Date post: | 06-Jul-2018 |
Category: |
Documents |
Upload: | thushara-rawidewa |
View: | 276 times |
Download: | 9 times |
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 1/230
C A S R I L A N K A C U R R I C U L U M 2 0 1 5
P R A C T I C E & R E V I S I O N K I T
In this pdf version word ‘Colombo’ has misspelled as ‘Columbo’ and has uploaded for your
reference purpose until we upload the pdf version with corrections done. We do apologize
for the inconvenience
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 2/230
ii
First edition 2015
ISBN 9781 4727 1065 9
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the
British Library
Published by
BPP Learning Media Ltd
BPP House, Aldine Place
142-144 Uxbridge Road
London W12 8AA
www.bpp.com/learningmedia
The copyright in this publication is owned by
BPP Learning Media Ltd.
All rights reserved. No part of this publication may be
reproduced, stored in a retrieval system or transmitted in
any form or by any means, electronic, mechanical,
photocopying, recording or otherwise, without the prior
written permission of the copyright holder.
The contents of this book are intended as a guide and not
professional advice and every effort has been made to
ensure that the contents of this book are correct at the time
of going to press by CA Sri Lanka, BPP Learning Media, the
Editor and the Author.
Every effort has been made to contact the copyright holders
of any material reproduced within this publication. If any
have been inadvertently overlooked, CA Sri Lanka and BPP
Learning Media will be pleased to make the appropriate
credits in any subsequent reprints or editions.
We are grateful to CA Sri Lanka for permission to reproduce
the Learning Outcomes and past examination questions, thecopyright of which is owned by CA Sri Lanka, and to the
Association of Chartered Certified Accountants for use of
past examination questions in which the Association holds
the copyright
©
BPP Learning Media Ltd
2015
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 3/230
Contents
iii
Contents
Page
Question Index iv
Introduction vi
How to use this Practice & Revision Kit vii
Exam techniques ix
Action verbs xi
Questions 3
Answers 69Mock exam 189
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 4/230
KC1 Corporate Financial Reportingiv
Question index
PageTitle
Marks
allocated
Timeallocated
(Minutes) Question Answer
Part A: Interpretation and Application of Sri Lanka Accounting Standards
1 Accounting queries 25 45 3 69
2 Prochain 25 45 4 73
3 Panel 25 45 6 76
4 Ambush 25 45 8 80
5 Engina 25 45 9 84
6 Masham 25 45 11 86
Part B: Preparation and Presentation of Consolidated Financial Statements
7 Glove 25 45 14 91
8 Angel 25 45 16 96
9 Ejoy 25 45 17 102
10 Memo 25 45 19 108
11 Swing 25 45 22 115
Part C: Analysis, Interpretations and Communication of Financial Results
12 Ghorse 25 45 24 117
13 Commonsizing 25 45 26 121
Part D: Corporate Governance and Recent Developments in Financial
Reporting
14 Calcula 25 45 28 125
15 Glowball 25 45 29 129
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 5/230
Question Indexv
Page
TitleMarks
allocated
Time
allocated
(Minutes) Question Answer
Part E: Case study questions covering multiple syllabus areas
16 Johan 50 90 31 133
17 Carpart 50 90 35 138
18 Mica 41 74 39 145
19 Robby 50 90 43 152
20 Ashanti 50 90 49 161
21 Rose 50 90 54 171
22 Warrburt 50 90 58 180
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 6/230
KC1 Corporate Financial Reportingvi
Introduction
Welcome to this first edition Practice & Revision Kit for the Institute of Chartered
Accountants of Sri Lanka professional examinations for curriculum 2015.
One of the key criteria for achieving exam success is question practice. There is
generally a direct correlation between candidates who revise all topics and practise
exam questions and those who are successful in their real exams. This Practice &
Revision Kit gives you ample opportunity for such practice in the run up to your
exams.
The Practice & Revision Kit is structured to follow the modules of the Study Text, and
comprises banks of non-complex mini scenario and functional scenario questions as
appropriate. Suggested solutions to all questions are supplied.
We welcome your feedback. If you have any comments about this Practice &
Revision Kit, or would like to suggest areas for improvement, please e-mail
Good luck in your exams!
BPP LEARNING MEDIA
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 7/230
How to use this Practice & Revision Kitvii
How to use this Practice & Revision Kit
This Practice & Revision Kit comprises banks of practice questions of the style that
you will encounter in your exam. It is the ideal tool to use during the revision phase of
your studies.
Questions in your exam may test any part of the syllabus so you must revise the
whole syllabus. Selective revision will limit the number of questions you can answer
and hence reduce your chances of passing. It is better to go into the exam knowing a
reasonable amount about most of the syllabus rather than concentrating on a few
topics to the exclusion of the rest. You should at all costs avoid falling into the trap of
question spotting, that is trying to predict what are likely to be popular areas for
questions, and restricting your revision and question practice to those.
Practising as many exam-style questions as possible will be the key to passing this
exam. You must do questions under timed conditions and ensure you write full
answers to the discussion parts as well as doing the calculations.
Planning your revision
When you begin your course you should make a plan of how you will manage your
studies, taking into account the volume of work that you need to do and your other
commitments, both work and domestic.
In this time, you should go through your notes to ensure that you are happy with allareas of the syllabus and practise as many questions as you can. You can do this in
different ways, for example:
Revise the subject matter a module at a time and then attempt the questions
relating to that module; or
Revise all the modules and then build an exam out of the questions in this
Practice & Revision Kit.
Using the practice questions
The best approach is to select a question and then allocate to it the time that you
would have in the real exam. All the questions in this Practice & Revision Kit have
mark allocations, so you can calculate the amount of time that you should spend on
the question.
Using the suggested solutions
Avoid looking at the answer until you have finished a question. It can be very
tempting to do so, but unless you give the question a proper attempt under exam
conditions you will not know how you would have coped with it in the real exam
scenario.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 8/230
KC1 Corporate Financial Reportingviii
When you do look at the answer, compare it with your own and give some thought to
why your answer was different, if it was.
If you did not reach the correct answer make sure that you work through the
explanation or workings provided, to see where you went wrong. If you think that
you do not understand the principle involved, go back to your own notes or your
study materials and work through and revise the point again, to ensure that you will
understand it if it occurs in the exam.
Our suggested solutions are comprehensive, but in some discursive questions it may
be that you have made points that are not included in the suggested solution that are
equally valid. In the real exams you should be given credit for such points.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 9/230
Exam techniquesix
Exam techniques
Using the right technique in the real exam can make all the difference between
success and failure.
Here are a few pointers:
1. During the 20 minute reading time at the start, read through the questions and
decide in what order you are going to attempt the exam. You have to write
your answers in the order set out in the question and answer booklet, but you
can attempt the questions in any order that you like.
Some candidates like to attempt the easiest questions first, on the basis that will
enable them to gain the easiest available marks quickly, and build up their
confidence.
If you select a question on a topic area about which you feel confident, and do
that first, you will build up your confidence right at the start, which will help to
calm you if you are nervous and set the tone for the rest of the exam. You should
decide what approach is best for you.
2. Having established the order that you are going to do the exam, allocate the
time available to the questions and work out at what time you will need to
stop working on one question and move on to the next. When you reach the end
of the allocated time for the question that you are working on, STOP. It is mucheasier to gain the straight forward marks for the next question than to spend a
long time working on the previous question in the hope of gaining one or two
final marks.
3. Read the question. Read it carefully once, and then read it again to ensure that
you have picked everything up. Make sure that you understand what the
question wants you to do, rather than what you might like the question to be
asking you.
4. Answer all parts of the question. Even if you cannot do all of the calculationelements, you will still be able to gain marks in the discussion parts.
5. Don’t worry if you think that you have made a mistake in a computational part
of a question. You will not earn the mark for that particular part, but you will
still be able to gain credit for correct application in the later parts of the
question, even if you are using the wrong figure.
6. When starting to read a question, especially a long case study, read the
requirement first . You will then find yourself considering the requirement as
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 10/230
KC1 Corporate Financial Reportingx
you read the data in the scenario, helping you to focus on exactly what you have
to do.
7. Plan your answer before you start to write your response, especially for longer
case studies. This will help you to focus on the requirements of the question and
to avoid irrelevance.
8. Try to make sure that your answer relates to the specifics of the question
itself. If you are asked to consider the impact of the scenario on someone named
in the question, make sure that you do that, so your answer is as relevant as
possible.
9. If you finish the exam with time to spare, use the rest of the time to review your
answers and to make sure that you answered every requirement for every
question.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 11/230
Action verbsxi
Action verbs checklist
Knowledge Process Verb List Verb Definitions
Define Describe exactly the nature, scope or meaning
Draw Produce (a picture or diagram)
Identify Recognise, establish or select after
consideration
List Write the connected items one below the other
Relate To establish logical or causal connections
Tier – 1 Remember
Recall important
information
State Express something definitely or clearly
Calculate/Compute Make a mathematical computation
Discuss Examine in detail by argument showing
different aspects, for the purpose of arriving at
a conclusion
Explain Make a clear description in detail revealing
relevant facts
Interpret Present in understandable terms or to translate
Recognise To show validity or otherwise, using knowledge
or contextual experience
Record Enter relevant entries in detail
Tier – 2 Comprehension
Explain important
information
Summarise Give a brief statement of the main points (in
facts or figures)
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 12/230
KC1 Corporate Financial Reportingxii
Knowledge Process Verb List Verb Definitions
Apply Put to practical use
Assess Determine the value, nature, ability or quality
Demonstrate Prove, especially with examples
Graph Represent by means of a graph
Prepare Make ready for a particular purpose
Prioritise Arrange or do in order of importance
Reconcile Make consistent with another
Tier – 3 Application
Use knowledge in a setting
other than the one in which
it was learned/solve close-
ended problems
Solve To find a solution through calculations and/or
explanations
Analyse Examine in detail in order to determine the
solution or outcome
Compare Examine for the purpose of discoveringsimilarities
Contrast Examine in order to show unlikeness or
differences
Differentiate Constitute a difference that distinguishes
something
Tier – 4 Analysis
Draw relations among ideas
and to compare andcontrast/solve open-ended
problems
Outline Make a summary of significant features
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 13/230
Action verbsxiii
Knowledge Process Verb List Verb Definitions
Advise Offer suggestions about the best course of
action in a manner suited to the recipient
Convince To persuade others to believe something using
evidence and/or argument
Criticise Form and express a judgment
Evaluate To determine the significance by careful
appraisal
Recommend A suggestion or proposal as to the best course
of action
Resolve Settle or find a solution to a problem or
contentious matter
Tier – 5 Evaluate
Formation of judgments and
decisions about the value of
methods, ideas, people or
products
Validate Check or prove the accuracy
Compile Produce by assembling information collectedfrom various sources
Design Devise the form or structure according to a plan
Develop To disclose, discover, perfect or unfold a plan or
idea
Tier – 6 Synthesis
Solve unfamiliar problems
by combining different
aspects to form a unique or
novel solution
Propose To form or declare a plan or intention for
consideration or adoption
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 14/230
KC1 | Corporate Financial Reporting
KC1 Corporate Financial Reportingxiv
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 15/230
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 16/230
KC1 | Corporate Financial Reporting
2 CA Sri Lanka
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 17/230
KC1 | Practice Questions
CA Sri Lanka 3
PART A: INTERPRETATION AND APPLICATION OF SRI LANKA ACCOUNTING
STANDARDS
Questions 1 to 6 cover Interpretation and Application of Sri Lanka Accounting
Standards.
1 Accounting queries
You are a manager with a medium-sized firm of accountants. You have been asked
to assist some of your clients with their accounting queries.
