount to cover the cost of constructing the machinery but there is no commitment to a minimum order of seats to guarantee the recovery of the costs of constructing the machinery. The same vehicles are also sold with an option that can be exercised by the buyer two years after sale. The expected life of each vehicle is five years. Unseen Details of Carpart's recent operations are as follows: Contract with Vehiclex The contract will last for five years and Carpart will manufacture seats to a certain specification. The two year and four year deals are mutually exclusive. The car must be maintained and serviced by the customer in accordance with certain guidelines and must be in good condition if Carpart is to repurchase the vehicle. Luisa.000 each) at a mark-up of 25% on cost. After four years. 1 million. (3 marks) (4) Analyse the other sales made by Carport and explain how revenue should be recognised with respect to those sales. (12 marks) (3) Analyse the information given and determine any impairment of the amount outstanding from Venue. The terms are that payment is due one month after the sale of the goods. A sale has been made under these terms and payment of Rs. After this period. Venue Carpart also entered into a contract with Venue to provide exhausts at a value of Rs. Carpart considers that there is a 5% risk that the customer will not pay the amount due after the goods have been delivered and the property transferred.KC1 | Practice Questions The vehicles that Carpart uses for demonstration purposes are normally used for this purpose for an 18-month period. A discount rate of 4% should be used in any calculations. Required (1) Analyse the information given and advise the directors of Carpart how they should account for the contract with Vehiclex. 0. Other sales Carpart has sold a vehicle testing system to a customer and. (7 marks) (2) Analyse the information given so as to determine how revenue should be recognised on the sale of vehicles. 5 million per annum. the vehicles are sold at a reduced price based upon their condition and mileage. At the reporting date. However an inflation adjustment will be made at the conclusion of leasing years 1 and 2. Carpart entered into a short operating lease agreement with Elpres to acquire use of another building. 3 million has been received. Carpart has agreed to defer receipt of the selling price of Rs. because of the current difficulties in the market. Venue had not paid the outstanding amount and Carpart felt that the maximum amount it would receive from the customer would be Rs. On the basis of experience with other customers with similar characteristics. The lease will last for three years and is currently Rs. 2 million until two years after the hardware has been transferred to the customer. Carpart has been offering discounts to customers if products were sold with terms whereby payment was due now but the transfer of the product was made in one year. 38 CA Sri Lanka . (6 marks) Leases On 1 May 20X4.8 million. Currently inflation is 4% per annum. KC1 | Practice Questions The following discount factors are relevant (8%). Single cash flow Year 1 0.926 Year 2 0.857 Year 3 0.794 Year 4 0.735 Year 5 0.681 Annuity 0.926 1.783 2.577 3.312 3.993 Carpart is considering entering into a three-year lease of a machine from Brooke from 1 May 20X5. The machine has a total economic life of 20 years. The fair value of the machine at 1 May 20X5 is Rs. 113,600. The lease payments are Rs. 13,000 per year, and the present value of the lease payments is Rs. 21,700, calculated using the rate Brooke charges Carpart. The directors of Carpart have heard about the proposals for revising the classification of leases but are unsure of the implications of this. Required (5) Analyse the subsequent measurement of the lease with Elpres, explaining how the inflation adjustment should be treated. (3 marks) (6) Explain the impact on the financial statements of ED/2013/6 on Leases on the lease with Brooke. (15 marks) Investments Carpart has several investments, in subsidiaries, associates and other entities. Required (7) Outline the disclosure requirements of SLFRS 12 in relation to such investments. (4 marks) (LO 1.1.1, 1.1.2, 1.1.7, 4.2.1) (Total = 50 marks) 18 Mica Preseen Background Mica Industries Limited (Mica) was set up by Andrew Dias and incorporated over 40 years ago, and has subsequently grown both organically and by acquisition to become a diversified corporation. It has, however, retained its private status and there are no intentions to obtain a listing for the company. Mica is based in Columbo and has operations throughout Sri Lanka. CA Sri Lanka 39 KC1 | Practice Questions Business operations Mica's core business was originally property construction, and it still has a strong presence in this sector. Until recently the company operated only in the commercial property construction sector, constructing office blocks, retail parks and hotels to meet customers' specific requirements. In 20X4 the company appointed a new business strategy consultant in the construction division, and as a result Mica has, during the year ended 31 December 20X4, begun to develop a presence in the residential property construction market. As a natural extension of its commercial property construction operations, and in response to customer demand, Mica began to offer a property maintenance service 25 years ago. This proved particularly popular with hotel chains that were keen to maintain the appearance of their properties in order to attract customers and gain good reviews from tourist boards. The company now offers maintenance service contracts to all of its construction customers when their build is complete, and has also extended this service to new maintenance-only customers. The contracts last for 2-5 years and require Mica to attend a property at the request of the owner in order to perform repairs and maintenance as required. The company has approximately 120 of these contracts in place. In 20W2, having constructed a number of hotels for customers, the Board of Mica took a decision to build a hotel in central Columbo that would be operated by the company itself. A new hospitality division was developed and an experienced hotel manager was employed. Unlike many other hotel operators, the company's focus was on business customers rather than tourists. The hotel proved to be a success, and as a result a further two hotels were built in Kandy and Jaffna and put under the control of the hotel manager. Most recently, within the last 10 years, the Board of Mica has developed an investment property division. This division owns a number of office blocks and retail parks built by the construction division, and rents out individual units to customers under operating leases. As a result, Mica has been able to tap into the small business market. Key personnel and ownership Mica has a main Board with seven executive and three non-executive directors. The CEO of the company is Luca Dias, the son of the founder Andrew Dias. Luca Dias also owns, together with his extended family, a majority of shares in the company. The remainder of the shares are owned by private investors. Other executive Board members are: Max Boetz, the Managing Director; Ama Balanchandran, the Finance Director; Tom Amaratunga, the Operations Director 40 CA Sri Lanka KC1 | Practice Questions (Construction); Hiruni Amour, the Operations Director (Diversified Operations); Ravindu Vaduga, the Sales Director; and Lucy Guardia, the HR Director. Financial reporting Mica prepares its financial statements to a reporting date of 31 December in accordance with Sri Lanka Financial Reporting Standards. It does not prepare interim statements. The company has always prepared some form of commentary on its social and environmental impact within the annual report, and Ama Balanchandran is keen to develop this into a full sustainability report. Capital structure Mica pays a modest dividend, with most profits retained and reinvested in the company. In order to fund diversification and expansion plans, the company has made new issues of shares and obtained bank funding. The company currently has two concurrent bank loans outstanding, each with restrictive covenants attached related to liquidity ratios. Financial health Mica has been facing difficult trading conditions for the past few years and its profits fell in 20X2 and again in 20X3. A slight drop is also expected in the current year, 20X4. This has been attributed in large part to the hospitality division, which experienced lower than expected occupancy rates. The Board of Mica attributed this to two factors: the emergence of new competition, with several new companies focusing solely on the hotel needs of business people; and the structure of Mica's operations, meaning that the focus of the company remained on the core construction and property businesses. Ama Balanchandran believes that these core businesses of Mica will achieve a healthy increase in profits in 20X5. A number of new construction contracts have recently been agreed and it is expected that these, together with projected increased tenancy levels in investment properties, will contribute to improved financial health for the company. Unseen In February 20X4, as a result of continuing poor trading conditions, the hospitality division was closed down and Mica's business restructured so that only its core business relating to building and property activities remained. During the year ended 31 December 20X4 the following occurred: • CA Sri Lanka On 1 January 20X4 Mica entered into a 5-year contract with Matara Properties Limited (Matara) to provide a maintenance service for Matara's portfolio of properties. The fee for the contract was Rs. 1.5m, to be paid in 41 KC1 | Practice Questions full on 31 December 20X7. Ama Balachandran wishes to recognise the whole of this amount in 20X4 as she claims it meets the conditions in LKAS 18. • In 20X4, Mica purchased some land on which it will build some houses to be sold to customers "off-plan." These houses will be sold with freehold title and to a standard design. The following assets had been used by the hospitality division prior to its closure and have been retained by Mica: • Speciality cookery equipment, which had a carrying amount at 31 December 20X4 of Rs. 750,000. This equipment has not been used since the closure of the hospitality division and at 31 December, Mica was undecided as to whether to sell it or to lease it to third parties under operating leases. The fair value less selling costs of the equipment was estimated at Rs. 670,000 and its value in use was estimated at Rs. 710,000. • Vans with a carrying amount at 31 December 20X4 of Rs. 310,000 were retained by Mica on closure of the hospitality division for use in the new maintenance business. The vans were eventually sold at auction in January 20X5 for Rs. 270,000 net of auction costs. • After the closure of the hospitality division, Mica commenced a pre-sale renovation of its headquarters in June 20X4. Asbestos was, however, discovered in August 20X4 and the work to remove the asbestos was not completed until January 20X5. The carrying amount of the property (including renovation and removal of asbestos) as at 31 December was Rs. 6.7m and the property was advertised for sale in February 20X5 at a price of Rs. 8.3m. Selling costs were estimated at 2%. Ama Balachandran has stated that she would like to simplify Mica's reporting and use the Sri Lankan Financial Reporting Standard for Small and Medium Sized Entities (SFRS for SMEs) as soon as possible. However her son, who is an auditor with a Big Four accounting firm, has told him that there are strict criteria that must be applied and that some of Mica's accounting policies may need to change. Mica's imputed rate of interest according to LKAS 18 is 5%. Income tax is 17%. Mica's year-end is 31 December 20X4. Required (1) 42 Analyse the information provided so as to determine how revenue from the maintenance contract should be recognised. Your answer should include calculations of the amounts to be recognised. (15 marks) CA Sri Lanka electricity generation and distribution. Operations include the extraction of natural gas. the situation worsened with the result that Mica was in breach of certain loan covenants at 31 March 20X5.7) (5 marks) (Total = 50 marks) 19 Robby Preseen Background Robby PLC ('Robby') is a quoted public company listed on the Colombo Stock Exchange. 1. During the first quarter of 20X5. Ama Balachandran feels that. Robby and its subsidiaries operate in the energy industry. the manufacture of coal gas. 1.4. such that the directors described it as 'unsatisfactory' in the management report. (LO 1. given the existing information in the financial statements. Required (5) Assess the adequacy of Mica's disclosures about this matter.1.1. 1. The notes to the financial statements indicated that there was 'ample' compliance with all loan covenants as at the date of the financial statements. (11 marks) (4) Advise Ama Balachandran on whether Mica may adopt SLFRS for SMEs and outline the differences between the accounting treatments given in SLFRS for SMEs and full SLFRS in respect of: • Purchased goodwill • Owned properties (currently held at valuation) • Provisions (9 marks) At the date of the financial statements. Mica's liquidity position was quite poor. (10 marks) (3) Assess the appropriate classification and measurement of the assets formerly used by the hospitality business. any further disclosure would be excessive and confusing to users.1. No additional information about the loan covenants was included in the financial statements. and sales of both gas and electricity. with interests in the gas industry and the electrical power industry.KC1 | Practice Questions (2) Assess how revenue should be recognised for the sale of the off-plan properties in accordance with the guidance in IFRIC 15 Agreements for the Construction of Real Estate.2. 31 December 20X4. CA Sri Lanka 43 .1.1. The financial statements were authorised for issue at the end of April 20X5. Mica had been close to breaching the loan covenants in respect of free cash flows and equity ratio requirements at 31 December 20X4. The directors' and auditor's reports both emphasised the considerable risk of not being able to continue as a going concern. Zinc operates in the electricity sector. and is expected to have a useful life of 10 years. On 1 June 20X1. and owns a hydroelectricity plant. The other joint operator (owning 60% of the joint operation) is Fabian PLC ('Fabian'). A deal was agreed with the previous owners in the summer of 20X2. Financial reporting Robby PLC prepares consolidated financial statements to 31 May in accordance with Sri Lanka Financial Reporting Standards. The construction of the station was completed on 1 June 20X2. This acquisition furthered Robby's strategy to pursue renewable and environmentally friendly energy sources. being a natural gas station. It has installed solar panels and wind turbines at 'sun and wind farms' throughout Sri Lanka. 50 million. and therefore unanimous consent is required. The following is an extract of the accounting policies section of Robby's financial statements: 44 CA Sri Lanka . Hail operates in the areas of solar and wind energy. Robby and Fabian have an agreement whereby any decisions about the joint operation require a 75% majority. The contract between the joint operators also states that revenue generated and costs incurred by the joint operation are receivable and payable by Fabian.KC1 | Practice Questions The company is viewed as one of the most successful energy companies listed on the Columbo Stock Exchange and has won a number of awards for best practice in corporate governance. This electricity is then distributed throughout Sri Lanka via the national power grid. which capture energy from sunlight and the wind and convert it into electricity. This minority shareholding was acquired by Robby with the intention that it would be increased in due course to be a majority shareholding if the performance of Zinc met certain defined thresholds. another Sri Lankan energy provider. Development of Robby Group On 1 June 20X0. Any amounts outstanding with Robby are settled after the year end. Robby also has a 40% interest in a joint operation. and a further 55% of Zinc was eventually acquired by Robby on 1 December 20X2. Robby acquired 5% of the ordinary shares of Zinc. Robby acquired 80% of the equity interests of Hail for cash consideration of Rs. The defined performance thresholds were met during 20X2 and the Board of Robby aggressively pursued a further acquisition of shares in Zinc. Such an acquisition would meet Robby's objectives to increase its interests in renewable energy sources and generate power through lowpollution activities. 18 Non-controlling interests Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the Group's equity therein. however it does not intend to implement this intention immediately and instead will wait two to three years in order to understand and benefit from the experiences of other companies adopting integrated reporting.KC1 | Practice Questions 2. 2. and in light of historic bad press about the impact of the energy sector. plant and equipment Land and buildings held for use in the production or supply of goods or services. instead investing spare cash in projects and acquisitions. In line with Robby's strategy to develop renewable and green energy resources. the Board of Robby have in recent years started publishing a sustainability report alongside the financial statements in the annual report.1 Property. available for sale (AFS) financial assets and loans and receivables. Accounting policies 2. held to maturity investments. being the fair value at the date of revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Cash management Robby does not maintain high cash balances. Non-controlling interests consist of the amount of those interests at the date of the original business combination and the non-controlling shareholders' share of changes in equity since the date of the combination. or for administrative purposes. As a result the company occasionally finds itself needing short-term injections of cash. Revaluations are performed with sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair values at the reporting date. are stated in the statement of financial position at their revalued amounts. The Board are keen to develop the annual report to become an integrated report in future years.8 Financial assets Financial assets are classified into the following specified categories: financial assets at fair value through profit or loss (FVTPL). The Treasury department of Robby has adopted a number of strategies to obtain these short-term cash injections in the past. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. The interest of noncontrolling shareholders in the acquiree is initially measured at fair value. 2. including securing bank overdrafts CA Sri Lanka 45 . A dividend received from Hail on 1 January 20X3 of Rs.KC1 | Practice Questions and short-term bridging loans. (a) Robby has treated the investment in Hail as an available for sale financial asset. plant and equipment Investments in subsidiaries: 55 Hail 19 Zinc 9 6 14 Financial assets 6 Joint operation 5 7 12 Current assets 206 73 52 Total assets Equity and liabilities 25 20 10 Stated capital 11 – – Other components of equity 70 27 19 Retained earnings 106 47 29 Total equity 53 20 21 Non-current liabilities: 47 6 2 Current liabilities 206 73 52 Total equity and liabilities The following information is relevant to the preparation of the group financial statements of Robby. 16 million. (b) 46 Robby measured the 5% investment in Zinc at fair value through profit or loss in the financial statements to 31 May 20X2. On 1 June 20X1. the fair value of the identifiable net assets of Hail was Rs. The fair value of the non-controlling interest was Rs. Unseen The following draft statements of financial position relate to Robby. 15 million on 1 June 20X1. as at 31 May 20X3. and making sale and leaseback agreements and sale and repurchase agreements. CA Sri Lanka . all public limited companies. Hail and Zinc. 2 million has similarly been credited to OCI. factoring receivables balances to banks. The excess of the fair value of the net assets is due to an increase in the value of nondepreciable land. Robby Hail Zinc Rs Mn Rs Mn Rs Mn Assets Non-current assets 112 60 26 Property. 60 million and the retained earnings of Hail were Rs. 2 million. At 1 December 20X2. the fair value of the equity interest in Zinc held by Robby before the business combination was Rs. 10 million on 1 June 20X0. 15 million to construct and is to be dismantled at the end of its useful life. revenue and costs are apportioned on the basis of shareholding. 9 million on 1 December 20X2. 16 million was sold for Rs.KC1 | Practice Questions The consideration for the acquisitions was as follows. PPE is to be depreciated on the straightline basis over a remaining period of five years. The present value of this dismantling cost to the joint arrangement at 1 June 20X2. The excess of the fair value of the net assets is due to an increase in the value of property. 20 million. 15 million. liabilities. plant and equipment (PPE). This increase does not affect the fair value of the noncontrolling interest at acquisition. 3 million in the fair value of PPE at the date of acquisition.5 million during the year. (ii) In the year. Additionally. paying Rs. Robby has only contributed and accounted for its share of the construction cost. 0. 5 million. (ii) The natural gas station cost Rs. These valuations were received on 1 March 20X3 and resulted in an additional increase of Rs. 26 million. and the retained earnings were Rs. The fair value of the non-controlling interest in Zinc was Rs. was Rs. Shareholding 1 June 20X0 1 December 20X2 5% 55% 60% Consideration Rs Mn 2 16 18 At 31 May 20X3 the carrying amount of the investment in Zinc in Robby's accounts represents the fair value of the initial 5% shareholding at 31 May 20X2 plus the cost of the additional 55% shareholding. gas with a direct cost of Rs. which was provisional pending receipt of the final valuations. 6 million. the joint arrangement incurred operating costs of Rs. The fair value of the identifiable net assets at 1 December 20X2 of Zinc was Rs. On 47 . (c) The following information relates to the joint arrangement activities with Fabian: (i) Assets. (d) CA Sri Lanka Robby purchased PPE for Rs. using a discount rate of 5%. It has an expected useful life of twenty years and is depreciated on the straight-line method. 6 million in cash. Required 48 (2) Advise when financial assets should be derecognised in accordance with LKAS 39 and apply these rules to the portfolio of trade receivables in Robby's financial statements. This was accounted for in accordance with LKAS 16. Robby's accounting policy is to make a transfer of the excess depreciation arising on the revaluation of PPE. 3. Robby sold land to a third party at a price of Rs. 11 million. 25 million on 31 May 20X3 and the carrying amount was Rs. the entity entered into a factoring agreement with a bank. less interest on this amount.6 million. Robby additionally agreed to other terms with the bank as regards any collection shortfall and repayment of any monies to Robby. (35 marks) In the above scenario (information point (e)). 16 million plus a premium of 3%.6 million. 3. Robby accounted for the sale. Robby has derecognised the receivables and charged Rs. The only accounting entry posted for the year to 31 May 20X3 was to account for the depreciation based on the revalued amount as at 31 May 20X2. will be repaid to Robby. Robby derecognised the receivables. The market value of the land is Rs.KC1 | Practice Questions 31 May 20X2. 7. 12 million. At 31 May 20X3. (f) Immediately prior to the year end. Required (1) Compile a consolidated statement of financial position of the Robby Group at 31 May 20X3 in accordance with Sri Lanka Financial Reporting Standards. (e) Robby held a portfolio of trade receivables with a carrying amount of Rs. any amounts above Rs. 4 million at 31 May 20X3. impairment indicators triggered an impairment review of the PPE. Robby holds a portfolio of trade receivables and enters into a factoring agreement with a bank. whereby it transfers the receivables in exchange for cash. 16 million with an option to purchase the land back on 1 July 20X3 for Rs. 3. (9 marks) (3) Assess the legitimacy of Robby selling land just prior to the year end in order to show a better liquidity position for the group and whether this CA Sri Lanka . consequently eliminating the bank overdraft at 31 May 20X3. The recoverable amount of the PPE was Rs. Once the receivables have been collected. the PPE was revalued to Rs. whereby it transfers the receivables in exchange for Rs. At that date.4 million as a loss to profit or loss. This is an example of the type of complex transaction that can arise out of normal terms of trade.8 million. 0. Robby has agreed to reimburse the factor for any shortfall between the amount collected and Rs. ) (6 marks) (LO 2.1. From its inception the company had a good reputation for treating its workforce well. 2. but it has a significant presence. This was a strategic acquisition allowing Ashanti to move into a growth market.2.1. it is not one of the 'Apparel Giants' of Sri Lanka. a public limited company. Ashanti operates at the mid-tier. Ashanti shares were listed on the Columbo Stock Exchange. just as the Sri Lankan apparel industry began to grow as a result of the country's open economic policy and trade and investment friendly environment. Ashanti and its subsidiaries operate in the textiles and apparel manufacturing industry. Your answer should include reference to the above scenario. The Bhaskaran family developed Ashanti over the next 20 years.1. Bochem acquired 80% of the equity interests of Ceram. As a result the company raised funds which allowed it to expand through acquisition. In its 25th anniversary year. establishing a number of factories throughout the country. Development of Ashanti Group On 1 May 20X3. Ceram is an apparel retailer which Bochem had supplied with goods for many years and the acquisition signalled a diversification of operations for Bochem and the Ashanti Group. it has. so allowing Ashanti a dominant influence over the company. Within this market. After the listing. 5. on 1 May 20X3. 1.1. fair pay.1) (Total = 50 marks) 20 Ashanti Preseen Background Ashanti PLC ('Ashanti') is a quoted public company listed on the Colombo Stock Exchange. The company was established 35 years ago by the Bhaskaran family. another public limited company operating in the textiles and apparel industry. with good working conditions. the Bhaskaran family retained a minority shareholding in Ashanti and continued to manage the company. Ashanti acquired 70% of the equity interests of Bochem. Since the acquisition. whilst also achieving a number of cost-cutting strategies.2.KC1 | Practice Questions transaction is consistent with an accountant's responsibilities to ensure accurate presentation of financial statements in a given set of circumstances. (Note. however become CA Sri Lanka 49 . being children's apparel. This industry employs approximately 15% of Sri Lanka's workforce and accounts for approximately half of the country's exports. medical provision and generous holiday allowances. The remaining 30% of Bochem was owned by a number of disparate investors.1. are stated in the statement of financial position at their revalued amounts. As a revaluation surplus is realised. Loans and receivables are measured at amortised cost using the effective interest method. and the Ashanti Board is considering how best to deal with this issue. Any impairment is recognised immediately in profit or loss. Non-controlling interests are reported separately from the equity of the owners of the parent. Revaluations are performed with sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair values at the reporting date. The interest of non-controlling shareholders in the acquiree is initially measured at fair value in accordance with SLFRS 3. or for administrative purposes.15 Non-controlling interests Non-controlling interests consist of the amount of those interests at the date of the original business combination and the non-controlling shareholders' share of changes in equity since the date of the combination. Financial Reporting Ashanti PLC prepares consolidated financial statements to 30 April in accordance with Sri Lanka Financial Reporting Standards. Interest income is recognised by applying the effective interest rate. 50 CA Sri Lanka .KC1 | Practice Questions apparent that Ceram is not a good strategic fit with the rest of the group. Goodwill is tested for impairment at least annually. Accounting policies 2. 2. Subsequent reversals of impairment losses for goodwill are not recognised. 2. less any impairment. 2. being the fair value at the date of revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses.8 Goodwill Goodwill represents the excess of the cost of an acquisition (including the non-controlling interest) over the fair value of the acquiree's identifiable net assets at the date of acquisition. The following is an extract of the accounting policies section of Ashanti's financial statements: 2.4 Loans and receivables Trade receivables. loans and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as 'loans and receivables'. except for shortterm receivables when the recognition of interest would be immaterial. it is transferred to retained earnings. plant and equipment Land and buildings held for use in the production or supply of goods or services.1 Property. net of tax – Items that will not be reclassified to profit or loss: AFS financial assets Gains (net) on PPE revaluation Actuarial losses on defined benefit plan Other comprehensive income for the year. have led the Board of Ashanti to consider publishing a sustainability report as part of the company's annual report. Sri Lanka is also a signatory to 39 conventions of the International Labour Organisation.KC1 | Practice Questions Social responsibility Ashanti. Unseen The following financial statements relate to Ashanti: ASHANTI GROUP: STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 APRIL 20X5 Ashanti Bochem Ceram Rs Mn Rs Mn Rs Mn 810 235 142 Revenue (686) (137) (84) Cost of sales 124 98 58 Gross profit 31 17 12 Other income (30) (21) (26) Distribution costs (55) (29) (12) Administrative costs (8) (6) (8) Finance costs 62 59 24 Profit before tax (21) (23) (10) Income tax expense 41 36 14 Profit for the year Other comprehensive income for the year. together with the rest of the apparel industry of Sri Lanka. Sri Lanka Apparel. together with Ashanti's generous human resources policies. has invested heavily in achieving a conscientious standpoint in apparel production. Sri Lankan law requires that an employer contributes 3% of an employee's salary to a trust fund which the employer receives after leaving the company. and it outlaws child labour. runs a campaign called Garments without Guilt which it uses to draw attention to its adherence to ethical considerations. The industry's trade association. These factors. net of tax Total comprehensive income CA Sri Lanka 20 12 (14) 18 9 6 – 15 6 – – 6 59 51 20 51 . KC1 | Practice Questions The following information is relevant to the preparation of the group statement of profit or loss and other comprehensive income: (i) The purchase consideration for Bochem comprised cash of Rs. 35 million at the date of disposal. 90 million. Bochem can still exert significant influence. 55 million and Rs. After the disposal. 150 million and the fair value of the identifiable net assets was Rs. The effective annual interest rate is 8% or 4% on a semiannual basis. 20 million five-year bond with semiannual interest of 5% payable on 31 October and 30 April. The remaining equity interest of Ceram held by Bochem was fair valued at Rs. Ceram's identifiable net assets were Rs. The fair value of the non-controlling interest in Bochem was Rs. At 1 May 20X4 the amortised cost of the bond was Rs. Ashanti sells goods at a gross profit margin of 20% to group companies and third parties. Goodwill had reduced in value by 15% at 30 April 20X4 and at 30 April 20X5 had lost a further 5% of its original value before the sale of the equity interest to the NCI. which is depreciated on the straight-line method and has a five year remaining life at the date of acquisition. half of the inventory sold to Bochem remained unsold but the entire inventory sold to Ceram had been sold to third parties. (ii) The purchase consideration for Ceram was cash of Rs. This was classified as 'loans and receivables'. 210 million before any adjustments on consolidation. 85 million respectively and other components of equity were Rs. 21·62 million. 21. On 1 November 20X4. Ceram's profits are deemed to accrue evenly over the year. 5 million respectively. The carrying value of the net assets of Bochem at 30 April 20X5 was Rs. Ashanti purchased a Rs. The purchase price of the bond was Rs. At the year-end. 136 million. 10 million and Rs. The excess of the fair value of the identifiable net assets at acquisition is due to an increase in the value of plant. 115 million and the NCI of Ceram attributable to Ashanti had a fair value of Rs. The bond is held at amortised cost. 54 million on 1 May 20X3. 160 million at that date. Ashanti disposed of a 10% equity interest to the non-controlling interests (NCI) of Bochem on 30 April 20X5 for a cash consideration of Rs. 10 million at the date of acquisition. Goodwill had been impairment tested and no impairment had occurred. 26 million at that date. (iii) Ashanti has sold inventory to both Bochem and Ceram in October 20X4. Bochem disposed of 50% of the equity of Ceram for cash consideration of Rs. The share capital and retained earnings of Bochem were Rs. The issuer of the bond did pay the interest due on 31 October 20X4 and 30 April 20X5. The sale price of the inventory was Rs. Ceram's identifiable net assets were fair valued at Rs.046 million. 45 million. 160 million and the consolidated value of the NCI of Ceram attributable to Bochem was Rs. 34 million. (iv) On 1 May 20X2. but was in 52 CA Sri Lanka . (vi) Ashanti owned a piece of property. On 30 April 20X4. 8 million on 30 April 20X7. It is being depreciated over ten years on the straight-line basis with zero residual value. 8 million. The goods were sold after the announcement was made although the order was placed prior to the announcement. (You should assume the annual compound rate is 8% for discounting the cash flows. (vii) The salaried employees of Ashanti are entitled to 25 days paid leave each year. No adjustment has been made in the financial statements for the above and there was no opening accrual required for holiday entitlement.34 million on 30 April 20X6 and Rs. 8 million against the total receivable balance at the yearend. No accounting entries have been made in the financial statements for the above bond since 30 April 20X4. 13 million and on 30 April 20X5. Ashanti feels that as at 30 April 20X5. It is probable that Ashanti will not recover the amounts outstanding. 2. At 30 April 20X5. There are 255 working days in the year and the total annual salary cost is Rs. It is Ashanti's company policy to make all necessary transfers for excess depreciation following revaluation. Ashanti has 900 salaried employees and the average unused holiday entitlement is three days per employee. 5% of employees leave without taking their entitlement and there is no cash payment when an employee leaves in respect of holiday entitlement.) (v) Ashanti sold Rs. The current interest rate for discounting cash flows as at 30 April 20X5 is 10%. CA Sri Lanka 53 . plant and equipment (PPE) which cost Rs. The whole of the revaluation loss had been posted to other comprehensive income and depreciation has been charged for the year. 5 million relates to this sale. 5 million of goods to a customer who recently made an announcement that it is restructuring its debts with its suppliers including Ashanti. of which Rs. 19 million. the PPE was revalued to Rs. 12 million and was purchased on 1 May 20X3.KC1 | Practice Questions financial trouble at 30 April 20X5. the bond is impaired and that the best estimates of total future cash receipts are Rs. The holiday year is the same as the financial year. Ashanti wishes to make an additional allowance of Rs. (ix) Ignore any taxation effects of the above adjustments and the disclosure requirements of SLFRS 5 Non-current assets held for sale and discontinued operations. (viii) Investments in equity instruments (excluding shares group entities) have been categorised as available for sale financial assets. it was revalued to Rs. The entitlement accrues evenly over the year and unused leave may be carried forward for one year. Petal also 54 CA Sri Lanka . Development of Rose Group Sri Lanka has been mining graphite for 200 years and was a significant graphite producer and exporter at the start of the last century. (7 marks) (LO 2. Lump and chippy dust graphite products are the highest-value graphite products found globally. (35 marks) (2) Outline the factors which provide encouragement to companies such as Ashanti to disclose sustainability information in their financial statements. Rose and its subsidiaries operate in the mining sector.KC1 | Practice Questions Required (1) Compile a consolidated statement of profit or loss and other comprehensive income for the year ended 30 April 20X5 for the Ashanti Group.3. At this stage. whilst retaining interests in gem mining. given the requirement for accountants to ensure that financial statements are accurately presented in a given set of circumstances. Sri Lanka is the only country in the world that produces super-grade lump and chippy dust graphite containing between 95% and 99% pure carbon. a public limited company. and has since continued to grow in the graphite sector. Rose transferred its mining expertise to gem mining. Rose acquired 70% of the equity interests of Petal. This shareholding was increased to 80% on 30 April 20X8. 4.1.1) (Total = 50 marks) 21 Rose Preseen Background Rose PLC ('Rose') is a quoted public company listed on the Colombo Stock Exchange.1. On 1 May 20X7. and prices are considerably higher than those for other products such as flake or amorphous graphite. (8 marks) (3) Discuss the nature of and incentives for 'management of earnings' and whether such a process can be deemed to be ethically acceptable.1. after 20 years. Rose was quick to re-establish itself. The company grew steadily until the graphite sector was nationalised almost 50 years ago.1. When the private sector was allowed back into the graphite industry. Rose was set up almost 100 years ago to take advantage of this available resource. 