Advanced financial Reporting and Analysis April 2023 past paper

MONDAY: 24 April 2023. Afternoon Paper.                                                                    Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings. Do NOT write anything on this paper.


Zura Limited, a private limited company which operates in the textile industry, has been in financial distress and has been reporting trading losses in recent years.

The company’s latest statement of financial position as at 31 July 2022 was as shown below:

The board of directors of Zura Limited, which also comprises the main shareholders, have proposed a scheme of internal financial reconstruction with effect from 1 August 2022, under the following terms:

  1. The existing ordinary shares are to be reduced to 2.5 per share.

The current shareholders are to fully subscribe for a new issue of ordinary shares of Sh.2.5 each at par value, on the basis of four (4) new shares for every five (5) shares held.

  1. The loan notes holders agreed to lower their interest rate to 12% per annum on condition that the accrued interest would be paid immediately.
  2. The outstanding accounts payable accepted 4 million ordinary shares of Sh.2.5 each in full settlement of the amounts due.
  3. The bank overdraft is to be repaid
  4. The share premium account is to be utilised for the purpose of capital
  5. The balances in the retained earnings (losses) and goodwill accounts are to be written
  6. The following assets are to be adjusted to their fair values as follows:

8. Reconstruction costs of 4 million are expected to be incurred and paid.


  • Journal entries to effect the scheme of internal (8 marks)
  • Capital reduction account as at 31 July (6 marks)
  • Statement of financial position as at 1 August 2022 (immediately after the scheme of internal reconstruction). (6 marks)

(Total: 20 marks)



The following are the summarised financial statements of P Limited and S Limited for the year ended 31 December 2022:

Statement of financial position as at 31 December 2022:

Additional information:

  1. P Limited acquired 25% of S Limited on 1 January 2021 for Sh.2,424,000 and exercised significant influence over the financial and operating policy decisions of S Limited.
  2. The fair value of S Limited’s identifiable assets and liabilities as at 1 January 2021 was equivalent to their book value. S Limited’s reserves stood at Sh.6,960,000.
  3. A further 35% stake was acquired by P Limited in S Limited on 30 September 2022 for Sh.5,040,000. The fair value of S Limited’s identifiable assets and liabilities as at that date was Sh.11,040,000 and S Limited’s revenue reserves stood at Sh.9,360,000. As at 30 September 2022, S Limited’s share price was Sh.14.50.
  4. The difference between the fair value of the identifiable assets and liabilities of S Limited and their book value was due to The brands were estimated to have an average remaining useful life of 5 years from 30 September 2022.
  5. Incomes and expenses are assumed to accrue evenly over the year. Neither company paid dividends during the year and neither issued any shares.
  6. P Limited elected to measure non-controlling interests as at the date of acquisition at fair
  7. There is no impairment loss on goodwill as at 31 December 2022 while amortisation of brands is classified in cost of sales.


  • Consolidated statement of profit or loss and other comprehensive income for the year ended 31 December (10 marks)
  • Consolidated statement of financial position as at 31 December (10 marks)

(Total: 20 marks)

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1. International Accounting Standard (IAS) 12 “Income Taxes”, allows entities to recognise a deferred tax asset where they have unused tax losses, only to the extent that it is probable that future taxable profits will be available against which the unused tax losses can be utilised.


In view of the above statement, explain FOUR key considerations for recognition of deferred tax assets on unused tax losses. (8 marks)

2. The following statement of financial position relates to ABC , a public limited company, as at 31 March 2022:

The following information is relevant to the above statement of financial position:

  1. The financial assets are classified as fair value through other comprehensive income as shown in the above statement of financial position at their cost on 1 April 2021, including transaction costs of Sh.0.5 million. The market value of the assets is Sh.10.5 million on 31 March 2022. Taxation is payable on the sale of the assets.
  2. The stated interest rate for the long term borrowing is 8%. The loan of Sh.10 million represents a convertible bond which has a liability component of Sh.9.6 million and an equity component of Sh.0.4 million. The bond was issued on 31 March 2022.
  3. The defined benefit plan had a rule change on 1 April 2021. ABC Ltd. estimates that of the past service cost of 1 million, 40% relates to vested benefits and 60% relates to benefits that will vest over the next five years from that date. The past service costs have not been accounted for.
  4. The tax bases of the assets and liabilities are the same as their carrying amounts in the statement of financial position as at 31 March 2022 except for the following:

  • Other intangible assets are development costs which were allowed for tax purposes when the costs were incurred in 2021.
  • Trade and other payables include an accrual for compensation to be paid to employees. This amounts to Sh.1 million and is allowed for tax purposes when paid.