(1) Penn Co has a defined benefit pension plan and wishes to recognise the full
deficit in its statement of financial position.
The opening plan assets were Rs 3.6 Mn on 1 January 20X9 and plan
liabilities at this date were Rs 4.3 Mn.Company contributions to the plan during the year amounted to Rs. 550,000.
Pensions paid to former employees amounted to Rs. 330,000 in the year.
The yield on high quality corporate bonds at 31 December 20X9 was 8% and
the actual return on plan assets was Rs. 295,000.
During the year, five staff were made redundant, and an extra Rs. 58,000 in
total was added to the value of their pensions.
Current service costs as provided by the actuary are Rs. 275,000.
The actuary valued the plan liabilities at 31 December 20X9 as Rs 4.54 Mn.
Required
Design extracts from the statement of financial position as at 31 December
20X9 and the statement of comprehensive income for the year ended 31
December 20X9 to illustrate the relevant presentation and disclosures for
this plan. Ignore taxation.
(9 marks)
(2) Sion Co operates a defined benefit pension plan for its employees. Thefollowing details relate to the plan. The present value of the obligation was
Rs. 40m at 1 January 20X8, as was the market value of plan assets.
20X8 20X9
Rs'000 Rs'000
Current service cost 2,500 2,860
Benefits paid out 1,974 2,200
Contributions paid by entity 2,000 2,200
Present value of obligation at end of the year 46,000 40,800
Market value of plan assets at end of the year 43,000 35,680
Yield on corporate bonds at end of year 8% 9%
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 18/230
KC1 | Practice Questions
4 CA Sri Lanka
During 20X8, the benefits available under the plan were improved. The
resulting increase in the present value of the defined benefit obligation was
Rs. 2 million.
On the final day of 20X9, Sion Co divested part of its business and, as part of
the sale agreement, transferred the relevant part of its pension fund to the
buyer. The present value of the defined benefit obligation transferred was
Rs. 11.4 million and the fair value of plan assets transferred was
Rs. 10.8 million. Sion also made a cash payment of Rs. 400,000 to the buyer
in respect of the plan.
Assume that all transactions occur at the end of the year.
Required
Analyse the recognition and measurement of the net defined liability at the
end of 20X8 and 20X9.
(9 marks)
(3) Bed Investment Co entered into a contract on 1 July 20X9 with Em Bank. The
contract consisted of a deposit of a principal amount of Rs. 10 million,
carrying an interest rate of 2.5% per annum and with a maturity date of 30
June 20Y1. Interest will be receivable at maturity together with the principal
and Bed has the intention of holding the investment until this time. In
addition, a further 3% interest per annum will be payable by Em Bank if the
exchange rate of the rupee against the Ruritanian Kroner (RKR) exceeds or is
equal to Rs. 1.15 to RKR 1. Bed's functional currency is the rupee.
Required
Advise how Bed should classify the above investment in the financial
statements for the year ended 31 December 20X9.
(7 marks)
(LO 1.1.1, 1.1.2) (Total = 25 marks)
2 Prochain
Prochain, a public limited company, operates in the fashion industry and has a
financial year-end of 31 May 20X6.
The company sells its products in department stores throughout the world.
Prochain insists on creating its own selling areas within the department stores,
which are called 'model areas'. Prochain is allocated space in the department store
where it can display and market its fashion goods. The company feels that thishelps to promote its merchandise. Prochain pays for all the costs of the 'model
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 19/230
KC1 | Practice Questions
CA Sri Lanka 5
areas' including design, decoration and construction costs. The areas are used for
approximately two years after which the company has to dismantle the 'model
areas'. The costs of dismantling the 'model areas' are normally 20% of the original
construction cost and the elements of the area are worthless when dismantled.
The current accounting practice followed by Prochain is to charge the full cost ofthe 'model areas' against profit or loss in the year when the area is dismantled.
The accumulated cost of the 'model areas' shown in the statement of financial
position at 31 May 20X6 is Rs. 20 million. The company has estimated that the
average age of the 'model areas' is eight months at 31 May 20X6.
(7 marks)
Prochain acquired 100% of a sports goods and clothing manufacturer, Badex, a
private limited company, on 1 June 20X5. Prochain intends to develop its own
brand of sports clothing which it will sell in the department stores. The
shareholders of Badex valued the company at Rs. 125 million based upon profit
forecasts which assumed significant growth in the demand for the 'Badex' brand
name. Prochain had taken a more conservative view of the value of the company
and measured the fair value as being in the region of Rs. 108 million to Rs. 112
million of which Rs. 20 million relates to the brand name 'Badex'. Prochain is only
prepared to pay the full purchase price if profits from the sale of 'Badex' clothing
and sports goods reach the forecast levels. The agreed purchase price was Rs. 100
million plus a further payment of Rs. 25 million in two years, on 31 May 20X7. This
further payment comprises a guaranteed payment of Rs. 10 million with noperformance conditions and a further payment of Rs. 15 million if the actual
profits during this two-year period from the sale of Badex clothing and goods
exceed the forecast profit. The forecast profit on Badex goods and clothing over
the two year period is Rs. 16 million and the actual profits in the year to 31 May
20X6 were Rs. 4 million. Prochain did not feel at any time since acquisition that
the actual profits would meet the forecast profit levels. (8 marks)
After the acquisition of Badex, Prochain started developing its own sports clothing
brand 'Pro'. The expenditure in the period to 31 May 20X6 was as follows:
Period from Expenditure type Rs Mn
1.6.X5 – 31.8.X5 Research as to the extent of the market 3
1.9.X5 – 30.11.X5 Prototype clothing and goods design 4
1.12.X5 – 31.1.X6 Employee costs in refinement of products 2
1.2.X6 – 30.4.X6 Development work undertaken to finalise design of product
5
1.5.X6 – 31.5.X6 Production and launch of products 6
20
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 20/230
KC1 | Practice Questions
6 CA Sri Lanka
The costs of the production and launch of the products include the cost of
upgrading the existing machinery (Rs. 3 million), market research costs (Rs. 2
million) and staff training costs (Rs. 1 million). Currently an intangible asset of
Rs. 20 million is shown in the financial statements for the year ended 31 May
20X6. (6 marks)
Prochain owns a number of prestigious apartments, which it leases to famous
persons who are under a contract of employment to promote its fashion clothing.
The apartments are let at below the market rate. The lease terms are short and are
normally for six months. The leases terminate when the contracts for promoting
the clothing terminate. Prochain wishes to account for the apartments as
investment properties with the difference between the market rate and actual
rental charged to be recognised as an employee benefit expense. (4 marks)
Required
Analyse the information provided in order to recommend how the above items
should be dealt with in the financial statements of Prochain for the year ended 31
May 20X6 under Sri Lanka Financial Reporting Standards. (Assume a discount rate
of 5.5% where necessary and work to the nearest Rs100,000.)
(LO 1.1.3) (Total = 25 marks)
3 Panel
The directors of Panel, a public limited company, are reviewing the procedures for
the calculation of the deferred tax liability for their company. They are quite
surprised at the impact on the liability caused by changes in accounting standards
such as SLFRS 1 First time adoption of International Financial Reporting Standards
and SLFRS 2 Share-based payment . Panel is adopting Sri Lanka Financial Reporting
Standards for the first time as at 31 October 20X5 and the directors are unsure
how the deferred tax provision will be calculated in its financial statements ended
on that date including the opening provision at 1 November 20X3.
Required
(1) Explain how changes in accounting standards are likely to have an impact
on the deferred tax liability under LKAS 12 Income taxes. (5 marks)
(2) Explain the basis for the calculation of the deferred taxation liability on first
time adoption of SLFRS including the provision in the opening SLFRS
statement of financial position. (4 marks)
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 21/230
KC1 | Practice Questions
CA Sri Lanka 7
Additionally the directors wish to know how the provision for deferred
taxation would be calculated in the following situations under LKAS 12
Income taxes:
(i) On 1 November 20X3, the company had granted ten million share
options subject to a two year vesting period. The options had a fairvalue of $40million on the grant date and all are expected to vest. Local
tax law allows a tax deduction at the exercise date of the intrinsic value
of the options. The intrinsic value of the ten million share options at
31 October 20X4 was Rs. 16 million and at 31 October 20X5 was
Rs. 46 million. The increase in the share price in the year to 31 October
20X5 could not be foreseen at 31 October 20X4. The options were
exercised at 31 October 20X5. The directors are unsure how to account
for deferred taxation on this transaction for the years ended
31 October 20X4 and 31 October 20X5.
(ii) Panel is leasing plant under a finance lease over a five-year period. The
asset was recorded at the present value of the minimum lease
payments of Rs. 12 million at the inception of the lease which was
1 November 20X4. The asset is depreciated on a straight-line basis over
the five years and has no residual value. The annual lease payments are
Rs. 3 million payable in arrears on 31 October and the effective interest
rate is 8% per annum. The directors have not leased an asset under a
finance lease before and are unsure as to its treatment for deferredtaxation. The company can claim a tax deduction for the annual rental
payment as the finance lease does not qualify for tax relief.
(iii) A wholly owned subsidiary, Pins, a limited liability company, sold
goods costing Rs. 7 million to Panel on 1 September 20X5, and these
goods had not been sold by Panel before the year end of 31 October
20X5. Panel had paid Rs. 9 million for these goods. The directors do not
understand how this transaction should be dealt with in the financial
statements of the subsidiary and the group for taxation purposes. Pins
pays tax locally at 30%.
(iv) Nails, a limited liability company, is a wholly owned subsidiary of
Panel, and is a cash generating unit in its own right. The value of the
property, plant and equipment of Nails at 31 October 20X5 was
Rs. 6 million and purchased goodwill was Rs. 1 million before any
impairment loss. The company had no other assets or liabilities. An
impairment loss of Rs. 1.8 million had occurred at 31 October 20X5.
The tax base of the property, plant and equipment of Nails was
Rs. 4 million as at 31 October 20X5. The directors wish to know how
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 22/230
KC1 | Practice Questions
8 CA Sri Lanka
the impairment loss will affect the deferred tax liability for the year.
Impairment losses are not an allowable expense for taxation purposes.
(3) Required
Advise, with suitable computations, how the situations (i) to (iv) above will
impact on the accounting for deferred tax under LKAS 12 Income taxes in the
group financial statements of Panel. Assume a tax rate of 30%. (The
situations in (i) to (iv) above carry equal marks.) (16 marks)
(LO 1.1.1) (Total = 25 marks)
4 Ambush
Ambush loaned Rs. 200,000 to Bromwich on 1 December 20X3. The effective and
stated interest rate for this loan was 8%. Interest is payable by Bromwich at theend of each year and the loan is repayable on 30 November 20X7. At 30 November
20X5, the directors of Ambush have heard that Bromwich is in financial difficulties
and is undergoing a financial reorganisation. The directors feel that it is likely that
they will only receive Rs. 100,000 on 30 November 20X7 and no future interest
payment. Interest for the year ended 30 November 20X5 had been received. The
financial year-end of Ambush is 30 November 20X5.
Required
(1) Compare the approaches of LKAS 39 and SLFRS 9 as regards the impairment
of financial assets. (6 marks)
(2) Recommend the accounting treatment under LKAS 39 of the loan to
Bromwich in the financial statements of Ambush for the year ended
30 November 20X5. (4 marks)
The impairment of trade receivables has been calculated using a formulaic
approach, which is based on a specific percentage of the portfolio of trade
receivables. The general provision approach has been used by the company at 30
November 20X5. At 30 November 20X5, one of the credit customers, Tray, has
come to an arrangement with Ambush whereby the amount outstanding of Rs. 4
million from Tray will be paid on 30 November 20X6 together with a penalty of
Rs. 100,000. The total amount of trade receivables outstanding at 30 November
20X5 was Rs. 11 million including the amount owed by Tray. The following is the
analysis of the trade receivables.