5. mainly extracting and selling graphite. briefly discussing whether the content of such disclosure should be at the company's discretion. In addition it allowed Rose to access certain advanced mining methods and technologies that Petal had protected by way of patents. the results and financial position of each group company are expressed in Sri Lankan Rupees. The interest of non-controlling shareholders in the acquiree is initially measured at fair value in accordance with SLFRS 3.KC1 | Practice Questions operates in the graphite mining sector. the majority of which are retained and reinvested in the group's operations. Stem pays 40% of its costs and expenses in Sri Lankan Rupees with the remainder being incurred locally and settled in dinars. Stem's management has a considerable degree of authority and autonomy in carrying out the operations of Stem and is not dependent upon group companies for finance. The output of the mine is routinely traded in dinars and its price is determined initially by local supply and demand. Financial highlights The Stem Group has reported healthy profits over recent years. 2. The following is an extract of the accounting policies section of Ashanti's financial statements: 2. For the purposes of the consolidated financial statements. The income of Stem is denominated and settled in dinars.22 Foreign currencies The individual financial statements of each group company are presented in its functional currency. Stem is located in central Africa and operates a gold mine. Accounting policies 2. The acquisition was viewed as a strategic move to offset the possible negative effects of the Sri Lankan graphite mining industry being opened up to newer companies.15 Non-controlling interests Non-controlling interests consist of the amount of those interests at the date of the original business combination and the non-controlling shareholders' share of changes in equity since the date of the combination. Other funding requirements are met by way of loan stock issues and long term bank loans. CA Sri Lanka 55 . and its acquisition allowed operations to be streamlined and cost-cutting strategies to be put in place. Financial reporting Rose PLC prepares consolidated financial statements to 30 April in accordance with Sri Lanka Financial Reporting Standards. Rose acquired 52% of the ordinary shares of Stem on 1 May 20X7. which is the functional currency of the Company and the presentation currency for the consolidated financial statements. Non-controlling interests are reported separately from the equity of the owners of the parent. It is experienced in providing multi-disciplinary technical studies and due diligence for mineral assets including exploration through to development. Petal and Stem are as follows. (a) 56 The purchase consideration paid by Rose for Petal comprised cash of Rs. operation and mine closure. at 30 April 20X8. Rose.KC1 | Practice Questions Future developments Rose is considering acquiring a service company. plant and equipment Investment in subsidiaries 113 – – Petal 46 – – Stem 15 7 50 Financial assets 544 117 430 118 100 330 Current assets 662 217 760 Total assets Equity and liabilities 158 38 200 Stated capital 256 56 300 Retained earnings 7 4 – Other components of equity 421 98 500 Total equity 56 42 160 Non-current liabilities 185 77 100 Current liabilities 241 119 260 Total liabilities 662 217 760 Total equity and liabilities The following information is relevant to the preparation of the group financial statements. the group has concentrated on expanding its mining operations. have previously used the expertise of MineConsult Co. The directors of Rose have stated that the acquisition is under consideration because of the value of the human capital involved and the opportunity for synergies and cross-selling opportunities. The potential acquisition of the company would mark a change in group strategy as. The fair value of the identifiable net assets recognised by Petal CA Sri Lanka . Rose Petal Stem Dinars Mn Rs Mn Rs Mn Assets Non-current assets: 370 110 380 Property. Unseen The draft statements of financial position of Rose. 94 million. MineConsult Co. This company provides professional technical consultancy services to the mining and metals sector throughout the world. and the other companies in the Group. to date. 40 million and a discount rate of 8% is assumed. Under the scheme employees receive a cumulative bonus on the completion of five years of service.KC1 | Practice Questions was Rs. Additionally at 30 April 20X8. 57 . The total salary of employees for the year to 30 April 20X8 was Rs. The bonus is 2% of the total of the annual salary of the employees. Rose paid cash consideration of Rs. There have been no issues of ordinary shares of Stem and no impairment of goodwill in the company since acquisition. 19 million for the further 10% interest in Petal on 30 April 20X8. The retained earnings of Petal were Rs. (d) Rose commenced a long-term bonus scheme for employees at 1 May 20X7. The following exchange rates are relevant to the preparation of the group financial statements. There have been no issues of ordinary shares since acquisition and goodwill on acquisition is not impaired. This had not been recognised in the financial statements of Petal. 120 million excluding the patent below. 1 May 20X7 6 30 April 20X8 5 Average for year to 30 April 20X8 5. Depreciation has been charged for the year but the revaluation has not been taken into account in the preparation of the financial statements as at 30 April 20X8. it is assumed that all employees will receive the bonus and that salaries will rise by 5% per year. The identifiable net assets of Petal at 1 May 20X7 included a patent which had a fair value of Rs. the property was revalued to 35 million dinars. The fair value of the identifiable net assets of Stem on 1 May 20X7 was 495 million dinars. 4 million. 49 million and other components of equity were Rs. The property is depreciated over 20 years on the straight-line method. The fair value of the non-controlling interest in Petal was Rs. The property was acquired on 1 May 20X7 and is carried at a cost of 30 million dinars. 3 million at the date of acquisition. 46 million on 1 May 20X7. Dinars to Rs.8 CA Sri Lanka (c) Rose has a property located in the same country as Stem. The remaining excess of the fair value of the net assets is due to an increase in the value of land. (b) On 1 May 20X7 Stem's retained earnings were 220 million dinars. The patent had a remaining term of four years to run at that date and is not renewable. At 30 April 20X8. The excess of the fair value over the net assets of Stem is due to an increase in the value of land. The fair value of the non-controlling interest in Stem at 1 May 20X7 was 250 million dinars. 1. Required (1) Recommend which currency should be used as the functional currency of Stem. applying the principles set out in LKAS 21 The effects of changes in foreign exchange rates. (3) Evaluate the validity of the accounting treatment for MineConsult Co proposed by Rose's accountant and whether such a proposed treatment raises any ethical issues.1.1) (Total = 50 marks) 22 Warrburt Preseen Warrburt PLC is listed on the Columbo Stock Exchange and. Ignore deferred taxation.KC1 | Practice Questions (e) Rose purchased plant for Rs. 2. 5. (35 marks) Rose's accountant has measured the fair value of the assets of MineConsult Co based on what Rose is prepared to pay for them. The change in the residual value has not been taken into account when preparing the financial statements as at 30 April 20X8.1. MineConsult Co has contract-based customer relationships with well-known domestic and international companies and some mining companies. because Rose already enjoys relationships with the majority of these customers. The directors of Rose have further stated that what the company is willing to pay is influenced by its future plans for the business. 2.4 million. At 1 May 20X7. manufactures and distributes beverages. achieved speedy growth through acquisitions. together with its subsidiaries.1.6 million. 58 CA Sri Lanka . (8 marks) (2) Compile a consolidated statement of financial position of the Rose Group at 30 April 20X8 in accordance with Sri Lanka Financial Reporting Standards (SLFRS).2. the estimated residual value changed to Rs. The company was established over 50 years ago and after an initial period of organic expansion. 20 million on 1 May 20X4 with an estimated useful life of six years. Its estimated residual value at that date was Rs. Rose's accountant has measured the fair value of all of these customer relationships at zero. (7 marks) (LO 1. 1. showing the exchange difference arising on the translation of Stem's net assets. The Group promotes fair employment policies and one of its continuing objectives is to employ an ethnically diverse workforce with males and females represented as equally as possible. which makes canned iced tea drinks that are sold in Sri Lanka and India. Chillz is 85% owned and Elephant Brewery 95% owned. paid sick leave. Sharmini has worked for Warburtt group companies for 15 years. The subsidiaries are: • Fruitz. All employees are rewarded with a generous remuneration package. It currently holds majority shareholdings in four subsidiaries. Employees are encouraged to set personal development objectives and receive training in order that they can achieve promotion aspirations. progressing from assistant financial accountant of Chillz to Group Finance Director. • Elephant Brewery. which makes non-alcoholic bottled fruit cocktails that are sold to bars and restaurants throughout Sri Lanka and marketed at older teenagers. including holiday pay. The minority shareholders in Chillz and Elephant Group are. The 25% shareholding acquired afforded Warburrt significant influence over H200h. which makes fruit smoothie drinks which are distributed to supermarkets and convenience stores throughout Sri Lanka. All Board members have extensive experience in the drinks and beverages sector and are appropriately qualified in their respective fields. which brews and bottles a popular brand of lager and distributes it throughout South East Asia. a chartered accountant. At the start of December 20X7. a private family-run company that adds fruit extracts to mineral water in order to create a high-end flavoured water product. Certain employees are also eligible to join the company's defined benefit pension scheme after an initial period of employment. and an annual bonus. Warburrt acquired a 25% interest in H200h. The accounting team is led by Sharmini Cooper. and • Any14Tea. the families that set the companies up. the CEO. Management and employees` Warburrt is managed by a Board consisting of eight members. Both Fruitz and Any14Tea are 100% owned by Warburrt.KC1 | Practice Questions Group structure The parent company. CA Sri Lanka 59 . in both cases. Warburrt manufactures and distributes milkshake and fruit juice style shrinks. • Chillz. led by James Dashani. it suffered a small loss in the year ended 30 November 20X6. particularly for the Elephant Brewery. based on amounts reported in the statement of financial position at 30 November 20X8 is strong. A further. Despite this.KC1 | Practice Questions Financial performance and position Although the Warburrt Group is well-established and a big player in the beverage market. Warburrt 's cash position is deteriorating. as they have heard about the popularity of unusual beers in Europe and Australia. although the Board feel that the export market should be explored further. These factors have particularly affected Fruitz and Elephant Brewery and as a result goodwill in both companies has become impaired in the year ended 30 November 20X8. its liquidity position. Future strategy The strategy of the Warburrt Group remains focused on growth by acquisition.3:1 compared to a current ratio at 30 November 20X7 of 3.0. with a current ratio of 3. 47 million. Management has attributed the losses to a number of factors. the reported operating loss was Rs. Related to the continued losses. above all the need to cut selling prices aggressively due to competitor activities and the increase in raw materials costs as the result of a series of poor fruit and wheat harvests. 60 CA Sri Lanka . increased loss was reported in the following year and in the year ended 30 November 20X8. 415 198 163 323 684 1.112 595 454 4 16 1.066 46 1. plant and equipment Goodwill Other intangible assets Investment in associate Financial assets Current assets Inventories Trade receivables Cash and cash equivalents Total assets Equity and liabilities Equity attributable to owners of the parent: to last million Stated capital Retained earnings Revaluation surplus Other components of equity Non-controlling interest Total equity Non-current liabilities Long-term borrowing Deferred tax Long-term provisions Total non-current liabilities Current liabilities: Trade payables Current tax payable Short-term provisions Total current liabilities Total liabilities Total equity and liabilities CA Sri Lanka 30 Nov 20X7 Rs Mn 350 80 228 100 142 900 360 100 240 – 150 850 135 92 288 515 1.534 61 .KC1 | Practice Questions Unseen The following draft group financial statements relate to Warrburt: WARRBURT GROUP: STATEMENT OF FINANCIAL POSITION AS AT 30 NOVEMBER 20X8 30 Nov 20X8 Rs Mn Assets Non-current assets Property.534 650 371 6 39 1.069 53 1.122 20 28 100 148 64 26 96 186 115 35 5 155 303 1.415 180 42 4 226 412 1. KC1 | Practice Questions WARRBURT GROUP: STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 NOVEMBER 20X8 Revenue Cost of sales Gross profit Other income Distribution costs Administrative expenses Finance costs Share of profit of associate Loss before tax Income tax expense Loss for the year from continuing operations Loss for the year Other comprehensive income for the year (after tax) Investment in AFS financial assets Gains on property revaluation Remeasurement losses on defined benefit plan Other comprehensive income for the year (after tax) Total comprehensive income for the year Loss attributable to: Owners of the parent Non-controlling interest Total comprehensive income attributable to: Owners of the parent Non-controlling interest 62 Rs Mn 910 (886) 24 7 (40) (35) (9) 6 (47) (29) (76) (76) 27 2 (4) 25 (51) (74) (2) (76) (49) (2) (51) CA Sri Lanka . The remaining Rs 38 Mn related to an investment in the shares of Alburt.X8 Rs Mn 595 55 Rs Mn 454 Rs Mn 16 Rs Mn 4 (9) 650 (74) 23 2 371 39 6 Rs Mn 1. The following schedule summarises the changes: Alburt Other Total Rs Mn Rs Mn Rs Mn 38 112 150 Carrying amount at 1 December 20X7 7 30 37 Add gain on derecognition/reval'n (45) – (45) Less sales at fair value – 142 142 Carrying amount at 30 November 20X8 Deferred tax of Rs. with the fair value gain shown in 'other income' in the financial statements. At 1 December 20X7. which has been designated as fair value through profit or loss. the investment in Alburt was sold for Rs 45 Mn.112 NOTE TO STATEMENT OF CHANGES IN EQUITY: Profit/loss attributable to owners of parent Remeasurement losses on defined benefit plan Total comprehensive income for year – retained earnings Rs Mn (74) (4) (78) The following information relates to the financial statements of Warrburt. Rs 112 Mn of this Rs 150 Mn are classified as available for sale financial assets.069 55 Rs Mn 53 (9) (5) (14) (49) (2) (51) 1.122 55 1.KC1 | Practice Questions WARRBURT GROUP: STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 NOVEMBER 20X8 Stated Retained Other Reval'n Total NCI Total capital earnings comp of surplus equity equity b/f Share capital issued Dividends Total comprehensive income for the year Balance at 30. During the year.11.066 46 Rs Mn 1. 3 million arising on the Rs 30 Mn revaluation gain above has been taken into account in other comprehensive income for the year. (i) Warrburt holds financial assets that are owned by the parent company. the total carrying amount of those investments was Rs 150 Mn. CA Sri Lanka 63 . which was valued at Rs. There is no tax impact with regards to the retirement benefit liability. (iii) The property. in accordance with LKAS 19. 3 million. 63 million. 64 CA Sri Lanka . The remaining additions of PPE comprised imported plant and equipment from an overseas supplier on 30 June 20X8. The machines were acquired directly by the insurance company and no cash payment was made to Warrburt. The benefits paid in the period by the trustees of the scheme were Rs. The outstanding amount is included within the trade payables balance in the statement of financial position. 1 million had been destroyed by fire in the year. The asset was replaced by the insurance company with new plant and machinery. The company included the net gain on this transaction in 'additions at cost' and as a deduction from administrative expenses. 3 million. Deferred tax of Rs. The cost of the PPE was 380 million dinars with 280 million dinars being paid on 31 October 20X8 and the balance to be paid on 31 December 20X8.. The gain on disposal is included in administrative expenses. The disposal proceeds were Rs.KC1 | Practice Questions (ii) The retirement benefit liability is shown as a long-term provision in the statement of financial position and comprises the following: Rs Mn 96 Net defined benefit liability at 1 December 20X7 10 Expense for period (10) Contributions to scheme (paid) 4 Remeasurement losses 100 Net defined benefit liability at 30 November 20X8 Warrburt recognises remeasurement gains and losses in other comprehensive income in the period in which they occur. 2 million has been deducted in arriving at the 'gains on property revaluation' figure in other comprehensive income. plant and equipment (PPE) in the statement of financial position comprises the following: Rs Mn 360 Carrying amount at 1 December 20X7 78 Additions at cost 4 Gains on property revaluation (56) Disposals (36) Depreciation 350 Carrying amount at 30 November 20X8 Plant and machinery with a carrying amount of Rs. 20 million and other intangible assets by Rs.1. using the indirect method. They have suggested that the proceeds of the sale of property. (35 marks) (2) Outline the key issues which the statement of cash flows highlights regarding the cash flow of the company. does not occur. 1 5 4. 12 million. (v) An impairment test had been carried out at 30 November 20X8 on goodwill and other intangible assets. 24 million and paid a dividend of Rs. 300 million. (5 marks) (LO 2. plant and equipment and the sale of investments in equity instruments should be included in 'cash generated from operations'. 3. 5.9 4.2.KC1 | Practice Questions The rates of exchange were as follows: 30 June 20X8 31 October 20X8 30 November 20X8 Dinars to Rs. The result showed that goodwill was impaired by Rs.1. H200h made a profit after tax of Rs. (10 marks) (3) Assess the ethical responsibility of Sharmini Cooper in ensuring that manipulation of the statement of cash flows. They feel that the adjustments for the proceeds would enhance the 'cash health' of the business. (vi) The short term provisions relate to finance costs which are payable within six months. such as that suggested by the directors. (iv) The interest in H200h was acquired for cash on 1 December 20X7.1. The directors are afraid of an adverse market reaction to their results and aware of the importance of meeting targets in order to ensure job security.1) CA Sri Lanka (Total = 50 marks) 65 .8 Exchange gains and losses are included in administrative expenses. Required (1) Compile a group statement of cash flows for Warrburt for the year ended 30 November 20X8 in accordance with LKAS 7 Statement of cash flows. The net assets of H200h at the date of acquisition were Rs. 8 million out of these profits in the year ended 30 November 20X8. Warrburt's CEO and Managing Director are concerned about the results for the year in the statement of profit or loss and other comprehensive income and the subsequent effect on the statement of cash flows.1. KC1 | Practice Questions 66 CA Sri Lanka . . KC1 | Corporate Financial Reporting 68 CA Sri Lanka . 300 344 (330) 58 275 (107) 4.) Defined benefit obligation at 31 Dec 20X9 CA Sri Lanka 4.540 69 .115 – 4.KC1 | Answers to Practice Questions PART A: INTERPRETATION AND APPLICATION OF SRI LANKA ACCOUNTING STANDARDS Questions 1 to 6 cover Interpretation and Application of Sri Lanka Accounting Standards. 1 Accounting queries (1) Penn Statement of financial position (extract) at 31 December 20X9 Non-current liabilities Net defined benefit liability(4. Fig.540) Statement of comprehensive income (extract) for the year ended 31 December 20X9 Charged to profit or loss Current service cost Net interest on net defined benefit liability (344 – 288) Curtailment cost Other comprehensive income Actuarial gain on obligation Return on plan assets (excluding amounts in net interest) Disclosure Note – Employee benefits Reconciliation of pension plan movement Plan deficit at 1 Jan 20X9 (3.540) Rs'000 425 Rs'000 275 56 58 389 107 7 Rs'000 (700) 550 (389) 114 (425) Rs'000 Changes in the present value of the defined benefit obligation Defined benefit obligation at 1 Jan 20X9 Interest cost (4.115 – 4.300) Company contributions Profit or loss total Other comprehensive income total (107 + 7) Plan deficit at 31 Dec 20X9 (4.300  8%) Pensions paid Curtailment Current service cost Remeasurement gain through OCI (bal.600 – 4. since Sion will no longer have an obligation to the employees within the part of the business sold.000 31 December 20X8 c/f The improvement in the plan during 20X8 leads to an increase in the defined benefit obligation.200 Interest at 8% 2.726 274 Re-measurement losses through OCI 46.KC1 | Answers to Practice Questions Changes in the fair value of plan assets Fair value of plan assets at 1 Jan 20X9 Contributions Pensions paid Interest on plan assets (3.115 Sion Co Calculation of net defined benefit liability Changes in the present value of the defined benefit obligation Rs'000 40. 1 January 20X9 b/f Interest at 9% Current service cost Settlement Benefits paid Re-measurement losses 31 December 20X9 c/f 46.600 550 (330) 288 7 4.800 The transfer of the pension liability to the buyer constitutes a settlement and. the defined obligation is reduced. fig.600  8%) Remeasurement gain through OCI (295 – 288) Fair value of plan assets at 31 Dec 20X9 (bal.200) 39.400) (2.140 2.974) Benefits paid 45.000 Past service cost (1.400 40.860 (11.400 1.) (2) Rs'000 3.000 1 January 20X8 b/f 3. 70 CA Sri Lanka .000 4.500 Current service cost 2. The overall gain on settlement is calculated as: Present value of obligation settled Fair value of plan assets transferred on settlement Cash transferred on settlement Gain Rs'000 11.000 43.000 3.800) (400) 200 The pension fund will be presented in the financial statements as follows: Financial statements extracts STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20X8 Rs'000 Net defined benefit liability: (46.000)/(40.KC1 | Answers to Practice Questions Changes in the fair value of plan assets 1 January 20X8 b/f Interest at 8% Benefits paid Contributions paid in Remeasurement losses 31 December 20X8 c/f 1 January 20X9 b/f Interest at 9% Settlement Benefits paid Contributions paid in Re-measurement losses 31 December 20X9 c/f Rs'000 40.226 (226) 43.974) 2.870 (10.070 (390) 35.680 As Rs 10.8 Mn of plan assets are withdrawn from Sion’s plan and transferred to the purchaser.120 71 .800) (2.800 – 35.400 (10.000 CA Sri Lanka 20X9 Rs'000 5.200) 2. this reduces the value of the plan assets.200 36.000 – 43.680) 3.200 (1.000 3.000 43. and (c) The hybrid instrument is not measured at fair value with changes recognised in profit or loss (in which case there is no benefit to separating the embedded derivative). it is not quoted in an active market and Bed Investment Co does not intend to sell the investment in the short term. 72 CA Sri Lanka .140 – 3. so the economic characteristics and risks are different and condition (a) is met. To assess condition (c). LKAS 39 requires that an embedded derivative be separated from its host contract and accounted for separately if: (a) The economic characteristics and risks of the embedded derivative are not closely related to those of the host contract.500 2.000 – Gain on settlement – (200) Net interest: (3. the value of the derivative is dependent on exchange rate movements. and (b) A separate instrument with the same terms as the embedded derivative would meet the definition of a derivative. The deposit is a non-derivative financial asset with fixed or determinable payments. the deposit fits the “loans and receivables” classification. There is also an embedded derivative. contingent upon the movement of the Ruritanian Kroner. we must consider the classification of the host instrument. in the form of the possible receipt of further cash.200 – 3.KC1 | Answers to Practice Questions STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20X8 20X9 Rs'000 Rs'000 Profit or loss Current service cost 2. ie the deposit with EM Bank.200)/(4. assuming that it has not been designated as available-or-sale.860 Past service cost 2. ie the exchange rate.400 +390) (3) 500 1. In this case. Therefore.790 Classification of financial instruments Bed's investment is a financial asset. in that there could be a separate instrument with the same terms. This meets the definition of a derivative in that it derives its value from the price or rate of an underlying item.870) – 270 Other comprehensive income Re-measurement loss on defined pension plan: (274 + 226)/(1. since it carries a contractual right to receive cash from Em Bank. Condition (b) is also met. and is measured at amortised cost. 7 73 .7 Provision Provision: on initial recognition (20  20%  0.KC1 | Answers to Practice Questions As the deposit is not measured at fair value through profit or loss.0 PPE Cost of model areas Plus provision (20  20%  CA Sri Lanka 1 (= 0. The subsequent unwinding of the discount on the provision is recognised in profit or loss. At 31 May 20X6. As the name suggests.9) 15. plant and equipment is the relevant standard here. the embedded derivative should be separated out and accounted for separately.5%  8/12) Provision at 31 May 20X6 3. LKAS 16 states that the initial cost of an asset should include the initial estimate of the costs of dismantling and removing the item and restoring the site where the entity has an obligation to do so. The company should recognise the costs of setting up the model areas as tangible non-current assets and should depreciate the costs over their useful lives.7 million (cost of Rs.6  5. 3. A present obligation appears to exist. The model areas are held for use in the supply of goods and are used in more than one accounting period. In theory the company could measure the model areas at fair value if the revaluation model of LKAS 16 were adopted.6 million (W) less accumulated depreciation of Rs. 23. The provision should be discounted to its present value. as defined by LKAS 37 Provisions. contingent liabilities and contingent assets and therefore the entity should also recognise a provision for that amount.9 million (W)) and a provision of Rs.6 Cost on initial recognition Less accumulated depreciation (23. 15.7 million (W). Subsequent measurement should be based on cost. and this amount initially recognised as both part of the cost of the asset and a separate provision. 2 Prochain Model areas LKAS 16 Property. Working Rs Mn 20.898) Plus unwinding of discount (3.0552 3.1 3. but it would be difficult to measure fair value reliably in this case.6  8/24) Carrying amount at 31 May 20X6 23.6 0. it is measured at fair value and changes in value are recognised in profit or loss for the year. 7. It is classified as a financial asset at fair value through profit or loss.898) 1. the entity should recognise a non-current asset of Rs.6 (7. Under SLFRS 3. rather than subsumed within the measurement of goodwill. any changes in the contingent consideration as a result of changes in expectations of the targets being met are recognised in profit or loss (rather than as an adjustment to goodwill).0552 = Rs. Prochain should also recognise a corresponding financial liability for the deferred and contingent consideration as this meets the definition of a financial liability in LKAS 32 Financial Instruments: Presentation. as the profit forecast targets are unlikely to be met. 10m  1/1. the 'Badex' brand should be recognised as a separate intangible asset measured at Rs. an entity cannot demonstrate that any expenditure incurred will generate probable future 74 CA Sri Lanka . 100 million cash paid on the acquisition date. which are accounted for in accordance with LKAS 32. the fair value would be significantly less than Rs. these criteria appear to have been met as the brand could be sold separately from the entity. 8. any associated transaction costs are expensed to profit or loss unless they are the costs of issuing debt or equity. the asset must be separable or it must arise from contractual or legal rights. 15 million but as the percentage chance of the targets being met and other relevant information is not given. Development of own brand LKAS 38 Intangible assets divides a project such as this into a research phase and a development phase. it is not possible to establish a fair value. The Rs. SLFRS 3. The Rs. 25 million payable on 31 May 20X7 (two years after acquisition) is split into the Rs. Therefore. For an intangible to be identifiable. This is because Prochain has a contractual obligation to deliver cash on 31 May 20X7 providing the conditions of the contingent consideration are met. At this stage. 10 million deferred consideration which is discounted to its present value by two years (Rs.KC1 | Answers to Practice Questions Purchase of Badex SLFRS 3 Business Combinations states that the consideration transferred in a business combination must be measured at fair value at the acquisition date. 15 million. A further issue concerns the valuation and treatment of the 'Badex' brand name. requires the intangible assets of an acquiree to be recognised in a business combination if they meet the identifiability criteria in LKAS 38. Here. however. 1 June 20X5 is recognised as purchase consideration. The contingent consideration is measured at its acquisition-date fair value. The research phase of a project involves investigation to gain new scientific or technical knowledge and understanding.98m) and the contingent consideration of Rs. At the year end 31 May 20X6. Here. LKAS 38 Intangible Assets prohibits the recognition of internally generated brands and therefore the brand will not be recognised in Badex's individual statement of financial position prior to the acquisition. 20m in the consolidated statement of financial position. 11 million as an intangible asset. financial and other resources to complete the development and to use or sell it (f) Its ability to reliably measure the expenditure attributable to the asset. CA Sri Lanka 75 . subsequent development costs must be capitalised. Therefore the expenditure on the ‘Pro’ project should be treated as follows: Recognised in statement of financial position Intangible Property. plant and equipment. Development expenditure is the application of research findings to a plan or design for the production of new or improved materials. Development costs are capitalised when an entity demonstrates all the following. Directly attributable costs do not include selling or administrative costs.KC1 | Answers to Practice Questions economic benefits. products and processes prior to the start of commercial production. costs incurred prior to the criteria being met cannot be capitalised retrospectively. (a) The technical feasibility of completing the project (b) Its intention to complete the asset and use or sell it (c) Its ability to use or sell the asset (d) That the asset will generate probable future economic benefits (e) The availability of adequate technical. Once these criteria are met. plant Expense (P/L) Assets and equipment Rs Mn Rs Mn Rs Mn 3 Research 4 Prototype design 2 Employee costs 5 Development work 3 Upgrading machinery 2 Market research 1 Training 6 11 3 Prochain should recognise Rs. Capitalised development costs should comprise all directly attributable costs necessary to create the asset and to make it capable of operating in the manner intended by management. Therefore expenditure on research must be recognised as an expense when it occurs. The cost of upgrading existing machinery can be recognised as property. or training costs or market research. The financial statements would not present fairly the financial performance of the company. LKAS 40 Investment property specifically states that property occupied by employees is not investment property. Where the recognition criteria in SLFRS are different from those in tax law. the amount of the temporary difference between the carrying value and the tax base also changes. Although the rent is below the market rate the difference between the actual rent and the market rate is simply income foregone (or an opportunity cost). Therefore they cannot be classified as investment property. Panel prepares its opening SLFRS statement of financial position sheet at 76 CA Sri Lanka . LKAS 12 requires a company to make full provision for the tax effects of temporary differences. The apartments are property. This is the case regardless of whether rent is paid at a market rate or not. income from interest receivable is recognised in the financial statements in one accounting period but it is only taxable when it is actually received in the following accounting period. the carrying amount of an asset or liability in the financial statements is different from the amount at which it is stated for tax purposes (its 'tax base'). These differences are known as 'temporary differences'. measured using the cost or revaluation model and depreciated over their useful lives. For example.KC1 | Answers to Practice Questions Apartments The apartments are leased to persons who are under contract to the company. plant and equipment. Where a change in an accounting standard results in a change to the carrying value of an asset or liability in the financial statements. Therefore the amount of the deferred tax liability is affected. Therefore the company cannot recognise the difference as an employee benefit cost. The practical effect of these differences is that a transaction or event occurs in a different accounting period from its tax consequences. In order to recognise the difference as an employee benefit cost it would also be necessary to gross up rental income to the market rate. 3 Panel (1) The impact of changes in accounting standards LKAS 12 Income taxes is based on the idea that all changes in assets and liabilities have unavoidable tax consequences. (2) Calculation of deferred tax on first time adoption of SLFRS SLFRS 1 First time adoption of International Financial Reporting Standards requires a company to prepare an opening SLFRS statement of financial position and to apply LKAS 12 to temporary differences between the carrying amounts of assets and liabilities and their tax bases at that date. 2. 2. Therefore the deferred tax asset of Rs. deferred tax is recognised in profit or loss.4 million is no longer required.4 million (30%  8). and (ii) The related obligation to pay lease rentals (initially measured at the same amount as the asset and subsequently increased by interest accruing and decreased by lease payments. The related tax deduction does not arise until the share options are exercised. 13.8 million (30%  Rs. The carrying values of its assets and liabilities are measured in accordance with SLFRS 1 and other applicable SLFRSs in force at 31 October 20X5. Any adjustments to the deferred tax liability under previous GAAP are recognised directly in equity (retained earnings). Because the remuneration expense of $20m ($40. At 31 October 20X5 there is no longer a deferred tax asset because the options have been exercised. (3) (i) Share options Under SLFRS 2 Share based payment the company recognises an expense for the employee services received in return for the share options granted over the vesting period. Therefore a deferred tax asset arises. At 31 October 20X4 the tax benefit is as follows: Carrying amount of share based payment Less: tax base of share based payment (16 ÷ 2) Temporary difference Rs Mn – (8) (8) The deferred tax asset is Rs. 46 million).KC1 | Answers to Practice Questions 1 November 20X3. (ii) Leased plant An asset leased under a finance lease is recognised for accounting purposes as: CA Sri Lanka (i) An asset owned by the company (initially recognised at the lower of fair value or the present value of minimum lease payments and subsequently depreciated). The tax benefit receivable is Rs. The deferred tax provision is based on tax rates that have been enacted or substantially enacted by the end of the reporting period. This is recognised at 31 October 20X4 provided that taxable profit is available against which it can be utilised. based on the difference between the intrinsic value of the options and their carrying amount (normally zero)./2) is greater than the tax deduction ($8m). 77 . 00 Liability at inception of lease 0. 9 million. The tax base of the goods for Panel is Rs.: Rs Mn Rs Mn Carrying amount in financial statements: Asset: 12 Net present value of future lease payments at inception of lease (2. • The net tax base of the lease arrangement is therefore zero.96 Interest (8%  12) (3.. which is zero in this case.000 (30%  360. • The tax base of a liability is its carrying amount less any future tax deductible amounts. This is equal to the goods’ carrying amount and therefore no deferred tax arises in Panel’s separate financial statements 78 CA Sri Lanka .000) arises.36) 0.00 (0. 9 million in its individual financial statements. (iii) Intra-group sale Panel will recognise the goods at cost of Rs. Therefore at 31 October 20X5 a net temporary difference is calculated as: Carrying amount Less tax base Temporary difference (0. In this case the carrying amount of the liability is $9.00) Lease rental (9.96) (0. being the amount deductible for tax purposes in the future (the cost to Panel). Therefore a deferred tax asset of Rs.36) This is a deductible temporary difference as the tax base is greater than the carrying amount.36) For tax purposes: • The tax base of an asset is the amount deductible for tax in future.96 million and the full amount of this is tax deductible in the future. as capital allowances are not given on leased assets.KC1 | Answers to Practice Questions The carrying amount of the lease for accounting purposes is therefore the net of these two balances. giving a tax base of zero.60 Less finance lease liability 12. 108.4) Less depreciation (12 ÷ 5) 9. Therefore the tax base remains Rs.0 Carrying amount at 31 October 20X5 (1) (0. but is not allowable for tax. plant and equipment affects the deferred tax position. 