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KCE
COLLEGE
ADVANCED FINANCIAL REPORTING & ANALYSIS
ADVANCED LEVEL
IMPAREMENT OF ASSETS (IAS 36)
Question one ABC ltd owns a manufacturing plant with a carrying amount of sh.7, 490,000. The government has just imposed export quota on the products manufactured by the plant, following this development; ABC LTD has prepared the following estimates of cash flows from the usage of the plant over the next 5 years. Year Cash flows ‘ 000 ’
PVIF15%
The plant can be sold currently for sh.5, 600,000. Selling costs would amount to sh 100,000. Cost of capital is 15%. Required; a) Recoverable amount of the plant. b) Impairment loss on the plant. QUESTION TWO Q LTD has three operations based on three countries each of which represent a cash generating asset, on purchase, the data of Country A were: allocation of the purchase price of ksh.6M, of which fair value of identifiable asset was ksh.4M, goodwill 2M. Depreciation is charged on a straight line basis over 20 years with no residual value. At the beginning of year 4 there had no impairment of the goodwill arising on acquisition. At the end of year 4, the gov’t export restriction was introduced. The fair value less cost to sell for the operation of country A cannot be estimated since a buyer could not be found. The value in use is calculated as Ksh. 2.73M Required : Calculate the impairment loss and state how it should be allocated to the assets of Country A. QUESTION THREE JM ltd is a private company. The company sells toys and clothing. On 1 st^ Oct 2010 the company imported a plant at a cost of sh. 2.5M. The plant was estimated to have a useful life of 10years with nil residual value. Dep is provided on straight line. On 30 Nov 2012 a competitor was awarded license to import similar toys and clothing resulting into reduction in market share. On 30 th^ Sep 2013 the fair value of the machine was sh 1M and cost to sell was sh 150,000. On the same date it is estimated that the machine would generate sh 325,000 p.a over the remaining useful life which was unchanged.
On 31 st^ Aug 2014 the competitor license was withdrawn after contravening NEMA regulations .AS at 30 th^ Sep 2014 the fair value of the machine significantly exceeded the carrying amount and is estimated at sh. 3M. Discount rate is 20%, ignore deferred tax. Require d a) Compute the impairment loss to be recognized on 30/09/2013. b) Compute the reversal of impairment loss on 30/09/ c) Prepare the income statement and SFP extract for each year from 2011- Financial instruments QUESTION 1 On 1 st^ Jan 2012, Mark ltd purchased a debt instrument at its fair value of sh.1000.The debt instrument is due to mature on 31 st^ Dec 2016.Interest on the debt instrument is at the rate of 4.72%(coupon rate) that is payable at the end of each year. The instrument has a principle amount (par value) of sh.1250 payable on maturity. The effective interest rate is 10%. Required: How should Mark ltd account for the debt instrument? QUESTION 2 Summit ltd issued a bond for sh 503778 on 1 st^ Jan 2014. No interest is payable on the bond but it will be held to maturity and redeemed on 31 st^ Dec 2016 for sh 600008. Required: Calculate the finance charge and the carrying amount of the bond until maturity. QUESTION 3 John ltd issued 2000 convertible bond at the start of year 2013.The bonds have a 3-year term and they are issued at par value with a face value of sh.1000 per bond. The bond would be redeemed at par value on maturity. Interest is payable annually in arrears at an interest rate of 6% per annum. Each bond is convertible any time up to maturity into 50 ordinary shares. The prevailing market (effective) interest rate is 9%. Required: (a) Calculate the value of the liability component and the equity component in the bond. (b)Calculate the carrying amount of the bond at the end of each year. Assignment .(CFA) Upendo ltd wishes to take advantage of the new commercial paper now popular. It wishes to issue two debenture papers. Both bear coupons of 12% and the effective yield required on each is 20%. Paper A has a maturity of 10 years and paper B a maturity of 20 years. Both will be paying interest annually and Kshs. 100,000 at maturity. What is the price of each paper? If the effective yield on each paper rises to 24%, what is the price of each paper? (15 mks) INCOME TAXES QUESTION ONE M ltd provided the following information about its plant and machinery for the 4 years. Year Profit before tax Capital allowance Depreciation 2013 5850 2000 400 2014 5200 400 800 2015 4300 400 1200 2016 4200 2800 800 Assume tax rate of 30%
- 1/10/2014 A holder of 300,000 convertible preference shares converted them into equity shares in the ratio of 2 ord shares for every 3 pref shares held
- 1/11/2014 the co made a share split of 2 equity shares for every one equity shares held as at 1 st^ Nov 2014.