Balance Cash expected Due date
Rs Mn Rs Mn
Tray 4 4.1 30 November 20X6
Milk 2 2.0 31 January 20X5
Other receivables 5 4.6 On average 31.1.X5
11 10.7
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 23/230
KC1 | Practice Questions
CA Sri Lanka 9
Ambush has made an allowance of Rs. 520,000 against trade receivables which
represents the difference between the cash expected to be received and the
balance outstanding plus a 2% general allowance. Milk has a similar credit risk to
the 'other receivables'. (Use a discount rate of 5% in any calculations.)
Required
(3) Advise Ambush as to the acceptability of its approach towards the
impairment of trade receivables under LKAS 39, and recommend an
alternative acceptable approach if required. (8 marks)
Ambush is reviewing the accounting treatment of its buildings. The company uses
the revaluation model for its buildings. The buildings had originally cost Rs. 10
million on 1 December 20X3 and had a useful economic life of 20 years. They are
being depreciated on a straight-line basis to a nil residual value. The buildings
were revalued downwards on 30 November 20X4 to Rs. 8 million, which was thebuildings' recoverable amount. At this date the remaining useful life was
unchanged. At 30 November 20X5 the fair value of the buildings had risen to
Rs. 11 million, which is to be included in the financial statements. The company is
unsure how to treat the above events.
Required
(4) Advise the appropriate treatment for Ambush's property resulting from
these changes in value. You should work to the nearest Rs. 10,000.
(7 marks)
(LO 1.1.1, 1.1.2, 1.1.3) (Total = 25 marks)
5 Engina
Engina, a foreign company, has approached a partner in your firm to assist in
obtaining a local Stock Exchange listing for the company. Engina is registered in a
country where transactions between related parties are considered to be normal
but where such transactions are not disclosed. The directors of Engina are
reluctant to disclose the nature of their related party transactions as they feel thatalthough they are a normal feature of business in their part of the world, it could
cause significant problems politically and culturally to disclose such transactions.
The partner in your firm has requested a list of all transactions with parties
connected with the company and the directors of Engina have produced the
following summary:
(a) Every month, Engina sells Rs. 50,000 of goods per month to Mr Satay, the
Finance Director at cost price. The annual turnover of Engina is Rs. 300
million. Additionally Mr Satay has purchased his car from the company for
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 24/230
KC1 | Practice Questions
10 CA Sri Lanka
Rs. 45,000 (market value Rs. 80,000). The director, Mr Satay, earns a salary
of Rs. 500,000 a year, and has a personal fortune of many millions of rupees.
(b) A hotel property had been sold to a brother of Mr Soy, the Managing Director
of Engina, for Rs. 3.5 million (net of selling cost of Rs. 0.2 million). The
market value of the property was Rs. 4.3 million but in the foreign country,
property prices were falling rapidly. The carrying amount of the hotel in the
books of Engina was Rs. 5 million and its value in use was Rs. 3.6 million.
There was an oversupply of hotel accommodation due to government
subsidies in an attempt to encourage hotel development and the tourist
industry.
(c) Mr Satay owns several companies and the structure of the group is as
follows:
Mr Satay
100% ownership 80% ownership
of Car Limited of Wheel Limited
100% ownership
of Engina Limited
Engina earns 60% of its profits from transactions with Car and 40% of its
profits from transactions from Wheel.
Mr Satay's 80% ownership of Wheel Limited is established by his
shareholding of 100% of the Class A voting shares in that company. The
remaining 20% of the company is owned by Exhaust Limited (which is not
related to Mr Satay). Exhaust Limited holds 100% of the Class B voting
shares in Wheel Limited.
Required
(1) Evaluate the information provided and apply the requirements of LKAS 24
to identify whether a related party transaction exists and advise on the
disclosures to be made in respect of related parties in Engina's financial
statements. (20 marks)
(2) During the year, Wheel Ltd paid a dividend to its shareholders. Wheel and
Exhaust agreed that an unwanted property would be transferred from Wheel
to Exhaust in lieu of a Class B share cash dividend, since this was more
advantageous for tax purposes. The property had a carrying amount of
Rs. 450,000 at the date of transfer and a fair value of Rs. 520,000.
Outline the appropriate accounting treatment for this transaction.
(5 marks)
(LO 1.1.1, 1.1.2, 1.1.7) (Total = 25 marks)
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 25/230
KC1 | Practice Questions
CA Sri Lanka 11
6 Masham
Masham is a diversified company that operates in the agricultural and food
produce sectors. It operates a number of tea plantations and dairy farms
throughout Sri Lanka, as well as three food processing plants. The company hasrecently employed a new financial accountant, Richard Perera, who has sent you
the following email in your capacity as a senior working on Masham's external
audit and advisory team.
To: Lucy Da Silva
From: Richard Perera
Date: 21 January 20X3
Subject: Accounting issues
Dear Lucy
I am starting to work on the preparation of the financial statements for Masham
for the year ended 31 December 20X3, and I would like some advice on a number
of matters.
In particular I would like to know how to account for the following issues and the
effect that they will have on the financial statements.
(1) The Finance Director tells me that I must consider the effects of SLFRS 13
when preparing the financial statements and perform a fair value exercise on
certain assets. This is a relatively new standard and one that I didn't study at
college, so I really am a little lost. The assets in question are as follows:
(a) A piece of farm machinery met the criteria to be classified as held for
sale at 31 December 20X3. At that date it had a carrying amount of
Rs. 220,000. The company hasn't yet secured a buyer, however has
identified active markets for the machine in India and Thailand.
Neither of these markets is greater than the other in terms of the
number of sales transactions of similar machines. The market price of
such a machine is Rs. 244,680 in India and Rs. 237,800 in Thailand. Ifthe machine were sold to an Indian buyer, transaction costs would
amount to Rs. 4,600 and transport costs to Rs. 29,300. If the machine
were sold to a Thai buyer, transaction costs would be Rs. 3,900 and
transport costs Rs. 18,660.
(b) The company owns land which it accounts for under the LKAS 16
revaluation model. The land was donated to Masham by a party that
specified it must be used for agricultural purposes. Masham is not
restricted from selling the land but it is not clear whether the usagerestriction would transfer with title. We are trying to clarify this.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 26/230
KC1 | Practice Questions
12 CA Sri Lanka
Without the restriction, the land could be used for commercial
development and would have a higher market value than it does for the
current use. The owner of the adjacent property has a legal right of way
to access his property via the land – without this right, the land would
be worth approximately 5% more. (10 marks)
(2) The food processing plants are each classified as a cash-generating unit for
the purposes of impairment testing. At 31 December 20X3, the carrying
amount of each plant was:
The goodwill in CGU 1 arose when an 80% stake in a competitor was
acquired. The previous owners retained the other 20% shareholding; this
NCI was measured as a proportion of net assets for the purpose of
acquisition accounting.
The brand is used across all Masham processed food; I've allocated it to CGU
2 on the basis that the carrying amount of that CGU seemed very low.
The Finance Director has asked me to conduct an impairment test as a result
of poor market conditions and has provided me with the following
information:
I'm not quite sure what to do with this information though – I'd appreciate
guidance. (10 marks)
(3) I think I am correct in saying that both tea bushes and dairy cattle are
biological assets and so must be accounted for in accordance with LKAS 41.
That is an accounting standard that I studied at college, although as I have
never used it in practice I am a little rusty. Please could you confirm my
CGU 1
Rs'000
CGU 2
Rs'000
CGU 3
Rs'000
Fair value 45,150 80,000 33,250
Cost of disposal
– legal 250 190 200
– reorganization 100 35 30Value in use 43,950 79,500 33,500
CGU 1
Rs'000
CGU 2
Rs'000
CGU 3
Rs'000
PPE 30,000 46,000 16,000
Goodwill 5,000 - -
Net current assets 16,000 24,000 13,000
Brand 4,500
51,000 74,500 29,000
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 27/230
KC1 | Practice Questions
CA Sri Lanka 13
understanding that biological assets must be remeasured to fair value with
any changes recognised within equity? (5 marks)
Thanks very much – I look forward to hearing from you,
Kind regardsRichard
Required
Prepare notes in response to the financial accountant's email in preparation for a
telephone conversation to discuss the issues.
(LO 1.1.1, 1.1.2) (Total = 25 marks)
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 28/230
KC1 | Practice Questions
14 CA Sri Lanka
PART B: PREPARATION AND PRESENTATION OF CONSOLIDATED FINANCIAL
STATEMENTS
Questions 7 to 11 cover the Preparation and Presentation of Consolidated
Financial Statements.
7 Glove
The following draft statements of financial position relate to Glove, Body and Fit,
all public limited companies, as at 31 May 20X7.
Glove Body Fit Rs Mn Rs Mn Rs Mn
Assets Non-current assets
Property, plant and equipment 260 20 26 Investment in Body 60
Investment in Fit 30
Investments in equity instruments 10
Current assets 65 29 20
Total assets 395 79 46
Stated capital 150 40 20
Other reserves 30 5 8
Retained earnings 135 25 10 Total equity 315 70 38
Non-current liabilities 45 2 3
Current liabilities 35 7 5
Total liabilities 80 9 8
Total equity and liabilities 395 79 46
The following information is relevant to the preparation of the group financial
statements.
(a) Glove acquired 80% of the 40 million ordinary shares of Body on 1 June 20X5
when Body's other reserves were Rs. 4 million and retained earnings were
Rs. 10 million. The fair value of the net assets of Body was Rs. 60 million at
1 June 20X5. Body acquired 70% of the 20 million ordinary shares of Fit on
1 June 20X5 when the other reserves of Fit were Rs. 8 million and retained
earnings were Rs. 6 million. The fair value of the net assets of Fit at that date
was Rs. 39 million. The excess of the fair value over the net assets of Body and
Fit is due to an increase in the value of non-depreciable land of the companies.
There have been no issues of ordinary shares in the group since 1 June 20X5.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 29/230
KC1 | Practice Questions
CA Sri Lanka 15
(b) Body owns several trade names which are highly regarded in the market
place. Body has invested a significant amount in marketing these trade
names and has expensed the costs. None of the trade names has been
acquired externally and, therefore, the costs have not been capitalised in the
statement of financial position of Body. On the acquisition of Body by Glove,a firm of valuation experts valued the trade names at Rs. 5 million and this
valuation had been taken into account by Glove when offering Rs. 60 million
for the investment in Body. The valuation of the trade names is not included
in the fair value of the net assets of Body above. Group policy is to amortise
intangible assets over ten years.
(c) On 1 June 20X5, Glove introduced a defined benefit retirement plan. During
the year to 31 May 20X7, loss on re-measurement on the defined benefit
obligation was Rs 1 Mn, and gain on re-measurement on the plan assets was
Rs. 900,000. These have not yet been accounted for and need to be treated in
accordance with LKAS 19. The net defined benefit liability is included in non-
current liabilities.
(d) Glove has issued 30,000 convertible loan stock with a three-year term
repayable at par. The loan stock was issued at par with a nominal value of
Rs. 1,000 per bond. Interest is payable annually in arrears at a nominal
interest rate of 6%. Loan stock can be converted after 3 years into 300
shares of Glove. The loan stock was issued on 1 June 20X6 when the market
interest rate for similar debt without the conversion option was 8% per
annum. Glove does not wish to account for the loan stock at fair value
through profit or loss. The interest has been paid and accounted for in the
financial statements. The loan stock has been included in non-current
liabilities at its nominal value of Rs. 30 million.