2 million) is recognised in the consolidated financial statements.KC1 | Answers to Practice Questions From an accounting point of view. Therefore the carrying amount of the goods is Rs.0 7. the separate financial statements of Pins and Panel are consolidated and the unrealised profit of Rs.8) Impairment loss – 5.000. plant and equipment is different from its carrying amount and there is a temporary difference. plant and Goodwill equipment Total Rs Mn Rs Mn Rs Mn 1 6. CA Sri Lanka 79 . As a result a deductible temporary difference of Rs.8) (1.8 0.000 (30%  Rs. Under LKAS 36 Impairment of assets the impairment loss is allocated first to goodwill and then to other assets: Property. Pins and Panel remain two separate entities and each is taxed separately on its reported results.2 LKAS 12 states that no deferred tax should be recognised on goodwill and therefore only the impairment loss relating to the property.6 0. 600.24 Therefore the impairment loss reduces deferred the tax liability by Rs. 7 million. 2 million is eliminated. (iv) Impairment loss The impairment loss in the financial statements of Nails reduces the carrying amount of property.2 5.2 Temporary difference Tax liability (30%) 0. however. 7 million in the consolidated financial statements. plant and equipment. 2 million arises and an associated deferred tax asset of Rs. For tax purposes. Therefore the tax base of the property.36 Difference Rs Mn 0.2 Carrying amount (4) (4) Tax base 2 1. 240. The effect of the impairment loss is as follows: Before After impairment impairment Rs Mn Rs Mn 6 5. and  The impact on the estimated future cash flows of the asset can be reliably estimated. or a default in interest or principal payments. Expected credit losses are measured in a way that reflects:  An unbiased and probability weighted amount that is determined by evaluating a range of possible outcomes. an entity should assess whether there is any objective evidence that a financial asset or group of assets measured at amortised cost is impaired. Indications of impairment include significant financial difficulty of the issuer. The SLFRS 9 approach differs from this in that an ‘expected loss’ model is applied.KC1 | Answers to Practice Questions 4 Ambush (1) Impairment of financial assets LKAS 39 states that at each reporting date. Only losses relating to past events can be recognised. This model whereby losses relating to past events only are recognised is referred to as the ‘incurred loss’ model. lifetime expected credit losses. and  Reasonable and supportable information that is available without undue cost or effort at the reporting date about past events. expected credit losses are accounted for from the date when financial instruments are first recognised. Where there is objective evidence of impairment. Under both approaches. the probability that the borrower will enter bankruptcy. discounted at the financial instrument's original effective interest rate. where credit risk has increased significantly since initial recognition. Two conditions must be met before an impairment loss is recognised:  There is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset. Under this approach. 80 CA Sri Lanka . for financial assets carried at amortised cost the impairment loss is the difference between the asset's carrying amount and its recoverable amount. which is recognised immediately in profit or loss. current conditions and forecasts of future economic conditions.  The time value of money. The asset's recoverable amount is the present value of estimated future cash flows. Entities must recognise 12 month expected credit losses or. the entity should determine the amount of any impairment loss. This method. This is only acceptable if it produces an estimate sufficiently close to that produced by the LKAS 39 method.730) and this is recognised immediately in profit or loss. CA Sri Lanka 81 . The impairment loss is the difference between the carrying amount of the loan at 30 November 20X5 and the present value of the estimated future cash flows.082).730 (100. may not seem appropriate for short-term trade receivables with no stated interest rate. 85. This is Rs. (3) Trade receivables LKAS 39 classifies trade receivables as loans and receivables. The carrying amount of the trade receivable must be compared with the present value of the estimated future cash flows.KC1 | Answers to Practice Questions For assets at fair value. It is not acceptable to use a formula based on possible trends. For other assets. but this is not normally required for trade receivables unless the balance is not due for an extended period such that the effect of discounting is material. in order to assess. (2) Loan to Bromwich The financial difficulties and reorganisation of Bromwich are objective evidence of impairment. discounted at the original effective interest rate of 8%. which spreads the interest income over the life of the financial asset. 114. The general allowance of two percent is not permitted under LKAS 39. LKAS 39 requires an annual impairment test. changes in fair value are automatically recognised immediately in profit or loss or other comprehensive income.000  1/1. 100.000 – 85. whether the receivable is impaired. It is therefore normally the case that such receivables continue to be measured at the original invoiced amount. the carrying amount at 30 November 20X5 is Rs. as they do not normally bring in any interest income. Therefore the impairment loss is Rs. however.270 (200. As with other financial assets. because it is not based on past experience and is unlikely to be an accurate estimate of the cash flows that will be received. LKAS 39 requires that loans and receivables are initially measured at fair value (normally being the invoiced amount) and subsequently measured at amortised cost using the effective interest rate method. The present value of estimated future cash flows is Rs. 200. at each reporting date. As the stated and effective interest rate for the loan are both 8%.000. the cash flows would be discounted at the effective interest rate.000 (on 30 November 20X7). General allowance Ambush has calculated a general allowance using a formulaic approach. Milk Where.5 *Rs 4. an allowance for impairment must be made. plant and equipment. Milk has a similar credit risk to 'other receivables' and so will be grouped in with those. to the extent that it reverses the previously recognised loss. Tray Milk and other receivables Balance Rs Mn 4 7 11 Cash to be Received Rs Mn 3. Allowance for impairment This is calculated as follows. LKAS 36 Impairment of assets restricts the reversal of an impairment loss recognised in profit or loss by stating that it must not result in the asset having a carrying amount that exceeds the carrying amount at that date as if no impairment had taken place. Thereafter it is recognised in other comprehensive income.000 on the allowance account).05 Ambush should reduce trade receivables by Rs 11 Mn – Rs 10. An exception to this rule is where an increase reverses a revaluation decrease (an impairment) of the same asset and this was previously recognised in profit or loss. In this case the increase is recognised in profit or loss. 500. subject to the LKAS 36 Impairment of assets restrictions.5 Mn = Rs.6 10.1 Mn  1/1. (4) Buildings Under LKAS 16 Property. and so discounting should be used to calculate any impairment. as in the case of Milk. there is no objective evidence of impairment.000 (or recognise a balance of Rs. the individual asset is included in a group of assets with a similar credit risk. However. the payment will be in a year's time. 82 CA Sri Lanka .9* 6. an increase in the carrying amount of an asset measured using the revaluation model is recognised in other comprehensive income (items that will not be reclassified to profit or loss) and accumulated in equity under the heading of revaluation surplus. 500. Tray is expected to pay the full amount owed plus a penalty.KC1 | Answers to Practice Questions Tray Where it is probable that payment will not be received in full for an individually significant balance. and the group as a whole is assessed for impairment. These requirements are applied to the buildings of Ambush as follows: Y/e 30.42 Reversal of impairment charged to profit or loss (Note 2) 2.5) (0.X4 Y/e 30.00 Cost/valuation (0. 500.KC1 | Answers to Practice Questions If an asset's carrying amount is decreased as a result of a downwards revaluation (impairment).11. 83 .0 8. In this case the decrease is recognised in other comprehensive income to the extent of any credit balance existing in the revaluation surplus in respect of that asset.42) Depreciation (Note 1) 9.00 Gain on revaluation to revaluation surplus 8.X5 Rs Mn Rs Mn 10.42 million (Rs. An exception to this rule arises where the revaluation decrease reverses a revaluation increase previously recognised as other comprehensive income.5) – Impairment charged to profit or loss – 1.000 depreciation) had no loss arisen in 20X4. 420.5 7. LKAS 36 Impairment of Assets restricts the reversal that is recognised in profit or loss to the amount required to restore the asset’s carrying amount to that which would be recognised if no impairment loss had occurred. The decrease recognised in other comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus.053 rounded to Rs.0 11.5 million – Rs. However. the remainder is recognised as a revaluation gain in other comprehensive income. Therefore only Rs. 9 million (Rs.00 Carrying amount Notes CA Sri Lanka 1 Depreciation charged in the year to 30 November 20X5 is based on the carrying amount at 30 November 20X4 spread over the remaining life of 19 years: Rs 8 Mn  19 = Rs. 9.11. Here the carrying amount of the buildings at 30 November 20X5 would be Rs. as described above. 2 The gain on revaluation in 20X5 is recognised in profit or loss to the extent that it reverses the revaluation loss (impairment) charged in 20X4.58 million) of the gain in fair value is recognised as a reversal of the previous loss. 1. 7. 421.000. 9 million – Rs.58 (1. the decrease is recognised in profit or loss. and therefore disclosure of the transactions is required. Compensation includes subsidised goods and benefits in kind. • The issue is whether this is a related party transaction requiring disclosure. 45. although LKAS 24 does not address the issue of materiality. regardless of whether a price is charged. and because Mr Satay has considerable personal wealth. accounting standards do not apply to immaterial transactions and therefore if the sale of goods and the car are deemed immaterial. • It is. but we must consider whether the transaction is material. Mr Satay is a related party of the company. they are unlikely to be material to him either. • In this case a price is charged. • LKAS 1 states that omissions or misstatements are material if they could individually or collectively influence the economic decisions that users make on the basis of the financial statements.000) worth of goods from the company and a car for Rs. no disclosure is required. Disclosure should include the amount of the transactions and any outstanding balances. • Mr Satay has purchased Rs. 600. Therefore the sale of goods and the car do qualify as related party transactions. Therefore as a member of Engina’s key management personnel. LKAS 24 requires disclosure of compensation paid to directors. CA Sri Lanka . however. which is just over half its market value. services or obligations between a reporting entity and a related party.000 (12  Rs. As such he is likely to have authority and responsibility for planning. Materiality depends on the size or nature of an item or a combination of both. directing and controlling the activities of Engina. • In addition.000.KC1 | Answers to Practice Questions 5 Engina (1) 84 Sale of goods to the director • Mr Satay is a director of Engina. • A related party transaction is a transfer of resources. 50. normally the case that a transaction with a director (other than remuneration) is material by nature. • The size of the transactions means that they are not material to the company. clear whether Mr Soy’s brother is related party or not.1 Mn. Therefore Mr Satay has indirect control of Engina 85 .3 Mn – Rs 0. • LKAS 24 defines close family members as those who may influence or be influenced by the key personnel in their dealings with the entity. The recoverable amount is the higher of fair value less costs of disposal (Rs 4. The value of the hotel has become impaired due to the fall in property prices. • LKAS 24 requires disclosure of 'information about the transaction and outstanding balances necessary for an understanding of the potential effect of the relationship upon the financial statements'. This would highlight the nature of the transactions within the existing property market conditions. so the carrying amount needs to be adjusted in accordance with LKAS 36 Impairment of assets. • The question of impairment also needs to be considered. • LKAS 24 states that close family members of key management personnel are related parties of an entity. and it is this amount that must be disclosed. It is not. which owns 100% of Engina. and so the answer depends on whether Mr Soy’s brother qualifies as a close family member. however. • Therefore Mr Soy’s brother is a related party and the hotel property sold to the Managing Director's brother should be treated as a related party transaction. • Whether an individual is under the influence of his brother depends on their relationship in individual circumstances. • The sale of the property was for Rs.1 Mn) and value in use (Rs 3. Mr Soy is a member of the key management personnel of Engina and so qualifies as a related party. It says that this includes children and dependants and spouse. Therefore the hotel should be measured at Rs 4. Group structure • CA Sri Lanka In addition to his role as Finance Director of Engina.6 Mn).2 Mn = Rs 4.KC1 | Answers to Practice Questions Hotel property • As Managing Director. but does not limit the definition to these people. 4 million. Mr Satay controls Wheel. In this case the fact that Mr Soy’s brother was given a substantial discount on the property purchase would appear to suggest that he can influence Mr Soy. The hotel should be measured at the lower of carrying amount (Rs 5 Mn) and the recoverable amount. 000. prices. Dividend payment • This payment is covered by IFRIC 17 Distribution of non-cash assets to owners. • Engina's transactions with Car Ltd must also be disclosed. 6 Masham (1) Fair value of assets Farm machinery The farm machinery is classified as held for sale and therefore it must be measured at the lower of carrying amount or fair value less costs to sell. Mr Satay is disclosed as the ultimate controlling party. being Rs. and the two companies are under the common control of Mr Satay. if the transfer had been to Mr Satay. Therefore in Engina’s financial statements. • Engina must also disclose any transactions during the year with related parties. However. or selling. 70. LKAS 24 states that companies under common control are related parties. • LKAS 24 requires disclosure of the related party relationship between a parent and its subsidiary. In establishing the fair value of an asset. In this case Exhaust does not control Wheel and so there is no common control.. it is 86 CA Sri Lanka . • IFRIC 17 states that the dividend payment should be recorded at the fair value of the asset transferred.KC1 | Answers to Practice Questions (2) • LKAS 24 requires disclosure of an entity’s 'ultimate controlling party'. and any outstanding balances at the period end and provisions thereon. • Therefore sales to Wheel Ltd must be disclosed. • The difference of Rs. • IFRIC 17 does not apply where the asset being transferred is controlled by the same parties before and after the transfer.000 between the fair value and the carrying amount of the asset is recognised in profit and loss and disclosed. 520. Therefore Engina must disclose that Wheel is its parent company. Exhaust Limited is the sole Class B shareholder in Wheel Limited and therefore it applies in this case. SLFRS 13 requires that the fair value of an asset is established by reference to exit. • IFRIC 17 applies only where all shareholders of the same class of equity instruments are treated equally. it would fall outside the scope of IFRIC 17 since Mr Satay controls Wheel. legally permissible and financial feasible.780 Thailand Rs. It is also clear that transport costs are not transaction costs and therefore they do form part of the calculation of fair value. This is greater than the carrying amount of Rs. This is the market with the greatest volume and level of activity for the asset. The fair value of the machine is therefore equal to the selling price of the asset less transport costs in the most advantageous market ie Thailand.240.800 – 18. Land SLFRS 13 requires that measurement of the fair value of non-financial assets is based on the highest and best use of the asset. SLFRS 5 requires measurement of an asset held for sale at the lower of carrying amount and fair value less costs to sell. Therefore the fair value of the machine is Rs. Therefore neither is the principal market. CA Sri Lanka 87 . they are costs to sell and therefore the machine has a fair value less costs to sell of Rs. We must.660).240 and an impairment loss of Rs.760 must be recognised in profit or loss in the year ended 31 December 20X3.240 SLFRS 13 is clear that transaction costs do not form part of the calculation of fair value.000 and therefore the machine must be written down to Rs.300) 210. consider the impact of the neighbour’s right of way and the restriction on use.660) 215. 219. 244.680 (4. 215. Therefore fair value is established by reference to the most advantageous market.KC1 | Answers to Practice Questions assumed that the asset will be sold in its principal market.800 (3.600) (29. The most advantageous market is that which maximises the amount that would be received to sell the asset after taking into account transaction costs and transport costs. 220. The most advantageous market is therefore Thailand: Selling price Transaction costs Transport costs Net receipt India Rs. It is made clear that neither India nor Thailand exceeds the other in terms of sales volume of similar machines. Although the transaction costs do not form part of fair value. The highest and best use takes into account the use of the asset that is physically possible.900) (18. 4. 215. although they are used in order to establish the most advantageous market. It would initially seem that the highest and best use of the land is for commercial development as this results in a higher market value. however.140 (237. 237. 5 million carrying amount of goodwill is parent goodwill only.000 16. The revised carrying amount of each department is therefore as follows: CGU1 CGU 2 CGU 3 Rs'000 Rs'000 Rs'000 PPE 30.000 51.870 Having established carrying amount.100 870 51:70:29 Notional goodwill 20/80  5. Recoverable amount is the higher of fair value less costs of disposal and value in use. the shared or ‘corporate’ assets are allocated to the cash-generating units to which they relate ‘on a reasonable and consistent basis’.000 1.000 Brand Rs 4. 88 CA Sri Lanka .530 2.780 72.000 29. the Rs. the issue of the goodwill in CGU 1 must be addressed. The fair value of the land must therefore take this into account.000 46.5million brand carrying amount to CGU 2 on the basis of its carrying amount seeming low otherwise.000 Goodwill 5. recoverable amount is determined.100 29. the land may not be used for anything other than agricultural purposes and as such its fair value is lower.250 Carrying amount 53. In addition. it would be permissible to develop the land for commercial purposes and therefore its fair value at 31 December 20X3 would be based on this use. 4. Goodwill within the recoverable amount will include all goodwill relevant to the department and therefore the carrying amount of goodwill is notionally increased for the non-controlling interest. A common way to allocate corporate assets is based on the carrying amount of the net assets in each department. In order to determine carrying amounts.000 Net current assets 16.000 13. If the restriction on the use of the land is specific to Masham and would not pass to a purchaser.000 24.000 70. It is therefore not appropriate to allocate the Rs. If the restriction on the use of land is transferred with title.5 Mn split 1.KC1 | Answers to Practice Questions The legal right of way is related to the land and as such the neighbour continues to have this right even if the land is passed on to a purchaser. (2) Food processing plants – impairment test The first step in establishing whether an impairment loss has arisen is to determine the carrying amount of each CGU. As there is a non-controlling interest and it is measured as a proportion of net assets. LKAS 36 requires that the impairment loss is allocated firstly to goodwill.53/31.810 CGU 3 Rs'000 33.502) Goodwill – actual 5. 8.000) Brand (1.9 Mn = Rs.402 16. The recoverable amount of CGU 1 is less than its carrying amount and therefore it is impaired. Theses excluded costs comprise termination benefits.000) Goodwill – notional 1.000 + 16.KC1 | Answers to Practice Questions In the case of fair value less costs of disposal.880) Post impairment Rs'000 27. The remaining Rs 2. The impairment loss is Rs 53.900 79.000 89 . Note that the standard scopes out current assets such as inventories and receivables. Therefore the impairment loss is allocated as follows: Pre impairment Impairment Rs'000 Rs'000 PPE (2.63  30/31.372 53.500 Where carrying amount exceeds recoverable amount. an impairment loss is recognised in profit or loss.500 Recoverable amount (higher) 44.100 + 870) Net current assets (16.050 33.78 Mn – Rs 44.000 (5.000 0 53.900 79.25 Mn is allocated to actual and notional goodwill.63 Mn is allocated on a pro rata basis to the other assets of the CGU that are within the scope of the standard.498 4.498 0 0 1. and restructuring and reorganisation expenses.63  1.88 million.53) 1. plant and equipment (27.000) CA Sri Lanka Rs'000 89.000 (2.402+ 2. Therefore the recoverable amount of each unit is as follows: CGU 1 CGU 2 Rs'000 Rs'000 Fair value – costs of disposal 44.950 79.250) Brand (2. The recoverable amount of CGUs 2 and 3 exceed their carrying amount and therefore they are not impaired.780 (8.53) 30. meaning that Rs 6.810 Value in use 43.498 + 46.000 + 13.500 33. LKAS 36 is clear that certain costs do not constitute costs of disposal.900 Amounts reported in Masham’s financial statements for the year ended 31 December 20X3 are therefore as follows: Statement of financial position Property.000 + 24.000 44.250 (1.530 (128) Net current assets 16. It is however relevant that.KC1 | Answers to Practice Questions Statement of profit or loss Impairment loss (8. plant and equipment within the scope of LKAS 16.630 Biological assets A biological asset is defined as a living plant or animal and therefore both tea bushes and dairy cattle are classified as biological assets. with effect from 1 January 2016.880 – 1. LKAS 41 is amended to identify certain types of biological asset as bearer plants. unless Masham chooses to adopt the LKAS 41 amendment early). Therefore tea bushes are bearer plant biological assets. dairy cattle are not. 90 CA Sri Lanka . Changes in fair value are recognised as part of profit or loss for the year. they are not recognised directly in equity. As regards the dairy cattle (and the tea bushes for the time being. bearer plants are scoped out of LKAS 41 and will instead be accounted for as property. LKAS 41 requires that they are measured at fair value less costs to sell at initial recognition and at each reporting date. and • Have a remote likelihood of being sold as agricultural produce other than incidental scrap sales. These are living plants that: • Are used in the production or supply of agricultural produce • Are expected to bear produce for more than one period. because from 1 January 2016.250 re notional goodwill) (3) Rs'000 7. This distinction is important. 0 10.1 49. 7 Glove GLOVE GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MAY 20X7 Rs Mn Non-current assets Property.1 4.9 362.0 458.0 47.1 114.0 458.7 150.1 91 .2 28.0 10.1 150.KC1 | Answers to Practice Questions PART B: PREPARATION AND PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS Questions 7 to 11 cover the Preparation and Presentation of Consolidated Financial Statements. plant and equipment Goodwill Other intangibles: trade name Investments in equity instruments Current assets: Total assets Equity and liabilities Equity attributable to owners of parent Ordinary shares Other reserves Retained earnings Equity reserve Non-controlling interests Non-current liabilities Current liabilities: Total equity and liabilities CA Sri Lanka 320.0 344.6 333.0 30.9 1.0 96. 16 (4.6 135 25 10 170 315 70 38 423 NCI (10) 13 Non-current liabilities Current liabilities 1 (6) 17.1) 457.16 49 (0.24 28.1 (1.16 10 65 395 29 79 20 46 60 30 10 114 520 6 8 5 (60) St capital Other res Equity reserve Ret’d earnings 150 30 40 5 20 8 210 43 60 30 Rs Mn Rs Mn (W5) (W6) (W7) Rs Mn Rs Mn Rs Mn Consolidated Rs Mn 2 319 10.8) (6) (0..16 4 – – 10 114 457.96 (0.16 Retained earnings Other reserves Rs 10 Mn Rs 4 Mn Retained earnings Other reserves Rs 6 Mn Rs 8 Mn Fit Effective interest: 80% × 70% .16 (1) (24) (40) (4) Rs Mn (20) (8) (6) (0.94 332.6 (0. Non-controlling interest 92 % 56 44 100 CA Sri Lanka .2) 150 30.1) 1.2) 45 2 3 50 35 7 5 47 47 80 9 8 97 96 395 79 46 520 Group structure Glove 1 June 20X5 80% Body 1 June 20X5 70% 0.76) 4.KC1 | Answers to Practice Questions Workings GLOVE GROUP – CONSOLIDATION SCHEDULE AS AT 31 MAY 20X7 Glove Body Fit Total (W2(i)) (W2(ii)) (W3(i)) (W3 (ii)) (W4) Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn PPE Goodwill Intangibles Inv in B Inv in F Inv in eq inst C assets 260 20 26 306 5 2.7 1.5) 2 149..92 361. 16 20 6 8 5 24 17. Therefore an intangible asset is recognised on acquisition of Body (at 1 June 20X5).16 10. (i) The standing journal to recognise goodwill in Body is therefore (Rs Mn): DEBIT DEBIT DEBIT DEBIT DEBIT DEBIT CREDIT CREDIT Goodwill Stated capital Retained earnings Other reserves PPE Intangible assets Investment in B NCI 8 40 10 4 6 5 60 13 To recognise the acquisition of Body.KC1 | Answers to Practice Questions 2 Goodwill Glove in Body Rs Mn Rs Mn Consideration transferred Non-controlling interests Fair value of net assets at acq'n: Stated capital Retained earnings Other reserves Fair value uplift – land Trade name (W6) (65 × 20%) 60 13 Body in Fit Rs Mn Rs Mn (30 × 80%) (39 × 44%) 24.16 Note: The trade name is an internally generated intangible asset. CA Sri Lanka 93 .00 17.16 20 6 8 5 – 40 10 4 6 5 (65) 8 (39. While these are not normally recognised under LKAS 38 Intangible assets.16 To recognise the acquisition of Fit.00) 2. This will reduce the value of goodwill. (ii) The standing journal to recognise goodwill in Fit is therefore (Rs Mn): DEBIT DEBIT DEBIT DEBIT DEBIT CREDIT CREDIT Goodwill Stated capital Retained earnings Other reserves PPE Investment in F NCI 2. SLFRS 3 Business combinations allows recognition if the fair value can be measured reliably. 76 (i) These amounts are allocated to the NCI by (Rs Mn): DEBIT DEBIT CREDIT Retained earnings ( 3 + 1.76 0. Therefore (Rs Mn) DEBIT DEBIT CREDIT Retained earnings (80%) NCI (20%) Intangibles 0.1) CA Sri Lanka . The amortisation expense is allocated between the group and NCI interests in Body. (ii) The carrying amount of the NCI is adjusted for its share of Body’s investment in Fit (Rs Mn): DEBIT CREDIT NCI (30 × 20%) Investment in F 6 6 To eliminate the NCI in Body’s share of the cost of the investment in Fit.KC1 | Answers to Practice Questions 3 Allocation of post-acquisition profits and reserves to the NCI Body Fit Retained Other Retained Other earnings reserves earnings reserves Rs Mn Rs Mn Rs Mn Rs Mn At reporting date 25 5 10 8 At acquisition (10) (4) (6) (8) Post-acquisition 15 1 4 NCI % (20% / 44%) 3 0.96 To allocate the NCI its share of retained earnings and reserves since acquisition. 1 million.76) Other reserves NCI 4. 4 Amortisation of intangible assets The intangible assets recognised at acquisition are amortised over 10 years therefore at the reporting date cumulative amortisation is Rs 5 Mn  2/10 years = Rs.8 0.2 1 To recognise amortisation of the intangible asset.9 (0. 5 Defined benefit pension scheme The amount to be recognised is as follows Loss on remeasurement through OCI on defined benefit obligation Gain on remeasurement through OCI on plan assets 94 Rs Mn (1.20 4.0) 0.2 1. 1.276 (1.667 1 1.08 2 1. the loan stock must be split into a liability and an equity component: Rs Mn Rs Mn 30 Proceeds: 30.08 3 1.1 Mn Rs 0.083 Present value of interest annuity Rs 30 Mn × 6% = Rs.429 (28.1 Mn To account for the remeasurement of the net defined benefit liability 6 Convertible loan stock Under LKAS 32.930 Balance b/f at 1 June 20X6 Effective interest at 8% Coupon interest paid at 6% Balance c/f at 31 May 20X7 The accounting entries that have been made in respect of the loan stock are (Rs Mn): DEBIT CREDIT And DEBIT CREDIT CA Sri Lanka Cash Non-current liability Finance cost (retained earnings) Cash 30 30 1. 1.454 2.8 95 .5 Mn Balance of liability at 31 May 20X7 Rs'000 28.546 Liability component ∴ Equity component Rounded to Rs 1.KC1 | Answers to Practice Questions Therefore (Rs Mn): DEBIT Other reserves CREDIT Net defined benefit liability Rs 0.454) 1.800) 28.800.000  1 1.8 1.08   23.000 × Rs.815 1.000 Present value of principal in three years' time 1 Rs 30 Mn × 1.543 1 1. 15 310.8 0.00 533. rather than the carrying amount of the asset given up. and to retained earnings. Rs.X8 Rs'000 Non-current assets Property.KC1 | Answers to Practice Questions The accounting entries should have been (Rs Mn): DEBIT CREDIT CREDIT And DEBIT CREDIT CREDIT Cash Non-current liability Equity reserve Finance cost Cash Non-current liability 30 28.343.3 1.010.15 1. An adjustment must be made to the value of the plant.5 Therefore a correction journal is (Rs Mn): DEBIT DEBIT CREDIT CREDIT 7 Finance cost (retained earnings) Non-current liability Non-current liability Equity reserve 0.12.00 133.15 333.15 CA Sri Lanka .00 1.5 1.15 500.343.033. plant and equipment Investment in Shane Current assets Equity attributable to owners of the parent Stated capital Retained reserves Current liabilities 96 200.5 1.6 Exchange of assets The plant should be measured at initial recognition at its fair value. Fair value of plant 6 (4) Carrying amount of land 2 ∴ Adjustment required (Rs Mn) PPE 2 DEBIT Retained earnings 2 CREDIT 8 Angel ANGEL GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31.00 1.4 1.15 1.6 2.6 0. 00) Income tax expense 148.12.40 159.60 1.80 148.45 146.15 97 .X8 Rs'000 110.40 Profit before tax (44.10 Share of profit of associate 192.00 Profit before interest and tax 80.40 159.40 Profit for the year 13.75 2.30 Profit on disposal of shares in subsidiary 2.05 14.70 162.75 533.45 ANGEL GROUP CONSOLIDATED RECONCILIATION OF MOVEMENT IN RETAINED RESERVES Balance at 31 December 20X7 (W7) Total comprehensive income for the year Balance at 31 December 20X8 CA Sri Lanka Rs'000 373.KC1 | Answers to Practice Questions ANGEL GROUP CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31.05 162.00 Other comprehensive income (not reclassified to P/L) net of tax Share of other comprehensive income of associate Other comprehensive income for the year Total comprehensive income for the year Profit attributable to: Owners of the parent Non-controlling interests Total comprehensive income attributable to: Owners of the parents Non-controlling interests 1. 15 900 310 1.15 133.210 1.15 Current 890 120 1.15 310 1.033.15 Consolidation schedule for Angel – statement of profit or loss and other comprehensive income for the year ended 31 December 20X8 98 CA Sri Lanka .15 in Shane/Ass 320 333.KC1 | Answers to Practice Questions Workings Consolidation schedule for Angel – statement of financial position at 31 December 20X8 Angel (W2) (W3(i)) (W6) Consolidated Rs'000 Rs'000 Rs'000 Rs'000 Rs'000 PPE 200 200 Investment 120 (60) 70 3.210 1.343.010 assets 1.15 Stated capital Retained reserves Current liabilities 500 400 60 70 3.343.15 500 533. 2 1.3 2.KC1 | Answers to Practice Questions Angel Rs'000 100 PBIT Profit on disposal Share of profit of Shane Tax Profit for year (W2) Rs'000 (W3 (ii)) Rs'000 60 20.1 146.8 1.X8 30.8 6.45 60 20.1 OCI net of tax Share of OCI of associate TCI (40) 60 (4) 6 (44) 66 10 3 13 70 9 79 60 4.12.7 70 2.75 2.3 3.3 2.6 1.8 60 20.3 (W6) Consolidated Rs'000 Rs'000 110 80.4 13 1.05 162.3 2.15 159.3 76.1 (44) 148.X8 SOCI Subsidiary – 6/12 Associate – 6/12 Group gain on disposal CA Sri Lanka Equity account in SOFP 99 .05 Profit attributable to: Owners of Angel NCI TCI attributable to: Owners of Angel NCI 1 Shane Total (6/12) Rs'000 Rs'000 10 110 1.7 Timeline 1.1.X8 31.7 2.6.2 64. 0 181.KC1 | Answers to Practice Questions 2 Parent gain on disposal The disposal has not been recognised in Angel’s accounts. 100 CA Sri Lanka .3 Group gain on disposal Group share of S’s profits from acquisition to disposal date 81 Disposal date (90 – (18  6/12)) (10) Acquisition date 49.0 130.300 on the disposal. The parent and group gains on the disposal of the 35% holding are reconciled as follows: Rs'000 Rs'000 10.7) 80.000 on the revaluation of the retained holding from cost of Rs.000 to fair value of Rs. 130.000 (ii) A gain of Rs. 3 Group gain on disposal The group gain on disposal is calculated as follows: Rs'000 Fair value of consideration received Fair value of 35% investment retained Less share of carrying amount when control lost Net assets 190 – (18 × 6/12) Goodwill (W4) Less non-controlling interests (W5) Rs'000 120. we have already recognised the group gain on disposal together with 70% of the profits made by Shane for the period that it was a subsidiary of Angel. Note that the gain on disposal is accumulated in retained earnings in the statement of financial position. 10.3 This incorporates two elements: (i) A gain of Rs.4 (72.7) (169. This is achieved by (RS'000): DEBIT Cash 120 CREDIT Investment (120/2) 60 CREDIT Gain on disposal 60 To recognise the disposal in Angel’s accounts.7  70% Parent gain on disposal 60 Therefore by recognising the parent’s gain (see working 2). 60. 70.0 61. 0) 61.050. These are recognised by (Rs’000): DEBIT CREDIT CREDIT Investment in associate Share of profits of associate Share of OCI of associate 4.3 72. 1.KC1 | Answers to Practice Questions (i) Adjustment must.000 gain on the revaluation of the retained 35% (Rs’000): DEBIT CREDIT Investment in associate Retained earnings 70 70 To recognise the fair value uplift to the retained holding. the journal is to achieve the correct presentation only.3-60) Profit on disposal (SPLOCI) 20. 4 Goodwill – Shane Rs'000 Consideration transferred Non-controlling interests (FV) Less: Stated capital Retained reserves Rs'000 120.3 20.4 100 10 (110. 2.4 5 Non-controlling interests at date of disposal Rs'000 Non-controlling interest at acquisition (FV) NCI share of post-acqn retained earnings (30%  71(W4)) 6 Rs'000 51. however. The group share of OCI is 35%  6/12m  Rs. CA Sri Lanka 101 .100. (ii) In addition for reporting purposes.000) ie Rs.15 1.0 51. be made for the Rs70.05 To recognise group share of the associate’s profits since the disposal date.7 Investment in associate The group share of the profits in the associate since 30 June 20X8 are 35% of (6/12m  Rs.000 = Rs.3 To ensure that the group gain is reported in profit or loss. 12. 6. The credit entries accumulate in retained reserves in the statement of financial position. Note that this journal cancels out within retained earnings.4 21. the group gain on disposal rather than the parent gain must be reported in the consolidated statement of profit or loss (Rs’000): DEBIT CREDIT Retained earnings (80.20 3. 2 355.6 77 (250) (190) 5.0 43.5 CA Sri Lanka .5 256.9 4.4 373. ret'd reserves (62  70%) 9 Angel Rs'000 330.4 Shane Rs'000 72 (10) 62 Ejoy EJOY: CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MAY 20X6 Rs Mn Continuing operations Revenue Cost of sales Gross profit Other income Distribution costs Administrative expenses Finance income Finance costs Profit before tax Income tax expense Profit for period from continuing operations Discontinued operations Profit for the year from discontinued operations Profit for the year Other comprehensive income for the year (not reclassified to P/L): Gain on property revaluation net of tax: Total comprehensive income for the year Profit attributable to: Owners of the parent Non-controlling interest Total comprehensive income for the year attributable to: Owners of the parent Non-controlling interest 102 4.5 94 355.3 8.6 261.5 347.8 (133.4) 965.KC1 | Answers to Practice Questions 7 Retained reserves b/f .0 330.5 13 261.034.proof Per Q Less: Pre-acquisition retained reserves Shane – Share of post-acq.9) 474.000 (3.5 (226) 248. 8 (1.4 370 (2) (2) (3) (3) (33.4) 2.7) 1.000 103 .9 (8.034.7 0.8) 0.5 (34.5 (42.300) (W5(i)) (W5(ii)) (W6(i)) (W6(ii)) (W6(iii)) (W6(iv)) Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn (W7) Consolidated Rs Mn 300 (34.8 6 12.3 8.7) 1.7 0.9 4.4) 0.5 (1.400 (400) (300) (3.6 (3) 77 1.6 Ejoy 72 = 60% (owned for six months) 120 Tbay Tbay is a discontinued operation (SLFRS 5).5 10 (226) 248.2 Group structure 160 = 80% 200 256.6 8.KC1 | Answers to Practice Questions Workings Consolidation schedule for Ejoy – statement of profit or loss and other comprehensive income for the year ended 31 May 20X6 Ejoy Revenue Zbay Tbay (6m) Rs Mn Rs Mn Rs Mn 2.5 290 27.2 (33.9) 474.2 9 326.2) 1.5 15 (2) 13 290 34 15 339 261. CA Sri Lanka Rs Mn 4.4) (3.5 80 10 4 94 94 370 44 19 433 355.5 (1.4) 0.2 11.7) (133.8 35.4) Zbay 347.2 2.9 (8.500 1.200) COS Total (W2) (W3) (W4) Rs Mn Rs Mn Rs Mn Rs Mn 4.6 16.500 400 (1.4 416.8) 0.1 (50) (40) (10) (100) 490 60 25 575 (200) (26) (10) (236) 290 34 15 339 10 2.4) Gross profit 700 300 100 1.8 7.100 Other income Distribution costs Admin expenses Finance income Finance costs PBT 70 10 - 80 (130) (120) (35) (285) 35 (250) (100) (90) (30) (220) 30 (190) Tax Profit – continuing operations Profit – discontinued operations Profit for yr OCI net of tax TCI Profit to: Owners of ejoy (80%/60%) NCI (20%/40%) TIC to: Owners of Ejoy (80%/60%) NCI (20%/40%) 1 965.800) (1.5 5.7 0.2 6.5 (34. 