STRATHMORE UNIVERSITY

SCHOOL OF ACCOUNTANCY
EVENING COURSE
2ND
SEMESTER MOCKS
CPA part III
ADVANCED FINANCIAL REPORTING Friday, December 18, 2009
ANSWER ALL QUESTIONS Time 5.30 8.30pm

QUESTION ONE
Hail Limited (a US company) purchased 80% of Storm Limited (a Mexican Company),
on 1 January 2007 when there was a credit balance on the retained profits of
of Mexican Pesos (MP) 630 million. Both companies operate in the tourism industry.

The following draft financial statements relate to the two companies:

Statement of comprehensive incomes for the year ended 31 December 2008

Hail Storm
$m MPm
Revenue 1,500.00 3,316.50
Cost of sales (800.00) (1,763.00)
Gross profit 700.00 1,553.50
Dividend from subsidiary 8.00 -
708.00 1,553.50
Distribution costs (120.00) (220.00)
Administration expenses (130.00) (330.00)
Finance costs (35.00) (154.00)
Profit before tax 423.00 849.50
Income tax expense (120.00) (110.00)
Profit after tax 303.00 739.50
Dividends paid (150.00) (112.00)
Retained Profit for y/r 153.00 627.50
Retained Profit for b/f 162.00 1,272.50
Retained Profit for c/r 315.00 1,900.00

Statement of Financial Position as at 31 December 2008

$m MPm
Non Current assets Million Million
Property, plant and equipment 660.00 3,250.00
Investment in Storm 278.00 -

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 938.00 3,250.00
Current Assets:
Inventory 325.00 1,200.00
Receivables 240.00 1,150.00
Cash at bank and in hand 150.00 600.00
715.00 2,950.00
Total assets 1,653.00 6,200.00

Financed by:
Ordinary Shares of $.10 800.00 2,100.00
Retained Profits 315.00 1,900.00
Shareholders funds 1,115.00 4,000.00

Non Current liabilities

10% loan Stock 400.00 1,500.00
-
400.00 1,500.00
Current liabilities:
Trade and Other payables 131.00 600.00
Current tax 7.00 100.00
138.00 700.00
Total equity and liabilities 1,653.00 6,200.00

Additional information
1 On the date of acquisition of Storm, the fair value of an item of plant was MP 120
million in excess of the book value. Depreciation of the plant is 25% per annum.
The non controlling interest had a fair value of MP 670 million on the same date.

2 The 10% loan stock in Hail was borrowed from a Mexican bank to finance the
acquisition of Storm. The loan will be paid several years later and is used as a hedge
on the investment in Storm. In the current year Hail has reported a loss of $5 million
in its finance cost as a result of translating the loan.

3 During the year Hail sold goods worth $100 million to Storm reporting a profit of $20
million. Half the goods are still in the inventory of storm as at 31 December 2008.

4 Included in the receivables of Hail is $30 million due from Storm. This amount stood
at MP 250 million using the exchange rate on the date of the transaction. The amount will
be paid in dollars by Storm.

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 5 Goodwill is considered impaired by 20% in the current year. No impairment had been
reported in previous years.

6 The following exchange rates are relevant:

Date Rate ( $= MP)

1 January 2007 10
31 December 2007 12.5
31 December 2008 8
Average for year 2008 11
Date when dividends were paid by Storm 11.2

7 The opening group translation reserve was a debit balance of $ 12 million.

Required:
Prepare the consolidated financial statements for 2008. (25 marks)

QUESTION TWO
Great Mountain Estates Limited is the holding company for a group of tea growing
subsidiary companies. In the year to 31 March 2003, it sold one of its subsidiaries so that
the groups area of operations could be confined to a single area of the country.