(e) On 31 May 20X7, Glove acquired plant with a fair value of Rs. 6 million. In
exchange for the plant, the supplier received land, which was currently not
in use, from Glove. The land had a carrying amount of Rs. 4 million and an
fair value of Rs. 7 million. In the financial statements at 31 May 20X7, Glovehad made a transfer of Rs. 4 million from land to plant in respect of this
transaction.
(f) Goodwill has been tested for impairment at 31 May 20X6 and 31 May 20X7
and no impairment loss occurred.
(g) It is the group's policy to measure the non-controlling interest at acquisition
at its proportionate share of the fair value of the subsidiary's identifiable net
assets.
(h) Ignore any taxation effects.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 30/230
KC1 | Practice Questions
16 CA Sri Lanka
Required
Compile the consolidated statement of financial position of the Glove Group at
31 May 20X7 in accordance with Sri Lanka Financial Reporting Standards (SLFRS).
(LO 2.1.1) (25 marks)
8 Angel
Angel Co bought 70% of the stated capital of Shane Co for Rs. 120,000 on 1
January 20X6. At that date Shane Co's retained earnings stood at Rs. 10,000.
The statements of financial position at 31 December 20X8, summarised
statements of profit or loss and other comprehensive income to that date and
movement on retained earnings are given below.
Angel Co Shane CoRs'000 Rs'000
STATEMENTS OF FINANCIAL POSITION
Non-current assets Property, plant and equipment 200 80
Investment in Shane Co 120 –
320 80
Current assets 890 140
1,210 220
Equity Stated capital 500 100
Retained reserves 400 90
900 190
Current liabilities 310 30
1,210 220
SUMMARISED STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME
Profit before interest and tax 100 20
Income tax expense (40) (8)
Profit for the year 60 12 Other comprehensive income (not reclassified to P/L) ,net of tax
10 6
Total comprehensive income for the year 70 18
MOVEMENT IN RETAINED RESERVES
Balance at 31 December 20X7 330 72
Total comprehensive income for the year 70 18
Balance at 31 December 20X8 400 90
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 31/230
KC1 | Practice Questions
CA Sri Lanka 17
Angel Co sells one half of its holding in Shane Co for Rs. 120,000 on 30 June 20X8.
At that date, the fair value of the 35% holding in Shane was slightly more at
Rs. 130,000 due to a share price rise. The remaining holding is to be dealt with as
an associate. This does not represent a discontinued operation.
No entries have been made in the accounts for the above transaction.
Assume that profits and other comprehensive income accrue evenly throughout
the year.
It is the group's policy to measure the non-controlling interest at acquisition at fair
value. The fair value of the non-controlling interest on 1 January 20X6 was
Rs 51.4 Mn.
Required
Compile the consolidated statement of financial position, statement of profit orloss and other comprehensive income and a reconciliation of movement in
retained reserves for the year ended 31 December 20X8. (Ignore income taxes on
the disposal. No impairment losses have been necessary to date.)
(LO 2.1.1) (25 marks)
9 Ejoy
Ejoy, a public limited company, has acquired two subsidiaries. The details of the
acquisitions are as follows:
Company
Date of
acquisition
Ordinary
share
capital
Reserves
at acq.
Fair value
of net
assets at
acq.
Cost of
investment
% of share
capital
acquired
Rs Mn Rs Mn Rs Mn Rs MnZbay 1.6.X4 200 170 600 520 80Tbay 1 .12.X5 120 80 310 192 60
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 32/230
KC1 | Practice Questions
18 CA Sri Lanka
Any fair value adjustments relate to non-depreciable land. The draft statements of
profit or loss and other comprehensive income for the year ended 31 May 20X6 are:
Ejoy Zbay Tbay
Rs Mn Rs Mn Rs Mn
Revenue 2,500 1,500 800 Cost of sales (1,800) (1,200) (600)
Gross profit 700 300 200
Other income 70 10 –
Distribution costs (130) (120) (70)
Administrative expenses (100) (90) (60)
Finance costs (50) (40) (20)
Profit before tax 490 60 50
Income tax expense (200) (26) (20)
Profit for the year 290 34 30
Other comprehensive for the year
(not reclassified to profit or loss):
Gain on property revaluation net of tax 80 10 8
Total comprehensive income for the year 370 44 38
Total comprehensive income for year 31 .5.X5 190 20 15
The following information is relevant to the preparation of the group financial
statements.
(a) Tbay was acquired exclusively with a view to sale and at 31 May 20X6 meets
the criteria of being a disposal group. The fair value of Tbay at 31 May 20X6
is Rs. 344 million and the estimated selling costs of the shareholding in Tbay
are Rs. 5 million. Selling costs increase proportionately with the level of
shareholding.
(b) Ejoy entered into a joint arrangement with another company on
31 May 20X6, which met the SLFRS 11 definition of a joint venture. The joint
venture is a limited company and Ejoy has contributed assets at fair value of
Rs. 20 million (carrying value Rs. 14 million). Each party will hold fivemillion ordinary shares of Rs. 1 in the joint venture. The gain on the disposal
of the assets (Rs. 6 million) to the joint venture has been included in 'other
income'.
(c) Zbay has a loan asset which was carried at Rs. 60 million at 1 June 20X5. The
loan's effective interest rate is 6%. On 1 June 20X5 the company felt that,
because of the borrower's financial problems, it would receive Rs. 20 million
in approximately two years, on 31 May 20X7. At 31 May 20X6, the company
still expects to receive the same amount on the same date. The loan asset is
held at amortised cost.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 33/230
KC1 | Practice Questions
CA Sri Lanka 19
(d) On 1 June 20X5, Ejoy purchased a five year bond with a principal amount of
Rs. 50 million and a fixed interest rate of 5% which was the current market
rate. The bond is classified as measured at fair value through profit or loss.
Because of the size of the investment, Ejoy has entered into a floating
interest rate swap. Ejoy has designated the swap as a fair value hedge of thebond. At 31 May 20X6, market interest rates were 6%. As a result, the fair
value of the bond has decreased to Rs. 48.3 million. Ejoy has received Rs. 0.5
million in net interest payments on the swap at 31 May 20X6 and the fair
value hedge has been 100% effective in the period, and you should assume
any gain/loss on the hedge is the same as the loss/gain on the bond. No
entries have been made in the statement of profit or loss and other
comprehensive income to account for the bond or the hedge.
(e) No impairment of the goodwill arising on the acquisition of Zbay had
occurred at 1 June 20X5. The recoverable amount of Zbay was Rs. 630
million and the value in use of Tbay was Rs. 334 million at 31 May 20X6.
Impairment losses on goodwill are charged to cost of sales.
(f) Assume that profits accrue evenly throughout the year and ignore any
taxation effects.
(g) It is the group's policy to measure the non-controlling interest at its
proportionate share of the fair value of the subsidiary's identifiable net
assets.
Required
Compile a consolidated statement of profit or loss and other comprehensive
income for the Ejoy Group for the year ended 31 May 20X6 in accordance with Sri
Lanka Financial Reporting Standards.
(LO 2.1.1) (25 marks)
10 Memo
Memo, a public limited company, owns 75% of the ordinary share capital of
Random, a public limited company which is situated in a foreign country. Memo
acquired Random on 1 May 20X3 for 120 million crowns (CR) when the retained
profits of Random were 80 million crowns. Random has not revalued its assets or
issued any share capital since its acquisition by Memo. The following financial
statements relate to Memo and Random:
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 34/230
KC1 | Practice Questions
20 CA Sri Lanka
STATEMENTS OF FINANCIAL POSITION AT 30 APRIL 20X4
Memo Random
Rs Mn CR Mn
Property, plant and equipment 297 146
Investment in Random 48 – Loan to Random 5 –
Current assets 355 102
705 248
Equity Stated capital 110 52
Retained earnings 360 95
470 147
Non-current liabilities 30 41
Current liabilities 205 60 705 248
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR
YEAR ENDED 30 APRIL 20X4
Memo Random
Rs. CR Mn Revenue 200 142
Cost of sales (120) (96)
Gross profit 80 46 Distribution and administrative expenses (30) (20)
Profit from operations 50 26
Interest receivable 4 –
Interest payable – (2)
Profit before taxation 54 24
Income tax expense (20) (9)
Profit/total comprehensive income for the year 34 15
The following information is relevant to the preparation of the consolidated
financial statements of Memo.
(a) Goodwill is reviewed for impairment annually. At 30 April 20X4, the
impairment loss on recognised goodwill was CR4.2m.
(b) During the financial year Random has purchased raw materials from Memo
and denominated the purchase in crowns in its financial records. The details
of the transaction are set out below:
Date of transaction Purchase price Profit percentage
Rs Mn on selling price
Raw materials 1 February 20X4 6 20%
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 35/230
KC1 | Practice Questions
CA Sri Lanka 21
At the year end, half of the raw materials purchased were still in the
inventory of Random. The intragroup transactions have not been eliminated
from the financial statements and the goods were recorded by Random at
the exchange rate ruling on 1 February 20X4. A payment of Rs. 6 million was
made to Memo when the exchange rate was 2.2 crowns to Rs. 1. Anyexchange gain or loss arising on the transaction is still held in the current
liabilities of Random.
(c) Memo had made an interest free loan to Random of Rs. 5 million on 1 May
20X3. The loan was repaid on 30 May 20X4. Random had included the loan
in non-current liabilities and had recorded it at the exchange rate at 1 May
20X3.
(d) The fair value of the net assets of Random at the date of acquisition is to be
assumed to be the same as the carrying amount.
(e) The functional currency of Random is the Crown.
(f) The following exchange rates are relevant to the financial statements:
Crowns to Rs.
30 April/1 May 20X3 2.5
1 November 20X3 2.6
1 February 20X4 2.5
30 April 20X4 2.1
Average rate for year to 30 April 20X4 2.5
(g) It is the group's policy to measure the non-controlling interest at acquisition
at its proportionate share of the fair value of the subsidiary's identifiable net
assets.
Required
Compile a consolidated statement of profit or loss and other comprehensive
income for the year ended 30 April 20X4 and a consolidated statement of financial
position at that date in accordance with International Financial Reporting
Standards. (You should round their calculations to the nearest Rs. 100,000.)
(LO2.1.1) (25 marks)
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 36/230
KC1 | Practice Questions
22 CA Sri Lanka
11 Swing
On 1 September 20X5 Swing Co acquired 70% of Slide Co for Rs. 5,000,000
comprising Rs. 1,000,000 cash and 1,500,000 shares of Swing Co.
The statement of financial position of Slide Co at acquisition was as follows:
Rs'000
Property, plant and equipment 2,700
Inventories 1,600
Trade receivables 600
Cash 400
Trade payables (300)
Income tax payable (200)
4,800 The consolidated statement of financial position of Swing Co as at 31 December
20X5 was as follows:
20X5 20X4
Non-current assets Rs'000 Rs'000
Property, plant and equipment 35,500 25,000
Goodwill 1,400 –
36,900 25,000
Current assets
Inventories 16,000 10,000 Trade receivables 9,800 7,500
Cash 2,400 1,500
28,200 19,000
65,100 44,000
Equity attributable to owners of the parent
Stated capital 18,100 12,000
Revaluation surplus 350 –
Retained earnings
32,100
21,900 50,550 33,900
Non-controlling interest 1,750 –
52,300 33,900
Current liabilities Trade payables 7,600 6,100
Income tax payable 5,200 4,000
12,800 10,100
65,100 44,000
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 37/230
KC1 | Practice Questions
CA Sri Lanka 23
The consolidated statement of profit or loss and other comprehensive income of
Swing Co for the year ended 31 December 20X5 was as follows:
20X5
Rs'000
Profit before tax 16,500 Income tax expense (5,200)
Profit for the year 11,300
Other comprehensive income (not reclassified to P/L) Revaluation surplus 500
Total comprehensive income for the year 11,800
Profit attributable to: Owners of the parent 11,100
Non-controlling interest 200
11,300 Total comprehensive income for the year attributable to
Owners of the parent 11,450
Non-controlling interest 200 + (500 × 30%) 350
11,800
Notes:
1 Depreciation charged for the year was Rs. 5,800,000. The group made no
disposals of property, plant and equipment.