- 1/12/2014 the co made a right issue of one equity shares for every 5 shares held at an exercise price of sh 12.5 per share. The cum-right price was sh 20 per share. Required: Compute the basic EPS in respect of continuing operation and the entity as a whole. Question four The issued and fully paid shares of A ltd as at 1 st^ Jan 2015 was as follows 8% 400,000 sh 10 convertible preference shares 400,000 sh. 10 ord shares The PAT for the year ended 31 st^ Dec 2015 was sh. 40,320,000. On 1 st^ Oct 2015 the co issued sh. 12,000,000 6% convertible debentures with a conversion ratio of 20 ord for every shs.100 of debenture. The convertible preference shares has a conversion ratio of one ord shares for every one preference share The corporate tax rate for the year was 30%. Required : The basic EPS and Diluted EPS for the year ended 31 st^ Dec 2015. LEASES REVISION QUESTION. QUESTION ONE Royal contractor’s ltd owns an item of plant used for the construction with the carrying value of sh 14 million as at 31 December 2015. The firm won a construction contract and decided to sell and lease back the machine on that date under the following conditions. Selling price sh 40 million. This was also the fair value of the plant. Lease rentals payable annually in arrears amounted to sh 15,521,200. Lease duration for the machine was 3 years. The economic life of the machine was also 3 years. The implicit interest rate was 8% annually. Required: Financial statement extract for the 3 years. QUESTION 2 A company entered into a 4-year lease commencing on 1 January 2018 (and intends to use the asset for 4 years). The terms are 4 payments of Sh.50,000, commencing on 1 January 2018, and annually thereafter. The interest rate implicit in the lease is 7.5% and the present value of lease payments not paid at 1 January 2018 (i.e. 3 payments of Sh.50,000) discounted at that rate is Sh.130,026. Legal costs to set up the lease incurred by the company were Sh.402. Required Show the lease liability from 1 January 2018 to 31 December 2021 and explain the treatment of the right-of-use asset.
COMPANY RECONSTRUCTION
Question 1 Mac ltd has been operating profitably until 3 years ago when it started experiencing financial problem. This resulted in the buss reporting heavily trading losses. The directors are considering taking internal reconstruction. The statement of financial position for the company as at 31 st March 2015, before reconstruction was as follows. Assets sh. “ 000 ” Non-current assets Land and buildings 720, Furniture’s and equipment 480, Motor vehicle 90, Goodwill 60, Current assets Inventory 240, Trade receivables 1,020, Total assets 2,610, Capital & reserves Ordinary share capital (sh. 10 each par value) 450, 9% cumulative preference share (10 sh each) 300, Revaluation reserves 450, Profit and loss account (615,000) NCL 10% debentures 500, Current liabilities Bank overdrafts 500, Trade payables 1,025, Total 2,610, Additional information
1. The cost of the scheme of reconstruction was estimated to be 4,500,000. 2. The dividends for preference shares were 2 years in arrears. 3. The fair values of the assets as at 31 st^ March 2015 were as follows. “ 000 ” Land and buildings 777, Furniture’s and equipment 435, Motor vehicles 45, Inventories 210, Trade receivables 939, 4. Goodwill was considered valueless 5. Assume that the internal reconstruction would be completed at the close of buss on 31 st March 2015. Required: a) Suggest a suitable scheme of capital reduction for Mac ltd b) Capital reduction account c) Opening SFP as at 1 st^ April 2015 after conclusion of the capital reduction scheme
At the year end, half of the raw materials purchased were still in inventory of Skolt ltd. The inter-company transaction had not been eliminated from the financial records and the goods were recorded by Skolt ltd at the exchange rate ruling on 1st Feb 2015. A payment of Ksh 6 million was made to cactus when the exchange rate was 2.2 domes to 1 Ksh. Any exchange gain/loss arising is still included in the current liabilities of Skolt ltd.