6. we are given the fair value of the whole of Tbay and therefore must ensure that costs to sell and carrying amount (including goodwill) also represent 100% of Tbay.X5 31.5.3) 335. Fair value less costs to sell Fair value Costs to sell 100/60% x 5 104 Rs Mn 344 (8.12. When comparing these amounts. it is measured in accordance with SLFRS 5 at the lower of fair value less costs to sell and carrying amount.7 CA Sri Lanka .X6 Ejoy Zbay Tbay 2 Tbay Tbay has been classified as a discontinued operation and therefore its profits must be presented as a single line item in the statement of profit or loss (Rs Mn): DEBIT Revenue 400 CREDIT Cost of sales CREDIT Distribution costs 35 CREDIT Administrative expenses 30 CREDIT Finance costs 10 CREDIT Tax 10 CREDIT Profit from discontinued operations 15 300 To reclassify items of Tbay’s income and expenses as profits of discontinued operations.KC1 | Answers to Practice Questions Timeline 1. care must be taken to ensure that like is being compared with like.X5 1. 3 Re-measurement of Tbay As Tbay is a disposal group. 3 Mn) CREDIT Assets of disposal group (SOFP) 2 2 To recognise the impairment loss in Tbay. 60% of the impairment loss is recognised (Rs Mn): DEBIT Profits of discontinued operations (60%  Rs 3. 4 Investment in joint venture A gain of Rs. This is allocated against goodwill.7 Mn = Rs 3. As 60% of total goodwill is recognised in the consolidated financial statements. The loss is allocated to the owners of the parent company.3 Mn arises. LKAS 28 requires that only that part of the gain that is attributable to other investors is recognised. Therefore 50% of the gain (Rs 3 Mn) is eliminated against the cost of investment in the joint venture (Rs Mn): DEBIT CREDIT Other income Investment in joint venture 3 3 To eliminate the gain attributable to Ejoy against the investment in the joint venture. 6million has been recognised on a disposal to a joint venture.KC1 | Answers to Practice Questions Carrying amount Fair value of net assets at acquisition (1 December 20X5) Post-acquisition TCI (38  6/12) Notional (unrecognised) NCI goodwill 100/60% x 6 (W4) Rs Mn 310 19 10 339 Working: Goodwill in Tbay Rs Mn 192 124 (310) 6 Consideration transferred NCI (310m  40%) Fair value of net assets at acquisition Therefore an impairment loss of Rs 339 Mn – Rs 335. CA Sri Lanka 105 . The adjustment is attributable to the owners of the parent company. 8 Carrying amount of loan at 1. The loan is held by Zbay and therefore the income is allocated between the owners of Ejoy and the NCI in Zbay in proportion to their ownership interests.5 To recognise income on the bond. calculated based on the impaired amount: 1.0 1.6.1 Interest income (6%  17.X5 (a financial asset) Impairment loss (balancing figure) Present value of expected future cash flows (20  1/1.X6 (per question) (i) The interest income is recognised by (Rs Mn): DEBIT Bond /cash CREDIT Finance income 2.7) Fair value loss (balancing figure) 48.5.KC1 | Answers to Practice Questions 5 Loan asset The loan asset was impaired at the start of the year.5 2. 6 Hedged bond The carrying amount of the hedged bond at the period end is calculated as: Rs Mn 50.1 To recognise income on the loan asset.5) Interest received (1.1 1.2) 17.0 (42.062 ) 1. 106 CA Sri Lanka .X5 2.2 To recognise the impairment of the loan asset in Zbay.5 Interest income (5% × 50) (2. The loan is held by Zbay and therefore the impairment loss is allocated between the owners of Ejoy and the NCI in Zbay in proportion to their ownership interests.8) This is recognised by: DEBIT Loan asset CREDIT Finance income 1. (ii) Interest income is recognised on the loan asset.6. Rs Mn 60.X5 (i) The loss is recognised by: DEBIT Finance costs CREDIT Loan asset 42.6.3 Fair value at 31.2 42. 2) 1. CA Sri Lanka 107 . As 80% of total goodwill is recognised in the consolidated financial statements.9 Mn – Rs 630 Mn = Rs 42. Therefore finance income of this amount is recognised by (Rs Mn): DEBIT Swap financial asset 1.KC1 | Answers to Practice Questions (ii) The fair value loss is recognised by (Rs Mn): DEBIT Finance costs CREDIT Bond 1. (iii) Since the interest rate swap is 100% effective as a fair value hedge.5 CREDIT Finance income 0. 1. 7 Impairment of Zbay Zbay is tested for impairment by comparing the carrying amount of the investment in the consolidated financial statements with its recoverable amount of Rs. Carrying amount Fair value of net assets at acquisition (1 June 20X4) Post-acquisition TCI(20 + 44) Impairment of loan asset (W5) Interest income on loan asset Notional (unrecognised) NCI goodwill 100/80% x 40 (W8) Rs Mn 600 64 (42.9 Mn) Goodwill 34.4 To recognise the impairment loss in Zbay The loss is allocated to the owners of the parent company. it exactly offsets the loss in value of Rs.9 Mn arises. (iv) The net settlement of interest is recognised by: DEBIT Cash 0.7 1. since the bond is held by Ejoy.7 CREDIT Finance income 1.7 million on the bond.5 To recognise settlement of interest. This is allocated against goodwill. 80% of the impairment loss is recognised (Rs Mn): DEBIT CREDIT Cost of sales (80% × Rs 42. All amounts recognised in profit or loss in respect of the bond are allocated to owners of the parent.4 34.7 To recognise the swap at fair value at the reporting date. 630m.9 Therefore an impairment loss of Rs 672.7 To recognise the remeasurement of the bond to fair value.1 50 672. 5 110 11. plant and equipment: Goodwill Current assets Equity and liabilities Equity attributable to owners of the parent: Stated capital Foreign exchange reserve Retained earnings Non-controlling interest Non-current liabilities Current liabilities: 108 366.5 8 403 777.2 362 483.2 43.2 18 501.5 CA Sri Lanka .7 777.6 232.KC1 | Answers to Practice Questions 8 Goodwill in Zbay Consideration transferred NCI (310m  40%) Fair value of net assets at acquisition Rs Mn 520 120 (600) 40 10 Memo MEMO CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 30 APRIL 20X4 Rs Mn Assets Property. 2 4.7)  25% 52.8 Non-controlling interest (7.KC1 | Answers to Practice Questions MEMO CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 APRIL 20X4 Rs Mn 250.6) Income tax expense 38.9 Profit for the year Other comprehensive income (items that may subsequently be reclassified to profit or loss) 13.5 Profit before tax (23.0 CA Sri Lanka 109 .0 Total comprehensive income for the year Profit attributable to 37.9 Non-controlling interest (25%  7.9 + 9.0 Owners of the parent 1.8) Finance costs 1.9) (W4) 38.8 Revenue (153) Cost of sales Gross profit 97.1 Exchange differences on foreign operations 52.8 (38) Distribution costs and administrative expenses (2) Impairment of goodwill 4 Interest receivable (0.9 Total comprehensive income for the year attributable to Owners of the parent 47.5 Exchange gains 62. 6 48.6 1.8 (158.6 (2) 48.4) 98.6 (5) 205 27.1 281.1 (3.5 470 71.8 11.5 ____ 54 (20) 34 11.2 4.5 53 34 5.8 (38.5 (23.1 (23.2 Non current liabilities Current liabilities (0.3 118.6 1.8 48.6) (2.3 823.6) 7.6 13.6) (2) 4 – 4 Consolidated Rs Mn 250.7 232.8 541.5 110 11.6) 47.1 52 (2) (0.8) 1.2 43.6 118.9 34 14.5 (0.9 (2) (0.8 1.9) 483.1 276.6 (32) (1.2 4.4 (38) (W6(ii)) Rs Mn (W6(iii)) Rs Mn (W8(i)) Rs Mn (6) 6 W8(ii)) Rs Mn (0.5 48 5 403.6) 38.5 399.8) 1.5 19 11.2 (0.8 Rs Mn 297 St capital FX reserve Ret’d earnings 48 5 355 705 110 NCI (5) 403 777.KC1 | Answers to Practice Questions Workings Consolidation schedule – consolidated statement of financial position at 30 April 20X4 Memo PPE Goodwill Inv in R Loan to R C assets Random (W2) Rs Mn 69.6) 41.8 30 18.8) 1.7 235 705 46.6) 37 1.2 4.8 CA Sri Lanka .8 (38) (2) 4 (0.2 18 501.1 130.8) 1.9) (2) 13.6 823.6 1.4 (8) Total Rs Mn 256.5 (0.8 11.5 Consolidation schedule – consolidated statement of profit or loss and other comprehensive income for the year ended 30 April 20X4 Revenue Cost of sales Gross profit Expenses Impairment of goodwill Interest receivable Interest payable Exchange gains PBT Tax Profit for the year OCI TCI Profit attributable to: Owners of M NCI TCI attributable to: Owners of M NCI 110 Memo Rs Mn 200 (120) 80 (30) Random Rs Mn 56.5 Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn 8.6 4.5 8 – 360 39.4) 18.9 34 11.9 39.5 62.6) 362 (20.5 Total (W6(i)) (W6(ii)) (W6(iii)) (W7) (W8(ii)) (W8(iii)) Consolidated Rs Mn 366.7 232.8 (153) 97.5 Rs Mn 366.4 (48) 1.1 20.5 65.3 777. This must be transferred to be recognised as an exchange gain by: DEBIT Current liabilities 1.2m) remains in current liabilities. The total exchange gain is therefore CR 3.5 = CR 15 Mn.2) 13. Random paid the outstanding balance when the exchange rate was 2. The gain is recognised by (CR Mn): DEBIT Loan account CREDIT Exchange difference (profit or loss) 2 2 To recognise the gain on retranslation of the loan.2 To recognise the payment of the balance outstanding at the spot rate on settlement date.5 million.2 CREDIT Cash 13.8m (15m – 13. In Random’s accounts.8 To recognise the exchange gain on settlement.2:1 and recorded the transaction by: DEBIT Current liabilities (6  2.1 = CR 10. at the year-end. 5 million at the start of the year and Random recorded this at Rs 5 Mn  2.KC1 | Answers to Practice Questions 1 Group structure Memo 1 May 20X3 75% Cost = 120m crowns PAR = 80m crowns Random 2 Exchange differences arising in Random’s separate financial statements (i) Memo loaned Random Rs.8 CREDIT Exchange gain 1.8m CA Sri Lanka 111 . the loan is retranslated using the closing rate to Rs 5 Mn  2. DEBIT Purchases 15 CREDIT Current liabilities 15 To recognise the purchase of goods at the spot rate. (ii) Memo sold Random goods from Rs 6 Mn during the year and Random recorded the purchase and current liability at Rs 6 Mn  2.5 = CR 12.5 million. Therefore a credit balance of CR 1. 5 18.1 32.5 39.1 2.0 7.KC1 | Answers to Practice Questions 3 Translation of statement of profit or loss and other comprehensive income Rs Mn CR Mn Rate 142 2.8/2.1 2.1 Profit before tax (9) 2.1) 8.5 2.4 11.1 Rs Mn 10.5 11.1 20.8 11.6) Income tax expense 7.9 Gain Retained profit at average rate (18.1 27.5 2.0 18.5 3.8 (W2(ii))) Rate 2.5 71.5 OCI (W5) 19.0 Property.5 CA Sri Lanka .8 Post-acquisition: 15 + 3.6 58.2 2.8/2.5 48.4 Gross profit (20) 2.0 Total comprehensive income for the year 4 Translation of statement of financial position CR Mn 146.5 (3.4) Cost of sales 46 18.5 (8) Distribution and administrative expenses (2) 2.7 248.8 Exchange gain (W2) 27.8 Revenue (96) 2. plant and equipment 102.8 Profit/total comprehensive income for the year 11.5 1.8) Interest payable 2.5 56.1 1.5) 7.5 Retained profit at closing rate (18.6 118.0 Retained earnings: Pre-acquisition 80.0 2.5 (38.5 52.1.8 Opening net assets at closing rate (52+80)/2.8 Exchange difference on translation of financial statements Rs Mn Opening net assets at opening rate (52+80)/2.8 (W2) FX reserve (W5) Non-current liabilities (41 – 2 (W2(i))) Current liabilities (60 .1 62.5 (0.0 Current assets 248.0 Stated capital 52.0 5 112 Rs Mn 69.8 18.9 Gain Gain on translation 118. KC1 | Answers to Practice Questions In accordance with LKAS 21 the gain on translation of the financial statements is recognised as other comprehensive income of the subsidiary and accumulated in a separate foreign exchange reserve of the subsidiary.X4 (i) CR Mn 120.1 Goodwill is recognised on the acquisition of Random by (Rs Mn): DEBIT Goodwill 8.1  2.0) 1.0 2.0 33.0 (4. therefore the gain is attributable to the owners of the parent company and accumulated in the foreign exchange reserve. CA Sri Lanka 113 .5 (20. (ii) The goodwill is retranslated to Rs 10 Mn using the closing rate at the period end (CR 21 Mn/2.2) – 16.4 (2. and accumulated in retained earnings.0 Rate 2.2m/2. The loss is again attributable to the owners of the parent company only.8) (32) 8.1) 2 CREDIT Goodwill 2 To recognise the impairment loss in goodwill.4.6 To retranslate goodwill to the closing rate.4 DEBIT Share capital 20.6 CREDIT Other comprehensive income 1.8 2. Goodwill is attributable to the parent company only as the NCI is measured as a proportion of net assets. 6 Goodwill Consideration transferred Non-controlling interests (132  25%) Less fair value of net assets at acq'n: Share capital Retained earnings Impairment losses FX gain At 30.6 8. (iii) The impairment loss of CR 4.2 To recognise goodwill on the acquisition of Random.5 Rs Mn 48 13.1).5 2.5 2.2 52 80 21.2 Mn is recognised at the period end by (Rs Mn): DEBIT Impairment loss (4.8 DEBIT Retained earnings 32 CREDIT Investment in Random 48 CREDIT NCI 13. The gain is recognised as other comprehensive income (Rs Mn): DEBIT Goodwill 1. 5 = Rs 6 Mn. By (Rs Mn): DEBIT DEBIT CREDIT Retained earnings (7.9 2.5 Mn.5 Mn (W2). At the period end expenses are translated to the presentation currency using the average rate for the year and these purchases translate to CR15 Mn/2. (ii) As some of the items remain in stock at the period end. In addition 25% of the Rs 11. 0.6 CREDIT Current assets 0. The selling company was the parent and therefore the additional expense in profit or loss is allocated to the owners of the parent and accumulated in retained earnings. 114 CA Sri Lanka .8 To allocate a share of profits and OCI since acquisition to the NCI.5 Mn other comprehensive income is allocated.1 = CR 10. At the period end this is retranslated in Random’s accounts using the closing rate to Rs 5 × 2. recorded it at Rs 5 Mn × 2. on receiving the loan. These were translated at the spot rate and recognised at CR 15 Mn by Random. Therefore the sales and purchases are eliminated by (Rs Mn): DEBIT CREDIT Revenue Cost of sales 6 6 To eliminate intragroup sales.5 = CR 12. Memo has recognised a loan asset of Rs 5 Mn and Random.9 4. (iii) The intragroup loan must be eliminated.6 To eliminate the unrealised profit.1 = Rs 5 Mn Therefore to eliminate the loan (Rs Mn): DEBIT CREDIT Non-current liabilities Loan asset 5 5 To eliminate the intragroup loan. This is eliminated by (Rs Mn): DEBIT Cost of sales 0.5 Mn profits (W4) since acquisition as reported by Random are allocated to the NCI.5m × 25%) FX reserve (11. Then on translation of Random’s accounts to the presentation currency.5m × 25%) NCI 1. 6m. the loan is translated to CR 10.6 million.5 Mn/2. an unrealised profit arises of Rs 6 Mn  20%  ½ = Rs.KC1 | Answers to Practice Questions 7 Allocate profits and OCI since acquisition to the NCI 25% of the Rs 7. 8 Intragroup transactions (i) During the year Memo sold goods to Random for Rs. KC1 | Answers to Practice Questions 11 Swing Rs'000 Cash flows from operating activities Profit before tax Adjustments for: Depreciation Impairment losses (W1) Increase in trade receivables (W4) Increase in inventories (W4) Increase in trade payables (W4) Cash generated from operations Income taxes paid (W3) Net cash from operating activities Cash flows from investing activities Acquisition of subsidiary net of cash acquired Purchase of property.700) (4.800) 2.800 240 22.400 Workings 1 Assets b/f OCI (revaluation) Depreciation/ Impairment – balancing figure Acquisition of sub/assoc Cash paid/(rec'd) – balancing figure c/f CA Sri Lanka Property.000 500 (5.200 17.700) 2.160 900 1.440 (600) (13.500 Goodwill Rs'000 – (240) 1.540 (1.640 (4.700 13.200) 13.500 5.100 (900) (40) 1.500 2.400) 1.400 115 .640 (W5) – 1.100) (13.100 35. plant and equipment (W1) Net cash used in investing activities Cash flows from financing activities Proceeds from issue of share capital (W2) Dividends paid (W2) Dividends paid to non-controlling interest (W2) Net cash from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period Rs'000 16. plant and equipment Rs'000 25. 800 Payables Rs'000 6.800) 1.500 600 8.440 (4.200) 5.000 1.000) (600) Note.200 7.440 (W5) (40) (900)* 1.750 32.600 4.700 9.100 18.200 b/f SPLOCI Acquisition of subsidiary Cash (paid)/rec'd – balancing figure c/f 4 Working capital changes Balance b/f Acquisition of subsidiary Increase/(decrease) – balancing figure Balance c/f 5 Inventories Rs'000 10.KC1 | Answers to Practice Questions 2 Equity Share capital Rs'000 12. Goodwill on acquisition (before impairment): Consideration Non-controlling interest: 4.000 Receivables Rs'000 7.000 b/f SPLOCI Acquisition of subsidiary Cash (paid)/rec'd – balancing figure c/f 4.000 5.100 300 6.000 1.600 11.000 2.100 *Dividend paid is given in question but working shown for clarity. 3 Liabilities Tax payable Rs'000 4.200 200(4.600 Purchase of subsidiary Cash received on acquisition of subsidiary Less cash consideration Cash outflow Rs'000 400 (1. The shares issued as part of the consideration are reflected in the share capital working (W2) above.100 Noncontrolling interest Rs'000 Retained earnings Rs'000 21.900 11.100 1.400 16.400 1.100 – 350 1.640 CA Sri Lanka . Only the cash consideration is included in the figure reported in the statement of cash flows.800 × 30% Net assets acquired Goodwill 116 Rs'000 5. Interpretations and Communication of Financial Results. any impairment loss will be based on the difference between the adjusted carrying amounts and the fair value less cost to sell. the loss being allocated in the order required by LKAS 36 Impairment of assets. Before the manufacturing units are classified as held for sale. cash generating unit basis. calculate carrying amount under the individual standard. A disposal group that is held for sale should be measured at the lower of its carrying amount and fair value less costs to sell. Any impairment loss reduces the carrying amount of the non-current assets in the disposal group. 12 Ghorse (a) The criteria in SLFRS 5 Non-current assets held for sale and discontinued operations have been met for Cee and Gee. Once classified as held for sale. the entity must recognise impairment in accordance with applicable SLFRS. 105m. Step 2 Classify as held for sale. plant and equipment or LKAS 38 Intangible assets. Any impairment loss is generally recognised in profit or loss. 105m. but if the asset has been measured at a revalued amount under LKAS 16 Property. Measure at the lower of carrying amount and fair value less costs to sell. here given as Rs. Cee and Gee together are deemed to be a disposal group under SLFRS 5. the impairment will be treated as a revaluation decrease.KC1 | Answers to Practice Questions PART C: ANALYSIS. Compare the carrying amount (Rs. INTERPRETATIONS AND COMMUNICATION OF FINANCIAL RESULTS Questions 12 to 13 cover Analysis. the impairment testing is done on a disposal group basis. As the assets are to be disposed of in a single transaction. 117 . The impairment loss (if any) will be recognised in profit or loss. Immediately before classification of a disposal group as held for sale. here Rs. To summarise: CA Sri Lanka Step 1 Immediately prior to classification as held for sale (on 30 September 20X7). 105m) with fair value less costs to sell (Rs. impairment is tested for on an individual. Once the disposal group has been classified as held for sale. A subsequent increase in fair value less costs to sell may be recognised in profit or loss only to the extent of any impairment previously recognised. The disposal group as a whole is measured on the basis required for noncurrent assets held for sale. 125m). Here the gain recognised is Rs 50 Mn – Rs 35 Mn = Rs 15 Mn Therefore carrying amount can increase by Rs 15 Mn to Rs 120 Mn as loss reversals are limited to impairment losses previously recognised (under SLFRS 5 or LKAS 36). Rs Mn 40 Fair value less costs to sell: Cee 95 Fair value less costs to sell: Gee 135 (105) Carrying amount 30 Increase Impairment previously recognised in Cee: Rs 15 Mn (Rs 50 Mn – Rs 35 Mn) Step 4 The change in fair value less costs to sell is recognised but the gain recognised cannot exceed any impairment losses to date. The differences between the carrying amounts and the tax base represent temporary differences. These temporary differences are revised in the light of the revaluation for tax purposes to fair value permitted by the government. Deferred tax liability before revaluation Property Vehicles Other taxable temporary differences Carrying amount Rs Mn 50 30 Tax base Rs Mn 48 28 Taxable temporary difference Rs Mn 2 2 4 5 9 118 CA Sri Lanka . profit for the year increases to Rs 45 Mn and capital employed increases to Rs 235 Mn. ROCE can therefore be recalculated as 19%. After adjusting for the increase in fair value less costs to sell. 105m. Deferred tax assets are recognised for deductible temporary differences to the extent that taxable profits will be available against which the deductible temporary differences may be utilised. but only part of this increase can be recognised. Ghorse has not taken account the increase in fair value less costs to sell. This adjustment therefore results in a significant improvement to ROCE. calculated as follows.KC1 | Answers to Practice Questions Step 3 At 31 October 20X7 determine fair value less costs to sell (see below) and compare with carrying amount of Rs. (b) LKAS 12 Income taxes requires that deferred tax liabilities are recognised for all taxable temporary differences. profit before interest and tax (although it will affect profit or loss for the year). i.KC1 | Answers to Practice Questions Deferred tax liability: 30%  Rs 9 Mn = Rs 2. If impairment is indicated. If the recoverable amount is less than the carrying amount. either at the reporting date or during the accounting period. While the reversal of the liability of Rs 2. and ignoring issue (a)) to be 13.7 Mn and the creation of the asset of Rs 4.5 Mn This will have a considerable impact on ROCE. Ghorse must review all assets for indications of impairment.2 Mn. The recoverable amount is defined as the higher of the asset's fair value less costs to sell and its value in use.e. At each reporting date. Value in use is the discounted present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Therefore ROCE decreases as a result of this adjustment. but this does not automatically mean that the asset is impaired.) These indications may also be identified during the accounting period. economic or legal environment of the business.7 Mn Deferred tax asset after revaluation Carrying Property Vehicles Other taxable temporary differences amount Rs Mn 50 30 Tax base Rs Mn 65 35 Deductible temporary difference Rs Mn 15 5 (5) 15 Deferred tax asset: Rs 15 Mn  30% = Rs 4. (c) LKAS 36 Impairment of assets requires that no asset should be carried at more than its recoverable amount. The value in use of the equipment is calculated as follows: CA Sri Lanka 119 . Such indications include fall in the market value of an asset or adverse changes in the technological. indications that the carrying amount may be higher than the recoverable amount. then the asset's recoverable amount must be calculated immediately. capital employed increases by Rs 7. this impairment loss is recognised in profit or loss as an expense. (LKAS 36 has an extensive list of criteria. Unless the asset in question has been revalued. Here the manufacturer has reduced the selling price.2% (Rs 30 Mn/Rs 227. then an impairment loss is recognised. Therefore ROCE can be recalculated (after the effects of this adjustment alone.2 Mn).5 Mn do not affect the numerator. Both items are measured at the lower of fair value (Rs 35 Mn) and present value of the minimum lease payments (Rs 34. Since the recoverable amount is higher than the carrying amount of Rs. the asset is not impaired. generally on straight line basis. Consequently there will be no effect on ROCE as neither capital employed not profit before interest and tax is adjusted. the effect on capital employed is nil and this reclassification does not affect ROCE in the current year. Thus the present value of the minimum lease payments is substantially all the fair value of the asset. LKAS 17 Leases requires that operating lease payments are charged to profit or loss over the term of the lease.1 Mn. and it now falls to be classified as a finance lease. Since both assets and liabilities increase.8137 = Rs 34. the present value of the minimum lease payments is Rs 5 mn  6.2 1. The renegotiation of the lease means that its terms have changed significantly.2 2.7m.3 Discounted (10%) Rs Mn 1.1 Mn. (d) The manufacturing property was held under an operating lease. (i) The lease is for the major part of the economic life of the assets. 4. as this is higher. (iii) A finance lease does not require transfer of legal title.1 Mn).7 The fair value less costs to sell of the asset is estimated at Rs 2 Mn. (ii) At the inception of the lease. it is recognised as both an asset and an associated finance lease obligation in the statement of financial position. 120 CA Sri Lanka . Reasons for reclassification are as follows.7 4. 3m (Rs 4 Mn  75%).3 2. ie at Rs 34.8 1. The recoverable amount must be the value in use of Rs. Since the lease is now a finance lease.KC1 | Answers to Practice Questions Year ended 31 October 20X8 20X9 20Y0 Value in use Cash flows Rs Mn 1. The fair value of the asset is Rs 35 mn. 6% to 18. as ROCE has risen from 13.5 2.4 13.1 Assessment of performance Before looking at the information conveyed by the common size statements.0 15.6%.0 9.5 + 2.KC1 | Answers to Practice Questions Cumulative effects of adjustments on ROCE Profit before interest and tax Add increase in fair value less costs to sell of disposal group Capital employed Add increase in fair value less costs to sell of disposal group Add reversal of deferred tax liability and recognition of deferred tax asset: 4.0 72. so the directors' fears were misplaced.6 20X0 % 100.0 28. In fact.6% The directors were concerned that the above changes would adversely affect ROCE.7 Rs Mn 30. the following aspects of performance in 20X1.2 13.0 7.9 13.3 4.0 220.5 30.0 69.2 = 18. 13 Commonsizing (1) Common size statements Revenue Cost of sales Gross profit Distribution costs Administrative expenses Operating profit Interest payable Profit before tax Tax Profit for the year Dividends paid (2) 20X1 % 100.2 2.9% from 20X0 to 20X1. may be noted: CA Sri Lanka 121 .8 3. as compared with that in 20X0.8 2. the effect has been favourable.0 2. it should be noted that the absolute level of activity. Turning to the common size statements.6 14.3 11.2 ROCE is 45/242. as measured by revenue.7 1.2 6.0 45.2 242. has increased by 16.8 3.1 9.0 15. the reason for the borrowings should be investigated. resulting in a small increase in operating expense percentage from 15. As a percentage of profits. whilst the level of dividends as a percentage of sales has fallen in 20X1. however. an increase from 30.9% but costs have not fallen. dividends have risen from 34% (dividend cover = 2. outside the control of the company.4 times). Further analysis of these costs between their fixed and variable elements will help to determine the underlying causes of the changes.8%. If the increase is the result of increased borrowing levels. This would be beneficial for the company in the long term. despite the immediate negative effect.5% to 28%. The reasons behind the increased cost of sales need further analysis and investigation. from 30. as the tax charge is based upon profits.8% to 16.4% (interest cover = 10. and volumes have increased by more than 16. it may equally be the case that the increase in these costs is related to the increase in revenue and results from operating in a new market. Looking instead at the effective rate of tax on profits. this is not a particularly helpful measure. however.  Interest payable has increased from 1. Tax is. If this is the case. The extent to which this is due to increases in interest rates and to increases in the amounts of borrowing would be apparent from the statement of financial position.5% in 20X1 is observed.KC1 | Answers to Practice Questions 122  There is a significant fall in the gross profit margin. This is as a result of the increase in cost of sales and distribution costs as a percentage of revenue.4% (dividend cover = 2. distribution costs have increased.7% to 11. this is misleading.2%. It may be that the number of units sold has increased by a greater percentage than the 16. as discussed above. whilst administrative expenses have fallen. CA Sri Lanka .9 times) to 42.8 times). Although the increase in distribution costs may be related to poor cost control or inefficient distribution networks.4 times) to 2. This is likely to be in line with a policy of steadily increasing dividends to maintain shareholder confidence and thus market value.  Again.  Relatively.  There is a fall in the tax charge as a percentage of sales.6% in 20X0 to 32.0% (interest cover = 5. these may be related to product or market development and be beneficial for the company in the long-term.  The total operating profit margin has fallen from 14. it follows that costs will increase by a greater amount than revenue.9% increase in revenue as a result of a reduction in selling prices. This does help with an assessment of whether a company can meet its short-term liabilities as they fall due – for example trade payables and other amounts due within a year. including factors such as:       (4) Market and competition Relative price levels and other economic factors Taxation legislation Product range and mix Group structure – acquisitions. however provide an indication of whether a company is in a position to meet its longer-term debt commitments.KC1 | Answers to Practice Questions (3) Limitations Limitations in general of using common size statements as an analysis of performance include  Common size statements conceal underlying changes in absolute measures that may be of significance. erg the level of activity as measured by revenue  The expression of figures as a percentage of sales is not appropriate in some cases. these may reveal healthy liquidity. in isolation of the environment within which they were generated. CA Sri Lanka 123 . Accounting issues Criticism of statements (i) The current and quick ratios provide an indication of a company’s liquidity position. or with other similar firms. and changes thereon. For example. which is not representative of the true position. It will not. disposals etc. The assertion that the ‘higher these ratios are the better placed the company is’ should also be considered. which are not reflected in the percentage figures. Examples of this are seen in (b) in the cases of tax and dividends  As with all ratio analysis. For example a bank loan due for repayment 13 months after a reporting date is not considered in the calculation of the current and quick ratios. and can be misleading. Using common size statements to analyse performance over a ten-year period will have limitations that are brought about by changes in the internal and external environment over the period. care must be taken not to look at percentages. it would be useful to look at the changes highlighted in (b) in comparison with those of the industry within which the company operates. Equally large retailers are unlikely to have trade receivables (as customers are not given credit) and they invest cash in long-term assets rather than retain it. an excessively high current ratio means that resources are tied up in inventory.KC1 | Answers to Practice Questions Whilst liquidity ratios of 1 to 1. and where the borrowed money has been invested in profitable projects. CA Sri Lanka .5 indicate that a company has sufficient current assets to meet current liabilities as they fall due. dependent on borrowed funds being invested in such profitable projects. As well as the potential for high returns. receivables and cash instead of producing profits. the retailer will receive cash from customers and therefore a low ratio should not immediately be viewed as an indicator that it cannot pay amounts it owes. This business model results in very low liquidity ratios. companies in the service industry that have no inventory are likely to have low liquidity ratios. together with longer-term capital growth as income levels grow. For example. Current assets should generally be kept as low as is compatible with efficient production and paying liabilities as they fall due. high gearing refers to a high level of debt. a company is committing to pay its lenders interest. high gearing means greater risk for the shareholders. however. which are not invested wisely. will even result in the failure of a company. however they do have high levels of trade payables. By taking on debt. (ii) 124 There is some truth in this statement. Where invested funds do not increase profits and cash flows. This outcome is. however it must be remembered that on any given trading day. and eventually repay the principal. In some cases high levels of debt. Liquidity ratios are also affected by the type of industry that a company operates within. it may result in immediate dividend growth for shareholders. it may be that the shareholders’ dividends are cut to meet these obligations. For example. An integrated report should detail the company's mission and values. In line with best practice in integrated reporting. The company's annual accounts have made it hard for shareholders to understand Calcula's strategy. To assist users in appraising the company's performance. A key feature of integrated reporting focuses on the need for organisations to use non-financial customer-oriented key performance measures (KPIs) to help communicate the entity's strategy. the company has struggled to communicate its 'strategic direction' to key stakeholders. along with features on how it differentiates itself from its competitors. Communicating strategy The introduction of integrated reporting may help Calcula to overcome these issues as it places a strong focus on the organisation's future orientation. plans to improve the company's human capital through hiring innovative software developers working at competing firms would help to support the company's long term mission. Calcula should provide details on how it will measure value creation in each 'capital'. the nature of its operations. Such detail could focus on resource allocations over the short to medium term. Including Calcula's new mission to become the market leader in the specialist accountancy software industry would instantly convey what the organisation stands for. Uncertainty among shareholders and employees is likely to increase the risk of investors selling their shares and talented IT developers seeking employment with competitors. which in turn has led to confusion. 'Human capital' could be measured by the net movement in new joiners to the organisation compared to the previous year. 14 Calcula (1) Benefits of integrated reporting at Calcula Confusion As a result of the recent management changes at Calcula. The most successful companies in CA Sri Lanka 125 . Calcula could supplement its mission with how the board intend to achieve this strategy.KC1 | Answers to Practice Questions PART D: CORPORATE GOVERNANCE AND RECENT DEVELOPMENTS IN FINANCIAL REPORTING Questions 14 to 15 cover Corporate Governance and Recent Developments in Financial Reporting. The Finance Director's assertion regarding shareholders is likely to some degree to be correct. the achievement of which requires the successful implementation of both short and long term strategies. Improving long term performance The introduction of integrated reporting may also help Calcula to enhance its performance. However. Ultimately.KC1 | Answers to Practice Questions Calcula's industry are committed to enhancing their offering to customers through producing innovative products. many shareholders will also be interested in how the board propose to create value in the future. which served to reduce the staff training budget. Historically. the company has not given consideration to how decisions in one area have impacted on other areas. Although. To dismiss developments in integrated reporting as simply being a 'fad'. this move may have enhanced the company's short-term profitability. it has damaged long term value creation. Calcula could report through the use of KPIs how it is delivering on this objective. However. Finance Director's comments As illustrated in the scenario. measures could be set which for example measure the number of new software programs developed in the last two years or report on the number of customer complaints concerning newly released software programs over the period. some critics refute this and argue that the voluntary nature of integrated reporting increases the likelihood that companies will choose not to pursue its adoption. Investors looking for short-term results from an investment might assess Calcula's performance based on improvements in profitability. Calcula's aim to appease both groups is its focus on maximising shareholder value. Such individuals highlight that until companies are legally required to comply with integrated reporting guidelines. suggest that the Finance Director is unaware of the commitment of many accounting bodies in promoting its introduction. The nature of the software industry requires successful organisations to invest in staff training to ensure that the products they develop remain innovative in order to attract customers. 