2 Dividends paid by Swing Co amounted to Rs. 900,000.
It is the group's policy to measure the non-controlling interest at acquisition at its
proportionate share of the fair value of the subsidiary's identifiable net assets.
Required
Compile the consolidated statement of cash flows of Swing Co for the year ended
31 December 20X5. No notes are required.
(LO 2.1.1) (25 marks)
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 38/230
KC1 | Practice Questions
24 CA Sri Lanka
PART C: ANALYSIS, INTERPRETATIONS AND COMMUNICATION OF
FINANCIAL RESULTS
Questions 12 to 13 cover Analysis, Interpretations and Communication of
Financial Results.
12 Ghorse
Ghorse, a public limited company, operates in the fashion sector and had
undertaken a group re-organisation during the current financial year to 31
October 20X7. As a result the following events occurred.
(a) Ghorse identified two manufacturing units, Cee and Gee, which it had
decided to dispose of in a single transaction. These units comprised non-
current assets only. One of the units, Cee, had been impaired prior to thefinancial year end on 30 September 20X7 and it had been written down to its
recoverable amount of Rs. 35 million. The criteria in SLFRS 5 Non-current
assets held for sale and discontinued operations, for classification as held for
sale had been met for Cee and Gee at 30 September 20X7. The following
information related to the assets of the cash generating units at
30 September 20X7:
Depreciated
historical cost
Fair value less costs to sell
and recoverable amount
Carrying amount
under SLFRS
Rs Mn Rs Mn Rs Mn Cee 50 35 35
Gee 70 90 70
120 125 105
The fair value less costs to sell had risen at 31 October 20X7 to Rs. 40 million
for Cee and Rs. 95 million for Gee. The increase in the fair value less costs of
disposal had not been taken into account by Ghorse. (7 marks)
(b) As a consequence of the re-organisation, and a change in government
legislation, the tax authorities have allowed a revaluation of the non-currentassets of the holding company for tax purposes to fair value at 31 October
20X7. There has been no change in the carrying amounts of the non-current
assets in the financial statements. The tax base and the carrying amounts
after the revaluation are as follows:
Carrying
amount at 31
October 20X7
Tax base at 31
October 20X7 after
revaluation
Tax base at 31
October 20X7 before
revaluation
Rs Mn Rs Mn Rs Mn
Property 50 65 48
Vehicles 30 35 28
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 39/230
KC1 | Practice Questions
CA Sri Lanka 25
Other taxable temporary differences amounted to Rs. 5 million at 31 October
20X7. Assume income tax is paid at 30%. The deferred tax liability at 31
October 20X7 had been calculated using the tax values before revaluation.
(6 marks)
(c) A subsidiary company had purchased computerised equipment for
Rs. 4 million on 31 October 20X6 to improve the manufacturing process. At 31
October 20X7, Ghorse had discovered that the manufacturer of the
computerised equipment was now selling the same system for Rs. 2.5 million.
The projected cash flows from the equipment are:
Cash flows
Rs.
Year ended 31 October
20X8 1.3
20X9 2.2
20Y0 2.3
The residual value of the equipment is assumed to be zero. The company
uses a discount rate of 10%. The directors think that the fair value less costs
to sell the equipment is Rs. 2 million. The directors of Ghorse propose to
write down the non-current asset to the new selling price of Rs. 2.5 million.
The company's policy is to depreciate its computerised equipment by 25%
per annum on the straight-line basis. (5 marks)
(d) The manufacturing property of the group, other than the head office, washeld on an operating lease over eight years. On re-organisation on
31 October 20X7, the lease has been renegotiated and the new term is twelve
years from that date at a rent of Rs. 5 million per annum paid in arrears. The
fair value of the property is Rs. 35 million and its remaining economic life is
thirteen years. The lease relates to buildings rather than land. The factor to
be used for an annuity at 10% for 12 years is 6.8137. (5 marks)
The directors are worried about the impact that the above changes will have
on its key performance indicator which is 'Return on Capital Employed'(ROCE). ROCE is defined as operating profit before interest and tax divided
by share capital, other reserves and retained earnings. Based on the draft
financial statements (before any adjustments are made in respect of the
issued above), the directors have calculated ROCE to be 13.6% (being
Rs. 30 million divided by Rs. 220 million).
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 40/230
KC1 | Practice Questions
26 CA Sri Lanka
Formation of opinion on impact on ROCE. (2 marks)
Required
Advise on an appropriate accounting treatment of the above transactions and
the impact that the resulting adjustments to the financial statements wouldhave on ROCE. Note. Your answer should include appropriate calculations
where necessary and a discussion of the accounting principles involved.
(LO 3.2.1) (Total = 25 marks)
13 Commonsizing
The following are the statements of profit or loss of a company for the years ended
31 December 20X1 and 20X0.
20X1 20X0
Rs'000 Rs'000
Revenue 127,695 109,223
Cost of sales (91,975) (75,936)
Gross profit 35,720 33,287
Distribution costs (3,705) (2,384)
Administrative expenses (16,950) (14,870)
Operating profit 15,065 16,033
Interest payable (2,581) (1,549)
Profit before tax 12,484 14,484
Tax (4,062) (4,436)
Retained profit for the financial year 8,422 10,048
Dividends paid 3,574 3,418
Required
(1) Prepare common size statements for the years ended 31 December 20X1
and 20X0, using total revenue for each year as 100%. (6 marks)
(2) Assess the financial performance of the company as illustrated by the
common size statements, supporting your analysis by any additional
appropriate ratios. (9 marks)
(3) Outline the limitations of using a common size statement approach to the
analysis of a company's performance over a ten-year period. (5 marks)
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 41/230
KC1 | Practice Questions
CA Sri Lanka 27
(4) Criticise the following statements:
(i) The current ratio and the quick ratio help to assess whether a company
is able to meet its debts as they fall due. Therefore the higher these
ratios are the better placed the company is.
(ii) A high gearing ratio is advantageous to shareholders, because they
benefit from the income produced by investing the money borrowed.
(5 marks)
(LO 3.2.1) (Total = 25 marks)
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 42/230
KC1 | Practice Questions
28 CA Sri Lanka
PART D: CORPORATE GOVERNANCE AND RECENT DEVELOPMENTS IN
FINANCIAL REPORTING
Questions 14 to 15 cover Corporate Governance and Recent Developments in
Financial Reporting.
14 Calcula
Asha Alexander has recently been appointed as the CEO of Calcula, a public limited
company. The company develops specialist software for use by accountancy
professionals. The specialist software market is particularly dynamic and fast
changing. It is common for competitors to drop out of the market place. The most
successful companies have been particularly focused on enhancing their offering
to customers through creating innovative products and investing heavily intraining and development for their employees.
Turbulent times
Calcula has been through a turbulent time over the last three years. During this
time there have been significant senior management changes, which resulted in
confusion among shareholders and employees as to the strategic direction of the
company. One investor complained that the annual accounts made it hard to know
where the company was headed.
The last CEO introduced an aggressive cost-cutting programme aimed atimproving profitability. At the beginning of the financial year the annual staff
training and development budget was significantly reduced and has not been
reviewed since the change in management.
Future direction
In response to the confusion surrounding the company's strategic direction, Asha
and the board published a new mission, the primary focus of which centres on
making Calcula the market leader of specialist accountancy software. Asha was
appointed as the CEO having undertaken a similar role at a competitor. The boardwere keen on her appointment as she is renowned in the industry for her
creativity and willingness to introduce 'fresh ideas'. In her previous role Asha
oversaw the introduction of an integrated approach to reporting performance.
This is something she is particularly keen to introduce at Calcula.
During the company's last board meeting, Asha was dismayed by the finance
director's reaction when she proposed introducing integrated reporting at Calcula.
The Finance Director made it clear that he was not convinced of the need for such
a change, arguing that 'all this talk of integrated reporting in the business press is
just a fad, requiring a lot more work, simply to report on things people do not care
about. Shareholders are only interested in the bottom line'.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 43/230
KC1 | Practice Questions
CA Sri Lanka 29
Required
(1) Advise how integrated reporting may help Calcula to communicate its
strategy and improve the company's strategic performance. Your answer
should make reference to the concerns raised by the finance director.
(11 marks)
(2) Outline the likely implications of introducing 'integrated reporting' which
Calcula should consider before deciding to proceed with its adoption.
(6 marks)
(3) Advise the directors of Calcula as to what should be included in the
company's integrated report, referencing the eight key content elements
required by the <IR> Framework (8 marks)
(LO 4.1.3) (Total = 25 marks)
15 Glowball
The directors of Glowball, a public limited company, have discovered that their
main competitors are applying the 'Global Reporting Initiative' (GRI) "G4"
guidelines and producing sustainability reports alongside their annual reports.
Glowball has a reputation for ensuring the preservation of the environment in its
business activities. It has produced environmental reports in the past and it
wishes to produce a sustainability report for 20X2, but the directors are worriedthat any sustainability report produced by the company may detract from its
image if the report does not comply with recognised standards. They are unsure
of the extra requirements of a sustainability report.
Further the directors have collected information in respect of a series of events
which they consider to be important and worthy of note, but are not sure as to
how they would be incorporated in the sustainability report.
The events are as follows.
(a) Glowball is a company that constructs pipelines and pipes gas from offshore
gas installations to major consumers. The company purchased its main
competitor during the year and found that there were environmental
liabilities arising out of the restoration of many miles of farmland that had
been affected by the laying of a pipeline. There was no legal obligation to
carry out the work but the company felt that there would be a cost of around
Rs. 150 million if the farmland was to be restored.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 44/230
KC1 | Practice Questions
30 CA Sri Lanka
(b) Most of the offshore gas installations are governed by operating licenses,
which specify limits to the substances that can be discharged to the air and
water. These limits vary according to local legislation and tests are carried
out by the regulatory authorities. During the year the company was
prosecuted for infringements of an environmental law in the USA when toxicgas escaped into the atmosphere. In 20X2 the company was prosecuted five
times and in 20X1 11 times for infringement of the law. The final amount of
the fine/costs to be imposed by the courts has not been determined but is
expected to be around Rs. 5 million. The gas escape occurred over the sea
and it was considered that there was little threat to human life.
(c) The company produced statistics that measure their improvement in the
handling of emissions of gases that may have an impact on the environment.
The statistics deal with:
(i) Measurement of the release of gases with the potential to form acid
rain. The emissions have been reduced by 84% over five years due to
the closure of old plants.
(ii) Measurement of emissions of substances potentially hazardous to
human health. The emissions are down by 51% on 20W8 levels.
(iii) Measurement of emissions to water that removes dissolved oxygen and
substances that may have an adverse effect on aquatic life. Accurate
measurement of these emissions is not possible but the company isplanning to spend Rs. 70 million on research in this area.