- Cactus ltd had made an interest free loan to Skolt ltd of Ksh 5 million on 1 may 2014.the loan was repaid on 30 may 2015.skolt ltd had included the loan in the non-current liabilities and had recorded it at the exchange rate at 1 may 2014.
- The fair value of the net assets of Skolt ltd at the date of acquisition is assumed to be the same as the carrying amount.
- Skolt ltd operates with a significant degree of autonomy.
- The following exchange rates are relevant to the financial statement: Domes to Ksh 30 April/1st^ may 2014 2. 1 st^ Nov 2014 2. 1 st^ Feb 2015 2 30 th^ April 2015 2. Average rate for year to 30 th^ April 2015 2
- Cactus ltd paid a dividend of Ksh 8 million during the financial year and this is not included in the income statement.
- The policy of the group is to account for NCI at their fair value of the identifiable assets. Required: a) Consolidated income statement for the year ended 30 th^ April 2015. b) Consolidated statement of financial position as at 30 th^ April 2015.(round to nearest 100,000) GROUP STATEMENT OF CASHFLOWS FORMAT (IAS 7) INDIRECT METHOD NASA Group Statement of cash flow for the year ended xx/xx/ Operating Activities cash flows Profit before tax xx Adjustments Depreciation xx Amortization/Impairment xx Loss on disposal xx Finance cost xx Gain on disposals (xx) Associate profit/joint venture profit (xx) Investments income/Dividends income (xx) Xxx
Changes in working capital Increase/Decrease in inventory (xx)/ xx Increase /Decrease in receivables (xx)/ xx Decrease /Increase in payables xx/ (xx) Gross operating cash flows xxx Less interest paid ( xxx) Tax paid (xx) Net operating cash flows. Xxx (A) Investing Activities cash flows Cash proceed from disposals xx Dividends /interest /investment income received xx Disposal of subsidiary net of cash disposed xx Acquisition of subsidiary net of cash acquired (xx) Purchase on non-current assets (xx) Net investing cash flows xxx(B) Financing Activities cash flows Cash received from issue of shares xx Cash received from issue of debentures xx Loan borrowed xx Loan paid (xx) Dividend paid (xx) Lease rentals paid (xx) Net financing cash flows xxx(C) Cash and cash equivalents (A+B+C) xx Add: cash balance b/d xx Cash and cash equivalent balance c/d xx DIRECT METHOD OPERATING ACTIVITIES CASHFLOWS. Cash received xx Cash paid (xx) Gross operating cash flow xx Tax paid (xx) Net operating cash flows xx (A)
ENVIRONMENTAL REPORTING.
This is the disclosure of information in the published annual report or elsewhere of the effect that the operations of the business have on the natural environment. Environmental reporting in practice. There are two main vehicles that entities use to publish information about the ways in which they interact with the natural environment. The published annual report 9 which include the financial statements). A separate environment report. The IASB encourages the presentation of environmental reports if management believes that they will assist users making economic decision. Separate environmental reports. Many large companies publish environmental report that re completely separate from the annual report and financial statements. The environmental report is often combined in a sustainable report. Most environmental reports take the form of a combined statement of policy and review of activity. They cover issues such as: The waste management. Pollution. Intrusion into the land scape. The effect of an entity’s activity upon wildlife. Use of energy. Contents of environment report. The content of an environment report may cover the following areas:
1. Environment issues pertinent to the entity and industry. The entity’s policy towards the environment and any improvement made. Whether the entity has a formal system for managing environmental risks. The identity of the directors responsible for environmental issues. The entity perception of the risks to the environment from its operations. The extent to which the entity would be capable of responding to a major environmental disaster. Details of any significant infringement of environmental legislation on environmental matters. Details of key indicators (if any) used by the entity to measure environmental performance. 2. Financial information. The entity accounting policies relating to environmental costs provisions and contingencies. The amount charged to the income statement during the accounting period in respect of expenditure to prevent or rectify damage to the environment caused by the entities operations. Details (including amount) of any provisions or contingent liabilities relating to environmental matters.