126 CA Sri Lanka . This is clearly indicated by former CEO's cost cutting programme. the Finance Director's comments indicate a very narrow understanding of how the company's activities and 'capitals' interact with each other in delivering value. The decision to reduce the training budget will most likely impact on future profitability if Calcula is unable to produce what software customers' demand. many will simply regard it as an unnecessary effort and cost. boosting financial capital. if innovation is highlighted as a key factor in sustaining Calcula's long-term value. finance and human resources) the associated costs in improving the infrastructure to deliver relevant data about each area is likely to be CA Sri Lanka 127 . As we shall explore in part (b). This is made especially difficult as there is no recognised criteria for determining the level of importance of each 'capital'. However. focusing management's attention on the non-financial aspects of Calcula's performance as well as its purely financial performance. unlike traditional annual reports.KC1 | Answers to Practice Questions Furthermore. Integrated reporting encourages companies to report performance measures that are closely aligned to the concepts of sustainability and corporate social responsibility. with the impact an organisation's activities have on the natural environment. Due to the broad range of business activities reported on using integrated reporting (customer. This is implied by the different capitals used: consideration of social relationships and natural capitals do not focus on financial performance but instead are concerned. integrated reports highlight the importance of considering a wider range of users. as integrated reporting provides senior management with a greater quantity of organisational performance data this should help in identifying previously unrecognised areas which are in need of improvement. for example. Clearly. a focus on innovation could help to encourage innovation within the company. the Finance Director's remark regarding the increase in the Calcula's employee workload to comply with integrated reporting practices may have some merit. Ultimately. It is debatable as to whether the production of an integrated report necessarily leads to an improvement in organisational performance or whether it simply leads to an improvement in the reporting of performance. For example. (2) Implications of implementing integrated reporting IT and IS costs The introduction of integrated reporting at Calcula will most likely require significant upgrades to be made to the company's IT and information system infrastructure. Key stakeholder groups such as Calcula's customers and suppliers are likely to be interested in assessing how the company has met or not met their needs beyond the 'bottom line'. could be expected to lead to performance improvements in those areas. a major downside to generating extensive additional data concerns determining which areas to report on. Such developments will be needed to assist Calcula in capturing both financial and non-financial KPI data. It may. In the event that Calcula have hired an external consultant to support the introduction of integrated reporting it is likely that the advice given by the consultant will stress the need to avoid disclosure of commercially sensitive information. Calcula could explain that it develops specialist accounting software and give information about its customer types. Such a move is likely to undermine any future moves to out-manoeuvre other industry players. In some cases this may require Calcula to pay employees overtime to ensure all required information is published in the report on time. Time implications The process of gathering and collating the data to include in an integrated report is likely to require a significant amount of staff time. (3) Content of the integrated report The <IR> Framework prescribes the eight key content elements of an integrated report: 1. Consultancy costs As this will be Calcula's first integrated report the board may seek external guidance from an organisation that provides specialist consultancy on reporting. Any advice is likely to focus on the contents of the report. In the event that Calcula fully disclosed the company's planned strategies it is likely that this could be used by competitors. CA Sri Lanka . be the case that Calcula's existing information systems are already capable of producing the required non-financial performance data needed in which case it is likely that the focus here will be on investigating which data sets should be included in the integrated report. however.KC1 | Answers to Practice Questions significant. The consultant's fees are likely to be significant and will increase the associated implementation costs of introducing integrated reporting. This will invariably lead to an increase in staff costs. Disclosure A potential downside of adopting integrated reporting centres on Calcula potentially volunteering more information about its operations than was actually needed. 128 Organisational overview and external environment: what Calcula does and the circumstances under which it operates. Staff costs To avoid overburdening existing staff the board may decide to appoint additional staff to undertake the work of analysing data for inclusion in the integrated report. This may serve to decrease staff morale especially if staff are expected to undertake this work in addition to completing existing duties. 8. For example. Outlook: the challenges and uncertainties that Calcula is likely to encounter in pursuing its strategy. for example. Performance: whether Calcula achieved its strategic objectives for the period and what its outcomes are in terms of effects on its different types of capitals. Calcula could explain. could disclose information about the effect of toxic gases in the air. 4. chemicals leaking into the sea. It could explain how their remuneration is linked to value added within the company. 3. Risks and opportunities: the specific risks facing Calcula should be identified and its risk management approach explained. Business model: the organisation’s business model should be explained. Calcula could discuss the intense competition in the market and how it responds by investing in its employees. for example. Calcula could mention its increased intellectual capital due to new products patented and human capital in terms of employee knowledge. Calcula could explain the process by which Asha Alexander and (presumably) other directors compile the report. 15 Glowball (1) Environmental and sustainability reports Environmental reports typically only contain information about an entity’s impact on the environment ie air. Strategy and resource allocation: how Calcula intends to achieve its strategic objectives. Governance: how Calcula’s governance structure supports its ability to create value in the short. 5. Basis of preparation and presentation: how Calcula determines what matters to include in the report and how these matters are quantified or evaluated. Calcula could explain how it identifies the need for and develops its programs. CA Sri Lanka 129 . Calcula has stated that its mission is to become the market leader of specialist accounting software so it should provide information as to how it plans to achieve this. Calcula could discuss the challenges faced from lower cost competitors and the problems of protecting its intellectual property. water and land. the composition of its board of directors and how directors are selected on the basis of their experience and expertise. Glowball. medium and long term.KC1 | Answers to Practice Questions 2. 6. 7. or damage to land caused by construction works. and how it tries to predict future demand under conditions of uncertainty. Economic 130 • Market presence: Glowball could measure its market share in each of its key markets. Economic issues might include disclosure of economic performance (ie profit. (2) Issues that could be considered in the sustainability report Note: In each case. Market share would have increased in the current period due to the acquisition of a competitor. product labelling and compliance procedures. so that should be explained. volume of gas transported in the new lines or the number of new installations served. • Economic impacts: Glowball could discuss the impact of climate change on the demand for its services. A distinction should be made between organic growth and growth due to acquisition. value added). Any unexpected performance should be explained. • Human rights disclosures might include details of policies on child labour. performance should be compared to previous years and against targets.. social and governance issues.KC1 | Answers to Practice Questions Sustainability reports also provide information on economic. indigenous rights and supplier human rights. • New pipelines installed: Since this is a driver of revenue. training and education and diversity and equal opportunity practices. • Society disclosures might detail the impact of the business and its suppliers’ businesses on society and anti-corruption policies • Product responsibility might include disclosure of customer health and safety practices. a measure would be useful. Governance issues might include disclosure of directors’ recruitment and remuneration policies. market share and procurement practices. Social issues can be considered in terms of a number of areas according to the GRI G4 guidelines: • Labour practices and decent work disclosures might include details of health and safety. CA Sri Lanka . Glowball could measure the number of kilometres of pipe laid. • Occupational health and safety: Glowball could detail accidents. Glowball could detail the type and cost of security measures it has in place to protect its assets and employees. • Risk assessment process: Glowball could provide information on how the directors assess risks facing the company and the adequacy of internal controls. any education support given to employees (eg paying for MBAs) and measures taken to retain well-trained staff. • Biodiversity: Glowball could provide detail of the impact of its pipe laying on ocean bioversity and the practices it adopts to try to minimise that impact. for example of the suppliers of materials that are used to construct the pipelines. although there is no legal obligation to restore the farmland. and lost days due to accidents. Governance (3) • Director selection: Glowball could detail how directors are recruited and selected and could provide data on educational qualifications and years of experience. 150 million and the fact that a provision has been made in the financial statements. its policy is to be environmentally responsible (the question refers to Glowball’s reputation for preserving the environment). • Energy: Glowball could detail its energy usage and measures taken to establish energy efficient alternatives. perhaps distinguishing between fatal and non-fatal. • Directors’ remuneration: Glowball could explain how directors’ remuneration is determined and could provide data on and explanations for remuneration compared to performance. The report could mention the cost of Rs. It could explain that. Comments on 'environmental events' (a) CA Sri Lanka Glowball could explain how this issue arose. • Security practices: As it may operate in dangerous parts of the world.KC1 | Answers to Practice Questions Environmental • Supplier environmental assessment: Glowball could discuss the number and type of assessments of its suppliers’ environmental practices it has performed. Social • Training and education: Glowball could detail the amount spent on training. assuming that it has been made on the basis 131 . The directors may wish to point out the fact that the number of prosecutions has been falling from year to year. A provision should therefore be recognised in the financial statements for the estimated fine of Rs. an outflow of economic resources is probable and the amount can be estimated reliably. (d) The environmental report should mention the steps that the company is taking to minimise the harmful impact on the environment in the way it sites and constructs its gas installations. However. The emissions statistics should be split into three categories:    Acidity to air and water Hazardous substances Harmful emissions to water As regards the aquatic emissions. Specific examples of other restorations of land could be included in the sustainability report. 132 CA Sri Lanka . 70m planned expenditure on research should be mentioned in the sustainability report as it shows a commitment to benefiting the environment. The report should also explain the policy of dismantling the installations rather than sinking them at the end of their useful life. the Rs. It would be useful to provide target levels for comparison. The report might also put the fines into context by stating how many tests have been carried out and how many times the company has passed the tests. This should be mentioned in the sustainability report.KC1 | Answers to Practice Questions of the constructive obligation. The sustainability should be referenced to the financial statements. where an explanation of the accounting treatment and detail of the decommissioning provision can be found. the emphasis should be on accurate factual reporting rather than boasting. 5m. (c) These statistics are good news and need to be covered in the sustainability report. (b) The LKAS 37 criteria to recognise a provision are met: there is a legal obligation as a result of a past event. or an industry average if available. 16 Johan (1) Costs incurred in extending the network LKAS 16 states that the cost of an item of property. should be expensed as incurred.KC1 | Answers to Practice Questions PART E: CASE STUDY QUESTIONS Questions 16 to 22 are case study questions. CA Sri Lanka 133 . each one covering a variety of syllabus areas. the selection of a base station site that meets the technical conditions required for the optimal operation of the network is an inherent part of the process of bringing the network assets to the location and condition necessary for operation. and is governed by LKAS 17. the right to use an asset for an agreed period of time. and may therefore be capitalised. Applying the LKAS 16 definition of directly attributable costs. (2) Lease The other costs – a payment of Rs. Examples of such directly attributable costs are site preparation costs and installation and assembly costs. according to LKAS 16. both internal and external. LKAS 17 defines a lease as an agreement whereby the lessor conveys to the lessee.000 a month for twelve years – is a lease. plant and equipment should be recognised when two conditions have been fulfilled: • It is probable that future economic benefits associated with the item will flow to the entity. because (by definition) the economic benefits of a feasibility study are uncertain. • The cost of the item can be measured reliably. 250. 50. The feasibility study relates to general site selection. 60. The costs incurred to select a specific site within the chosen geographical area are treated differently. in return for a payment or series of payments. Rs. includes directly attributable costs of bringing the asset to the location and condition necessary for it to be capable of operating in a manner intended by management. 300. The Rs.000 followed by Rs. ie selecting a general geographical area in which the base station may be installed. These costs. Applying the first criterion (probability of economic benefits) would exclude the feasibility study costs.000 paid to third party consultants to find a suitable site is part of the cost of constructing the network. The cost.000 in total. All handsets held in inventory by the Retail Division must be written down to Rs. and charged to profit or loss for the year on a straightline basis over the life of the contract. Accordingly. 134 CA Sri Lanka . that is when Johan has no further obligation to the customer. 60.KC1 | Answers to Practice Questions The question arises as to whether the payments are to be treated as a finance lease or as an operating lease.000 should be treated as a prepayment in the statement of financial position. there is no transfer of ownership. 200. revenue is recognised by reference to the stage of completion of the transaction at the reporting date. because the land has an indefinite economic life. 21 received per call card is recognised as deferred revenue at the point of sale. The handsets cost Rs. revenue is generated by the provision of services. 1. The lease cannot therefore be said to transfer substantially all the risks and rewards of ownership to Johan. Of this. Rs. The initial payment of Rs. The Rs.000 should be expensed as incurred. (3) Inventory of handsets LKAS 2 states that inventories must be valued at the lower of cost and net realisable value. The term of the lease is not for the major part of the asset's life. and accordingly revenue should be recognised as the services are provided. In the case of the call cards. (4) Revenue recognition Call cards Under LKAS 18. 3 of unused credit – an average figure may be used rather than the figure for each card – is recognised as revenue when the card expires. 18 per card is released and recognised as income over the six month period from the date of the sale. In the case of the contract with the government for access to the land. 300. The Rs. not the sale of the card itself. The monthly payments of Rs. 150 less costs to sell of Rs. An operating lease is a lease other than a finance lease. the contract should be treated as an operating lease. which is Rs. LKAS 17 defines a finance lease as a lease that transfers substantially all of the risks and rewards incidental to ownership of the leased asset to the lessee. 149. and the net realisable value is selling price of Rs. 149 per handset. No amount is recognised for the lease contract in the statement of financial position. and therefore SLFRS 2 does apply. which may qualify as an intangible asset under LKAS 38. so the two transactions must be taken together because the commercial effect of either transaction cannot be understood in isolation. The total fair value here is the market value of the shares. (5) Shares issued to the directors The three million shares issued to the directors on 1 June 20X6 as part of the purchase consideration for Hash are accounted for by Johann in accordance with SLFRS 3 Business combinations rather than SLFRS 2 Share-based payment. Johan sets the price of the handset. Therefore the dealer. being Rs. From Johan's point of view revenue is not earned when the handsets are transferred to the dealer. in this case. so revenue should not be recognised at this point. as the dealer may return any handsets before a service contract is signed with a customer.KC1 | Answers to Practice Questions Sales to dealers Johan bears the risk of loss in value of the handset. and states that revenue for an agent is not the amounts collected on behalf of the principal. Revenue from the service contract will be recognised as the service is rendered. The cost of the business combination is the total of the fair values of the consideration given by Johan. it will be amortised over the 12-month contract. The fact that the additional payment of shares is linked to continuing employment suggests that it is a compensation arrangement. The handset cannot be sold separately from the service contract. If it is so recognised. 130 (commission paid to the agent less cost of the handset) should be recognised as a customer acquisition cost. Instead the net payment of Rs. LKAS 18 deals with the issue of agency. however. is acting as an agent for the sale of the handset and service contract. 6m. not from the sale of the handset to the dealer. be seen as compensation accounted for in accordance with SLFRS 2. Johan earns revenue from the service contract with the final customer. SLFRS 2 requires that the transaction is measured at the fair value of the instruments granted at at the grant date. but the commission earned for collecting them.000 shares per director. The market value of each share at CA Sri Lanka 135 . to be received on 31 May 20X7 if the directors are still employed by Leigh – may. In addition. The contingent consideration – 5. This is because the shares issued are not remuneration or compensation. but simply part of the purchase price of the company. the debt component is remeasured to its fair value. 6m. and the fair value of each instrument at that date is Rs. is 1. Shares issued to employees These shares are remuneration and are accounted for under SLFRS 2. 4m. Here. the grant date and issue date are the same. The journal entries are: DEBIT CREDIT CREDIT Property. 3. The fair value of the equity element is the fair value of the goods or services (in this case the property) less the fair value of the debt element of the instrument. with a debt and an equity element. As the shares are given as a bonus they vest immediately and are presumed to be consideration for past services. plant and equipment Liability Equity Rs 4 Mn Rs 3. An adjustment is recognised as follows: 136 CA Sri Lanka .55.KC1 | Answers to Practice Questions that date is Rs. in shares or in cash. 50. 3.000. Such transactions are treated as the issue of a compound financial instrument. Therefore the total of Rs 3 Mn is recognised in profit or loss as a staff cost when the shares are issued with a corresponding increase to equity.3m × Rs. 2.9 Mn Rs 0. In the year ended 31 May 20X7. 3 million. 3 per share. (three million shares are valued at Rs. In three months' time.1 Mn To recognise the acquisition of PPE and the share-based transaction.) Therefore the total value of the compensation is 5 directors  5. 3 = Rs. plant and equipment is treated as a share-based payment in which the counterparty has a choice of settlement. Rs.50.3 million × Rs. The transaction is measured at the fair value of the instruments issued at the date on which they are granted. Purchase of property. plant and equipment In accordance with SLFRS 2. based on the share price at that date. 4. 3.000 is recognised in profit or loss as part of staff costs with a corresponding increase in equity recognised in the statement of financial position. the purchase of property.9 million. The fair value of the property is Rs. 2 = Rs. the liability at that date will be 1. Therefore the transaction is measured at Rs.5 = Rs. The fair value of the liability component at 31 May 20X7. 50.000 shares  Rs. Assuming the estimate of the future share price was correct at Rs. The fair value of the equity alternative is Rs.55 – 3. 125. Nor can CA Sri Lanka 137 . 5.000 – is deemed to be the fair value of the equity component. contingent liabilities and contingent assets as a liability of uncertain timing or amount.000 To recognise the share-based transaction.000. is known as the obligating event. 120. 120. The obligation may be legal.KC1 | Answers to Practice Questions DEBIT CREDIT Expense (4.000  Rs. Choice of share or cash settlement The share-based payment to the new director.000 = Rs. No legal action has been brought in respect of the accident. The cash alternative is valued at 40. 125.000 cash in order to obtain equity worth Rs. 120. At the settlement date. 2. 125. the liability element is measured at fair value and the method of settlement chosen by the director determines the final accounting treatment. and A reliable estimate of the amount can be made If these conditions apply. the fair value of the services is determined by the fair value of the equity instruments given.000. or it may be constructive (as when past practice creates a valid expectation on the part of a third party).000. a provision must be recognised. to a present obligation. 3 = Rs. the director surrenders the right to Rs.50  50.9) Liability Rs 0. In effect.65 Mn Rs 0.000 Rs. As at 31 May 20X7. The difference between these two values – Rs. 5. LKAS 37 states that a provision should only be recognised if:    There is a present obligation as the result of a past event An outflow of resources embodying economic benefits is probable. is also treated as the issue of a compound instrument. under LKAS 37.65 Mn To re-measure the liability to fair value. At 31 May 20X7. (6) Provision A provision is defined by LKAS 37 Provisions. which offers a choice of cash or share settlement. The past event that gives rise. Hash has no legal obligation to pay compensation to third parties. the accounting entries are: DEBIT CREDIT CREDIT Profit or loss – directors' remuneration Liability Equity Rs. The entity must have no realistic alternative but to settle the obligation. In this case.000 Rs. 138 CA Sri Lanka . must be disclosed in the notes to the financial statements. transactions are more complicated. which is:  A possible obligation depending on whether some uncertain future event occurs. because the investigation has not been concluded. the selling price charged per car seat related to two parts. however.KC1 | Answers to Practice Questions Hash be said to have a constructive obligation at the year end. or  A present obligation for which payment is not probable or the amount cannot be measured reliably There is uncertainty as to the outcome of the investigation and findings of the report. Sometimes. Therefore in respect of the contingent liability. however. In this case.the provision of the car seat and a recharge to cover the cost of construction of the machinery. contingent liabilities and contingent assets no provision is recognised. However. The question arises as to whether the possible recovery of the compensation costs from the insurance company should be disclosed as a contingent asset under LKAS 37. the standard states that the reimbursement is recognised only when it is virtually certain that reimbursement will be received if the entity settles the obligation. the details and. Therefore under LKAS 37 Provisions. if possible an estimate of the amount payable. it follows that no reimbursement asset can be recognised either. 17 Carpart (1) Vehiclex Generally. As no provision has been recognised at the reporting date in respect of costs associated with the airport’s collapse. fall within the LKAS 37 definition of a contingent liability. and it is necessary to break a transaction down into its component parts. the uncertainty over these details is not so great that the possibility of an outflow of economic benefits is remote. The possible payment does. and the expert report will not be presented to the civil courts until 20X8. In this case. and the extent of the damages and any compensation arising remain to be confirmed. LKAS 37 provides specific guidance on reimbursements ie where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party. LKAS 18 Revenue looks at each transaction as a whole. LKAS 18 does not address the issue of splitting revenue where goods are provided with the price including a recharge for a capital item. Equally it can be argued that the recharge amount does not meet the LKAS 18 definition of revenue. Therefore. It does however state that revenue should be measured at fair value. that part of the selling price relating to the provision of a car seat is recognised as revenue when the following LKAS 18 criteria are met: (a) the significant risks and rewards of ownership have been transferred by Carpart (b) Carpart does not retain managerial involvement or effective control over the goods (c) The amount of revenue can be estimated reliably (d) It is probable that economic benefits associated with the sale of the seat will transfer to Carpart (e) The costs associated with the transaction can be measured reliably. not a service contract or a construction contract. being the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when CA Sri Lanka 139 . and will not be sold elsewhere. in accordance with LKAS 18. through the sale of car seats. Recharge for the machinery In effect. Provision of the car seat The contract to manufacture and sell seats is a contract for the sale of goods. This may be determined as the cost of the car seat (excluding the cost of the machinery) plus Carpart’s standard margin.KC1 | Answers to Practice Questions The selling price per car seat should be split into its component parts for accounting purposes. (iii) The contract with Vehiclex is not a construction contract under LKAS 11 Construction contracts. It therefore follows that the part of the selling price allocated to the provision of the car seat should be the fair value (standalone selling price) of that car seat. (ii) The machinery is for the use of Carpart only. Carpart has paid for the machinery and. Carpart is not selling the machinery to Vehiclex: (i) There is no contract to sell the machinery to Vehiclex. is charging Vehiclex a total of some or all of the price it has paid (dependent on the number of car seats sold). The sale price allocated to each component part then needs to be assessed separately in terms of recognition. According to LKAS 18. In addition. if significant risks and rewards remain with the seller. even if legal title has been transferred. as there is evidence that Carpart has not transferred the risks and rewards of ownership. Therefore Carpart should not recognise revenue in respect of the machinery. this repurchase takes place four years into the vehicles economic life of five years. 140 CA Sri Lanka . such agreements must be analysed to determine whether the seller has transferred the significant risks and rewards of ownership to the buyer. In such cases. Here the inflow of economic benefits directly compensates for an outflow of economic benefits (the purchase of the machine) rather than increasing equity. There is no relevant accounting standard and therefore the principles of the Conceptual Framework should be applied. there is evidence that the significant risks and rewards have been transferred. The question therefore remains as to how that part of the selling price is accounted for. when the LKAS 18 recognition criteria for the sale of goods are met.KC1 | Answers to Practice Questions those inflows result in increases in equity. As a result an appropriate solution would be to recognise the receipt of recharged amounts as a credit balance in the statement of financial position and release it to profit or loss as income to match depreciation over the useful life of the machinery. the substance of the transaction is a financing arrangement. Carpart's obligation to repurchase the vehicles at 20% of the original selling price is not retention of significant risks because this is considerably below the market price. In the case of the vehicles that are repurchased by Carpart after 4 years. and the purchaser must maintain and service the vehicle and return it in good condition. then the transaction is not a sale and revenue cannot be recognised. The transfer of risks and rewards can only be decided by examining each transaction. then revenue can be recognised. (2) Vehicle sales Sale and repurchase agreements Carpart enters into a sale and repurchase agreement with its customers. Carpart must recognise revenue. Since the significant risks and rewards have been transferred. The vehicles sold with an option for the buyer to require repurchase by Carpart after two years are treated differently.. and what the credit entry to the accounts should be. If the risks and rewards of ownership have been transferred to the customer. measured at the fair value of consideration received. which is 55% of the original price. This is a general market risk for which current standards make no arrangements and therefore no adjustment is made to the recognised receivables balance. revenue is recognised and the carrying amount of the cars is transferred to cost of sales. based on experience with other customers. CA Sri Lanka 141 . The trade receivable is a financial asset within the scope of LKAS 39 and therefore Carpart must assess at the end of each reporting period whether there is objective evidence of an impairment. plant and equipment and depreciated over the 18 month period during which they are being used as demonstration vehicles. and so the transaction should be accounted for as if it will be. The deteriorating financial situation of the customer is identified as an indicator of impairment by LKAS 39. plant and equipment. At the end of the 18 month period. A trade receivable of Rs. that Venue will default. They should be removed from inventories and debited to 'assets under operating leases'. They should be capitalised as property. 1m is also recognised. When the LKAS 18 recognition criteria for the sale of goods are met. but have the characteristics of property. but is instead split between rentals received in advance (30%) and long-term liabilities (70%). the vehicles must be accounted for as operating leases. At this stage Carpart believes that there is a 5% risk. Importantly. the option is expected to be exercised.KC1 | Answers to Practice Questions The repurchase period is less than substantially all of the vehicles' economic life (only two years into the five year life). They should be depreciated over the two-year period of the option. The rentals received in advance balance is released and recognised as operating lease income in profit or loss over the two years on a straight-line basis. the vehicles are reclassified back into inventories and are no longer depreciated. being the fair value of consideration receivable. 1m is recognised on the sale of the exhausts. with the depreciable amount being adjusted for the residual value. The cash received is not recognised as revenue in the year. (3) Venue Under LKAS 18. because they are held for use in the business (demonstrations) and are expected to be used in more than one accounting period. Demonstration vehicles These are not conventional inventory. revenue of Rs. and the repurchase price of 70% of the original purchase price is greater than the fair value. as it would be for a sale. Until the option expires. 000 is recognised in profit or loss. Therefore an impairment of Rs.85 × 1. the present value of the consideration is Rs 2 Mn/1.KC1 | Answers to Practice Questions The impairment loss is measured as the difference between the carrying amount of the receivable (Rs 1 Mn) and the present value of estimated future cash flows that it will give rise to (Rs. or • a rate of interest that discounts the nominal amount to the current cash sale price. In other words. the fair value of the consideration is determined by discounting future receipts to present value using the more clearly determinable of: • the prevailing interest rate for a similar instrument of an issuer with a similar credit rating. (and when the LKAS 18 revenue recognition critier are met) revenue is recognised by: DEBIT CREDIT 142 Deferred income Revenue Rs 3 Mn Rs 3 Mn CA Sri Lanka . LKAS 18 states that the fair value of consideration may be less than the nominal value of cash receivable.85 Mn To recognise the revenue receivable at the discounted amount. The unwinding of the discount is credited to profit or loss as finance income over the two-year period as follows: Year 1 Year 2 DEBIT Receivable (1. 76.000 Rs. instead a deferred income liability is recognised: DEBIT Cash Rs 3 Mn CREDIT Revenue Rs 3 mn On delivery in a year's time. 74. 76.042 = Rs 1. receipt of the selling price of Rs 2 Mn is deferred for two years. revenue is not recognised immediately because the LKAS 18 revenue recognition criteria are not met.85 Mn. In this case.04) × 0. Using the 4% discount rate given.8 million). 74. This is recognised by: DEBIT CREDIT Receivable Revenue Rs 1.04) Rs.960 Regarding the Rs 3 Mn payment in advance.85 × 0. In this case.000 Rs.04/(1. where payment is deferred. 0.85 Mn Rs 1. 200. the substance of the arrangement is that there is both a sale and a financing transaction. (4) Other sales Revenue is measured at the fair value of consideration received or receivable.960 CREDIT Finance income Rs. for example vehicles or equipment. Carpart will recognise operating rental expenses as follows: Year 1 Year 2 Year 3 Rs. 13. 5 million Rs. generally faster in the CA Sri Lanka 143 . It does however state that where contingent rent is related to finance leases. 5 million plus (Rs 5 Mn × 4%) = Rs 5. Therefore no asset or liability would be recognised in respect of the leased asset. On this basis. Type A leases are leases in which the lessee consumes part of the leased asset.2 million plus (Rs 5. These are leases of depreciating assets. This guidance is normally extended to operating leases. LKAS 17 provides no guidance on accounting for contingent rent and operating leases. Accordingly. whereby leases are either Type A or Type B. and payments of Rs.000 would be recognised as expense on a straight-line basis in each of the three years of the lease term. it would not be incorrect to revert to standard guidance for operating leases and recognise associated costs on a straight line basis over the term of the lease.KC1 | Answers to Practice Questions (5) Lease with Elpres Inflation adjustments are effectively contingent rent. defined in LKAS 17 Leases as 'that part of the rent that is not fixed in amount. with the type of lease based on the amount of consumption of the underlying asset. A lessee is required to recognise a right-of-use asset and a lease liability for all leases of more than 12 months. as the lease with Brooke is. whose value declines over its useful life. a lessee is not required to recognise a rightof-use asset and a lease liability. 5. ED/2013/6 The basic principle of the 2013 ED is that all leases are recognised in the statement of financial position and entities do not distinguish between an operating and finance lease.2 Mn × 4%) = Rs 5. the IASB has developed a dual approach. A single accounting model for lessees would not reflect the true economics of different assets. but may choose to do so.2 Mn Rs.408 Mn As LKAS 17 does not provide clear guidance in respect of contingent rent and operating leases. it is recognised as incurred. but based on the future amount of a factor that changes other than with the passage of time'. For leases of 12 months or less. (6) Lease with Brooke LKAS 17 This lease meets the definition of an operating lease. Therefore a finance cost would be recognised in profit or loss. the proposed new standard requires that Carpart would initially recognise a “right-of-use” asset and a lease liability at the present value of the lease payments of Rs.700/Rs. (1) The lease term is for an insignificant part of the total economic life of the underlying asset. the right-of-use asset would be amortised over the lease term on a straight-line basis unless another systematic basis were more representative of the consumption of the asset. Type B leases normally relate to property. therefore: • • The lessee pays for that part of a Type A leased asset that it consumes.KC1 | Answers to Practice Questions earlier years. They are not normally property. 113. leases for assets other than property will be classified as type B leases in either of the following circumstances. however.700. (2) The present value of the lease payments accounts for substantially all of the fair value of the underlying asset at the commencement date.. The lessee pays for the use of a Type B leased asset. (2) The present value of the lease payments is insignificant relative to the fair value of the underlying asset at the commencement date of the lease. however. In the case of a Type A asset. Although the term insignificant is not defined in ED/2013/6. 21. The carrying amount of the lease liability would be increased in each period by the unwinding of the interest payment and decreased by the amount of the payments made. 21. In effect. 144 CA Sri Lanka . (1) The underlying asset (the machine) is not property.. (1) The lease term is for the major part of the remaining economic life of the underlying asset.600). property will be classified as a Type A lease in either of the following circumstances. 