(d) The company tries to reduce the environmental impact associated with the
siting and construction of its gas installations. In particular it aims to
minimise the impact on wildlife and human beings. Additionally when the
installations are at the end of their life, they are dismantled rather than sunk
into the sea. The current provision for the decommissioning of these
installations is Rs. 215 million.
You are a consultant with Sustainability Matters Co, and the directors have askedfor your advice on the compilation of their first sustainability report.
(1) Contrast the information that might be contained in an environmental
report with that required in a sustainability report. (4 marks)
(2) Recommend disclosures that might be made by Glowball in its
sustainability report in relation to each of the key areas of performance and
impact. Suggest suitable performance measures in each case. (12 marks)
(3) Advise Glowball how the issues above should be addressed in the
sustainability report. (9 marks)
(LO 4.1.2) (Total = 25 marks)
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 45/230
KC1 | Practice Questions
CA Sri Lanka 31
PART E: CASE STUDY QUESTIONS
Questions 16 to 22 are case study questions, each one covering a variety of
syllabus areas.
16 Johan
Preseen
Johan, a public limited company, operates in the telecommunications industry.
The industry is capital intensive with heavy investment in licences and network
infrastructure.
Operations of Johan
The company is operated through three divisions: the Network Division, the Retail
Division and the Dealer Division.
Network Division
The Network Division of Johan operates telephone networks throughout Sri Lanka
and other South-East Asian countries.
The division operates a number of masts and base stations throughout the
countries in which it operates, and is continually striving to develop its network
and improve coverage in certain areas through the installation of new masts andbase stations.
The process to install a new mast and base station is as follows:
(1) Johan works with external advisers to identify a general location within a
geographical area for a new base station and masts.
(2) After this the company pays third party consultants to identify an exact
location within the general area where signal quality and coverage will be
optimised.
(3) The company then applies for planning permission and negotiates with the
owner of that land in order to achieve access or acquire the land.
Retail Division
The Retail Division of Johan purchases telephone handsets from a manufacturer
and sells them directly to customers together with call credit.
Dealer Division
The Dealer Division of Johan sells handsets to dealers and invoices the dealers for
those handsets. The dealer can return the handset up to the point when a servicecontract in respect of the handset has been signed by a customer. When the
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 46/230
KC1 | Practice Questions
32 CA Sri Lanka
customer signs a service contract, the customer receives the handset free of
charge. Johan allows the dealer a commission on the connection of a customer to
the network. The handset cannot be sold separately by the dealer.
Hash
Johan purchased the whole of the stated capital of Hash on 1 June 20X6. The whole
of the stated capital of Hash was formerly owned by the five directors of Hash.
This acquisition signaled a diversification of the operations of Johan, as Hash
operates in the construction sector. Hash has a number of commercial building
contracts in place and is currently engaged in the construction of an office block in
Columbo and a hotel complex on the west coast of Sri Lanka. Recently completed
projects include a regional airport, a length of motorway and a multi-storey car
park.
The management of Johan intend to start using Hash to build new base stations for
the Network Division in the future.
Employees
Johan values its employees highly and its remuneration packages are structured in
order to retain and reward excellent staff.
Cash salaries are competitive and, bonuses are regularly awarded based on the
performance of the individual and the company as a whole. Staff are also entitled
to medical benefits and receive a holiday allowance in excess of the statutoryminimum. They also benefit from in-house childcare facilities and a heavily
subsidised staff canteen and snack bar.
As extra incentive, Johan also operates share-option schemes whereby employees
are awarded options that vest over a three-year period.
Financial statements
Johan prepares consolidated financial statements to a reporting date of 31 May in
accordance with Sri Lankan Financial Reporting Standards.
Financial performance
Johan's recent performance has been described as 'exceptional' by its directors,
with all divisions reporting strong profits and a healthy financial position. The
company has expanded its network substantially and this has translated into
increased revenue and profits.
The company has also seen an increase in the number of handsets sold through
both its Retail and Dealer Divisions.
Hash has reported a strong growth in profits since its acquisition by Johan andcontinues to expand.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 47/230
KC1 | Practice Questions
CA Sri Lanka 33
Unseen
Johan's Network Division has carried out a feasibility study during the year to 31
May 20X7 to extend its network. The design and planning department of Johan
identified five possible geographical areas for the extension of its network. The
internal costs of this study were Rs. 150,000 and the external costs were
Rs. 100,000 during the year to 31 May 20X7. Following the feasibility study, Johan
chose a geographical area where it was going to install a base station for the
telephone network. The location of the base station was dependent upon getting
planning permission. A further independent study has been carried out by third
party consultants in an attempt to provide a preferred location in the area. Johan
proposes to build a base station on the recommended site on which planning
permission has been obtained. The third party consultants have charged
Rs. 50,000 for the study. Additionally Johan has paid Rs. 300,000 as a single
payment together with Rs. 60,000 a month to the government of the region for
access to the land upon which the base station will be situated. The contract with
the government is for a period of 12 years and commenced on 1 May 20X7. There
is no right of renewal of the contract and legal title to the land remains with the
government.
Johan's Retail Division purchases telephone handsets from a manufacturer for
Rs. 200 each, and sells the handsets direct to customers for Rs. 150 if they
purchase call credit (call card) in advance on what is called a prepaid phone. The
costs of selling the handset are estimated at Rs. 1 per set. The customers using a
prepaid phone pay Rs. 21 for each call card at the purchase date. Call cards expire
six months from the date of first sale. There is an average unused call credit of
Rs. 3 per card after six months and the card is activated when sold.
The Dealer Division sells handsets (to dealers) for Rs. 150. The dealers act as
agents, selling phone packages, including handsets, on to customers. Johan allows
the dealer a commission of Rs. 280 on the connection of a customer and the
transaction with the dealer is settled net by a payment of Rs. 130 by Johan to the
dealer, being the cost of the handset to the dealer (Rs. 150) deducted from thecommission (Rs. 280). The service contract lasts for a 12 month period. Dealers do
not sell prepaid phones, and Johan receives monthly revenue from the service
contract.
Under the terms of the purchase agreement for Hash, the five directors of Hash
were to receive a total of three million ordinary shares of Johan on 1 June 20X6
(market value Rs. 6 million) and a further 5,000 shares per director on 31 May
20X7, if they were still employed by Johan on that date. All of the directors were
still employed by Johan at 31 May 20X7.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 48/230
KC1 | Practice Questions
34 CA Sri Lanka
Johan granted and issued fully paid shares to its own employees on 31 May 20X7.
Normally share options issued to employees would vest over a three-year period,
but these shares were given as a bonus because of the company's exceptional
performance over the period. The shares issued had a market value of Rs. 3
million (one million ordinary shares at Rs. 3 per share) on 31 May 20X7 and anaverage fair value of Rs. 2.5 million (one million ordinary shares at Rs. 2.50 per
share) for the year ended 31 May 20X7. It is expected that Johan's share price will
rise to Rs. 6 per share over the next three years.
On 31 May 20X7, Johan purchased property, plant and equipment for its fair value
of Rs. 4 million. The supplier has agreed to accept payment for the property, plant
and equipment either in cash or in shares. The supplier can choose to receive either
1.5 million shares of the company, to be issued in six months, or a cash payment in
three months equivalent to the market value of 1.3 million shares. It is estimated
that the share price will be Rs. 3.50 in three months and Rs. 4 in six months.
Additionally, at 31 May 20X7, one of the directors recently appointed to the board
has been granted the right to choose either 50,000 shares of Johan or receive a
cash payment equal to the current value of 40,000 shares at the settlement date.
This right has been granted because of the performance of the director during the
year and is unconditional at 31 May 20X7. The settlement date is 1 July 20X8 and
the company estimates the fair value of the share alternative is Rs. 2.50 per share
at 31 May 20X7. The share price of Johan at 31 May 20X7 is Rs. 3 per share, and if
the director chooses the share alternative, they must be kept for a period of fouryears.
One of Hash's building contracts was for a regional airport. During the financial year
to 31 May 20X7, a section of an airport collapsed. Luckily the collapse happened in
the early hours of the morning and the airport was closed at the time, meaning that
no-one was hurt. The accident did, however, result in the closure of the airport
terminal. Investigation into the accident and reconstruction of the section of the
airport damaged is still in progress and no legal action has yet been brought in
connection with the accident. The expert report that is to be presented to the civil
courts, in order to determine the cause of the accident and to assess the respective
responsibilities of the various parties involved, is expected in 20X8. The directors of
Hash feel that at present, there is no requirement to record the impact of the
accident in the financial statements. If any compensation is eventually payable to
the airport operator, this is expected to be covered by Hash's insurance policies.
The directors of Hash feel that the conditions for recognising a provision or
disclosing a contingent liability have not been met. Therefore, Hash does not
intend to recognise a provision in respect of the accident nor disclose any related
contingent liability or a note setting out the nature of the accident and potential
claims in its financial statements for the year ended 31 May 20X7.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 49/230
KC1 | Practice Questions
CA Sri Lanka 35
Required
(1) Analyse the information provided to determine whether the costs of
extending the network may be recognized as property, plant and equipment,
and critically analyse the amounts to be capitalised. (7 marks)
(2) Analyse the information provided so as to determine whether the payments
to the government may be treated as a finance lease. (4 marks)
(3) Advise the basis of measurement of the handsets purchased by the Retail
Division. (2 marks)
(4) Analyse how Johan should recognise revenue on the sale of call cards to
customers and revenue on sales to dealers. (9 marks)
(5) Assess the amounts to be included in Johan's financial statements for the
year ended 31 May 20X7 in respect of share-based payments. (18 marks)
(6) Evaluate the information provided to identify whether a provision needs to
be made in the financial statements of Hash for the year ended 31 May 20X7.
(10 marks)
(LO 1.1.1, 1.1.2) (Total = 50 marks)
17 Carpart
Preseen
Carpart is a public limited company based in Sri Lanka and listed on the Columbo
Stock Exchange. Its core business is twofold:
• It is a vehicle part manufacturer, and
• It sells vehicles purchased from the manufacturer to retail customers.
The business was established 50 years ago, by Luis Karava. He initially bought and
sold spare motor parts. Luis had held an interest in motor vehicles since a young
age, and establishing Carpart joined his hobby with his entrepreneurial spirit. The
business gradually grew and was incorporated. After ten years of trading, Luis
realised that he could improve profitability by manufacturing as well as
distributing motor components. Carpart duly acquired its first factory on the
outskirts of Columbo.
Parts were priced competitively, and soon the company built up a reputation for
providing low cost, quality parts. On the back of this reputation, the company
continued to expand, acquiring a further five factories over the next 40 years. The
company still operates from these properties, all of which are owned rather than
leased. Additional storage facilities are acquired as necessary by way of short-term leases.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 50/230
KC1 | Practice Questions
36 CA Sri Lanka
Having forged excellent relationships with a number of car manufacturers over
the years, Carpart moved into vehicle sales 15 years ago. The company operates
from four showrooms, all of which are held under lease agreements. Carpart has
agreements with three international car manufacturers to supply their cars to the
general public.
Core operations
Vehicle parts
Carpart makes a number of spare parts that are integral to a motor vehicle. These
include car seats, exhaust pipes, gearboxes and batteries.
The company has a number of supply contracts in place; the biggest are with the
following companies:
• Vehiclex – for the supply of car seats• Autoseat – for the supply of car seats
• Venue – for the supply of exhausts
Carpart also supplies goods to a number of mid-size and small customers. Luis
Karava's son, Mikey, now runs the business and is particularly wary of over-
reliance on a few customers.
The vehicle parts division also distributes vehicle-testing systems for use by car
service centres and garages. The customer base for these products is made up of a
large number of customers.
