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No. of pages: 11

Business Level
Business Financial Reporting
Instructions to candidates
(1) Time allowed: Reading and planning – 15 minutes
Writing – 3 hours
(2) Total: 100 marks

K
(3) Answer all questions.

(4) This paper consists of two sections.

Section 1: 5 questions
Section 2: 2 questions
(5) Answers should be in the English Language, in the answer booklet/s given

B
to you.
(6) Begin each answer on a separate page in the answer booklet. Submit all
workings.
(7) The examination will be conducted as an open book examination and only
the following publications of CA Sri Lanka will be permitted to be used at the
examination hall:

1
 Sri Lanka Accounting Standards 2017 or 2018
 Open Book Referential – Student Version (Statement of Alternative
Treatment, Sri Lanka Statement of Recommended Practice, IFRICs
and SICs)
 Code of Best Practice on Corporate Governance 2017
 CA Sri Lanka approved IFRIC 22 - Foreign Currency Transactions and
Advance Consideration.
 CA Sri Lanka approved IFRIC 23 – Uncertainty over Income Tax
Treatments.
 Sri Lanka Accounting Standard for Small and Medium-sized Entities JUNE 2018
2015
 Sri Lanka Accounting Standards - SLFRS 9, SLFRS 15 and SLFRS 16
 Sri Lanka Accounting Standard for Smaller Entities 2015
(8) Students are allowed to bring permitted publications which are highlighted,
sidelined, or underlined. Short notes written on the permitted publications
will also be allowed. Page tabs may be used to refer the pages. Short notes
pasted on the permitted publications are not allowed.
(9) Notes, text books (other than permitted publications) or any other materials
will not be allowed. Photocopies/extracts of the above publications will not
be allowed.
(10) Answers written on the answer booklets, graph papers and any other
stationery, distributed at the examination hall, only are considered in
marking of the answer scripts. Any other attached documents are not taken
into account at the time of marking the answer scripts.
 SECTION 1

All five questions are compulsory.

Total marks for Section 1 is 50 marks.
Recommended time for the section is 90 minutes.

Question 01

(a) P (Pvt) Ltd has a property that is used partly for administrative purposes. The
other part, which can be sold separately, has been given on rent. This property has
been reflected in the financial statements as property, plant and equipment and all
the disclosures required by LKAS 16, Property, Plant and Equipment have been
made.

Required:

Discuss whether the above property has been faithfully represented in the
financial statements as required by the Conceptual Framework for Financial
Reporting.
(5 marks)

(b) The following information is relevant to S PLC.

 S PLC holds board meetings twice a year.

 It has seven directors and one of them is a non-executive director.
 The chairman of S PLC is the CEO of the company.

Required:

Discuss the compliance to the Code of Best Practice on Corporate Governance

by S PLC.
(5 marks)

(Total: 10 marks)

KB1 – June 2018 Page 2 of 11

Question 02

(a) Reliable (Pvt) Ltd (RL) is a retailer selling computer accessories. It prepares its
financial statements in accordance with SLFRS for SMEs.

The financial results of the entity have deteriorated for three consecutive years
including the year ended 31 March 2018. Presently the entity is facing a challenging
time period for its business operations. As a result going concern issues are noted.
A director has made an inquiry from the accountant of RL whether any issue on
going concern should be disclosed even when the entity prepares its financial
statements in accordance with SLFRS for SMEs.

Required:

Advise the director regarding the going concern disclosure in accordance with
SLFRS for SMEs.
(4 marks)

(b) Plaza (Pvt) Ltd (Plaza) owned a property in Colombo and has rented it out to
different parties for commercial purposes. Plaza prepares its financial statements
using SLFRS for SMEs and has reflected this property in the financial statements for
the year ended 31 March 2018 as property, plant and equipment at cost less
accumulated depreciation and impairment, which amounted to Rs. 45 million. The
fair value of this property as at 31 March 2018 has been estimated as Rs. 60 million,
which is higher than the previous year-end fair value by Rs. 5 million. The fair value
has been estimated each year since the management wants to know the real market
value of the property.