The amount of environmental expenditure capitalized during the year. Details of fines, penalties and compensation paid during the accounting period in respect of non-compliance with environmental regulations. Accounting for environment costs. Environment costs -include environmental measures and environmental losses. Environmental measures- are the costs of preventing, reducing or repairing damage to the environment and the costs of conserving resources. Environmental losses -are costs that bring no benefit to the business. Environmental measures cost can include: Capital expenditure. Closure or decommissioning costs. Clean-up cost Development expenditure. Recycling costs/conserving energy. Environmental losses can include; Fines, penalties and compensation. Impairment or disposal losses of asses. Accounting treatments. Environmental cost are treated in accordance with the requirement of current accounting standards. (a) Most expenditure is charged in the P&L in the period they occur. (b) Fines and penalties for non-compliance are charged to the P&L or Statement of comprehensive income. (c) Expenditure on non-current current asset is capitalized and depreciated in the usual way as per IAS 16 PPE (d) Any government grant received for expenditure that protects the environment are treated in accordance with IAS 20. (e) Non-current assets (including goodwill) may become impaired as a result of environmental legislation or new regulations. (f) Research and development expenditure in respect of environmentally friendly products, processes or services is covered by IAS 38 intangible asset. Provisions for environmental liabilities. IAS 37 provision, contingent liabilities and contingent assets states that three conditions must be met before a provision may be recognized. i. The entity has a present obligation as a result of a past event. ii. It’s probable that a transfer of economic benefits will be required to settle the obligation. iii. A reliable estimate can be made of the amount of obligation. Reasons for environmental reporting. To differentiate it from its competitors. To acknowledge responsibility for the environment. To demonstrate compliance with regulations. To obtain social approval for its activities.
- There is no law that will reinforce the reporting of social activities of the firm.
- Benefits from social responsibility reporting are hard to quantify. PROFESSIONAL ETHICS CODE OF CONDUCT FOR PROFESSIONAL ACCOUNTANTS. Fundamental principles. A professional accountant is required to comply with the following fundamental principles. 1. Integrity A professional accountant should be straight forward and hence honest in all professionals and business relations. 2. Objectivity. He should not allow bias, conflict of interest or undue influence of others to override professional or business judgment. 3. Professional competence and due care. A professional accountant has a continuing duty to maintain professional knowledge and skills at the level required to ensure that the client receives competent professional service. 4. Confidentiality. He should respect confidentiality of information acquired as a result of professional and business relations and should not disclose any such information to 3 rd^ parties without proper and specific authority. 5. Professional behavior A professional accountant should comply with the relevant laws and regulations and should avoid any action that discredit the profession. Threats and safeguards. THREATS Compliance with the fundamental principles may potentially be threatened by a broad range of circumstances. Many threat fall into the following categories. (a) Self-interest threats. (b) Self-review threats. (c) Advocacy threat. (d) Familiarity threats. (e) Intimidation threat. ETHICAL ISSUES FOR ICPAK MEMBERS. A member of the institute is guilty of professional misconduct if such member:
- Allows any person to practice in his name as an accountant, unless such person is the holder of a practicing certificate and is in partnership with him.
- Discloses information acquired in the course of professional engagement to any person other than a client, without the consent of the client.
- Certifies or submits in his name or the name of the firm a report of an examination of financial statement which related to statement not been made by him.
- Fails to report a material misstatement known to him to appear in a financial statement with which he is concerned in a professional capacity.
- Is found to engage in any other fraudulent acts.
- If guilty of gross negligence in the conduct of his professional duties. INTERIM FINANCIAL REPORTING. In order to satisfy demand for timely information, quoted companies usually publish interim financial report during the year. It is a requirement by the capital market authority in Kenya for quoted companies to publish interim financial reports. Minimum components of an interim financial report.
- A condensed statement of financial position.
- A condensed statement of comprehensive income.
- A condensed statement of changes in equity.
- A condensed statement of cash flows.
- Selected explanation notes. OMMITED TOPICS. The IFRS foe SME does not address the following topics that are covered in full in IFRS EPS Interim financial reporting Segment reporting. Special accounting for asset held for sale. RELATED PARTY DISCLOSURES. (IAS 24) Parties are considered related if one of the party has the ability to control the other party or exercise significance influence over the other party in making financial and operating decisions. The objective of the standard is to ensure that the entity financial statement contains the disclosure necessary to draw attention to the possibility that its financial position and P&L may have been affected by the existence of the related parties and transactions with such parties. A party is related to an entity if:/Examples of related parties.