SCI for the year ended 31 March 2003 Consolidated SFP as at 31 March

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 Sh. Sh. 2003 2003
million million Sh. Sh
Capital employed million million
Revenue 596
Cost of sales (417) Share capital 400 300
Gross profit 179 Share premium 112 84
Other incomes 12 Retained earnings 64 95
Distribution costs (48) 576 479
Admin. expenses (154) NCI 13 21
Other expenses (19) 589 500
(30) Non-current liabilities
Finance cost: (35) Bank loans 29 52
Gain on sale of subs. 19 Deferred tax liabilities 18 17
Loss before tax (46) Provisions and charges 18 19
Tax: Finance lease liabilities - 2
Current (2) 65 90
Deferred tax 13 654 590

11 Represented by:
Net Loss (35)
Att. To NCI 4 Non-current
Att. Holding co (31) PPE 705 769
Depreciation (161) (135)
544 634
Intangible assets:
Goodwill cost 40 50
Impairment (24) (50)
16 25
Deferred tax assets 16 2
576 661
Current assets:
Inventories 158 225
Trade & Oth receivables 103 134
Tax recoverable 11 9
Cash & equivalents 3 5
275 373
Current liabilities
Trade and other payables 112 188
Current tax - 2
Finance lease liabilities 2 8
Bank overdrafts 83 246
197 444
Net current 78 (71
assets/(liabilities) 654 590

Additional information:

1.The assets and liabilities in the subsidiary (which was sold on 31 December 2002) were
as follows:
Sh. million

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 Property, plant, equipment cost 118
Depreciation (31)
87
Inventories 27
Trade and other receivables 41
Cash and bank balances 3
Bank overdraft (61)
Trade and other payables (38)
Bank loans (18)
Current tax payable (1)
40

Great Mountain Estates Limited had purchased 90% of the ordinary share capital
of this subsidiary on 1 April 1997 for Sh.28 million when the fair value and the
carrying value of the net assets were Sh.20 million.

2.The other companies in the group sold property, plant and equipment which had cost
Sh.11 million for Sh.9 million.

3.The figures for provisions for liabilities and charges are made up entirely of amounts
due in respect of staff retirement gratuities.

4.There was an issue of ordinary shares at a premium of 30%, issue costs were charged
against the share premium.

5.The loss before tax is arrived at after charging the following items:

Sh. million
Depreciation of property, plant and 65
equipment
4
Amortization of goodwill
227
Staff costs (2,433 members of staff at year
3
end)
2
Auditors remuneration
Directors remuneration

6.The interest expense charged in the profit and loss account is made up of Sh.2 million
on finance leases and Sh.33 million on bank loans and overdrafts. At 31 March

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 2003, included in trade and other payables is accrued interest of Sh.1 million on
31 March 2002 the figure had been Sh.5 million.

7.There were no purchases of property, plant and equipment using new finance leases.

Required:

Prepare the consolidated statement of cash flows for the year ended 31 March 2003
using the indirect method in IAS 7.
(20 marks)

QUESTION THREE

(a)

Tourists Paradise Limited, TPL is a company quoted on the Nairobi Stock exchange. Its
managing directors, Mr. Tamiba, owns 52% of the share capital of the company. Mr.
Tamiba is a director of Tourists Travels Limited (TTL), an 80% subsidiary of Tourists
Paradise Limited, of Mombasa Deep-sea Fishing Limited (MDFL), a 40% associate of
Tourists Paradise Limited, and of Mombasa Hotel Supplies Limited (MHSL). TPL owns
and runs 6 tourist hotels along the coast, both north and South of Mombasa. TTL is a
travel and transport company. All TPLs travel and transport needs are outsourced to
TTL, MDFL, markets a wide variety of fish products parts of its output is exported and
the rest is sold to a large number of hotels and restaurants both in the coastal region and
inland. MHSL supplies many hotels in the coast region with an assortment of different
products. Mr. Tamiba owns 40% of the share capital of MHSL, his wife owns 20%, the
owners of the 4 other hotels in the coastal region each own 10% of the ordinary share
capital. In addition to being a director of these companies, Mr. Tamiba is a director of
Bamburi Cement Limited (BCL) from which company all the other companies named
above buy cement at the normal market price. All 5 companies prepare their annual
financial statements to 30 November each year.