Required:

Evaluate the accounting treatment adopted by Plaza as at 31 March 2018 for

the above property.
(6 marks)

(Total: 10 marks)

KB1 – June 2018 Page 3 of 11

Question 03

(a) Helen Holdings (Pvt) Ltd (HHL) is the holding company of a diversified group. The
following information relevant to HHL is provided to you.

 Helen Poly Pack PLC is a subsidiary of HHL. During the year ended 31 March
2018, there were no transactions between Helen Poly Pack PLC and HHL.

 Helen Plastics (Pvt) Ltd is the other subsidiary of HHL. Helen Poly Pack PLC
has sold goods amounting to Rs. 23 million to Helen Plastics (Pvt) Ltd in the
normal course of business. An amount of Rs. 12 million is yet to be received by
Helen Poly Pack PLC as at 31 March 2018.

 The chairman of HHL is the major shareholder of HHL. He also owns 75% of
the share capital of Rathna (Pvt) Ltd. During the year Rathna (Pvt) Ltd
obtained Rs. 10 million worth of services from Helen Poly Pack PLC. As
consideration for settlement of this transaction, Rathna (Pvt) Ltd will issue
shares in 6 months’ time.

Required:

(i) Identify the related parties of Helen Poly Pack PLC in accordance with
LKAS 24 Related Party Disclosures.
(2 marks)

(ii) Prepare the related party disclosure note to be included in Helen Poly
Pack PLC’s financial statements for the year ended 31 March 2018.
(4 marks)

(b) Horizon Finance PLC’s financial year ends on 31 December. The management of
Horizon is currently working on the new impairment model as required by
SLFRS 9 Financial Instruments. They intend to present the financial statements for
the year ending 31 December 2018 with the application of new accounting policies
relating to financial instruments retrospectively. The management believes that
this restatement will have a material effect on the information in the Statement of
Financial Position as at 1 January 2017.

Required:

Explain how the above will affect the presentation of financial statements per
LKAS 1 Presentation of Financial Statements.

(4 marks)

(Total: 10 marks)

KB1 – June 2018 Page 4 of 11

Question 04

(a) Peter & Co. PLC (PCP) is in the process of finalising its financial statements for the
year ended 31 March 2018. The following issue is yet to be resolved.
During the year PCP introduced two pension schemes to its employees. The details
are as given below.
Scheme 1
This is a retirement benefit plan for its employees where PCP and its employees
have to contribute 7% and 5% of annual salaries respectively to the plan. These
contributions will be invested in plan assets. Under this scheme employees are
entitled to a specified proportion of such plan assets at retirement. This in turn
depends on the performance of investments.

Scheme 2
This is also a retirement benefit plan where PCP and its employees have to
contribute 7% and 5% of annual salaries respectively to the plan. These
contributions will be invested in plan assets. The amount of pension paid to
retirees is determined by reference to their length of service. If the plan does not
have sufficient funds to meet the pension liability, PCP is obliged to fund the
shortfall.

Required:

Advise the management of PCP on the following:

(i) Classification of the above pension schemes per LKAS 19 Employee
Benefits.
(ii) The accounting treatment to be used for the pension schemes.
(6 marks)

(b) MAC (Pvt) Ltd has issued preference shares to two companies with different
features as given below.
(i) 1,000 preference shares were issued to MM (Pvt) Ltd at par (Rs. 100 per
share). According to the contractual terms, MM (Pvt) Ltd has the option to
require MAC (Pvt) Ltd to redeem the shares at par at any time after
issuance.

(ii) 500 non-redeemable preference shares were issued to BC (Pvt) Ltd at par
(Rs. 100 per share). According to the contractual terms, distributions
(i.e. dividends) are made to the holder at the discretion of MAC (Pvt) Ltd.

Required:
Analyse whether the above should be classified as equity or liability in the
financial statements of MAC (Pvt) Ltd.
(4 marks)
(Total: 10 marks)
KB1 – June 2018 Page 5 of 11
Question 05

You have been given the following information of SEL (Pvt) Ltd in relation to the current
and previous financial years.