- Directly or indirectly through one or more intermediary the party controls another entity or has a significance influence.
- The party is an associate of another entity.
- The party is a joint venture in which the entity is a venture.
- The party is a member of the key management personnel.
- The party is a close member of the family of the key management personnel.
- The party is a post-employment benefit plan for the benefit of the employees of the entity.
- Affiliates.
- Owners of the business.
- Trusts for the benefit of employees. A RELATED PARTY TRANSACTION -is a transfer of resources or services between related parties.
d) The amount of the closing balance of all loans and receivables. Importance of related party disclosure. Disclosure of related party transactions is important as it may affect assessment of an entity’s operation and the entity’s operation and the entity risks and opportunity by users of financial statement. Disclosure of related party is useful because the company’s performance may be influence by inter-company sales and other transactions. Valuation of related party receivables and payables has an impact on financial performance and position. Related party relationship and transactions can have an effect on the profit or loss and financial position of the reporting entity. RELATED PARTY DISCLOSURES UNDER IPSAS (IPSAS 20) IPSAS 20 considers parties to be related if ne party has ability to control the other party or exercise significance influence over the other party in making financial and operating decisions, including key management personnel. Disclosure should always be made where control exists. In addition, where business transactions are not at arm length, the nature of the relationship, type and element of transaction should be disclosed. As regard to the key management personnel, disclosure is required on aggregate remuneration. How does IPSAS 20 differ from IAS 24. Unlike IAS 24, IPSAS 20 does not require disclosure of information about business transactions between related parties which occur on normal terms and conditions. HEDGE ACCOUNTING (IFRS 9) Hedge accounting is a method of accounting where entries for the ownership of a security and the opposite hedge are treated as one. Hedge accounting tries to reduce the volatility created by repeated adjustment of the financial instrument value known as marking to market. A hedge item can be an asset, liability. Types of Hedge relationships.
- Fair value hedge. This is a hedge of the exposure to changes in the fair value of a recognized asset or liability or an identified portion of such an asset or liability that is attributable to a particular risk and could affect profit or loss. 2. Cash flow hedge. This is hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with a recognized assets r liability and could affect profit or loss. 3. Hedge of a net investment in foreign operations. IAS 21 defines a net investment in a foreign operation as the amount of reporting entity’s interest in the net asset of that operation. Conditions for hedge accounting The following conditions must be met before a hedge relationship qualifies for accounting
- The hedge is assessed on a going concern basis.
- The effectiveness of the hedge can be measured reliably.
- For cash flow hedge, a forecast transaction that is the subject of the hedge must be highly probable.
- The hedge is expected to be highly effective in achieving offsetting changes in fair value or cash-flows attributable to the hedge risk. **Accounting treatment
- Fair value hedge.** The gain or loss resulting from re-measuring the hedging instrument at fair value is recognized in P&L. 2. Cash-flow hedge. The portion of the gain/loss on the hedge instrument that is determined to be an effective hedge shall be recognized directly in equity through the statement of changes in equity. The ineffective portion of gain/loss should be recognized in P&L. EXPLORATION FOR AND EVALUATION OF MINERAL RESOURCES (IFRS 6) Accounting for exploration of mineral resources The scope of IFRS 6,stated as follows: An entity shall apply the IFRS to exploration and evaluation expenditures that it incurs. An entity shall not apply the IFRS to expenditure incurred before the exploration for and evaluation of mineral resource, such as expenditures incurred before the entity has obtained the legal rights to explore a specific area; after technical feasibility and commercial viability of extracting a mineral resource are demonstrable. Key provisions on impairment of exploration assets as per IFRS 6 IFRS 6 effectively modifies the application of IAS 36 Impairment of Assets to exploration and evaluation assets recognized by an entity under its accounting policies. Entities recognizing exploration and evaluation assets are required to perform an impairment test on those assets when specific facts and circumstances outlined in the standards indicate an impairment test is required. The facts and circumstances outlined in IFRS 6 are non-exhaustive and are applied instead of indicators of impairment in IAS 36. Impairment loss shall be treated as an expense in the profit and loss account. The company shall evaluate (carry out impairment test) the indicators of impairment loss of its exploration asset. Disclosure requirement. An entity shall disclose:
- Its accounting policies for exploration and evaluation expenditure including the recognition of exploration and evaluation asset.
