MONDAY: 21 August 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.
QUESTION ONE
H Limited, a public limited entity, had exercised significant influence over S Limited, another public limited entity, for many years before obtaining control. H Limited acquired a 40% ordinary shareholding in S Limited on 1 April 2013 for a cash consideration of Sh.2,500 million, when the retained earnings of S Limited stood at Sh.360 million.
The draft statements of financial position for the two companies as at 31 March 2023 are presented below:
Additional information:
1. H Limited acquired a further 30% interest in S Limited on 1 April 2019 for a cash amount of Sh.2,200 million. At this date, the retained earnings of S Limited amounted to Sh.860 million and the fair value of the previously held 40% interest in S Limited was Sh.3,000 million.
2. At the time of achieving the controlling interest in S Limited, the fair values of its identifiable net assets approximated their carrying amounts, with the exception of the following items:
• An item of plant whose fair value exceeded its carrying amount by Sh.150 million. On 1 April 2019, this
item of plant had a remaining economic useful life of six (6) years.
• On 1 April 2019, the directors of H Limited identified that S Limited had an internally generated database of customers who had the potential of purchasing their products for an indefinite period of time. Although there were no contractual or legal rights associated with this database, a professional expert estimated that competitors of S Limited would be prepared to pay Sh.90 million for this database. S Limited had not yet recognised the database as an asset in its individual financial statements.
3. The group policy is to measure the non-controlling interests at their proportionate share of net assets in the subsidiary at the date of acquisition.
4. On 28 March 2023, H Limited sold goods worth Sh.100 million to S Limited. H Limited reported a gross profit margin of 20% on this sale. S Limited had neither received nor recorded these goods in its books of account as at 31 March 2023.
5. The current accounts between H Limited and S Limited did not agree due to the goods that remained in transit as per note 4 above. As at 31 March 2023, the trade receivables of H Limited included Sh.600 million due from S Limited.
6. An impairment review carried out on 31 March 2023, revealed that neither goodwill arising on acquisition, nor the intangible asset with infinite useful life had been impaired.
7. Ignore all deferred tax consequences on acquisition and fair value measurements of S Limited.
8. S Limited has not issued any ordinary shares since the date of acquisition.
Required:
1. Determine the equity-accounted value of the investment in S Limited as at 31 March 2019. (2 marks)
2. Calculate the value of goodwill arising on the acquisition of S Limited as at 1 April 2019. (4 marks)
3. Consolidated statement of financial position for H Group as at 31 March 2023. (14 marks)
(Total: 20 marks)
QUESTION TWO
1. In the context of International Accounting Standard (IAS) 24 “Related Party Disclosures”, explain THREE reasons why it is important for an entity to disclose related party transactions. (6 marks)
2. Citing FOUR relevant points, explain the extent to which integrated reporting (IR) addresses the limitations of traditional financial reporting. (4 marks)
3. Explain SIX reasons why it was important for the International Accounting Standards Board (IASB) to develop a conceptual framework for financial reporting. (6 marks)
4. In the context of International Public Sector Accounting Standard (IPSAS) 22 “Disclosure of Financial
Information about the General Government Sector”, summarise FOUR disclosures that must be made with respect to the general government sector. (4 marks)
(Total: 20 marks)
QUESTION THREE
1. B Limited purchased a loan note for Sh.2,000,000 on 1 April 2021 and intends to hold it until maturity. The effective interest rate is 10% per annum which was the same as the nominal rate.
The loan note will mature on 31 March 2024 and annual payments are in arrears. On 31 March 2022, B Limited received interest of Sh.200,000. B Limited estimated that no further interest would be received and only half of the initial capital would be repaid on 31 March 2024. The probability of default on the loan note within the next 12 months was 0.5% and the credit risk as at 31 March 2022 was low.
The 10% present value factors are as follows:
Required:
Illustrate the accounting treatment of the investment in the loan note as at 31 March 2022 in accordance with International Financial Reporting Standard (IFRS) 9: “Financial Instruments”. (8 marks)
2. The following figures appeared in the consolidated statement of profit or loss and other comprehensive income of Jameni Group for the year ended 31 July 2023, together with comparatives for the year 2022:
During the year ended 31 July 2023, the following changes took place to the issued share capital of Jameni Group:
1. 200 million equity shares were issued in conjunction with the acquisition of another business. These
equity shares were issued at full market price at the date of issue which was 1 November 2022.