31 March 2018 31 March 2017

Current ratio 2.1 1.82
Quick ratio 0.83 1.09
Debtors collection period 30 days 25 days
Creditors payment period 25 days 27 days
Inventory turnover period 109 days 73 days

Required:

(a) Assess the liquidity position and efficiency of SEL (Pvt) Ltd using the above
information.
(6 marks)
(b) Recommend methods to improve the liquidity position and efficiency level
based on your answer to (a) above.
(4 marks)
(Total: 10 marks)

KB1 – June 2018 Page 6 of 11

 SECTION 2

Both questions are compulsory.

Total marks for Section 2 is 50 marks.
Recommended time for the section is 90 minutes.

Question 06

Maczilion PLC (Maczi) is a large public limited company based in Sri Lanka. It has
shareholdings in two other companies; Haczilion PLC (Haczi) and Vaczilion PLC (Vaczi).
Statements of financial position as at 31 March 2018 are shown below for all three
companies.

Maczi Haczi Vaczi

Rs. ʽ000 Rs. ʽ000 Rs. ʽ000
Assets
Non-current assets
Property, plant and equipment 192,000 50,000 41,000
Investments 83,000 27,000 -
275,000 77,000 41,000
Current assets
Inventories 46,000 23,000 16,000
Trade and other receivables 32,000 14,000 12,000
Cash and cash equivalents 8,000 2,000 -
86,000 39,000 28,000
Total assets 361,000 116,000 69,000

Equity and liabilities

Equity
Stated capital 175,000 70,000 33,000
Retained earnings 132,000 16,000 12,000
307,000 86,000 45,000

Non-current liabilities
Retirement benefit obligation 12,000 7,000 4,000
12,000 7,000 4,000

Current liabilities
Trade and other payables 29,000 18,000 13,000
Bank overdraft - - 7,000
Dividends payable 13,000 5,000 -
42,000 23,000 20,000
Total equity and liabilities 361,000 116,000 69,000

KB1 – June 2018 Page 7 of 11

The following additional information is to be taken into account in so far as it is relevant:

(i) Maczi bought 45 million out of the 50 million ordinary shares in Haczi on 1 April
2017. The consideration consisted of an immediate cash payment of
Rs. 58 million together with a deferred payment of Rs. 30 million due on 1 April
2019. The Rs. 58 million has been accounted for, but no record has been made of
the deferred payment. Maczi’s cost of capital can be taken to be 10%.

(ii) On the acquisition date the fair values of the assets of Haczi were equivalent to
their book values with two exceptions. A certain plant was worth Rs. 4 million in
excess of its book value on the date Maczi acquired its holding. Further, Haczi’s
investments carried at Rs. 27 million had a fair value of Rs. 28 million at the
acquisition date. The plant was estimated to have had a five-year useful life from
the date of acquisition. The value of the investments has not changed since the
acquisition date. (Ignore the tax effect of fair valuation of assets).

(iii) Group accounting policy is to value non-controlling interests at fair value at the
date of acquisition, and goodwill to be calculated accordingly. On 1 April 2017 the
non-controlling interest in Haczi was fair-valued at Rs. 9.2 million. The
management assessed that 40% of the value of goodwill in Haczi was impaired as
at 31 March 2018.

(iv) Maczi bought 10 million out of the 25 million ordinary shares in Vaczi on
1 July 2017, paying an amount of Rs. 25 million in cash for these shares. This
investment has been correctly recorded at cost. Maczi exercises joint control over
its investment in joint venture Vaczi.

(v) The stated capitals of Haczi and Vaczi have not changed since their respective dates
of acquisition. The retained earnings were as follows on the respective acquisition
dates.
Haczi: Rs. 10.6 million, Vaczi: Rs. 9 million.