- The amount of asset, liabilities, income and expenses arising from the exploration for and evaluation of mineral resources.
- An entity shall treat exploration and evaluation asset as a separate class of asset and make disclosure required by either IAS 6 or IAS 38 consistent with how the asset are classified.
- Impairment loss
- Carrying amount.
- Performance.
- Outlook
- Basis of preparation and presentation. Guiding principles underpinning the preparation of an integrated report (a) Strategic focus. (b) Communication. (c) Responsiveness and stakeholder inclusiveness. (d) Conciseness, reliability and materiality. (e) Future orientation. TRIPLE BOTTTOM LINE ACCOUNTING Triple bottom line is an accounting framework that incorporates three dimensions of performance; Social, environment and financial. The concept behind the triple bottom line is that companies should focus as much on social and environmental issues as they do on profits. The TBL consists of three elements; profit, people and the planet. TBL theory holds that if a firm looks at profit only, ignoring people and the planet, it cannot account for the full cost of doing business. Profi t-this is the traditional measure of corporate profit. People/Social -This measures how socially responsible an organization has been throughout its history. Planet/environment - this measures how environmentally responsible affirm has been. Departing from application of IFRS, IAS or IPSAS Disclosure requirement. When an entity departs from the requirement of a standard in accordance with paragraph 3, it shall disclose; That the management has concluded that the financial statement present fairly the entity’s financial position, financial performance and cashflows. That it has complied with applicable IFRS/IPSAS/IAS, except that it has departed from a particular requirement to achieve a fair presentation. The nature of the departure, including the treatment that the standard would require. The impact of the departure on each item affected in the financial statement. Accounting policy choices that are disallowed under the SMEs standards. IFRS for small and medium-sized companies (the SME standards) has been issued for use by entities that have no public accountability. One of the notable differences between the SMEs Standards and the full IFRS and IAS Standards that is not available to companies that apply the SMEs Standards. Accounting policy choices that are disallowed under the SMEs standard includes: Goodwill arising on acquisition of subsidiary is always determined using the proportionate net asset method (partial goodwill method). The fair value model of measuring the NCI is not available.
Intangible assets must be accounted for at cost less accumulated amortization and impairment. The revaluation model is not permitted for intangible assets. After initial recognition, investment property is re-measured to fair value at the end of the year with the fair value gain or losses recorded in profit or loss. The cost model can only be used if fair value cannot be measured reliably or without undue cost or effort. MANAGEMENT COMMENTARY REPORT This is a narrative report that relates to financial statement that have been prepared in accordance with IFRSs. Management commentary provides users with historical explanation of the amount presented in the financial statement, specifically the entity’s financial position, financial performance and cashflows. It also provides commentary on an entity prospects and other information not presented in the financial statement. Management commentary also serves as a basis for understanding management’s objective and strategies for achieving that objective. Elements of management commentary
- The nature of the business-the knowledge of the business in which a entity is engaged and the external environment in which it operate.
- Management objective and its strategies for meeting those objectives
- The entity’s most significant resources, risks and relationship.
- The results of operations and prospects.
- The critical performance measures and indicators that management uses to evaluate the entity’s performance against stated objectives THE CONCEPTUAL FRAMEWORK A conceptual framework has been defined as a coherent system of interrelated objectives and fundamentals that can lead to consistent and that prescribes the nature, function and limits of financial accounting and financial accounting systems. The usefulness of a conceptual framework for financial accounting is evident in that: (a) It enables the development and issuance of a coherent set of accounting standards and practices built upon the same foundation. (b) It increases financial statement user’s understandability and confidence in FR. (c) It enhances comparability among the financial statement of different companies. (d) It assists in the resolution of new and emerging practical problems by providing a frame of reference for resolving accounting issues. (e) It defines the bound of judgment in the preparation of financial statement. Framework for preparation and presentation and presentation of financial statement (IASB Framework) The framework deals with/scope Users and their information needed. The objective of the financial statement. Underlying assumptions-such as accrual and going concern assumption.