2. 300 million ordinary shares were issued for cash to existing shareholders on 1 February 2023. The issue price was Sh.1.50 per share, which represented a discount of 25% on the traded price immediately before the issue (Sh.2.00).
3. On 31 July 2023, a bonus issue of 540 million shares was completed, capitalising Sh.270 million of
retained earnings. Also on this date, the preference dividend due for the year, and an equity dividend of
Sh.46 million, were paid.
Required:
Applying the requirements of International Accounting Standard (IAS) 33 (Earnings per Share) to the information provided above, calculate:
The basic EPS for the year ended 31 July 2023. (10 marks)
The comparative figure for the year 2022 to be reported in the year 2023 financial statements, given that
the EPS figure originally reported in the year 2022 was Sh.0.525. (2 marks)
(Total: 20 marks)
QUESTION FOUR
1. With reference to International Financial Reporting Standard (IFRS) 2 “Share based Payments” and
citing examples, explain the impact of a non-market based performance condition on accounting for an
equity-settled share based payment transaction. (4 marks)
On 1 January 2020, Tabora Limited granted each of its 180 employees 1,000 share options. These
options would vest if the employees remained in the employment of the company until 31 December
2022. On the grant date, the fair value of the share options was Sh.15 each. Twenty five (25) employees left the company during the year ended 31 December 2020 and a further thirty (30)
employees were expected to leave in each of the two years ended 31 December 2021 and 31 December 2022. During the years ended 31 December 2021 and 31 December 2022, twenty (20) employees and eighteen (18) employees terminated their employment contracts respectively.
Required:
Show the extracts of financial statements for Tabora Limited for each of the three years ended 31 December 2020, 31 December 2021 and 31 December 2022 to record the above transactions. (6 marks)
2. Waigwa Limited is a public limited company quoted on the securities exchange. The company’s capital structure comprises both equity and debt financing. On 1 August 2019, the company raised additional finance by issuing Sh.24,000,000 four-year deep discount bonds.
The interest is payable annually in arrears at the coupon interest rate of 6% per annum. The bonds were issued at a discount of 10% and were redeemable on 1 August 2023 at a premium of Sh.1,217,000.
The effective rate of interest was 12% per annum. The issue costs amounted to Sh.1,200,000. The reporting date for Waigwa Limited is 31 July.
Required:
Illustrate how the above financial instrument should be accounted for in the financial statements of Waigwa Limited for the years ended 31 July 2020, 2021, 2022 and 2023 (Round your answers to the nearest thousand). (10 marks)
(Total: 20 marks)
QUESTION FIVE
The following financial statements relate to Ukulima Group:
The following information is relevant to the Ukulima Group:
1. Machinery with a carrying amount of Sh.12 million was disposed of for cash proceeds of Sh.10 million.
Depreciation of Sh.52 million had been charged to operating expenses in the statement of profit or loss. As a result of a revaluation of Ukulima Group’s factories during the year, a transfer was made within equity for excess depreciation of Sh.1 million. Included in trade and other payables at the reporting date is Sh.2 million (2021: Sh. NIL) that related to property, plant and equipment purchased during the period.
2. Ukulima Group received a government grant of Sh.3 million in cash during the reporting period to help fund the acquisition of machinery needed for its production process. Ukulima Group accounts for grants as a reduction to the cost of assets.
3. Ukulima Group accounted for investment properties at fair value. Some new investment properties were acquired at a cash price of Sh.14 million during the year.
4. Ukulima Group disposed of some of its shares held in Shamba Ltd. Ukulima held 90% of the shares in Shamba Ltd. before disposal and 40% of the shares after disposal leaving it with significant influence. The Ukulima Group received cash proceeds from the sale. The profit on disposal of Sh.3 million was correctly calculated and credited to the statement of profit or loss. The fair value of the interest retained in Shamba Ltd. was Sh.32 million.Goodwill and non-controlling interest at the disposal date were Sh.40 million and Sh.4 million respectively.
A breakdown of Shamba Ltd.’s net assets as at the date of the share disposal is provided below:
5. During the period, Sh.65 million in cash was spent on investments in associates.
6. Finance costs included a Sh.2 million loss on the retranslation of a loan that was denominated in a foreign currency. All other finance costs were paid in cash.
Required:
A consolidated statement of cash flows using the indirect method for the Ukulima Group for the year ended 30 September 2022 in accordance with International Accounting Standard (IAS) 7 “Statement of Cash Flows”. (Total: 20 marks)