(vi) During the financial year ended 31 March 2018 Haczi sold goods to Maczi
amounting to Rs. 6 million. These goods were sold inclusive of a mark-up of 50% on
cost. 30% of these goods remained in the stock of Maczi at the reporting date. Since
acquiring its holding in Vaczi, Maczi purchased Rs. 3 million of goods from Vaczi,
which had cost Vaczi Rs. 2 million. All of these remained in inventory at the
reporting date.

(vii) There was an intra-group balance of Rs. 2.2 millon owed by Maczi to Haczi at the
year-end. An amount of Rs. 1.5 million was owed by Maczi to Vaczi at the reporting
date.

(viii) Maczi has not accounted for any dividend receivable from its group companies.
Both Maczi and Haczi have declared dividends as shown in current liabilities.
Haczi’s declared dividend relates to the post-acquisition period only.

KB1 – June 2018 Page 8 of 11

 Required:

(a) Prepare the consolidated statement of financial position of Maczi as at

31 March 2018.
(22 marks)

(b) SLFRS 11 describes two types of joint arrangements and specifies the
accounting requirement for each.

Differentiate the accounting treatment applicable to each type of

arrangement.
(3 marks)

(Total: 25 marks)

KB1 – June 2018 Page 9 of 11

Question 07

Rock PLC is a listed diversified entity and you are its finance manager. The following
matters need to be properly addressed to finalise the financial statements for the year
ended 31 March 2018. Required calculations need to be provided where necessary to
support your explanations/recommendations.

(i) One of the business segments of Rock has sold 1.5 million units of its product to
customers during the past 12 months with one year warranty. Past experience
shows that 2% of goods sold require warranty repair at an average cost of
Rs. 15,000 per unit.

(ii) On 1 April 2017, Rock acquired a licence from a bankrupt competitor to provide
radio broadcast services to a region within the island, which had been originally
issued by the government for a ten-year period at zero cost. The cost of the licence
to Rock was Rs. 150 million, and the remaining useful economic life was 6 years. It
had a recoverable value of Rs. 100 million as at the end of the reporting period.

(iii) Rock entered a 50-year lease for land and buildings on 1 April 2017, and will have
to make lease payments of Rs. 12 million per annum in advance. The fair value of
the land and buildings is Rs. 160 million, of which Rs. 16 million relates to land. The
building has a 50-year useful economic life. The implicit interest rate of the lease
agreement of the building is 8% per annum and the present value of minimum
lease payment equals to its fair value.

(iv) On 28 March 2018, Rock received an offer of Rs. 50 million from an investor for its
portfolio of securities linked to the construction industry. The portfolio had been
purchased by Rock at a cost of Rs. 150 million when the construction industry was
at its peak. However, during the last year, the industry had not been performing as
expected and hence prices of securities attached to the portfolio dropped
significantly. Since there is no active market, it is difficult to value the portfolio.
However, valuation models of Rock present a fair value of Rs. 140 million, while
based on the analysis of quoted prices of similar assets, Rs. 75 million could be
reasonably expected to be realised under the prevalent condition.

KB1 – June 2018 Page 10 of 11

 Required:

(a) Discuss briefly how the matters described in (i) above should be recorded by
Rock in compliance with the requirements of LKAS 37 Provisions, Contingent
Liabilities and Contingent Assets.
(5 marks)

(b) Recommend the relevant accounting treatment in accordance with the

requirements of LKAS 10 Events after the Reporting Period on the matters
described in (i), if Rock has evidence after the reporting period but before the
signing-off of the financial statements that 3% of the goods sold require
warranty repair at an average cost of Rs. 20,000 per unit.
(3 marks)

(c) Advise on the appropriate accounting treatment for the intangible assets
described in (ii)
 at initial recognition
 subsequently as at the reporting period ended 31 March 2018.
(4 marks)

(d) Recommend the appropriate accounting treatment to be used for the lease
mentioned in (iii) per LKAS 17 Leases.
(7 marks)

(e) Advise on the amount at which Rock should state its investment portfolio
mentioned in (iv) in its financial statements per SLFRS 13 Fair Value
Measurement.
(6 marks)

(Total: 25 marks)

KB1 – June 2018 Page 11 of 11