Vehicle sales
Carpart sells vehicles to final customers on two or four year contracts. The
customer base is broad and there is a high level of repeat business, which
management believes is the result of continually high levels of customer service.
Carpart also holds a number of demonstration vehicles from each manufacturer
that it represents. These allow customers to 'try out' a variety of cars before
deciding on an appropriate make and model. When the demonstration vehicles
are no longer required, they are sold at a reduced price.
The Carpart Group
Since taking over as the Managing Director of Carpart, Mikey Karava has pursued
an aggressive acquisition strategy. This has resulted in the acquisition of
investments in several companies and the diversification of the business.
The Carpart Group now includes (as well as Carpart itself): four subsidiaries, an
investment in an associate and a number of trade investments.
The subsidiaries operate in a variety of business areas, including health clubs andfashion retail. These are areas in which Mikey has a personal interest and that he
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 51/230
KC1 | Practice Questions
CA Sri Lanka 37
felt would complement the core Carpart activities in terms of generation of profits.
There is no intragroup trade due to the disparate nature of the subsidiaries.
The associate company is run by Mikey's wife, Luisa. It operates two health and
beauty salons. This acquisition was made as a result of Luisa's business needing a
capital injection and Carpart having funds to invest.
The trade investments are in a number of stock exchange listed companies, and
are held for capital growth.
Financial reporting
Carpart prepares financial statements in accordance with Sri Lanka Financial
Reporting Standards to a reporting date of 30 April.
Unseen
Details of Carpart's recent operations are as follows:
Contract with Vehiclex
The contract will last for five years and Carpart will manufacture seats to a certain
specification, which will require the construction of machinery for the purpose.
The price of each car seat has been agreed so that it includes an amount to cover
the cost of constructing the machinery but there is no commitment to a minimum
order of seats to guarantee the recovery of the costs of constructing the
machinery. Carpart retains the ownership of the machinery and wishes to
recognise part of the revenue from the contract in its current financial statements
to cover the cost of the machinery that will be constructed over the next year.
Vehicle sales
Carpart sells vehicles on a contract for their market price (approximately
Rs. 20,000 each) at a mark-up of 25% on cost. The expected life of each vehicle is
five years. After four years, the car is repurchased by Carpart at 20% of its original
selling price. This price is expected to be significantly less than its fair value. The
car must be maintained and serviced by the customer in accordance with certain
guidelines and must be in good condition if Carpart is to repurchase the vehicle.
The same vehicles are also sold with an option that can be exercised by the buyer
two years after sale. Under this option, the customer has the right to ask Carpart
to repurchase the vehicle for 70% of its original purchase price. It is thought that
the buyers will exercise the option. At the end of two years, the fair value of the
vehicle is expected to be 55% of the original purchase price. If the option is not
exercised, then the buyer keeps the vehicle.
The two year and four year deals are mutually exclusive.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 52/230
KC1 | Practice Questions
38 CA Sri Lanka
The vehicles that Carpart uses for demonstration purposes are normally used for
this purpose for an 18-month period. After this period, the vehicles are sold at a
reduced price based upon their condition and mileage.
Venue
Carpart also entered into a contract with Venue to provide exhausts at a value of
Rs. 1 million. The terms are that payment is due one month after the sale of the
goods. On the basis of experience with other customers with similar
characteristics, Carpart considers that there is a 5% risk that the customer will not
pay the amount due after the goods have been delivered and the property
transferred. At the reporting date, Venue had not paid the outstanding amount
and Carpart felt that the maximum amount it would receive from the customer
would be Rs. 0.8 million.
Other sales
Carpart has sold a vehicle testing system to a customer and, because of the current
difficulties in the market, Carpart has agreed to defer receipt of the selling price of
Rs. 2 million until two years after the hardware has been transferred to the
customer.
Carpart has been offering discounts to customers if products were sold with terms
whereby payment was due now but the transfer of the product was made in one
year. A sale has been made under these terms and payment of Rs. 3 million has
been received.
A discount rate of 4% should be used in any calculations.
Required
(1) Analyse the information given and advise the directors of Carpart how they
should account for the contract with Vehiclex. (7 marks)
(2) Analyse the information given so as to determine how revenue should be
recognised on the sale of vehicles. (12 marks)
(3) Analyse the information given and determine any impairment of the amount
outstanding from Venue. (3 marks)
(4) Analyse the other sales made by Carport and explain how revenue should be
recognised with respect to those sales. (6 marks)
Leases
On 1 May 20X4, Carpart entered into a short operating lease agreement with
Elpres to acquire use of another building. The lease will last for three years and is
currently Rs. 5 million per annum. However an inflation adjustment will be made
at the conclusion of leasing years 1 and 2. Currently inflation is 4% per annum.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 53/230
KC1 | Practice Questions
CA Sri Lanka 39
The following discount factors are relevant (8%).
Single cash flow Annuity
Year 1 0.926 0.926
Year 2 0.857 1.783
Year 3 0.794 2.577
Year 4 0.735 3.312
Year 5 0.681 3.993
Carpart is considering entering into a three-year lease of a machine from Brooke
from 1 May 20X5. The machine has a total economic life of 20 years. The fair value
of the machine at 1 May 20X5 is Rs. 113,600.
The lease payments are Rs. 13,000 per year, and the present value of the lease
payments is Rs. 21,700, calculated using the rate Brooke charges Carpart.
The directors of Carpart have heard about the proposals for revising the
classification of leases but are unsure of the implications of this.
Required
(5) Analyse the subsequent measurement of the lease with Elpres, explaining
how the inflation adjustment should be treated. (3 marks)
(6) Explain the impact on the financial statements of ED/2013/6 on Leases on
the lease with Brooke. (15 marks)
Investments
Carpart has several investments, in subsidiaries, associates and other entities.
Required
(7) Outline the disclosure requirements of SLFRS 12 in relation to such
investments. (4 marks)
(LO 1.1.1, 1.1.2, 1.1.7, 4.2.1) (Total = 50 marks)
18 Mica
Preseen
Background
Mica Industries Limited (Mica) was set up by Andrew Dias and incorporated over
40 years ago, and has subsequently grown both organically and by acquisition to
become a diversified corporation. It has, however, retained its private status and
there are no intentions to obtain a listing for the company. Mica is based in
Columbo and has operations throughout Sri Lanka.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 54/230
KC1 | Practice Questions
40 CA Sri Lanka
Business operations
Mica's core business was originally property construction, and it still has a strong
presence in this sector. Until recently the company operated only in the
commercial property construction sector, constructing office blocks, retail parks
and hotels to meet customers' specific requirements. In 20X4 the company
appointed a new business strategy consultant in the construction division, and as
a result Mica has, during the year ended 31 December 20X4, begun to develop a
presence in the residential property construction market.
As a natural extension of its commercial property construction operations, and in
response to customer demand, Mica began to offer a property maintenance
service 25 years ago. This proved particularly popular with hotel chains that were
keen to maintain the appearance of their properties in order to attract customers
and gain good reviews from tourist boards. The company now offers maintenanceservice contracts to all of its construction customers when their build is complete,
and has also extended this service to new maintenance-only customers. The
contracts last for 2-5 years and require Mica to attend a property at the request of
the owner in order to perform repairs and maintenance as required. The company
has approximately 120 of these contracts in place.
In 20W2, having constructed a number of hotels for customers, the Board of Mica
took a decision to build a hotel in central Columbo that would be operated by the
company itself. A new hospitality division was developed and an experienced
hotel manager was employed. Unlike many other hotel operators, the company's
focus was on business customers rather than tourists. The hotel proved to be a
success, and as a result a further two hotels were built in Kandy and Jaffna and put
under the control of the hotel manager.
Most recently, within the last 10 years, the Board of Mica has developed an
investment property division. This division owns a number of office blocks and
retail parks built by the construction division, and rents out individual units to
customers under operating leases. As a result, Mica has been able to tap into the
small business market.
Key personnel and ownership
Mica has a main Board with seven executive and three non-executive directors.
The CEO of the company is Luca Dias, the son of the founder Andrew Dias. Luca
Dias also owns, together with his extended family, a majority of shares in the
company. The remainder of the shares are owned by private investors.
Other executive Board members are: Max Boetz, the Managing Director; Ama
Balanchandran, the Finance Director; Tom Amaratunga, the Operations Director
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 55/230
KC1 | Practice Questions
CA Sri Lanka 41
(Construction); Hiruni Amour, the Operations Director (Diversified Operations);
Ravindu Vaduga, the Sales Director; and Lucy Guardia, the HR Director.
Financial reporting
Mica prepares its financial statements to a reporting date of 31 December inaccordance with Sri Lanka Financial Reporting Standards. It does not prepare
interim statements. The company has always prepared some form of commentary
on its social and environmental impact within the annual report, and Ama
Balanchandran is keen to develop this into a full sustainability report.
Capital structure
Mica pays a modest dividend, with most profits retained and reinvested in the
company. In order to fund diversification and expansion plans, the company has
made new issues of shares and obtained bank funding. The company currently has
two concurrent bank loans outstanding, each with restrictive covenants attached
related to liquidity ratios.
Financial health
Mica has been facing difficult trading conditions for the past few years and its
profits fell in 20X2 and again in 20X3. A slight drop is also expected in the current
year, 20X4. This has been attributed in large part to the hospitality division, which
experienced lower than expected occupancy rates. The Board of Mica attributed
this to two factors: the emergence of new competition, with several new
companies focusing solely on the hotel needs of business people; and the structure
of Mica's operations, meaning that the focus of the company remained on the core
construction and property businesses.
Ama Balanchandran believes that these core businesses of Mica will achieve a
healthy increase in profits in 20X5. A number of new construction contracts have
recently been agreed and it is expected that these, together with projected
increased tenancy levels in investment properties, will contribute to improved
financial health for the company.
Unseen
In February 20X4, as a result of continuing poor trading conditions, the hospitality
division was closed down and Mica's business restructured so that only its core
business relating to building and property activities remained.
During the year ended 31 December 20X4 the following occurred:
• On 1 January 20X4 Mica entered into a 5-year contract with Matara
Properties Limited (Matara) to provide a maintenance service for Matara's
portfolio of properties. The fee for the contract was Rs. 1.5m, to be paid in
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 56/230
KC1 | Practice Questions
42 CA Sri Lanka
full on 31 December 20X7. Ama Balachandran wishes to recognise the whole
of this amount in 20X4 as she claims it meets the conditions in LKAS 18.
• In 20X4, Mica purchased some land on which it will build some houses to be
sold to customers "off-plan." These houses will be sold with freehold title
and to a standard design.
The following assets had been used by the hospitality division prior to its closure
and have been retained by Mica:
• Speciality cookery equipment, which had a carrying amount at 31 December
20X4 of Rs. 750,000. This equipment has not been used since the closure of
the hospitality division and at 31 December, Mica was undecided as to
whether to sell it or to lease it to third parties under operating leases. The
fair value less selling costs of the equipment was estimated at Rs. 670,000
and its value in use was estimated at Rs. 710,000.
• Vans with a carrying amount at 31 December 20X4 of Rs. 310,000 were
retained by Mica on closure of the hospitality division for use in the new
maintenance business. The vans were eventually sold at auction in January
20X5 for Rs. 270,000 net of auction costs.
• After the closure of the hospitality division, Mica commenced a pre-sale
renovation of its headquarters in June 20X4. Asbestos was, however,
discovered in August 20X4 and the work to remove the asbestos was not
completed until January 20X5. The carrying amount of the property
(including renovation and removal of asbestos) as at 31 December was
Rs. 6.7m and the property was advertised for sale in February 20X5 at a
price of Rs. 8.3m. Selling costs were estimated at 2%.