19% is unarguably insignificant. (3) The lease term is for more than an insignificant part of the total economic life of the machine (3 years out of 20). (2) The present value of the lease payments is 19% of the fair value of the machine at the commencement date (Rs. Type B leases are leases in which the lessee consumes only an insignificant part of the asset. Carpart should classify the lease of the machine as a Type A lease for the following reasons. In subsequent periods. joint control or significant influence and type of joint arrangement (ii) Information on interests in subsidiaries such that the composition of the group and non-controlling interest is understood and restrictions. revenue shall be recognised only to the extent of the expenses recognised that are recoverable. CA Sri Lanka 145 . The outcome of a transaction can be estimated reliably when all of the following conditions are satisfied: (a) the amount of revenue can be measured reliably. the associated revenue should be recognised by reference to the stage of completion of the transaction at the end of the reporting period. (7) Disclosure In order to meet the objective of SLFRS 12 Disclosure of interests in other entities. Ama Balachandran is wrong to believe that the whole of this revenue can be recognised in 20X4. (b) it is probable that the economic benefits associated with the transaction will flow to the entity. (i) Significant judgements and assumptions made in determining control. as the service will be provided over a 5 year term from 1 January 20X4 to 31 December 20X8. and (d) the costs incurred for the transaction and the costs to complete the transaction can be measured reliably. risks and changes in ownership can be evaluated (iii) Information on interests in associates and joint arrangements such that the nature and extent of the interests. (c) the stage of completion of the transaction at the end of the reporting period can be measured reliably. Where the outcome of the transaction involving the rendering of services cannot be estimated reliably. financial effects and associated risks can be evaluated (iv) Information on interests in unconsolidated structured entities such that the nature and extent of the interests and associated risks can be evaluated 18 Mica (1) Maintenance contract LKAS 18 states that where the outcome of a transaction involving the rendering of services can be estimated reliably.KC1 | Answers to Practice Questions Essentially this treatment is that currently applied to finance leases. entities are required to make the following disclosures. For example at 31 December 20X4. Alternatively the total costs of fulfilling the contract could be estimated based on costs incurred to date. revenue is recognised on a straight line basis over the specified period unless there is evidence that some other method better represents the stage of completion.151 CA Sri Lanka . It may be arguably uncertain as to whether the costs incurred can be measured reliably. 259. it seems likely that the first 3 conditions are met. • Services performed to date as a percentage of total services to be performed. LKAS 18 states that the stage of completion may be measured by reference to: • Surveys of work performed.151 259.000 per year.053) To record the revenue for 20X4 146 Credit Rs.e. In this case it is suggested that services will be performed by an indeterminate number of acts. i. at 20% per year. 300. since the contractual revenue has been agreed and there is no reason to suppose that Matara will not pay. when services are performed by an indeterminate number of acts over a specified period of time. but Mica may be able to base estimates on similar contracts in the past. and so revenue should be recognised on a straight line basis over the life of the contract. the amount of revenue would be Rs. or • The proportion that costs to date bear to expected total costs LKAS 18 also states that. and the discount unwound each year. provided that the agreed service is performed . because the consideration is deferred until 31 December 20X7. this must be discounted to present value and the discounted amount must be recorded in the periods preceding 20X7. 31 December 20X4 Receivable Revenue (300k/1. Assuming that Mica recognises the revenue on a straight-line basis according to the stage of completion. total costs could be estimated as 5 x the costs incurred during 20X4. However. Entries will be as follows: Debit Rs.KC1 | Answers to Practice Questions At the start of the contract. 000 300. 12.151 × 5%) To unwind the discount in respect of the receivable Receivable Revenue (300k/1.109 27.109) × 5%) To unwind the discount in respect of the receivable Receivable Revenue (300k/1.211 + 285.857 42.000 Off-plan sales Although Mica’s previous construction contracts would have been accounted for in accordance with LKAS 11 Construction Contracts.958 12.000 300.151 + 12.000 900.714 42. the nature of these contracts may be different. revenue for the year and deferred income 20X8 Deferred income Revenue To recognise revenue for 2018 (2) Credit Rs.857 1.109 + 27. 31 December 20X5 Receivable Interest income (259.714) × 5%) To unwind the discount in respect of the receivable Cash Receivables Revenue Deferred income To recognise receipt of cash.958 + 272.211 285.000 300.151 + 12.052) To record the revenue for 20X5 31 December 20X6 Receivable Interest income ((259. Since each sale represents a sale of land plus an agreement for the construction of real estate. the two components must be treated separately.714 285.05) To record the revenue for 20X6 31 December 20X7 Receivables Interest income ((259.958 + 272.000 300. CA Sri Lanka 147 .109 272.958 272.211 27.500.KC1 | Answers to Practice Questions Debit Rs. The total fair value of consideration received or receivable must be allocated to each component. KC1 | Answers to Practice Questions LKAS 18 (para. IFRIC 15 Agreements for the Construction of Real Estate provides guidance to determine which standard should be applied. Mica recognises revenue in respect of the sale of land at this point. (d) it is probable that the economic benefits associated with the transaction will flow to the entity. (c) the amount of revenue can be measured reliably. 148 CA Sri Lanka . this is an agreement for the sale of goods therefore the provisions of LKAS 18 in relation to the sale of goods apply. the risks and rewards relating to the sale of land will pass to the purchaser when a binding sales agreement is signed. and (e) the costs incurred or to be incurred in respect of the transaction can be measured reliably. (b) the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold. In this case. An agreement for the construction of real estate is within the scope of LKAS 18 when buyers have limited ability to influence the design of real estate and can specify only minor variations to the basic design. The remaining component of the transaction is an agreement for the construction of real estate and directly related services. Since Mica will be supplying the (standard) construction materials rather than the purchaser supplying materials. An agreement for the construction of real estate is within the scope of LKAS 11 when the buyer is able to specify the major structural elements of the design of the real estate before construction begins and/or specify major structural changes once construction is in progress (whether or not it exercises that ability) (IFRIC 15 para 11). Since the houses will be built to a standard design and the buyers of the houses are likely to have only minimal input into design features (such as kitchen styles). 14) states that revenue from the sale of goods is recognised when all the following conditions have been satisfied: (a) the entity has transferred to the buyer the significant risks and rewards of ownership of the goods. the sale falls within the scope of LKAS 18 rather than LKAS 11. Next Mica should consider whether this component is an agreement only for the rendering of services or is for the sale of goods. This transaction falls within the scope of either LKAS 11 Construction Contracts or LKAS 18 Revenue. 40. and will be measured and presented in accordance with that standard. 750. For this to be the case: 1. it will be transferred to be an asset held for sale when the SLFRS 5 criteria are met. Therefore the equipment is impaired.KC1 | Answers to Practice Questions (3) Former hospitality division SLFRS 5 states that an entity shall classify a non-current asset as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. meaning (a) an appropriate level of management must be committed to a plan to sell the asset (b) there must be an active programme to locate a buyer (c) the asset (or disposal group) must be actively marketed for sale at a price that is reasonable in relation to its current fair value (d) the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification (e) it must be unlikely that significant changes to the plan will be made Cookery equipment Since the decision has not fully been made as to whether to sell the equipment or retain it and lease it. and must be tested for impairment at each period end. there is no indication that they were intended to be sold as at 31 December 20X4. The recoverable amount. The asset therefore continues to be classified as PPE. Vans Although the vans were in fact sold in January 20X5. and depreciation should continue to be charged on the written down amount over the remaining useful life.000. The cookery equipment is currently idle and therefore an impairment test must be performed. its sale must be highly probable. an indicator of possible impairment is a change in operations resulting in a change in use of the asset. is the value in use of Rs. being the higher of fair value less costs of disposal and value in use. If the decision is made to sell the equipment. According to LKAS 36. CA Sri Lanka 149 . the asset must be available for immediate sale in its present condition 2. 710. if indicators of impairment exist. An impairment loss of Rs.000 must be recognised in profit or loss. it cannot be categorised as held for sale. The carrying amount of the equipment is Rs.000. If the sale at less than carrying amount was due to conditions that existed at the reporting date. Accordingly the property may not be designated as held for sale at 31 December 20X4. The sale so soon after the year-end at a price lower than carrying amount could be an indicator that the vans were actually impaired at the year-end. then this is an adjusting event and the value of the vans should be written down to Rs. If the loss of value is due to events occurring after the year-end. meaning there was (understandably) not an active programme to find a buyer.KC1 | Answers to Practice Questions SLFRS 5 states that if the criteria for assets to be classified as held for sale are met after the reporting period. then this is a nonadjusting event. the company decided to renovate the property prior to the sale. Therefore at no stage has the property been available for immediate sale in its present condition. the entity must make additional disclosures. the renovations are ongoing at the reporting date. An SME is an entity that does not have public accountability and publishes general purpose financial statements for external users. Therefore Mica shall disclose: • a description of the vans • a description of the facts and circumstances of their sale. and should be disclosed if material. Headquarters Although Mica have clearly intended to sell the property since June 20X4. As a result of the discovery of asbestos. (4) SLFRS for SMEs The SLFRS for SMEs may be applied by any company that meets the definition of a Small or Medium Sized Entity (SME) and is not a Specified Business Entity (SBE).e. The vans are therefore presented in the statement of financial position as at 31 December 20X4 within property. plant and equipment rather than assets held for sale. an entity must not classify a non-current asset as held for sale in those financial statements i. the reportable segment in which the vans are presented in accordance with SLFRS 8. it was not advertised for sale until February 20X5.7 Mn. 270. and should be recorded at carrying amount of Rs 6. 150 CA Sri Lanka . When those criteria are met after the reporting period but before the authorisation of the financial statements for issue. Furthermore.000 as at 31 December 20X4. it is a non-adjusting event. and • if relevant. equally it does produce general purpose financial statements for external users. An SBE is a company such as a bank or insurance company. it does not include a property construction and management company. Provisions The guidance contained within the SLFRS for SMEs on accounting for provisions is identical to that contained within LKAS 37. the SLFRS for SMEs requires that these costs form part of the acquisition cost. but instead is tested for impairment annually. The SLFRS for SMEs simplifies this treatment in a practical sense by requiring that goodwill is amortised over a finite life (presumed to be 10 years) and is tested for impairment only if there is an indicator of impairment. As a result goodwill calculated in accordance with the SLFRS for SMEs may be greater than that calculated in accordance with SLFRS 3.KC1 | Answers to Practice Questions Mica has retained its private status rather than seek a listing and therefore does not have public accountability. the SLFRS for SMEs does not provide a choice of measuring properties under either the revaluation or cost model. and LKAS 10 Events after the reporting period. Therefore Mica is eligible to apply the SLFRS for SMEs. SLFRS 3 requires that transaction costs on an acquisition are recognised in profit or loss. Goodwill is therefore measured at cost less accumulated amortisation charges less accumulated impairment losses. Therefore recognised goodwill always represents the parent share of goodwill only. CA Sri Lanka 151 . Purchased goodwill SLFRS 3 requires that the NCI is measured as a proportion of the net assets of the acquiree. Instead it requires all property. there is no option to measure it at fair value. Full SLFRS require that recognised goodwill is not amortised. (5) Adequacy of disclosures The applicable standards here are SLFRS 7 Financial instruments: disclosures. Mica should have included additional information about the loan covenants sufficient to enable the users of its financial statements to evaluate the nature and extent of risks arising from financial instruments to which the entity is exposed at the end of the reporting period. plant and equipment to be measured using the cost model. According to SLFRS 7. Owned properties held at revalued amount Unlike full SLFRS. 13 6. as indicated by the directors' and auditor’s doubts about the company continuing as a going concern. after the date of the financial statements but before those statements were authorised.00 312. plant and equipment: + 12 (W13) Goodwill Financial assets 241. Here both the directors' and auditor’s reports express going-concern doubts however the information in the financial statements is prepared on a going-concern basis. Therefore the event should have been disclosed in accordance with LKAS 10. The directors should therefore assess the going concern status of the company. SLFRS 7 requires disclosure of additional information about the covenants relating to each loan or group of loans. Information should have been given about the conditions attached to the loans and how close the entity was at the year-end to breaching the covenants. Although the breach is a non-adjusting event.00 29. as it does not provide additional information concerning year-end conditions. The actual breach of the loan covenants at 31 March 20X4 is a material event after the reporting period as defined in LKAS 10. including headroom (the difference between the amount of the loan facility and the amount required). 19 Robby (1) ROBBY GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MAY 20X3 Rs Mn Assets Non-current assets Property. The breach. LKAS 10 requires that the financial statements are not prepared on a going concern basis. where such an event means that an entity is no longer a going concern.KC1 | Answers to Practice Questions Such disclosure is particularly important in Mica’s case because there was considerable risk at the year-end (31 December 20X4) that the loan covenants would be breached in the near future.13 Current assets + 4 (W12) Total assets 152 36. is a non-adjusting event.13 CA Sri Lanka .00 276. 04 206 73 52 331 312.13 (20) (10) 25 (2) (1) (16) 3 (15) (3.13 Group structure 1 June X1 80% (sub) Preacquisition retained earnings CA Sri Lanka Rs 16 Mn Robby Hail 94.20 312.64 136.4 (4) 81.6 100 26 23 149 176.24) 9 3.13 Non-controlling interests Non-current liabilities Current liabilities+ 3.45 108.84 3.13 1 6 (50) (1) – 3 (21) – 29 29 6 (6) 8 5 7 12 24 206 73 52 331 St capital 25 20 10 55 OC Equity 11 – – 11 (7) Ret’d earnings 70 27 19 116 2 106 47 29 182 4 36 312.45 27.16) 0.00 81.6 (W12)+16 (W13) Total equity and liabilities Workings Consolidation schedule – consolidated statement of financial position at 31 May 20X3 Robby Rs Mn 112 PPE Hail Rs Mn 60 Zinc Rs Mn 26 Rs Mn 198 (W2(i)) Rs Mn (W2(ii)) Rs Mn Goodwill (W3) Rs Mn 24 (W4(i)) (W4(ii)) Rs Mn Rs Mn 4 5 Inv in H 55 55 Inv in Z 19 19 Financial assets Joint operation C assets 9 6 14 6 (5) (W5) Rs Mn (W6) Rs Mn (0.68 (0.4) (W7) Rs Mn 6.12 (W8) Rs Mn (2.09 Non current liabilities Current liabilities 1 53 20 21 94 0.00 2.84 81.84 47 6 2 55 6.45 108.KC1 | Answers to Practice Questions Rs Mn Equity and liabilities Equity attributable to owners of the parent Ordinary shares Other components of equity Retained earnings 25.8) (0.64 136.09 94.6 16 1 June 1 Dec X2 X2 5% + 55% = 60% (IEI) Preacquisition Zinc retained earnings N/A Rs 15 Mn 153 81.59) (W9) Rs Mn (W10) Rs Mn 12 Consolidated Rs Mn 241.59) 2 0.20 .45 NCI 15 27.8 (0. In addition. These are achieved by (Rs Mn): DEBIT Other components of equity (%m + 2m) CREDIT Investment in H CREDIT Retained earnings 7m 5m 2m To eliminate the fair value gain on Hail in Robby’s separate financial statements and transfer the dividend to retained earnings.land 24 (60) 5 CA Sri Lanka . 16 million. Goodwill (Hail) Rs Mn Rs Mn 50 Consideration transferred 15 Non-controlling interest (fair value per q) FV of identifiable net assets at acq'n: Stated capital 20 Retained earnings 16 Fair value adjustment . Robby has recognised a dividend from Hail in other comprehensive income (and so accumulated in other components of equity).KC1 | Answers to Practice Questions 2 (i) Carrying amount of Hail Hail was initially recognised at purchase consideration of Rs. This must be eliminated on consolidation. At the reporting date it is measured at its fair value of Rs 55 Mn and therefore a cumulative revaluation gain of Rs 55 Mn – Rs 50 Mn = Rs 5 Mn is represented in other components of equity. (ii) Carrying amount of Zinc Total consideration for the 60% investment in Zinc was Rs. This is reversed by (Rs Mn): DEBIT Retained earnings 1m CREDIT Investment in Zinc 1m 3 154 To eliminate the fair value gain on Zinc in Robby’s separate financial statements. the initial investment was measured at FVTPL and a re-measurement of Rs 1 Mn was recognised at 31 May 20X2. Whilst the second investment is carried at cost of Rs. This must be transferred to retained earnings. 55 million and is subsequently classified as available for sale and measured at fair value with changes recognised in other comprehensive income. 18million. however is determined to be Rs. (ii) Goodwill is calculated as follows: Consideration transferred (55%) Non-controlling interest at fair value (per question ) Fair value of previously held interest (5%) FV of identifiable net assets at acq'n: 10 Stated capital 15 Retained earnings * 4 Fair value adjustment (1 + 3) Rs Mn 16 9 5 (29) 1 . 3million higher when the final valuations are received 3 months later. on the acquisition date it is remeasured to its fair value of Rs5m and. * The fair value adjustment is provisionally Rs. 4 Goodwill (Zinc) (i) The previously held interest in Zinc has a carrying amount of Rs. This adjustment takes place in the measurement period and SLFRS 3 requires that goodwill is retrospectively adjusted.KC1 | Answers to Practice Questions The standing journal to recognise this is (Rs Mn): DEBIT Goodwill 5m DEBIT Stated capital 20m DEBIT Retained earnings 16m DEBIT PPE 24m CREDIT Investment in H CREDIT NCI 50m 15m To recognise the acquisition of Hail and resulting goodwill. a gain of Rs. 3million is recognised in profit or loss and accumulated in retained earnings (Rs Mn): DEBIT Investment in Z 3m CREDIT Retained earnings 3m To recognise the remeasurement to fair value of the existing interest. The standing journal to recognise this is (Rs Mn): DEBIT Goodwill 1m DEBIT Stated capital 10m DEBIT Retained earnings 15m DEBIT PPE 4m CREDIT Investment in Z (16 + 5) CREDIT NCI CA Sri Lanka 21m 9m 155 . 1 million at the acquisition date. 2 million. Therefore the charge from acquisition to the period end is Rs.16m CREDIT PPE 0.8 million (2.8m CREDIT NCI 3.KC1 | Answers to Practice Questions To recognise the acquisition of Hail and resulting goodwill. liabilities. 4 million in Zinc is depreciated over a remaining useful life of 5 years. revenues and expenses plus its share (40%) of the joint assets. revenue and expenses.24m DEBIT NCI (40%) 0.2m + 1.4m To recognise depreciation on the fair value uplift. The figures are calculated as follows: 156 CA Sri Lanka .2 Zinc Rs Mn 19 (15) 4 1. 400.6 Therefore a total Rs 3.8m To allocate profits since acquisition to the NCI. 6 Depreciation of fair value adjustment in Zinc (Note the fair value adjustment in Hail was to non-depreciable land) The fair value uplift of Rs. 5 Allocation of post-acquisition retained earnings to the NCI Hail Rs Mn Retained earnings at reporting date 27 Retained earnings at acquisition (16) Post-acquisition 11 NCI share (20%/40%) 2. 7 Joint operation (in Robby's books) The accounting treatment of a joint operation is prescribed by SLFRS 11 Joint arrangements.000. liabilities. This additional expense is attributable to the group and NCI in their ownership proportions and is recognised by: DEBIT Retained earnings (60%) 0. Robby must recognise on a line-by-line basis its assets.6m) of profits are allocated to the NCI by (Rs Mn): DEBIT Retained earnings 3. 4m/5 years  6/12m = Rs. 04 0.80 0.00 Trade payables (to other joint operator): 16 + 0.12 8. CA Sri Lanka 157 .5 (costs) × 40% 6.5 × 40% Depreciation Finance cost (unwinding of discount) Profit from joint operation (to retained earnings (W10) Rs Mn 8.12 Accumulated depreciation: 6.00 6.KC1 | Answers to Practice Questions Profit or loss for the year Revenue: 20 × 40% Cost of sales: 16 × 40% Operating costs: 0.60 Dismantling provision: At 1 June 20X2 (as above) Finance cost (unwinding of discount): 0.04) 0.80 6.00 (6.84 Robby has accounted only for its share of the construction cost of Rs 6 Mn.00 0.8 × 5% At 31 May 20X3 0.68) (0.68 To recognise the joint operation in accordance with SLFRS 11.20) (0.00 6. The journal to correct this is therefore as follows (Rs Mn): DEBIT DEBIT CREDIT CREDIT CREDIT CREDIT Property. plant and equipment Trade receivables Joint operation Trade payables Provision Retained earnings (Robby) 6.68) 6.8/10 31 May 20X3 carrying amount Trade receivables (from other joint operator): 20 (revenue) × 40% 8.84 0.60 0.40) (0.68 Statement of financial position Rs Mn Property. plant and equipment: 1 June 20X2 cost: gas station (15 × 40%) dismantling provision (2 × 40%) 6.80 (0. plant and equipment 2.61 – 0. 0.61) 10.11) 1. plant and equipment 1.89 is recognised as a reduction in other components of equity and Rs.59 2. 2.11 To transfer the excess depreciation charge from OCE to retained earnings. surplus Rs Mn 2.59) Reval.39 (2.00 (1.80 The impairment loss is charged to other comprehensive income and therefore to other components of equity to the extent of the revaluation surplus.50 31 May 20X3 Balance Impairment loss (balancing figure) Recoverable amount Carrying amount Rs Mn 10.59 To recognise the impairment loss. The net journal is therefore (Rs Mn): DEBIT Other components of equity DEBIT Retained earnings CREDIT Property.00 0. plant and equipment 1 June 20X0 Cost Acc.KC1 | Answers to Practice Questions 8 Property. 1.11 0.00 (0. 1.00) 9. The impairment loss is recognised by (Rs Mn): DEBIT DEBIT CREDIT Other components of equity Retained earnings Property.00 2. depreciation 2/20 × 10 Revaluation gain(balancing figure ) 31 May 20X2 Revalued PPE c/d Depreciation for year 1/18 × 11 Transfer to retained earnings: 0.89 = Rs.89 0. Therefore Rs. The remainder is taken to profit or loss and therefore to retained earnings.7 as a reduction in retained earnings.00 11.59 To recognise the impairment and excess depreciation transfer.89 7. 158 CA Sri Lanka .00 (0.59 – Rs.70 2. The reserve transfer for excess depreciation is recorded by (Rs Mn): DEBIT CREDIT Other components of equity Retained earnings 0. the loss reversed and the proceeds recognised as a liability (Rs Mn): DEBIT CREDIT CREDIT Trade receivables Current liabilities Retained earnings (to reverse loss) 4.KC1 | Answers to Practice Questions 9 Debt factoring Robby should not have derecognised the receivables because the risks and rewards of ownership have not been transferred. The substance of the transaction is a loan of Rs 16 Mn. and the 5% 'premium' on repurchase is effectively an interest payment. or (2) The entity transfers the financial asset or substantially all the risks and rewards of ownership of the financial asset to another party. The sale must be reversed and the land reinstated at its carrying amount before the transaction. (2) Derecognition of a financial asset Derecognition is the removal of a previously recognised financial instrument from an entity's statement of financial position. ie the repayment of the loan takes place one month after the year end. 10 Sale and repurchase of land Robby should not have derecognised the land from the financial statements because the risks and rewards of ownership have not been transferred. An entity should derecognise a financial asset when: CA Sri Lanka (1) The contractual rights to the cash flows from the financial asset expire. and so this is a current liability (Rs Mn): DEBIT DEBIT CREDIT Property. The receivables must therefore be reinstated.6 0. This is an attempt to manipulate the financial statements in order to show a more favourable cash position. The repurchase.0 3. 159 .4 To reverse the incorrect entry and recognise the factoring arrangement correctly. plant and equipment Retained earnings (to reverse profit on disposal)(16 – 12) Current liabilities 12 4 16 To reverse the incorrect entry and recognise the sale and repurchase arrangement correctly. KC1 | Answers to Practice Questions LKAS 39 gives examples of where an entity has transferred substantially all the risks and rewards of ownership. and the receivables should continue to be recognised.6 Mn once the Rs. In the case of Robby. Robby is entitled to receive the benefit (less interest) of repayments in excess of Rs 3. It could sell the right to receive the interest to another party while retaining the right to receive the principal. Robby has transferred the receivables to the factor in exchange for Rs 3. (3) Sale of land Ethical behaviour in the preparation of financial statements. Robby is liable for the whole Rs 3.6 Mn. It is possible for only part of a financial asset or liability to be derecognised. In addition. Substantially all the risks and rewards of the financial asset therefore remain with Robby.6 Mn and the amount collected. Robby therefore retains the credit risk. Therefore for amounts in excess of Rs 3.6m has been collected. but it is liable for any shortfall between Rs 3. for example to 160 CA Sri Lanka . 3. Financial statements may be manipulated for all kinds of reasons.6 Mn cash. The standard also provides examples of situations where the risks and rewards of ownership have not been transferred: (1) A sale and repurchase transaction where the repurchase price is a fixed price or the sale price plus a lender's return (2) A sale of a financial asset together with a total return swap that transfers the market risk exposure back to the entity (3) A sale of short-term receivables in which the entity guarantees to compensate the transferee for credit losses that are likely to occur.6 Mn Robby also retains the late payment risk. the substance of the transaction needs to be considered rather than its legal form. although it is unlikely that the default would be as much as this. In principle. to auditors and to accountants giving advice to directors. These include: (1) An unconditional sale of a financial asset (2) A sale of a financial asset together with an option to repurchase the financial asset at its fair value at the time of repurchase. or Only a fully proportionate (pro rata) share of the total cash flows For example. This is allowed if the part comprises: (1) (2) Only specifically identified cash flows. This applies equally to preparers of accounts. and in other areas. if an entity holds a bond it has the right to two separate sets of cash inflows: those relating to the principal and those relating to the interest. is of paramount importance. 44:1. and so the land needs to be reinstated in the accounts and a current liability recognised for the repurchase.KC1 | Answers to Practice Questions enhance a profit-linked bonus.09 The effect of the sale just before the year-end was intended to eliminate the bank overdraft and improve these ratios. To act ethically.00) Administrative costs (96. If a treatment does not conform to acceptable accounting practice.83 136. which hides the fact that the Robby Group has severe liquidity problems. it does not alter the true position and gives a misleading impression of it. In this case. it is not ethical. Acceptable accounting practice includes conformity with the qualitative characteristics set out in the Conceptual Framework particularly fair presentation and verifiability.01) 161 . The sale as originally accounted for might forestall proceedings by the bank.80 Distribution costs (64. The extent of the liquidity problems can be seen in the current ratio of Rs 36 Mn/Rs 81. calculated as follows: 53 + 20 + 21  non-current liabilities  + 3. the directors must put the interests of the company and its shareholders first. and must also have regard to other stakeholders such as potential investors or lenders.096.83.6  factored receivables  + 16  land option  Equity interest  including NCI 113.2 Mn = 0. there is no improvement to gearing.60 = = 0. the purpose of the sale and repurchase is to present a misleadingly favourable picture of the cash position. but as the substance of the transaction is a loan.00) Gross profit Other income 245. and the gearing ratio of 0.00 Revenue Cost of sales (851. Conformity with the Conceptual Framework precludes window-dressing transactions such as this.00 57. Company accountants act unethically if they use 'creative' accounting in accounts preparation to make the figures look better. although when the sale of land is correctly accounted for as a loan. 20 Ashanti (1) CA Sri Lanka ASHANTI GROUP STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 APRIL 20X5 Rs Mn 1. 00) 0.KC1 | Answers to Practice Questions Finance income Finance costs Share of profit of associate Profit before tax Income tax expense Profit for the year Other comprehensive income (items that will not be reclassified to profit or loss) Gain on AFS financial assets 2.90 Other comprehensive income for the year net of tax Total comprehensive income for the year Profit attributable to: Owners of the parent Non-controlling interests 38.10 113.37 CA Sri Lanka .00 Gain/loss on property revaluation Remeasurement of defined benefit plan Share of other comprehensive income of associate 19.89 20.37 Total comprehensive income attributable to: Owners of the parent Non-controlling interests 162 Rs Mn 1.87 32.68 (32.39 64.48 14.48 103.00) 64.87 82.87 (49.70) 50.60 (14.5 103. 54) (1.01) 1.48 14.1 2.3 4.21) 50.68 (3) (32.116 Cost of sales (686) (137) (42) (865) Gross profit 124 98 29 251 Other income Distribution costs Admin costs 31 17 6 54 (30) (21) (13) (64) (55) (29) (6) (90) Finance income Finance costs Share of profit of associate PBT – – – (8) (6) (4) (W2) Rs Mn (W3) Rs Mn (W5(i)) Rs Mn (W5(ii)) Rs Mn (W7(i)) Rs Mn (15) (W7(ii)) Rs Mn 15 (1) – – – _____ __ _ __ __ (W10) Rs Mn (W11) Rs Mn Consolidated Rs Mn 1.4 19.21) 82.8 3.63 35.66) (0.KC1 | Answers to Practice Questions Workings Revenue Ashanti Rs Mn 810 Bochem Rs Mn 235 Ceram Rs Mn 71 Total Rs Mn 1.7 5.39 (1) (10.12 (1.9 (1) (10.4) 2.89 20.6) 1.66) (0.096 (851) 245 57.6) (0.14 0.54) (1.47 10.8 – _____ (W8) Rs Mn (11.87 year OCI AFS 20 9 3 32 Revaluation 12 6 – 18 Remeas’t of DBP Share of OCI of associate TCI (14) – – (14) – – – – _____ 59 _____ 51 _____ 10 ______ 120 Profit attributable to: Owners of A 41 Tax NCI (30%/44%) TCI attributable to: Owners of A NCI (30%/44%) CA Sri Lanka 59 113.70) 2.08 13.66 1.1 15.48 163 .6) (0.14 0.02) (8) - (0.10 62 59 12 133 (21) (23) (5) (49) (49) Profit for the 41 36 7 84 64.9 0.68 (18) – (W9) Rs Mn (5) 3.66 2.6 (14) 0.88 (0.02) (8) (1.6) 1.7 (0.70) 1.2) (2) (1.8 (64) (2.37 25.6 100.21) (96.6 19.4) 2.2 3.9 103.3 (1.87 32 1.92 70. 0) 44.6) 37.0 54.2 The impairment loss in the year is recognised by (Rs Mn): DEBIT Administrative costs 2.4.11.2 To recognise the impairment of goodwill in the year.20X5: 44  5% Rs Mn 150.0 (160.2 CREDIT Goodwill (SOFP) 2.4.4.X4 2 1.2) 35. 164 CA Sri Lanka .4 (2.5.0 (6.X4 30. 20X4: 44  15% Impairment loss to 30.X5 Goodwill in Bochem Consideration transferred: per question/136  70% Fair value of non-controlling interest Fair value of net assets Impairment loss to 30.KC1 | Answers to Practice Questions 1 Group structure Ashanti 1 May 20X3 30 April 20X5 70% – 10% = 60% Bochem 1 May 20X3 1 Nov 20X4 80% – 50% = 30% Ceram Effective interest to 1 Nov 20X4 56% NCI (bal) 44% 100% Ashanti Bochem Subsidiary with 30% NCI for whole year Ceram Subsidiary with 44% NCI  6 12 30% associate (with 30% NCI by Ashanti) 1. the disposal journal is shown for completeness (Rs Mn): DEBIT CREDIT CREDIT Cash Non-controlling interest (251. there is no effect on the consolidated statement of profit or loss and other comprehensive income.0 216.88 * Net assets of Bochem at date of sale: Net assets at 30 April 20X5 FV adjustments (W3) Goodwill (W2) CA Sri Lanka Rs Mn 210. It is accounted for as an equity transaction directly in equity. The sale is.12 8. in effect.0 35. therefore (Rs Mn): DEBIT Administrative costs 2 (10m/5yrs) CREDIT PPE (SOFP) 2 To recognise additional depreciation in the year. Although no adjustment is required.0 6. and only reflected in the statement of changes in equity.2 251. 3 Fair value adjustment Rs Mn 160 (150) 10 Fair value of net asset at acquisition Book value of net assets at acquisition (55+85+10) Fair value upift The fair value uplift is depreciated over 5 years.KC1 | Answers to Practice Questions As the goodwill is attributable to both the group and the NCI.2 *  10%) Adjustment directly to parent's equity 34 25.2 165 . a transfer between owners (Ashanti and the noncontrolling interest). 4 Disposal of 10% of Bochem As control is not lost. the loss is allocated between the owners of Ashanti and the NCI in proportion to their ownership interests. 2) 3.2 (35.2 3. (ii) Ceram is now an associate and therefore after the disposal.0 160. the group share of its profit after tax and OCI is recognised as income from an associate (Rs Mn): DEBIT Investment in associate 3 (SOFP) CREDIT Share of profit of 2./12m) To recognise income from Ceram as an associate.1 associate (Rs 14 Mn × 30% × 6/12m) CREDIT Share of OCI of associate 0.KC1 | Answers to Practice Questions 5 Disposal of Ceram Rs Mn Fair value of consideration received Fair value of equity interest retained Carrying amount of Ceram at date of disposal Net assets Goodwill (W6) Less NCI per question Rs Mn 90.0) (131.0 6.0 45. 166 CA Sri Lanka .2 166. The gain is attributable between the owners of the parent and the NCI in Bochem in proportion to their ownership interests. This income is attributable to the owners of Ashanti and the NCI in Bochem in proportion to their ownership interests.9 (Rs 10 Mn × 30% × 6.8 (i) The disposal is recognised by (Rs Mn): DEBIT Cash (SOFP) DEBIT NCI (SOFP) DEBIT Interest in associate (SOFP) CREDIT Net assets (SOFP) CREDIT Goodwill (SOFP) CREDIT Other income 90 35 45 160 6.8 To recognise the gain on the part-disposal of Ceram. 046 1 May 20X4 amortised cost 0. (ii) The unrealised profit on sales from Ashanti to Bochem is cancelled by (Rs Mn): DEBIT Cost of sales (10  ½  20%) 1 CREDIT Inventory (SOFP) 1 To eliminate the unrealised profit in inventory.2 Intragroup sales (i) Intragroup sales/purchases must be eliminated by (Rs Mn): DEBIT Revenue (10m + 5m) 15 CREDIT Cost of sales 15 To eliminate intragroup sales.724 30 April 20X5 carrying amount As no accounting entries have been made in the year.000) 30 April 20X5 cash received 20.724) 0.842 Effective interest @ 4% (1.859 167 . the adjustment is attributable to the owners of Ashanti only.836 Effective interest @ 4% (1.082 CA Sri Lanka Rs Mn 2. the amortisation of the bond must be recognised by (Rs Mn): DEBIT Cash 2 CREDIT Financial asset (SOFP) (21.000) 31 October 20X4 cash received (20  5%) 20. Therefore Rs m Carrying amount 21.0 (115.08 30 April 20X7 Rs 8 Mn  1/1.888 0.167 6. the carrying amount of the bond at 30 April 20X5 is compared with the present value of future cash flows associated with the bond. As the selling company was Ashanti.68 To recognise amortisation of the bond for the year Present value of future cash flows 30 April 20X6 Rs 2.34 Mn  1/1. 8 Bond impairment In order to calculate the impairment.046 – 20.32 CREDIT Finance income (0.0) 6.842 + 0.KC1 | Answers to Practice Questions 6 Goodwill on acquisition of Ceram Consideration transferred (136m  70%) Fair value of non-controlling interest Fair value of net assets Goodwill on acquisition 7 Rs Mn 95.2 26.836) 1. plant and equipment 1 May 20X3 Cost Depreciation (12m/10yrs) SOFP Rs Mn 12.2 Revaluation loss (balancing figure) 30 April 20X5 Revalued PPE c/f (3.244) 1.444) Transfer to retained earnings: 1.000 Reval’n surplus Rs Mn 2. The costs are allocated to the owners of Ashanti.KC1 | Answers to Practice Questions 9.200 (0. The revenue should only be recorded when the customer pays for the goods. This is rounded and recognised by (Rs Mn): DEBIT Finance costs CREDIT Financial asset (SOFP) 11.56 CA Sri Lanka . 5m should not have been recorded. 9 Allowance for receivables The revenue of Rs.444 – 1. The required adjustments are recorded by (Rs Mn): DEBIT Revenue CREDIT Receivables (SOFP) DEBIT Finance costs (impairment of receivable) CREDIT Allowance for receivables (SOFP) 5 5 3 3 To reverse the recorded revenue and recognise the increase in allowance for receivables.556) 8.000 (1.70 11. and so the allowance must be limited to Rs 3 Mn.724 Mn – Rs 9.956 (1.70 To recognise the impairment loss on the bond. 10 Property. All amounts are attributable to the owners of Ashanti.026 Mn) arises. as it is not probable that future economic benefits from the sale will flow to Ashanti.698 Mn (Rs 20.026 Therefore an impairment loss of Rs 11.956) 0.200 13. It is not appropriate to include the Rs 5 Mn in the allowance for doubtful debts of Rs 8 Mn.000 (1.000 Ashanti has recorded the revaluation loss by (Rs Mn): DEBIT 168 Other comprehensive income 3.200) Revaluation (balancing figure) 30 April 20X4 Revalued PPE c/f Depreciation for year (13m/9 years) 2. As stated.KC1 | Answers to Practice Questions CREDIT Property.565 Accrual =  Rs 19 Mn = Rs 0.96 1. public interest in corporate social responsibility is steadily increasing. plant and equipment 3. social and environmental performance and impact. This is attributable to the owners of Ashanti.21 To recognise the holiday accrual.6 3. 