5. Goodwill is not allowable for tax purposes in the jurisdiction of ABC

6. Assume taxation is payable at the rate of 30%.


By applying the requirements of IAS 12 (Income Taxes):

  • Calculate the temporary differences after the necessary (10 marks)
  • Determine the deferred tax charge for the year ended 31 March (2 marks)

(Total: 20 marks)


1. The objective of International Accounting Standard (IAS) 29 “Financial Reporting in Hyperinflationary Economies” is to establish specific standards for entities reporting in the currency of a hyperinflationary economy so that the financial information provided is meaningful.


Discuss THREE limitations of historical cost accounting when used for assessing entity performance during periods of inflation. (6 marks)

2. The objective of International Financial Reporting Standard (IFRS) 13 “Fair Value Measurement” is to provide a single source of guidance for fair value measurement where it is required by a reporting standard, rather than it being spread throughout several reporting standards.


In light of the above statement and citing examples, briefly describe THREE hierarchical level inputs required by IFRS 13 “Fair Value Measurement”.   (6 marks)

3. The sole mandate and responsibility for issuing International Financial Reporting Standards (IFRSs) lies with the International Accounting Standards Board IASB (The Board) which in conjunction with other regulatory bodies such as IFRS Foundation, the IFRS Advisory Council and IFRIC ensure the development of global accounting standards of high quality.


In view of the above statement, briefly describe the procedure for the development of an IFRS standard. (4 marks)

4. With reference to International Public Sector Accounting Standard (IPSAS) 7 “Investment in Associates”, briefly explain the accounting treatment of investment in associates in the financial statements of a public sector entity, and indicate how the requirements of IPSAS 7 compare with those of International Accounting Standard (IAS) 28 “Investment in Associates” for commercial sector entities. (4 marks)

(Total: 20 marks)



The following draft consolidated financial statements were extracted from the financial records of G Group for the year ended 30 September 2022:

G Group

Consolidated statement of profit or loss for the year ended 30 September 2022:

Additional information:

  1. The property, plant and equipment comprised the following:

During the year ended 30 September 2022, G Limited disposed of an item of equipment for cash proceeds of Sh.260 million. The equipment had cost Sh.750 million and had an accumulated depreciation of Sh.370 million. Any gain/loss on disposal and depreciation on property, plant and equipment is included in cost of sales.

2. On 1 January 2022, G Limited acquired 75% of the 100 million ordinary shares of Sh.10 each in S Limited. The acquisition consideration comprised a share exchange on the basis of two (2) shares in G Limited for every three

(3) acquired shares in S Limited. G Limited was also to pay Sh.810 million to the owners of S Limited on 1 January 2023. G Limited’s cost of capital is 8% per annum.

The market values of ordinary shares at 1 January 2022 were Sh.30 and Sh.20 for G Limited and S Limited respectively. The fair values of assets and liabilities of S Limited at the date of acquisition were as follows:

3. The group policy is to measure the non-controlling interest in subsidiaries at fair value at acquisition dates. The market values of the subsidiaries’ ordinary shares are considered to be representative of the fair values of shares held by the non-controlling interests.

4. Investments at fair value through profit or loss consist of highly marketable and risk-free securities held by G Limited.

5. Any impairment loss on goodwill is included in administration


Consolidated statement of cash flows for G Group for the year ended 30 September 2022 using the indirect method in line with International Accounting Standard (IAS) 7 “Statements of Cash Flows”.

(Total: 20 marks)

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