Transactions between the companies in the year ended 30 November 2000 are as
follows

Purchaser Seller Amount Basis of price charged Outstanding at 30

November 2000
TPL TTL Sh.38 Comparable uncontrolled price Sh.4 million
million
TPL MDFL Sh.32 Cost plus 100% other consumers
million
are charged cost plus 80% Sh.3 million
TPL MHSL Sh.49 Comparable uncontrolled price
million
Plus 10% Sh.5 million
TPL BCL Sh.2 million Normal market price Sh.2 million
MDFL BCL Sh.1 million Normal market price Nil
MHSL MDFL Sh.66 Comparable uncontrolled price Sh.6 million

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 million plus 10%

Required:

(a) IAS 24 deals only with certain related party relationships. State the related party
relationships dealt with. (4 marks)

(b) Disclose the information required by IAS 24 in the consolidated financial

statements of TPL, and in the individual financial statements of TTL, MDFL and MHSL.(6 marks)

(b) Company X has a complex capital structure. The following information relates to the
company for the year ending 31 May 2001:

(i) The net profit of the company for the period attributable to the preference and
ordinary shareholders of the parent company was $146 million. Of this amount the net
profit attributable to discontinued operations was$33 million.

The following details relate to the capital of the company:

m
(ii) Ordinary shares of $1 in issue at 1 June 2000 6
Ordinary shares of $1 issued 1 September 2000 at full market price 12

The average market price of the shares for the year ending 31 May 2001 was $10 and the
closing market price of the shares on 31 May 2001 was $11. On 1 January 2001, 300,000
partly paid ordinary shares of $1 were issued. They were issued at $8 per share with $4
payable on 1 January 2001 and $4 payable on 1 January 2002. Dividend participation
was 50 per cent until fully paid.

(iii) Convertible loan stock of $20 million at an interest rate of 5% per annum was issued
at par on 1 April 2000. Half a years interest is payable on 30 September and 31 March
each year. Each $1,000 of loan stock is convertible at the holders option into 30
ordinary shares at any time. $5 million of loan stock was converted on 1 April 2001 when
the market price of the shares was $34 per share.

(iv) $1 million of convertible preference shares of $1 were issued in the year to 31 May
1998. Dividends are paid half yearly on 30 November and 31 May at a rate of 6% per
annum. The preference shares are convertible into ordinary shares at the option of the
preference shareholder on the basis of two preference shares for each ordinary share
issued. Holders of 600,000 preference shares converted them into ordinary shares on 1
December 2000.

(v) Warrants to buy 600,000 ordinary shares at $660 per share were issued on 1
January 2001. The warrants expire in five years time. All the warrants were exercised on
30 June 2001. The financial statements were approved on 1 August 2001.

(vi) The rate of taxation is to be taken as 30%.

Required:
Calculate the basic and diluted Earnings per share for X for the year ended
31 May 2001 in accordance with IAS33 Earnings per share (10 marks)

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 (Total: 20 marks)

QUESTION FOUR
(a) Briefly explain the 4 main categories and 2 main categories of financial
instruments as per IAS 39 Financial instruments: Recognition and
measurement. ( 6 marks)
(b) What are the main disclosure requirement in IFRS 7 Financial Instruments:
Disclosures (6 marks)
(c)
Hiza Ltd. entered into the following transactions during the year ended 31 December
2008:

1) Entered into a speculative interest rate option costing KSh.10,000 on 1 January

2008 to borrow KSh.6,000,000 from AB bank commencing 31 March 209 for 6
months at 4%. The value of the option at 31 December 2008 was KSh.15,250.

2) Purchased 6% bond in FG Co on 1January 2006 (their issue date) for

KSh.150,000 as an investment. Ellesmere Co intends to hold the debentures
until their redemption at a premium in 5 years time. The effective rate of interest
of the bond is 8.0%.

3) Purchased 50,000 shares in ST Co on 1 July 2008 for KSh.3.50 each as an

investment. The share price on 31 December 2008 was KSh.3.75.

Required

Show the accounting treatment and relevant extracts from the financial statements for
the year ended 31 December 2008, Hiza Ltd only designates financial assets as at fair
value through profit or loss where this is unavoidable.

QUESTION FIVE
(a) Briefly explain 4 benefits that a firm would derive from presentation a social and
environmental report. (4 marks)

(b) List 10 items that would appear in a social and environmental report of a firm. (5
marks)

(c) Explain any three challenges that firms face when presenting their social and
environmental reports and any three ways that can be used to encourage firms
present a social and environmental report. (6 marks)
(Total: 15 marks)

END OF QUESTIONS!
GOOD LUCK!