11 Holiday pay accrual LKAS 19 Employee benefits requires that an accrual be made for holiday entitlement carried forward to next year.56 Therefore the journal required to correct the entry is (Rs Mn): DEBIT CREDIT Administrative costs Other comprehensive income Rs 1. Such reports are becoming increasingly important to stakeholders who use them to evaluate the long term viability of a company. plant and equipment 1.6 Mn Rs 1.21 0. Although financial statements are primarily intended for investors and their advisers. The PPE is owned by Ashanti and therefore the loss is attributable to the owners of the parent only.56 It should have (Rs Mn): DEBIT DEBIT CREDIT Other comprehensive income Profit or loss (balancing figure) Property.21 Mn 229. There are a number of factors that encourage companies to provide a sustainability report with their financial statements.500 Therefore (Rs Mn): DEBIT CREDIT Administrative costs Accruals 0. It includes anything from environmental awareness to involvement in local community issues to modifying business processes to reduce the operational use of energy resources.500 2.6 Mn To correctly recognise the downwards revaluation. Number of days c/f: 900  3  95% = 2. A sustainability report is an organisational report that provides information about a company’s economic.565 days Number of working days: 900  255 = 229. (2) Sustainability reporting Sustainability may also be known as corporate citizenship or social responsibility. there is growing recognition that companies CA Sri Lanka 169 . all of whom are potentially interested in the way in which a company's operations affect the natural environment and the wider community. As a result many companies now deliberately attempt to build a reputation for social. These include customers. give a misleadingly optimistic picture of a company's performance. whether consciously or not. In the Sri Lanka textiles and apparel industry. economic and environmental responsibility. There is also growing recognition that corporate social responsibility is actually an important part of an entity's overall performance. or a supplier or customer may decide to do business with a company on the basis of a favourable performance or 170 CA Sri Lanka . of influencing outcomes that depend on stakeholders' assessments.KC1 | Answers to Practice Questions actually have a number of different stakeholders. Companies that act responsibly and provide sustainability reports are perceived as better investments than those that do not. an incentive to promote sustainability reporting. If detailed rules are imposed. companies are likely to adopt a 'checklist' approach and will present information in a very general and standardised way. it is also the case that excellent practice in employee recruitment and relations has already been established. These provide further encouragement to disclose information. Therefore the disclosure of sustainability information is essential. Another factor is growing interest by governments and professional bodies. and structuring transactions so as to achieve stable and predictable result. However. in itself. For example. These stakeholders can have a considerable effect on a company's performance. Responsible practice in areas such as reduction of damage to the environment and the promotion of good employee relations increase shareholder value. This is. At present companies are normally able to disclose as much or as little information as they wish in whatever manner that they wish. and particularly in Ashanti. This causes a number of problems. it may be required by company legislation. a bank. (3) Management of earnings 'Earnings management' involves exercising judgement with regard to financial reporting. so that it is of very little use to stakeholders. employees and the general public. there are good arguments for continuing to allow companies a certain amount of freedom to determine the information that they disclose. in that there exists good practice to report upon. There are now a number of awards for high quality sustainability disclosure in financial statements. and in some cases. This is done with the intention. Although there are no SLFRSs that specifically require sustainability reporting. Companies tend to disclose information selectively and it is difficult for users of the financial statements to compare the performance of different companies. a parent of a group. Earnings management goes against the principle of corporate social responsibility.KC1 | Answers to Practice Questions position. The letter of the law may not be enough. Because the temptation to indulge in earnings management may be strong. or an operation within a group. Each entity. Word gets around that the company 'tells it like it is' and does not try to bury bad news. 21 Rose (1) Factors to consider in determining functional currency of Stem LKAS 21 The effects of changes in foreign exchange rates defines functional currency as 'the currency of the primary economic environment in which the entity operates'. (ii) It encourages management to safeguard the assets and exercise prudence. Companies have duty not to mislead stakeholders. (iv) Focus on cash flow rather than accounting profits keeps management anchored in reality. CA Sri Lanka 171 . whether their own shareholders. Nevertheless. A director may also wish to present the company favourably in order to maintain a strong position within the market. all forms of earnings management may be ethically questionable. should determine its functional currency and measure its results and financial position in that currency. even if not illegal. 'Aggressive' earnings management is a form of fraud and differs from reporting error. A more positive way of looking at earnings management is to consider the benefits of not manipulating earnings: (i) Stakeholders can rely on the data. Indeed earnings management. The motive is not directly private gain – he or she may be thinking of the company's stakeholders. and cannot be sustained. sometimes called 'creative accounting' may be described as manipulation of the financial reporting process for private gain. not arising from the manipulation of accruals. (iii) Management set an example to employees to work harder to make genuine profits. employees or the government. suppliers. it is important to have ethical frameworks and guidelines in place. particularly in times of financial crisis. such as employees. A director may wish to delay a hit to profit or loss for the year in order to secure a bonus that depends on profit. suppliers or customers – but in the long term earnings management is not a substitute for sound and profitable business. whether an individual company. These aspects point away from the dollar as the functional currency. and is not under the control of the parent as regards finance or management.) Applying the first of these. The position is not clear cut. Stem does not depend on group companies for finance. material and other costs of providing goods or services? (This will often be the currency in which such costs are denominated and settled. when it comes to costs and expenses. and there are arguments on both sides.KC1 | Answers to Practice Questions An entity should consider the following factors: (1) What is the currency that mainly influences sales prices for goods and services (this will often be the currency in which sales prices for its goods and services are denominated and settled)? (2) What is the currency of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services? (3) What is the currency that mainly influences labour. It also generates sufficient cash flows to meet its cash needs. it appears that Stem's functional currency is the dinar. since this most faithfully represents the economic reality of the transactions. Stem operates with a considerable degree of autonomy.85 CA Sri Lanka .65 22. However.cut. plant and equipment Goodwill Intangible assets Financial assets Current assets 172 603. (2) ROSE GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 APRIL 20X8 Rs Mn Non-current assets Property. dinars and the local currency. and the autonomy of Stem in relation to the parent company.85 284. However. so that aspect is less clear. (2) It is the currency in which receipts from operating activities are usually retained. Stem pays in a mixture of dollars. The price it charges is denominated and settled in dinars and is determined by local supply and demand.20 3.00 32. both operating and financing. on balance it is the dinar that should be considered as the functional currency.00 660.00 944. Furthermore. Other factors may also provide evidence of an entity's functional currency: (1) It is the currency in which funds from financing activities are generated. 12 0.67 1.46 362.65 944.65 173 .20 Non-controlling interests 130.65) 16.25 (0.03 (94) (19) - (46) 4 (1) 3 15 7 10 32 32 118 100 66 284 284 662 217 152 1.83 532.031 944.4 (16.78) (8.65 22.3) 0.3 1.7) (36.54 (49) (0.98 442.21 256 56 50.65 282.2 (2.KC1 | Answers to Practice Questions Rs Mn Equity and liabilities Share capital Retained earnings Other components of equity 158.17 (W7) Rs Mn 2.98 10.93 532.031 158 38 33.97) 6.21 16.37 89.03) 89.27 (7.5 2.85 158 (33.8 267.49 2.72) 0.4 (W10) Consolidated Rs Mn Rs Mn 603.85 Non-current liabilities Current liabilities Workings Consolidation schedule – consolidated statement of financial position at 30 April 20X8 PPE Rose Petal Rs Mn Rs Mn 370 110 Stem Rs Mn 76 Total (W4(i) ) (W4(ii)) (W5(i)) (W5(ii)) (W5(iii)) (W6) Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn 556 30 12.85 0.00 277.65 662 217 152 1.33 229.33 (38) 7 4 11 (3) FX reserve Ret’d earnings 5.2 Non current liabilities Current liabilities CA Sri Lanka 56 42 32 130 185 77 20 282 282 241 119 52 412 412.65 130.5 16 Goodwill Inv in P 113 113 Inv in S 46 46 Intangible assets Financial assets Current assets St capital OCE (W8) Rs Mn (W9) Rs Mn 0.25 16.2 1.46 421 98 100 619 NCI 944.3) 41.67) 46 (0.33) (0.00 412.39 6. KC1 | Answers to Practice Questions 1 Group structure Rose 1 May 20X7 30 April 20X8 10% = 80% 70% Cost FV NCI FV NA RE OCE 2 Rs94m + Rs46m Rs120m Rs49m Rs3m Rs19m 80% Petal 52% Stem Translation of SOFP of Stem at 30 April 20X8 Dinars (m) 380 Property.00 152.00 152.00 Exchange difference arising on translation Rs Mn Opening net assets (200m +220m) At opening rate of 6 At closing rate of 5 Gain Retained profit for the year (80m) At average rate of 5.79 16 2.21 16.21 CA Sri Lanka .21 100.00 20.00 66. plant and equipment 50 Financial assets 330 Current assets 760 200 Share capital Retained earnings Pre-acqn 220 Post-acqn FX Reserve Non-current liabilities Current liabilities 3 1 May 20X7 52% 80 500 160 100 760 Cost FV NCI FV NA RE OCE Rate 5 5 5 6 6 5.8 (W3) 5 5 Rs Mn 76.79 16.67 13.33 36.00 10.00 32.00 33.8 At closing rate of 5 Gain Gain recognised as OCI of Stem and accumulated in foreign exchange reserve 174 Rs46m 250m dinars 495m dinars 220m dinars Rs Mn 70 84 14 13. 00 41.KC1 | Answers to Practice Questions 4 Acquisition of Petal (i) Goodwill Consideration transferred Fair value of non-controlling interests Fair value of identifiable net assets at acquisition: Stated capital Retained earnings Other components of equity Patent Fair value adjustment – land (120 – 38 – 49 – 3) This is recognised by (Rs Mn): DEBIT Goodwill DEBIT Stated capital DEBIT Retained earnings DEBIT Other components of equity DEBIT Intangible assets DEBIT PPE CREDIT Investment in P CREDIT NCI Rs Mn 94 46 (38) (49) (3) (4) (30) 16 16 38 49 3 4 30 94 46 To recognise the acquisition of Petal and resulting goodwill. (ii) The intangible asset is amortised over 4 years.67) (12.33) (36.67 (200) (220) (75) 31 6 6 6 6 (33. 1 million (4m/4years).7 DEBIT NCI (30%  1m) 0. Amortisation to date is Rs.17 175 . 5 Acquisition of Stem (i) Goodwill is calculated as: Consideration transferred (Rs 46 Mn  6) Non-controlling interests Less fair value of net assets at acq'n Stated capital Retained earnings FV adjustment to land At 1 May 20X7 CA Sri Lanka Dinars(m) 276 250 Rate 6 6 Rs Mn 46. It is recognised by (Rs Mn): DEBIT Retained earnings (70%  1m) 0.5) 5.3 CREDIT Intangible assets 1 To recognise amortisation on the intangible asset recognised on consolidation. 67 12.8 CA Sri Lanka .03 CREDIT NCI (48%  1.5 CREDIT FX Reserve (52%  2. 6 Allocation of post-acquisition reserves movements to the NCI Petal Stem Retained Retained earnings OCE earnings Rs Mn Rs Mn Rs Mn At reporting date At acquisition Post-acquisition NCI share (30%/48%) FX reserve Rs Mn 56 4 50.5 Mn gain is allocated between the owners of Rose and the NCI. Therefore a gain of Rs 1. It is recognised by (Rs Mn): DEBIT PPE 2.21 2.46 16.67) 7 1 13.3 6.67 To recognise the acquisition of Stem and resulting goodwill.33 36.5) 1. (ii) Goodwill is retranslated at the year-end using the closing rate to Rs 6. (iii) The fair value adjustment is also retranslated at the year-end using the closing rate to Rs 15 Mn(75m/5).2 To recognise the retranslation of the fair value adjustment using the closing rate.54 To recognise the retranslation of goodwill using the closing rate.5) 1.3 7.72 0.1 0.17 33.03 Mn is recognised.62) Other components of equity FX reserve NCI 8.1 + 6.62 7.78 – The NCI share of reserves movements are allocated by: DEBIT DEBIT DEBIT CREDIT 176 Retained earnings (2.21 (49) (3) (36.79 16. This is allocated between the owners of Rose and the NCI in Stem by (Rs Mn): DEBIT Goodwill 1.49 CREDIT FX reserve (52%  1.03m) 0.KC1 | Answers to Practice Questions This is recognised by (Rs Mn): DEBIT Goodwill DEBIT Stated capital DEBIT Retained earnings DEBIT PPE CREDIT Investment in P CREDIT NCI 5.03m) 0. The Rs 2.3 CREDIT NCI (48%  2.5 46 41.78 16.2 Mn (31m/5). 42 Mn.840 0. calculated as follows.000 × 1/1.054 This is Rs.053 Rs 0.25 7.8 Mn × 1.65 Mn This is recorded by (Rs Mn): DEBIT CREDIT Retained earnings Non-current liabilities 0. 8 Bonus scheme The cumulative bonus 5% annual increase: Bonus as at: 30 April 20X8 30 April 20X9 30 April 20Y0 30 April 20Y1 30 April 20Y2 payable is Rs 4. The current service cost is the present value of Rs.75 2. 884.25) 4.65 To recognise the long-term bonus scheme.5) 28.25 CREDIT OCE 2. 4. 884.8 Mn × 1.972 4.KC1 | Answers to Practice Questions To allocate the NCI its share of post-acquisition profits and OCI.5 6. 884. 9 Rose – plant The change in residual value is a change in accounting estimate and is applied prospectively from the date of change (1 May 20X7): CA Sri Lanka 177 .25 Mn is recognised in other components of equity by (Rs Mn): DEBIT PPE 2.052 Rs 0.25 To recognise the revaluation surplus. 1 Rs Mn 5.420 Rs 40 Mn × 2% Rs 0.000 (Rs. 7 Rose – property Cost at 1 May 20X7 Depreciation (30m/20) Carrying amount at 30 April 20X8 Revaluation (balancing figure) Revalued amount at 30 April 20X8 Dinars m 30 (1. with a Rs Mn 0.00 (0. 1 5m / 20yrs @ 5 dinars: Rs.882 0.8 Mn × 1.8 Mn × 1.65 0.000 at 30 April 20X8: Rs.926 0.00 The revaluation surplus of Rs 2.05 Rs 0.084 = Rs 0.42/5 years) per year.5 35 @ 6 dinars: Rs.800 0. 1m The adjustment to NCI is recognised in the parent’s equity by (Rs Mn): DEBIT DEBIT CREDIT Non-controlling interest Other components of equity (balancing figure) Investment in P 16.70 The adjustment is recognised by (Rs Mn): DEBIT PPE CREDIT Retained earnings 0.03 2.03m.10 (20 – (3. The adjustment to parent's equity.3) 2. 178 CA Sri Lanka .40 0. which is recognised in other components of equity is calculated as follows: Rs Mn 46.97 19 To eliminate the cost of the 10% investment in Petal and adjust equity to reflect the acquisition. retained earnings (W6) NCI share of post-acquisition OCE (W6) 0.10 16.6) ÷ 3 years 2.4 0. 48. The amount of the decrease is calculated in W5 as Rs.1 × 3 years) – 2.00 (0.4 To record depreciation correctly based on the revised residual value.1 NCI at acquisition (W4(i)) NCI share of amortisation of intangible (W4(ii)) NCI share of post-acq. 10 Increased shareholding in Petal The subsequent acquisition of a 10% holding in Petal for Rs. 19 million has been recognised by Rose by: DEBIT Investment in P 19 CREDIT Cash 19 In the consolidated accounts this acquisition is dealt with as a transaction between shareholders and is accounted for by adjusting the carrying amount of the NCI from 30% to 20%.KC1 | Answers to Practice Questions Depreciation for the year based on original residual value Depreciation for the year based on revised amount Adjustment Rs Mn (20 – 1.03 Adjustment 10%/30% x Rs. 16.3 48.4) ÷ 6 Rs Mn 3. and in other areas. influenced by future plans for the business) does not comply with SLFRS. Such a valuation needs to be based on the following SLFRS: (i) SLFRS 3 Business combinations.' This is also known as 'exit price'. in proposing to value these at zero on the grounds that Rose already has good relationships with customers. (ii) SLFRS 13 Fair value measurement defines fair value as as 'the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under LKAS 38. the standards may recognise as assets items that Rose does not identify. which specifies the price that would be paid by market participants. an acquirer must allocate the cost of a business combination by recognising the acquiree's identifiable assets. Measuring MineConsult Co's assets on the basis of their value to Rose does not accord with the above standards. Rose is failing to apply LKAS 38. CA Sri Lanka 179 . part of the cost of the acquisition should be allocated to these relationships. in turn. Under SLFRS 3. in particular if their treatment would mislead users. there has been no attempt to apply the SLFRS 13 definition of fair value. First. which will have a value separate from goodwill at the date of the acquisition. is of paramount importance. (iii) LKAS 38 Intangible assets states that intangible assets acquired in business combinations can normally be measured sufficiently reliably to be recognised separately from goodwill. The fair value of the customer relationships should not be based on Rose's judgement of their worth but on that of a market participant such as a well-informed buyer. which is. and implies that Rose's judgement alone would not be sufficient. market position or expectation of a bonus. liabilities and contingent liabilities that satisfy the recognition criteria at their fair values at the date of the acquisition. Directors and company accountants act unethically if they use 'creative' accounting in accounts preparation to make the figures look better. as here. With respect to the contract-based customer relationships that MineConsult Co has. Secondly. Motivation for misleading treatments can include market expectations.KC1 | Answers to Practice Questions (3) Acquisition of MineConsult Co Rose's proposed valuation of MoneConsult Co's assets (based on what it is prepared to pay for them. Ethical behaviour in the preparation of financial statements. the directors must put the interests of the company and its shareholders first. If a treatment does not conform to acceptable accounting practice.83 Mn (6) Share of profit of associate 32 Impairment losses: Rs 20 Mn + Rs 12 Mn 9 Interest expense 20 71 Decrease in trade receivables (W4) 63 Decrease in inventories (W4) (86) Decrease in trade payables (W4) 68 Cash generated from operations (10) Retirement benefit contributions* (8) Interest paid (W5) (39) Income taxes paid (W3) 11 Net cash from operating activities 180 CA Sri Lanka . and should not be put into practice. It is possible that non-compliance with SLFRS 3.KC1 | Answers to Practice Questions To act ethically. it is not ethical. then it is unethical. If so. 22 Warrburt (1) WARRBURT GROUP STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 NOVEMBER 20X8 Rs Mn Rs Mn Operating activities (47) Net loss before tax Adjustments for Gain on revaluation of investment in equity instruments (7) (Alburt – fair value on disposal less FV at 1. the mistake needs to be corrected in order to act ethically. in any case a duty of professional competence in the preparation of financial statements. If the aim of the proposed treatment is to deliberately mislead users of financial statements.1 Mn + Rs 0.X7 (W1) 10 Retirement benefit expense 36 Depreciation (7) Profit on sale of property plant and equipment: Rs 63 Mn – Rs 56 Mn (2) Profit on insurance claim: Rs 3 Mn – Rs 1 Mn 2 Foreign exchange loss (W6) Rs 1. SLFRS 13 and LKAS 38 is a genuine mistake. There is. and must also have regard to other stakeholders such as potential investors or lenders. which would entail keeping up to date with SLFRS and local legislation.12. 1 Mn (W6) Proceeds from sale of property. because they are not paid by the company. assets Rs Mn 240 Associate Rs Mn 0 6 4 (36) Financial assets Rs Mn 150 30** 7 (20) β (12) β 96 (1) 3 (56) 20 56 350 0 80 0 228 8 × 25% (2) 100 (45) 142 181 . The amounts paid by the trustees are not included. Only the contributions paid are reported in the cash flow. company (at FV) Disposals Non-cash additions (on credit)* Cash paid/(rec'd) c/f CA Sri Lanka PPE Rs Mn 360 Goodwill Rs Mn 100 Intan. plant and equipment Proceeds from sale of financial asset investments Acquisition of associate (W1) Dividend received from associate: (W1) Net cash used in investing activities Rs Mn (57) 63 45 (96) 2 (43) Financing activities Proceeds from issue of ordinary shares (W2) Repayment of long-term borrowings (W3) Dividends paid Dividends paid to non-controlling shareholders (W3) Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 55 (44) (9) (5) (3) (35) 323 288 *Note. Workings 1 Assets b/f P/L OCI (revaluation) FV gain on investment in Alburt Dep'n/Impairment/ Acquisition of associate Asset destroyed Replacement from ins.KC1 | Answers to Practice Questions Rs Mn Investing activities Purchase of PPE: Rs 56 Mn (W1) + Rs 1. because this is the only movement of cash. The gross gain is therefore Rs 30 Mn and is the amount reflected in this working. Notes * The additions are translated at the historic rate. 182 CA Sri Lanka . but working shown for clarity 3 Liabilities b/f P/L OCI Cash (paid)/rec'd c/f Long-term borrowings Rs Mn 64 (44) 20 Tax payable Rs Mn (26 + 42) 68 29 ( 3 + 2) * 5 (39) 63 (28+ 35) Retirement benefit liability Rs Mn 96 10 4 (10)** 100 Bold figures in the table above are calculated as balancing figures. that is at Rs 27 Mn. Rs Mn 280 56 Additions (cash) = 5 100 20 Additions (credit) 5 76 Total (excluding destroyed assets replaced): 78 – (3 – 1) ** This is the gain on revaluation. because this is the only movement of cash. The amounts paid by the trustees are not included. Adjustment for exchange rate differences are dealt with in (W9).KC1 | Answers to Practice Questions Bold figures in the table above are calculated as balancing figures. which is shown in the statement of profit or loss and other comprehensive income net of deferred tax of Rs 3 Mn (W3). because they are not paid by the company. 2 Equity b/f P/L OCI Cash (paid)/rec'd c/f Stated capital Rs Mn 595 Retained earnings Rs Mn 454 (74) Reval Surplus Rs Mn 4 OCE Rs Mn 16 2 55 650 (9) ** 371 NCI Rs Mn 53 (2) 23 6 (5) ** 46 39 * *Cash flow given in question. * On revaluation gain on PPE + revaluation gain on AFS financial assets ** Only the contributions paid are reported in the cash flow. 00 20. 5 Interest payable Rs Mn 4 9 (8) 5 Balance b/f (short-term provisions) Profit or loss for year Cash paid (balancing figure) Balance c/f (short-term provisions) 6 Exchange loss At 30 June 20X8: DEBIT Property.83) 115 Bold figures in the table above are calculated as balancing figures.83  –  100 =   5  20   Rs 0. DEBIT DEBIT CREDIT 280 5 Profit/loss (loss) 280 Cash 4.1 Mn To record payment of 280 million dinars At 30 November 20X8: DEBIT CREDIT P/L (loss) Payables  100   4. The realised loss on the cash payment of Rs 1. 2 The unrealised loss on retranslation of the payable (Rs 0.1 Mn Rs 57.83m was wrongly included in trade payables.83 Mn Rs 0. so must be removed from the decrease in trade payables in the SOCF. plant and equipment At 31 October 20X8.83 (85.8 =   20. Notes CA Sri Lanka 1 The Rs. 20. so is transferred to 'purchase of PPE'. 183 . plant and equipment (W1) CREDIT Payables 380 5 380 5 Rs 76 Mn Rs 76 Mn To record purchase of property.9 Rs 56 Mn Payables Rs 1.83 Mn To record loss on re-translation of payable at the year end.1 would not normally be adjusted. but it relates to a non-operating item.KC1 | Answers to Practice Questions 4 Working capital changes b/f Exchange loss (W6) ∴Increase/(decrease) c/f Inventories Rs Mn 198 (63) 135 Trade receivables Rs Mn 163 (71) 92 Trade payables Rs Mn 180.83 Mn) must always be adjusted. this is investment in the future of the company and is likely to increase or maintain revenue levels in coming years. however. a share issue. 11million. The cash inflow from operations further benefits from decreasing the levels of cash tied up in receivables and inventories. although it provides a necessary return to investors. the reduction of inventories may result in future supply problems. The Rs. 184 CA Sri Lanka . acquiring non-current assets. 47m. net cash generated by operations is Rs.KC1 | Answers to Practice Questions (2) Key issues arising from the statement of cash flows Cash is the life-blood of business. the loss before tax becomes a positive cash inflow of Rs. this is sustainable and is likely to continue into the future. as to whether this cash generation can continue if profitability does not improve. This leaves a ‘free cash flow’ of Rs. as well as the defined benefit pension contribution. Although the effect of working capital management on the cash flows of Warburrt is beneficial. the effect on the business should also be considered. In the case of Warburrt. for example. and is less able to be manipulated than profit. the reduction of trade receivables. may be the result of aggressively chasing (and so alienating) customers. rather than. is lost to the company. whilst releasing cash. for example. A decrease in trade receivables and inventories in this case may be related to a fall in trading levels. If cash has been spent on. 68 million. but before adjusting for changes in working capital. 68million cash generated by operations adequately covers the mandatory operating cash outflows to meet interest and tax commitments. This indicates that the loss is in some part due to the effect of accounting policies and conventions. Although Warrburt has made a loss before tax of Rs. 68m. Conversely. for example. 134m cash released by this action more than offsets the cash used to achieve a reduction in the level of trade payables. 20m. The Rs. If cash coming into a business is from trading activity. It is particularly important to look at where the cash has come from and what it has been spent on. Having taken account of these and other items. cash spent on the payment of dividends. the non-cash expenses of depreciation and impairment total Rs. The question arises. further cash inflows arise from the sale of PPE and financial asset investments. in other words. stakeholders in the company. . which will provide dividend income as well as capital growth in the future. because it derives from trading activities. The proceeds from sale of financial asset investments have clearly been used to invest in H200h. for example. or. the proceeds of the share issue appear to have been used in part to fund the repayment of long-term borrowings. As a professional. 35 million. which is the purpose of the company’s existence. wish to present a company's results in a favourable light. however whether this is achieved remains to be seen. This is encouraging because gearing will reduce. If the proceeds of the sale of financial asset investments and property. Equally. and appears to provide shareholders with an acceptable return on their investment. for the survival of the company. plant and equipment are presented in the statement of cash flows as part of 'cash generated from operations'. Sales of assets generate short term cash flows that cannot be repeated yearon-year. The proceeds from sale of PPE. there is a net cash outflow of Rs. however they are acceptable where ‘matched’ with a cash outflow. in the long term. It can be concluded that this is largely due to the high cost of the investment in H200h. unless there are to be no assets left to generate trading profits with. not only to the company she works for. The level of dividends is modest given other cash flows. the picture is misleading. Overall. which is not wholly covered by the cash raised from the sale of other assets. is offset to some extent by expenditure on new PPE. an inaccurate classification. Ms Cooper has a duty. indicating that Warburrt has not decreased its noncurrent asset base and continues to invest in PPE for the future good of the group.KC1 | Answers to Practice Questions Other than those arising from operating activities. particularly in times of falling profit and cash flow. It will be the intention of the directors of Warburrt that this investment should generate future profits that will sustain and increase the operating cash flow of the group. None of these are sustainable sources of cash in the long term. but to CASL. which is particularly important in the light of possible problems sustaining profitability and cash flows from trading activities. This may involve manipulation by creative accounting techniques such as window dressing. cash is tied up in long-term rather than short-term investment. and to the principles of CA Sri Lanka 185 . Operating cash flow is crucial. and the proceeds of share issues. as is proposed here. (3) Ethical responsibility of Sharmini Cooper Directors may. the two directors insist on the misleading presentation. If. and may well go against the requirements of local legislation.KC1 | Answers to Practice Questions independence and fair presentation of financial statements. It is essential that Ms Cooper tries to persuade the CEO and Managing Director not to proceed with the adjustments. despite Sharmini Cooper’s protests. which she must know violates LKAS 7. 186 CA Sri Lanka . then Ms Cooper has a duty to bring this to the attention of the auditors. . KC1 | Corporate Financial Reporting 188 CA Sri Lanka . The services rendered in return for such income include access to Havanna's database of members. The decision to sell the division at a price of Rs. Question 1 (a) Havanna owns a chain of health clubs and has entered into binding contracts with sports organisations. (7 marks) (b) In May 20X3. Havanna feels that because it only assumes limited obligations under the contract mainly relating to the provision of coaching. 40 million (net of costs to sell)_was made public in November 20X3 and gained shareholder approval in December 20X3. At the initial classification of the division as held for sale. which earn income over given periods. (i) CA Sri Lanka A loss relating to a potential write-off of a trade receivable owed by Cuba Sport. and admission to health clubs. 90 million. Both questions are compulsory. Recommended time for this section is 90 minutes. this could not be seen as the rendering of services for accounting purposes. These contracts are for periods of between nine and 18 months. Cuba Sport had sold the goods to a third party and the division had guaranteed the receipt of the sale proceeds to the Head Office of Havanna 189 . Havanna decided to sell one of its regional business divisions through a mixed asset and share deal. The business division was presented as a disposal group in the statement of financial position as at 30 November 20X3. These costs were related to the business division being sold and were as follows. 30 million which represented the difference between the carrying amount and value of the assets measured in accordance with applicable Sri Lanka Financial Reporting Standards (SLFRS). It was decided that the payment of any agreed sale price could be deferred until 30 November 20X5. including the provision of coaching and other benefits. In writing down the disposal group's carrying amount. Havanna showed the following costs as provisions relating to the continuing operations. As a result. This section has 50 marks in total. its net carrying amount was Rs. which had gone into liquidation. Havanna's accounting policy for revenue recognition is to recognise the contract income in full at the date when the contract was signed.KC1 | Mock Exam Questions SECTION A There are 2 questions of 25 marks each. Havanna accounted for an impairment loss of Rs. In the financial statements at 30 November 20X3. 5 million Rs. The following prices have been achieved in the market during the last few months for similar office buildings. (9 marks) (c) Havanna has decided to sell its main office building to a third party and lease it back on a ten-year lease.KC1 | Mock Exam Questions (ii) A provision was recognised relating to the expected transaction costs of the sale including legal advice and lawyer fees The directors wish to know how to treat the above transactions. 5 million and the carrying amount of the asset is Rs. The lease has been classified as an operating lease. The mark allocation is shown against each of the three issues above.) (Total = 25 marks) 190 CA Sri Lanka . 4 million Havanna would like advice on how to account for the sale and leaseback. (i) (ii) (iii) (iv) Rs. The current fair value of the property is Rs. (9 marks) Advise Havanna on how the above transactions should be dealt with in its financial statements with reference to Sri Lanka Financial Reporting Standards where appropriate.8 million Rs. 6 million Rs. (Note.2 million. 4. with an explanation of the effect which the different selling prices would have on the financial statements. 4. The forecast hedged transactions were still expected to occur and Bental recognised the entire amount of the compensation in profit or loss. CA Sri Lanka 191 . Bental's business represents 45% and Lental's business 55% of the total value of the combined businesses. In Bental's consolidated financial statements. Some of these transactions qualified for cash flow hedge accounting in accordance with LKAS 39 Financial instruments: recognition and measurement. which were contingent upon each other. The exercise price is the original cost paid by the shareholders. The hedges were considered to be effective. or (ii) The minority shareholders can exercise their put options every three years. Bental entered into a business combination with another listed bank. Bental acquired 45% of the share capital and voting rights of Lental for cash. Bental also has an investment in a foreign entity over which it has significant influence and therefore accounts for the entity as an associate. 90 million. On 1 September 20X3. Lental. the B-shares owned by minority shareholders are to be reported as a non-controlling interest. 70 million and Lental a market value of Rs. Hexal. a listed bank. Bental wishes to designate the investment as a hedged item in a fair value hedge in its individual and consolidated financial statements. The entity's functional currency differs from Bental's and in the consolidated financial statements. A-shares carry voting powers and B-shares are issued to meet Hexal's regulatory requirements. On 31 August 20X3. The business combination has taken place in two stages. Under the terms of a shareholders' agreement. which has two classes of shares. the associate's results fluctuate with changes in the exchange rate.KC1 | Mock Exam Questions Question 2 (a) Bental. each B shareholder is obliged to capitalise any dividends in the form of additional investment in B-shares. (8 marks) (b) Bental entered into a number of swap arrangements during 20X3. (7 marks) (c) On 1 September 20X3. has a subsidiary. A and B. Bental decided to cancel the hedging relationships and had to pay compensation. At 30 November 20X3. Additionally. On 1 November 20X3. Lental merged with Bental and Bental issued new Ashares to Lental's shareholders for their 55% interest. The shareholder agreement also stipulates that Bental agrees to buy the B-shares of the minority shareholders through a put option under the following conditions (i) The minority shareholders can exercise their put options when their ownership in B-shares exceeds the regulatory requirement. Bental had a market value of Rs. The management comprised the COO and four other members. The purchase agreement provides for a board of six directors for the combined entity. Bental proposes to account for the transaction as a business combination and identify Lental as the acquirer. five of whom will be former board members of Bental with one seat reserved for a former board member of Lental.) (Total = 25 marks) 192 CA Sri Lanka . The mark allocation is shown against each of the three issues above. the former shareholders of Bental excluding those of Lental owned 51% and the former shareholders of Lental owned 49% of the votes of the combined entity.KC1 | Mock Exam Questions After the transaction. two from Bental and two from Lental. (10 marks) Evaluate the accounting practices and policies outlined above and consider whether they are acceptable under Sri Lanka Financial Reporting Standards. the COO of Lental is the COO of the combined entity. The Chief Operating Officer (COO) of Lental is the biggest individual owner of the combined entity with a 25% interest. (Note. Under the terms of the purchase agreement. The board of directors nominates the members of the management team. asthma and cancer. producing and distributing pharmaceuticals. The company’s over-the-counter health-care products. The Consumer Products division of Minny manufactures and sells oral healthcare products (toothpastes. These drugs and vaccines take years to develop. biologics. bleach products and furniture and floor polishes. nicotine replacements and pain relief products. Its head office is in Kandy. vaccines and consumer healthcare. Sri Lanka. The company invests a considerable amount of money in developing new nutritional products. Operations Minny is operated as four distinct divisions: Drugs and Vaccines. During this period Minny is normally able to generate sufficient profit to recoup the cost of developing a particular drug or vaccine. manufactured and sold by the Healthcare Products division include generic cold and flu remedies. as the route to market is more straightforward than that for regulated drugs and vaccines. and as a result returns arise more quickly. These include anti-bacterial sprays. This section has 50 marks. mouthwashes etc) and nutritional products (such as high fibre bars. Healthcare Products. with only a small proportion of candidate vaccines progressing to be licensed for clinical use by the authorities. Question 3 Preseen Minny is a public limited company that operates in the pharmaceuticals sector. competitors can produce and sell generic versions of the drug. Recommended time for this section is 90 minutes. Minny manufactures drugs and vaccines for major diseases including diabetes. Minny also manufactures and sells a small number of cleaning products for consumers through its Home Consumables division. energy drinks and weight loss shakes). these patents allow only Minny to sell the drugs that it has developed. Development of the group CA Sri Lanka 193 . The company was formed 60 years ago and has since grown significantly. After the expiry of a patent (between 10 and 15 years). The drugs developed by Minny’s Drugs and Vaccines division are protected by patent. protein shakes. Consumer Products and Home Consumables.KC1 | Mock Exam Questions SECTION B This section has one question which is compulsory. This was a strategic acquisition. which the Board of Minny intends to develop into a full sustainability report. In the case of drugs and vaccines. Minny acquired a 14% interest in Puttin. lymphoma and myeloma (blood cancers). 27 million and achieved significant influence. On 1 June 20X2. The Board of Minny is aware that SLFRS 3 allows a choice of method to measure the non-controlling interest on an acquisition-by-acquisition basis. but is tested for impairment at each reporting date in accordance with the requirements of SLFRS. Puttin operates in consumer healthcare products such as shampoos. They are presented in an annual report together with a social and environmental impact report. 320 million. and revaluation exercises are performed with sufficient frequency that carrying amounts are in line with fair values at each reporting date. In order to maximise reported goodwill. conditioners and toothpastes. This acquisition was made in order that Minny could achieve rapid market expansion. In time it is expected that the investment may be increased and control over Puttin achieved. Financial statements are prepared in accordance with SLFRS and Columbo Stock Exchange regulations. As a result of the acquisition. Goodwill arising from the acquisitions is not amortised. paid in cash. 21 million. Minny acquired an additional 16% interest in Puttin for a cash consideration of Rs. a market that Minny had not previously entered. An 80% share in the equity of Heeny (a public limited company) was acquired on 1 December 20X1 at a cost of Rs. Minny was able to develop its product base and access the market for drugs for blood disorders such as anaemia. a public limited company. As such this investment was seen to be a good strategic fit for Minny’s Consumer Products division. made with the intention of acquiring know-how and patents owned by Bower. 194 CA Sri Lanka .KC1 | Mock Exam Questions Minny acquired 70% of the equity shares in Bower (a public limited company) on 1 December 20X0 for a cash price of Rs. this is the period for which the product is patent protected. it has elected to measure the non-controlling interest in both subsidiaries at fair value at the acquisition date. The investment was accounted for at cost. Development costs are capitalised when the LKAS 38 criteria are met. They are amortised over a relevant period. on 1 December 20X0 for a cash consideration of Rs. 730 million. The company adopts the LKAS 16 revaluation model for its properties. Financial reporting and accounting policies The financial statements of Minny are prepared to a reporting date of 30 November. Heeny has a well-established sales and distribution network in Africa. for nutritional products it is usually 10 years. The Consumer Products division has shown steady growth in revenue over the past year. Revenue is relatively stagnant. and the Board consider that there are two viable routes for this division: either dispose of it or commit to invest in it and develop it. contributing the lowest profit margins of the group.KC1 | Mock Exam Questions Financial performance Analysis of the recent financial performance of Minny Group indicates strong performance from the Drugs and Vaccines division. which can be attributed to the continued consumer trend towards exercise and weight loss plans. it continues to require little investment in comparison to other divisions and returns steady profits. The Healthcare Products division is considered to be a ‘cash cow’ by the Board of Minny. In recent years the Home Consumables division has not performed as well as the other divisions of Minny. This is largely due to the launch to market of a drug to treat the effects of a new strain of flu. Unseen (a) CA Sri Lanka The draft statements of financial position of Minny. Bower and Heeny are as follows at 30 November 20X2: 195 . and Minny’s ability to respond to consumer demand in these areas. This drug has been licensed for use by a number of healthcare authorities throughout Asia and as a result has generated significant revenues since its launch. 835 million and retained earnings of Bower were Rs. the fair value of the identifiable net assets acquired was Rs. (i) At acquisition.KC1 | Mock Exam Questions Assets Non-current assets Property. At the date of acquisition. (ii) The fair value of a 20% non-controlling interest in Heeny at 1 December 20X1 was Rs. (iii) Both Bower and Heeny were tested for impairment at 30 November 20X2. 108 million and a 44% holding was Rs. On 1 December 20X0. the identifiable net assets of Heeny had a fair value of Rs.791 400 37 442 879 123 128 251 1. 106 million and other components of equity were Rs. The excess in fair value is due to nondepreciable land.130 200 25 139 364 93 138 231 595 The following information is relevant to the preparation of the group financial statements. 362 million. The excess in fair value is due to non-depreciable land. 72 million.888 495 408 903 2. a 30% holding was Rs.791 30 650 480 1.130 35 345 250 595 Equity and liabilities Stated capital Other components of equity Retained earnings Total equity Non-current liabilities Current liabilities Total liabilities Total equity and liabilities 920 73 895 1. 161 million. retained earnings were Rs.896 895 2. 295 million. plant and equipment Investment in subsidiaries: Bower Heeny Investment in Puttin Intangible assets Minny Rs Mn Bower Rs Mn Heeny Rs Mn 920 300 310 730 320 Current assets Total assets 48 198 1. The recoverable amounts of both cash generating units as stated in the individual financial statements at 30 November 20X2 were 196 CA Sri Lanka . 319 million and other components of equity were Rs. the fair value of the non-controlling interest in Bower was Rs. 20 million. 27 million. 3 million was spent. 4 million and in order to put the shake into a condition for sale. respectively. which has been credited to other components of equity. All of the above costs are included in the intangible assets of Minny. (v) Minny purchased patents of Rs. 197 . The two criteria which must be met before an asset or disposal group will be defined as recovered principally through sale are: that it must be available for immediate sale in its present condition. and Heeny. Rs. (iv) Puttin made profits after tax of Rs. 7 million. 30 million for the business. plant and equipment (PPE) 49 Inventory 18 Current liabilities 3 It is anticipated that Minny will realise Rs. Minny received a dividend from Puttin of Rs. 1. Rs. On 30 November 20X2. the carrying amount of the assets and liabilities comprising the division were: Rs Mn Property. 20 million and Rs.425 million. At the date the held for sale criteria were met. 2 million. 604 million. 10 million to use in a project to develop a new weight loss shake product on 1 December 20X1. Prepare the consolidated statement of financial position for the Minny Group as at 30 November 20X2. and has determined that the product can be developed profitably. Finally. The recoverable amount has been determined without consideration of liabilities which all relate to the financing of operations. An effective test batch was created at a cost of Rs. (vi) Minny intends to dispose of the Home Consumables division. incurring an additional cost of Rs. marketing costs of Rs. The directors of Minny felt that any impairment of assets was due to the poor performance of the intangible assets. Minny has completed the investigative phase of the project. a further Rs. No adjustments have been made in the financial statements in relation to the above decision. and the sale must be highly probable. 2 million were incurred. 30 million for the years to 30 November 20X1 and 30 November 20X2 respectively.KC1 | Mock Exam Questions Bower. The criteria in SLFRS 5 are very strict and regulators have been known to question entities on the application of the standard. (35 marks) (b) CA Sri Lanka Minny intends to dispose of the Home Consumables division and has stated that the held for sale criteria were met under SLFRS 5 Non-current assets held for sale and discontinued operations. You are not required to adjust your answer to part (a). setting out briefly why regulators may question entities on the application of the standard. Bower previously used the historical cost basis for measuring property. 400. This property had been revalued at the year-end and a revaluation surplus of Rs. 1 million shortly after the year-end.KC1 | Mock Exam Questions Outline what is meant in SLFRS 5 by 'available for immediate sale in its present condition' and 'the sale must be highly probable'. (8 marks) (Total = 50 marks) 198 CA Sri Lanka . Evaluate the ethical and accounting implications of the above intended sale of assets to Minny by Bower.000 had been recorded in other components of equity. (7 marks) (c) Bower has a property which has a carrying amount of Rs. 2 million at 30 November 20X2. The directors intended to sell the property to Minny for Rs. . KC1 | Mock Exam Answers 200 CA Sri Lanka . This applies to all transactions. The rendering of services typically involves the performance by the entity of a contractually agreed task over an agreed period of time. identify that admission fees. The basic principles of LKAS 18 are applied differently for the provision of goods and services: – revenue is recognised at a point in time in respect of the provision of goods – revenue is recognised over a period of time in respect of the provision of services.KC1 | Mock Exam Answers SECTION A Question 1 (a) Contracts with sports organisations The applicable standard relating to the contracts is LKAS 18 Revenue. Havanna argues that the 'limited obligations' under the contracts (coaching and access to its membership database) do not constitute rendering of services. Therefore the contracts with sports organisations should be considered as for the provision of services. LKAS 18 also requires that when services are performed by an indeterminate number of acts over a specified period of CA Sri Lanka 201 . revenue is recognised in the accounting periods in which the services are rendered. that is on a basis that 'reflects the extent to which services are performed'. the revenue from this transaction must be recognised by reference to the stage of completion of the transaction at the reporting date. however. The recognition of revenue by reference to the stage of completion of a transaction is often referred to as the percentage of completion method. initiation and membership fees and franchise fees constitute the provision of services and associated revenue is recognised over time. Therefore in the first instance it is important to establish whether Havanna is providing goods or services. when the outcome of a transaction involving services rendered can be estimated reliably. This applies to services as well as goods. Under this method. Under LKAS 18. regardless of the length of the contract term. The Illustrative Guidance that accompanies LKAS 18 does. In general revenue is recognised when it is probable that future economic benefits will flow to the entity and these benefits can be measured reliably. KC1 | Mock Exam Answers time, as is the case for Havanna, revenue is recognised on a straight-line basis over the specified period unless there is evidence that some other method better represents the stage of completion. When a specific act is much more significant than any other acts, the recognition of revenue is postponed until the significant act is executed. However, in Havanna's case there is no evidence that one act is much more significant than any other act. There is no justification for Havanna's treatment, that is recognising the contract income in full when the contract is signed. The 'limited obligations' argument is not supported by LKAS 18. Accordingly, Havanna must apportion the income arising from the contracts over the period of the contracts, as required by the standard. (b) Sale of division Impairment loss A division (or disposal group) is classified as held for sale when it is available for immediate sale in its present condition and the sale is highly probable. For a sale to be probable, management must be committed to a sale plan, and the plan must have been announced or its implementation begun. Here the plan has been announced and so the division to be sold meets the criteria in SLFRS 5 to be classified as held for sale. It has therefore been correctly classified as a disposal group under SLFRS 5. Measurement of a disposal group on classification as held for sale is determined in two steps: Step 1 Immediately before classification as held for sale, the assets and liabilities of a disposal group are re-measured in accordance with applicable SLFRS. Any impairment loss is generally recognised in profit or loss, but if the asset has been measured at a revalued amount under LKAS 16 Property, plant and equipment or LKAS 38 Intangible assets, the impairment is treated as a revaluation decrease. Step 2 On classification as held for sale, a disposal group is measured at the lower of its carrying amount and fair value less costs to sell. At this stage an impairment loss will arise if the adjusted carrying amount of the disposal group exceeds its fair value less costs to sell. The impairment loss (if any) is recognised in profit or loss. 202 CA Sri Lanka KC1 | Mock Exam Answers For assets carried at fair value prior to initial classification, the requirement to deduct costs to sell from fair value will result in an immediate charge to profit or loss. Havanna has calculated the step 1 impairment as Rs. 30m, being the difference between the carrying amount at initial classification and the value of the assets measured in accordance with SLFRS. Step 1 Calculate carrying amount under applicable SLFRS: Rs. 90m – Rs. 30m = Rs. 60m Step 2 Classified as held for sale. Compare the adjusted carrying amount under applicable SLFRS (Rs. 60m) with fair value less costs to sell (Rs. 40m). Measure at the lower of carrying amount and fair value less costs to sell, here Rs. 40m. Recognise a Rs. 20m impairment loss in profit or loss. Other costs Certain other costs relating to the division being sold are currently recognised as provisions relating to continuing operations. This treatment is not correct: (i) The trade receivable from Cuba Sports should have been tested for impairment immediately before classification of the division as held for sale. An impairment loss equal to the amount of the trade receivable should have been recognised; this would have reduced the carrying amount of the division prior to its initial classification as held for sale. The write down of the receivable balance replaces the provision recognised in the books of the continuing operations. In addition, the division has guaranteed the sale proceeds to Havanna's Head Office. As the amount owing has not been collected and the receivable is impaired, the regional business division must bear the cost of making good the guarantee. Therefore a liability should be recognised for the disposal group. Additionally, the sales price of the division (and hence the fair value less costs to sell) should be adjusted to reflect this amount. (ii) The provision for transaction costs should not have been recognised in continuing operations. The costs (legal advice and lawyers' fees) should be considered as part of 'costs to sell' when calculating fair value less costs to sell. CA Sri Lanka 203 KC1 | Mock Exam Answers Both items affect fair value less costs to sell, and item (i), the trade receivable, also affects the carrying amount of the division on classification as held for sale. (c) Sale and leaseback Where, as here, a lessee enters a sale and leaseback transaction resulting in an operating lease, the original asset should be derecognised. If the transaction is at fair value then the profit or loss is recognised as it arises. If the transaction is at a price above fair value, then the profit based on fair value is recognised immediately and sales proceeds in excess of fair value are deferred and amortised over the period for which the asset is expected to be used. If the sales price is below fair value, the operating lease rentals may have been adjusted downwards to compensate for the loss. The accounting treatment depends on whether this is the case. If this is not the case, any resulting profit or loss is recognised immediately. If this is the case, and a loss is made, that loss is deferred and amortised over the period that the asset will be used. Havanna has been given a range of selling prices, and should in each case compare the potential sales proceeds with the fair value (Rs 5 million) in order to determine the accounting treatment as well as comparing the sales price with the carrying amount (Rs. 4.2m) to determine the gain. (i) Sales price Rs. 5 million In this case the sales price is equal to the fair value. In effect, this is a normal sales transaction and the whole gain of Rs. 0.8m (Rs. 5m – Rs. 4.2m) is recognised immediately in profit or loss. (ii) Sales price Rs. 6 million Here the sales price is greater than fair value. Therefore the profit based on fair value of Rs. 0.8m (see (i) above) is recognised immediately. The excess of sales price over fair value of Rs. 1m (Rs. 6m – Rs. 5m) is deferred and amortised over the period for which the asset is expected to be used (ten years), giving an amortisation charge of Rs. 100,000 per annum.. (iii) Sales price Rs. 4.8 million Here the sales price is below fair value. The difference is small, and given that property valuations are estimates, Rs. 4.8m may simply be a 204 CA Sri Lanka KC1 | Mock Exam Answers better reflection of genuine fair value than Rs. 5m. In this case, therefore, the sales proceeds are recognised in full and a gain of Rs. 0.6m (Rs. 4.8m – Rs. 4.2m) is recognised. (iv) Sales price Rs. 4 million Here the sales price is also below fair value. However, the difference is significant, and cannot be explained by estimation tolerances in the valuation. The price appears to be artificially low, and it is likely that the lease rentals are low to reflect this. Therefore it is appropriate to recognise the sales proceeds of Rs. 4m, but the Rs. 200,000 loss on disposal is not recognised, being an artificial loss. Instead, it is deferred and amortised over the ten year life of the lease, that is at Rs. 20,000 per annum. Question 2 (a) Classification of B-shares It is not always easy to distinguish between debt and equity in an entity's statement of financial position, partly because many financial instruments have elements of both. The distinction is important, since the classification of a financial instrument as either debt or equity can have a significant impact on the entity's reported earnings and gearing ratio, which in turn can affect debt covenants. Companies may wish to classify a financial instrument as equity, in order to give a favourable impression of gearing, but this may in turn have a negative effect on the perceptions of existing shareholders if it is seen as diluting existing equity interests. LKAS 32 Financial instruments: presentation brings clarity and consistency to this matter, so that the classification is based on principles rather than driven by perceptions of users. Bental has classified the B-shares as non-controlling interest (equity) but this does not comply with LKAS 32. LKAS 32 defines an equity instrument as: 'any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities'. It must first be established that an instrument is not a financial liability, before it can be classified as equity. A key feature of the LKAS 32 definition of a financial liability is that it is a contractual obligation to deliver cash or another financial asset to another entity. CA Sri Lanka 205 An instrument may be classified as an equity instrument if it contains a contingent settlement provision requiring settlement in cash or a variable number of the entity's own shares only on the occurrence of an event which is very unlikely to occur – such a provision is not considered to be genuine. if the criteria for hedge accounting are no longer met. a forecast transaction is no longer expected to occur or if the entity revokes the designation. If hedge accounting ceases for a cash flow hedge relationship because the forecast transaction is no longer expected to occur. In the case of Bental. If the transaction is still expected to occur and the hedge relationship ceases. gains and losses deferred in other components of equity are recognised in profit or loss immediately. If the contingent payment condition is beyond the control of both the entity and the holder of the instrument. Cash flow hedge accounting should be discontinued if the hedging instrument expires or is sold. does not apply here: the minority shareholders' can exercise their put option at least every three years. the minority shareholders' holdings of B shares should be treated as a financial liability in the consolidated financial statements of Bental.KC1 | Mock Exam Answers A financial instrument is an equity instrument if there is an unconditional right to avoid delivering cash or another financial asset to another entity. terminated or exercised. The circumstance above. and more frequently if their ownership in B-shares exceeds the regulatory requirement. Bental should recognise the cash payments of compensation against 206 CA Sri Lanka . It does not have an unconditional right to avoid delivering cash or another financial asset to settle the obligation. the forecast hedged transactions are still expected to occur. then the instrument is classified as a financial liability. Accordingly. The shareholders' agreement imposes on Bental a clear contractual obligation to buy B-shares from the non-controlling shareholders on the terms set out in the agreement. where the contingent settlement provision is not considered genuine because an event is unlikely to occur. the amounts accumulated in equity are retained in equity until the hedged item affects profit or loss. (b) Hedging Swap arrangements LKAS 39 Financial instruments: recognition and measurement sets out requirements for when hedge accounting is discontinued. be able to designate the investment as a hedged item in a fair value hedge in its individual financial statements. Investment in foreign entity The foreign entity is an associate and Bental therefore accounts for it using the equity method in its consolidated accounts. so there is no immediate effect on profit or loss. The amounts accumulated in equity are reclassified to profit or loss in the period when the item that was hedged affects profit or loss. (c) Business combination SLFRS 3 Business Combinations requires an acquirer to be identified in all business combinations. rather than changes in the investment's fair value. There is no requirement for that power to have been exercised. Under LKAS 39. and (iii) The ability to use its power over the investee to affect the amount of the investor's returns. not a fair value hedge of the change in the value of the investment. The acquirer is the combining entity that obtains control of the entity with which it is combined. even where the business combination looks like a merger of equals. A hedge of a net investment in a foreign operation is different because it is a hedge of the foreign currency exposure. (i) Power over the investee (ii) Exposure. rather than mere ownership. to variable returns from its involvement with the investee. The key point is control.KC1 | Mock Exam Answers the fair value of the swaps. however. provided its fair value can be measured reliably. and SLFRS 3 defers to IFRS 10 in respect of guidance on the matter. but this may not be easy to assess. Power is defined as existing rights that give the current ability to direct the relevant activities of the investee. Bental may. SLFRS 10 states that an investor controls an investee if and only if it has all of the following. or rights. an equity method investment cannot be a hedged item in a fair value hedge because the equity method recognises in profit or loss the investor's share of the associate's profit or loss. Relevant activities are activities of the investee that significantly affect the investee’s returns. They may include selling and purchasing goods or CA Sri Lanka 207 . It is not always easy to determine which party is the acquirer. here Bental which has 51% immediately after the transaction. (ii) In a business combination effected primarily by exchanging equity interests. for example. or alone. and as a result the ability to direct relevant activities.KC1 | Mock Exam Answers services. acquiring and disposing of assets. (ii) Other factors need to be taken into consideration in determining which of the combining entities has the power to govern the financial and operating policies of the other entity. CA Sri Lanka . Thus Bental appears to be the acquirer. In other cases. electing. which is a significant share of the total purchase consideration. SLFRS 10 gives the following examples of rights. assessment is more complex and more than one factor must be considered. reassign or remove key management personnel who can direct the relevant activities (ii) Rights to appoint or remove another entity that directs the relevant activities (iii) Rights to direct the investee to enter into. as here. researching and developing new products and processes and determining a funding structure or obtaining funding. in particular the acquirer is usually the entity which transfers cash or other assets. managing financial assets. the acquirer is usually the entity that issues its equity interests. SLFRS 3 Business combinations gives a number of other factors to consider. other than voting or potential voting rights. which individually. where power is obtained directly and solely from having the majority of voting rights or potential voting rights. or veto changes to transactions for the benefit of the investor (iv) Other rights. Arguments in favour of Bental being the acquirer 208 (i) Bental is the entity giving up cash amounting to 45% of the purchase price. If it is not clear which is the acquirer from applying SLFRS 10. can give an investor power. Usually that is the one whose shareholders retain or receive the largest proportion of the voting rights in the combined entity. Applying the above criteria produces arguments in favour of either party being the acquirer. In some cases assessing power is straightforward. such as those specified in a management contract. (i) Rights to appoint. (ii) The Chief Operating Officer of Lental has. gives him a great deal of influence over the team. It is possible to conclude that Bental is the acquirer. the Chief Operating Officer of Lental is the source of much of Lental's power. as an individual. CA Sri Lanka 209 . which points to Bental being the acquirer. for example in terms of assets. Power may also be given by rights to appoint. revenue or profit. reassign or remove key management personnel who can direct the relevant activities of the combined entity. and there are arguments on both sides. The management team consists of the Chief Operating Officer and two former employees of Lental. Five out of the six directors of the combined entity are former board members of Bental. Although the board nominates the team. arguably the former management of Lental has greater representation on the management team. while Bental has only two former employees on the management team. but this is not a clear-cut case. In the case of Lental.. The fair value of Lental is Rs. especially taking into account the composition of the team. Arguments in favour of Lental being the acquirer (i) Despite the above. which at 25%. whereas Bental has a balance of other factors in its favour. the most important of which are: (i) Bental is the entity transferring the cash (ii) Bental issued the equity interest (iii) Bental has the marginal controlling interest. Conclusion Identifying the acquirer is not easy. this individual influence points towards Lental being the acquirer.KC1 | Mock Exam Answers (iv) A controlling share does not always mean that the party that has it has the power to govern the combined entity's financial and operating policies so as to obtain benefits from its activities. (iii) Lental may also be seen as the acquirer when the relative size of the combining entities is taken into account. which is significantly greater than that of Bental. (Rs. 70m) and this is an indication of control. 90m. the largest share of the combined entity. 00 3.88 394.5 Total assets Equity and liabilities Equity attributable to owners of the parent Stated capital Retained earnings Other components of equity Non-controlling interests Non-current liabilities Current liabilities Current liabilities associated with disposal group Total equity and liabilities 210 920.933.0 Goodwill 227.607.62 2.5 – 2 2.20X2 Rs Mn Non-current assets 1.50 CA Sri Lanka .08 77.073.0 Property.713.5 Investment in associate: 48 + 4.0 Disposal group held for sale 3.5 1.11.80 1.00 3.50 711.00 936.KC1 | Mock Exam Answers SECTION B Question 3 (a) MINNY GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30.0 Current assets 33.713. plant and equipment 190.00 671.0 Intangible assets 50.328.606. . Non-controlling interest 2 Goodwill Bower Rs Mn Consideration transferred Non-controlling interests FV of identifiable net assets at acq'n: Stated capital Retained earnings OCE FV uplift – land Impairment losses (W4) (i) CA Sri Lanka 730 295 Heeny Rs Mn 320  70% (44%) (400) (319) (27) (89) 190 (-) 190 The acquisition of Bower is recognised by (Rs Mn): DEBIT Goodwill 190 DEBIT Stated capital 400 DEBIT Retained earnings 319 DEBIT OCE 27 DEBIT PPE 89 CREDIT Investment in B 224 161 (200) (106) (20) (36) 23 (23) - 730 211 . 320m) Rs 319 Mn Rs 27 Mn Rs 295 Mn Rs 362 Mn FV NA Retained earnings OCE FV NCI Rs 106 Mn Rs 20 Mn Rs 161 Mn Heeny % 56 44 100 Effective interest: 70% × 80% . 730m) Rs 835 Mn FV NA Retained earnings OCE FV NCI Bower 1 Dec 20X1 80% (Consideration = Rs.KC1 | Mock Exam Answers Workings 1 Group structure 1 Dec 20X0 Minny 70% (Consideration = Rs.. 52 2.2) 5.9 3 14.9 + 14.2 CREDIT NCI 56.425) Heeny Rs Mn 595 36 23 654 (604) CA Sri Lanka .2 (30%/44%) 4 (i) The allocation of these amounts to the NCI is recognised by (Rs Mn): DEBIT Retained earnings 51.52) DEBIT OCE (3 + 2.KC1 | Mock Exam Answers CREDIT (ii) 3 NCI 295 The acquisition of Heeny is recognised by (Rs Mn): DEBIT Goodwill 23 DEBIT Stated capital 200 DEBIT Retained earnings 106 DEBIT OCE 20 DEBIT PPE 36 CREDIT Investment in Heeny CREDIT NCI 224 161 Allocation of profits to the NCI The increase in retained earnings and OCE since acquisition in both companies is calculated as follows (Rs Mn): Bower Heeny Retained OCE Retained OCE earnings earnings At reporting date 442 37 139 25 At acquisition (319) (27) (106) (20) Increase 123 10 33 5 NCI share 36.130 89 190 1.62 (ii) The NCI cost of Bower’s investment in Heeny is eliminated against the NCI by (Rs Mn): DEBIT NCI (30%  320) 96 CREDIT Investment in Heeny 96 Impairment Bower Rs Mn Carrying amount Assets (separate SOFP) Fair value adjustments (W2) Goodwill (W2) Recoverable amount 212 1.42 (36.409 (1. 5 4. and the impairment loss is calculated as follows. the group share of Puttin’s profits since gaining significant influence are recognised by (Rs Mn):.5 In addition the dividend received and credited to OCE is transferred to reduce the carrying amount of the investment in the associate (Rs Mn): DEBIT CREDIT 6 OCE Investment in associate 2 2 Disposal group Assets and liabilities of the disposal group are re-classified as current and shown as separate line items in the statement of financial position. but Heeny's assets are impaired.KC1 | Mock Exam Answers Impairment loss Bower Rs Mn – Heeny Rs Mn 50 23 27 50 Allocated to: goodwill Intangible assets (balancing figure) Bower is not impaired as the carrying amount is below the recoverable amount. CA Sri Lanka 213 . 5 Investment in associate The associate is already measured at cost in the financial statements of Minny. The impairment loss is recognised by (Rs Mn): DEBIT DEBIT CREDIT CREDIT Retained earnings (56%) NCI (44%) Goodwill Intangible assets 28 22 23 27 Note that the loss is allocated to the NCI as well as group retained earnings. because the directors believe that it is the poor performance of the intangible assets that is responsible for the reduction in the recoverable amount. This includes the impairment loss in respect of goodwill because goodwill is ‘full goodwill’ ie it includes NCI goodwill. The disposal group is impaired. The impairment loss is allocated first to goodwill and then to the intangible assets. DEBIT CREDIT Investment in associate (30%  Rs 30 Mn  6/12m) Retained earnings 4. In order to apply equity accounting. 214 CA Sri Lanka . auditors or users of accounts to determine whether an entity genuinely intends to dispose of the asset or group of assets. for example. and often decision to sell an asset or disposal group is made well before they are met. plant and equipment Inventory Current liabilities Carrying amount Anticipated proceeds (FV less costs to sell) Impairment loss This is recognised by (Rs Mn): DEBIT DEBIT DEBIT CREDIT CREDIT CREDIT 7 Current liabilities Assets of disposal group (49 + 18 – 34) Retained earnings PPE Inventory Liabilities of disposal group 3 33 34 49 18 3 Development costs Patent Investigation phase Prototype Preparation for sale Marketing Rs Mn 10 7 4 3 2 Intangible asset Profit or loss Intangible asset: development costs Intangible asset: development costs Profit or loss The adjustment required to eliminate the items which should be recognised in profit or loss is (Rs Mn): DEBIT CREDIT (b) Profit or loss (retained earnings) Intangible assets 9 9 Held for sale criteria under SLFRS 5 Non-current assets held for sale and discontinued operations The held for sale criteria in SLFRS 5 Non-current assets held for sale and discontinued operations are very strict. SLFRS 5 requires an asset or disposal group to be classified as held for sale where it is available for immediate sale in its present condition subject only to terms that are usual and customary and the sale is highly probable. Such terms may include.KC1 | Mock Exam Answers Rs Mn 49 18 (3) 64 (30) 34 Property. The standard does not give guidance on terms that are usual and customary but the guidance notes give examples. It may be difficult for regulators. plus the 'realised' revaluation surplus of Rs. 215 . 2m reflects the current value as it was revalued at the year end. 1m. 442m. Bower's retained earnings of Rs. For a sale to be highly probable: • Management must be committed to the sale. and so regulators have reason look very closely at whether the classification as held for sale is genuine.000 more than cover the distribution. depending on the distributable profits rules in the jurisdiction in which it operates. • It is unlikely that significant changes will be made to the plan or the plan withdrawn. The property's carrying amount of Rs. but it will be presented separately from other assets in the consolidated statement of financial position. for example. so. or it may include contracts or surveys. it is likely to be legal. this is a distribution of profits of Rs.KC1 | Mock Exam Answers a specified period of time for the seller to vacate a headquarters building that is to be sold. Certain SLFRS may apply to the transfer. Regulators may question entities' application of this standard because the definition of highly probable as 'significantly more likely than probable' is subjective. Entities may wish to separate out an unprofitable/impaired part of the business in order to show a more favourable view of continuing operations. (i) CA Sri Lanka If the asset meets the held for sale criteria under SLFRS 5 Non-current assets held for sale and discontinued operations. In effect. Distributions of this kind are not necessarily wrong or illegal. 400. However. a seller could not continue to use its headquarters building until construction of a new headquarters building had taken place. • Completion of the sale must be expected within one year from the date of classification. the shortfall on the transfer. • The asset must be marketed at a price that is reasonable in relation to its own fair value. • An active programme to locate a buyer must have been initiated. it will continue to be included in the consolidated financial statements. they would not include terms imposed by the seller that are not customary. 1m. but the 'sale' price is only Rs. (c) Transfer of property The proposed transfer of property from Bower to its parent Minny is not a normal sale. An asset that is held for sale should be measured at the lower of its carrying amount and fair value less costs to sell. and looks like a cosmetic exercise of some kind. and even if it is correctly accounted for and disclosed in accordance with LKAS 24 and SLFRS 5 (or LKAS 16 if the SLFRS 5 criteria are not met) the transaction raises ethical issues. Accounting information should be truthful and neutral. to auditors and to accountants giving advice to directors. LKAS 24 Related party disclosures will apply and in the individual financial statements of Bower and Minny. the entity must update any impairment test carried out. In this case. the directors need to explain why they are doing it. but in this case the related party relationship clearly has affected the price of the transfer. Ethical behaviour in the preparation of financial statements. 216 CA Sri Lanka . although its motives are unclear. although it would be eliminated on consolidation. for example to enhance a profit-linked bonus or to disguise an unfavourable liquidity position. (ii) As the transfer is from a subsidiary to its parent. suspicion might be aroused by the fact that the transfer of the property between group companies at half the current value has no obvious logical purpose. Even if the company's transactions and operations have not been affected by a related party relationship. Knowledge of related party relationships and transactions affects the way in which users assess a company's operations and the risks and opportunities that it faces.KC1 | Mock Exam Answers Immediately before classification of the asset as held for sale. and while the transaction is probably permissible. is of paramount importance. Even though the transfer is likely to be legal. Financial statements may be manipulated for all kinds of reasons. This applies equally to preparers of accounts. disclosure puts users on notice that they may be affected in future.