Ama Balachandran has stated that she would like to simplify Mica's reporting and
use the Sri Lankan Financial Reporting Standard for Small and Medium Sized
Entities (SFRS for SMEs) as soon as possible. However her son, who is an auditor
with a Big Four accounting firm, has told him that there are strict criteria that
must be applied and that some of Mica's accounting policies may need to change.
Mica's imputed rate of interest according to LKAS 18 is 5%. Income tax is 17%.
Mica's year-end is 31 December 20X4.
Required
(1) Analyse the information provided so as to determine how revenue from the
maintenance contract should be recognised. Your answer should include
calculations of the amounts to be recognised. (15 marks)
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 57/230
KC1 | Practice Questions
CA Sri Lanka 43
(2) Assess how revenue should be recognised for the sale of the off-plan
properties in accordance with the guidance in IFRIC 15 Agreements for the
Construction of Real Estate. (10 marks)
(3) Assess the appropriate classification and measurement of the assets
formerly used by the hospitality business. (11 marks)
(4) Advise Ama Balachandran on whether Mica may adopt SLFRS for SMEs and
outline the differences between the accounting treatments given in SLFRS
for SMEs and full SLFRS in respect of:
• Purchased goodwill
• Owned properties (currently held at valuation)
• Provisions (9 marks)
At the date of the financial statements, 31 December 20X4, Mica's liquidity
position was quite poor, such that the directors described it as 'unsatisfactory' in
the management report. During the first quarter of 20X5, the situation worsened
with the result that Mica was in breach of certain loan covenants at 31 March
20X5. The financial statements were authorised for issue at the end of April 20X5.
The directors' and auditor's reports both emphasised the considerable risk of not
being able to continue as a going concern.
The notes to the financial statements indicated that there was 'ample' compliance
with all loan covenants as at the date of the financial statements. No additional
information about the loan covenants was included in the financial statements.Mica had been close to breaching the loan covenants in respect of free cash flows
and equity ratio requirements at 31 December 20X4.
Ama Balachandran feels that, given the existing information in the financial
statements, any further disclosure would be excessive and confusing to users.
Required
(5) Assess the adequacy of Mica's disclosures about this matter. (5 marks)
(LO 1.1.1, 1.1.2, 1.1.4, 1.1.7) (Total = 50 marks)
19 Robby
Preseen
Background
Robby PLC ('Robby') is a quoted public company listed on the Colombo Stock
Exchange. Robby and its subsidiaries operate in the energy industry, with
interests in the gas industry and the electrical power industry. Operations include
the extraction of natural gas, the manufacture of coal gas, electricity generationand distribution, and sales of both gas and electricity.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 58/230
KC1 | Practice Questions
44 CA Sri Lanka
The company is viewed as one of the most successful energy companies listed on
the Columbo Stock Exchange and has won a number of awards for best practice in
corporate governance.
Development of Robby Group
On 1 June 20X0, Robby acquired 5% of the ordinary shares of Zinc. Zinc operates
in the electricity sector, and owns a hydroelectricity plant. This minority
shareholding was acquired by Robby with the intention that it would be increased
in due course to be a majority shareholding if the performance of Zinc met certain
defined thresholds. Such an acquisition would meet Robby's objectives to increase
its interests in renewable energy sources and generate power through low-
pollution activities.
The defined performance thresholds were met during 20X2 and the Board of
Robby aggressively pursued a further acquisition of shares in Zinc. A deal was
agreed with the previous owners in the summer of 20X2, and a further 55% of
Zinc was eventually acquired by Robby on 1 December 20X2.
On 1 June 20X1, Robby acquired 80% of the equity interests of Hail for cash
consideration of Rs. 50 million. This acquisition furthered Robby's strategy to
pursue renewable and environmentally friendly energy sources. Hail operates in
the areas of solar and wind energy. It has installed solar panels and wind turbines
at 'sun and wind farms' throughout Sri Lanka, which capture energy from sunlight
and the wind and convert it into electricity. This electricity is then distributedthroughout Sri Lanka via the national power grid.
Robby also has a 40% interest in a joint operation, being a natural gas station. The
construction of the station was completed on 1 June 20X2, and is expected to have
a useful life of 10 years. The other joint operator (owning 60% of the joint
operation) is Fabian PLC ('Fabian'), another Sri Lankan energy provider. Robby
and Fabian have an agreement whereby any decisions about the joint operation
require a 75% majority, and therefore unanimous consent is required. The
contract between the joint operators also states that revenue generated and costs
incurred by the joint operation are receivable and payable by Fabian. Any
amounts outstanding with Robby are settled after the year end.
Financial reporting
Robby PLC prepares consolidated financial statements to 31 May in accordance
with Sri Lanka Financial Reporting Standards. The following is an extract of the
accounting policies section of Robby's financial statements:
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 59/230
KC1 | Practice Questions
CA Sri Lanka 45
2. Accounting policies
2.1 Property, plant and equipment
Land and buildings held for use in the production or supply of goods or
services, or for administrative purposes, are stated in the statement offinancial position at their revalued amounts, being the fair value at the date
of revaluation less any subsequent accumulated depreciation and
subsequent accumulated impairment losses. Revaluations are performed
with sufficient regularity such that the carrying amount does not differ
materially from that which would be determined using fair values at the
reporting date.
2.8 Financial assets
Financial assets are classified into the following specified categories:financial assets at fair value through profit or loss (FVTPL), held to maturity
investments, available for sale (AFS) financial assets and loans and
receivables. The classification depends on the nature and purpose of the
financial assets and is determined at the time of initial recognition.
2.18 Non-controlling interests
Non-controlling interests in the net assets of consolidated subsidiaries are
identified separately from the Group's equity therein. Non-controlling
interests consist of the amount of those interests at the date of the originalbusiness combination and the non-controlling shareholders' share of
changes in equity since the date of the combination. The interest of non-
controlling shareholders in the acquiree is initially measured at fair value.
In line with Robby's strategy to develop renewable and green energy resources,
and in light of historic bad press about the impact of the energy sector, the Board
of Robby have in recent years started publishing a sustainability report alongside
the financial statements in the annual report. The Board are keen to develop the
annual report to become an integrated report in future years, however it does not
intend to implement this intention immediately and instead will wait two to three
years in order to understand and benefit from the experiences of other companies
adopting integrated reporting.
Cash management
Robby does not maintain high cash balances, instead investing spare cash in
projects and acquisitions. As a result the company occasionally finds itself needing
short-term injections of cash.
The Treasury department of Robby has adopted a number of strategies to obtainthese short-term cash injections in the past, including securing bank overdrafts
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 60/230
KC1 | Practice Questions
46 CA Sri Lanka
and short-term bridging loans, factoring receivables balances to banks, and
making sale and leaseback agreements and sale and repurchase agreements.
Unseen
The following draft statements of financial position relate to Robby, Hail and Zinc,all public limited companies, as at 31 May 20X3.
Robby Hail Zinc
Rs Mn Rs Mn Rs Mn
Assets Non-current assets Property, plant and equipment 112 60 26
Investments in subsidiaries: Hail 55
Zinc 19
Financial assets 9 6 14
Joint operation 6
Current assets 5 7 12
Total assets 206 73 52
Equity and liabilities Stated capital 25 20 10
Other components of equity 11 – –
Retained earnings 70 27 19
Total equity
106
47
29 Non-current liabilities: 53 20 21
Current liabilities 47 6 2
Total equity and liabilities 206 73 52
The following information is relevant to the preparation of the group financial
statements of Robby.
(a) Robby has treated the investment in Hail as an available for sale financial
asset.
A dividend received from Hail on 1 January 20X3 of Rs. 2 million hassimilarly been credited to OCI.
The fair value of the non-controlling interest was Rs. 15 million on 1 June
20X1.
On 1 June 20X1, the fair value of the identifiable net assets of Hail was Rs. 60
million and the retained earnings of Hail were Rs. 16 million. The excess of
the fair value of the net assets is due to an increase in the value of non-
depreciable land.
(b) Robby measured the 5% investment in Zinc at fair value through profit orloss in the financial statements to 31 May 20X2.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 61/230
KC1 | Practice Questions
CA Sri Lanka 47
The consideration for the acquisitions was as follows.
Shareholding Consideration Rs Mn
1 June 20X0 5% 2
1 December 20X2 55% 16 60% 18
At 31 May 20X3 the carrying amount of the investment in Zinc in Robby's
accounts represents the fair value of the initial 5% shareholding at 31 May
20X2 plus the cost of the additional 55% shareholding.
At 1 December 20X2, the fair value of the equity interest in Zinc held by
Robby before the business combination was Rs. 5 million.
The fair value of the non-controlling interest in Zinc was Rs. 9 million on
1 December 20X2.
The fair value of the identifiable net assets at 1 December 20X2 of Zinc was
Rs. 26 million, and the retained earnings were Rs. 15 million. The excess of
the fair value of the net assets is due to an increase in the value of property,
plant and equipment (PPE), which was provisional pending receipt of the
final valuations. These valuations were received on 1 March 20X3 and
resulted in an additional increase of Rs. 3 million in the fair value of PPE at
the date of acquisition. This increase does not affect the fair value of the non-
controlling interest at acquisition. PPE is to be depreciated on the straight-line basis over a remaining period of five years.
(c) The following information relates to the joint arrangement activities with
Fabian:
(i) Assets, liabilities, revenue and costs are apportioned on the basis of
shareholding.
(ii) The natural gas station cost Rs. 15 million to construct and is to be
dismantled at the end of its useful life. The present value of this
dismantling cost to the joint arrangement at 1 June 20X2, using a
discount rate of 5%, was Rs. 2 million.
(ii) In the year, gas with a direct cost of Rs. 16 million was sold for
Rs. 20 million. Additionally, the joint arrangement incurred operating
costs of Rs. 0.5 million during the year.
Robby has only contributed and accounted for its share of the construction
cost, paying Rs. 6 million.
(d) Robby purchased PPE for Rs. 10 million on 1 June 20X0. It has an expecteduseful life of twenty years and is depreciated on the straight-line method. On
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 62/230
KC1 | Practice Questions
48 CA Sri Lanka
31 May 20X2, the PPE was revalued to Rs. 11 million. This was accounted for
in accordance with LKAS 16. At 31 May 20X3, impairment indicators
triggered an impairment review of the PPE. The recoverable amount of the
PPE was Rs. 7.8 million. The only accounting entry posted for the year to 31
May 20X3 was to account for the depreciation based on the revalued amountas at 31 May 20X2. Robby's accounting policy is to make a transfer of the
excess depreciation arising on the revaluation of PPE.
(e) Robby held a portfolio of trade receivables with a carrying amount of
Rs. 4 million at 31 May 20X3. At that date, the entity entered into a factoring
agreement with a bank, whereby it transfers the receivables in exchange for
Rs. 3.6 million in cash. Robby has agreed to reimburse the factor for any
shortfall between the amount collected and Rs. 3.6 million. Once the
receivables have been collected, any amounts above Rs. 3.6 million, less
interest on this amount, will be repaid to Robby. Robby has derecognised the
receivables and charged Rs. 0.4 million as a loss to profit or loss.
(f) Immediately prior to the year end, Robby sold land to a third party at a price
of Rs. 16 million with an option to purchase the land back on 1 July 20X3 for
Rs. 16 million plus a premium of 3%. The market value of the land is Rs. 25
million on 31 May 20X3 and the carrying amount was Rs. 12 million. Robby
accounted for the sale, consequently eliminating the bank overdraft at
31 May 20X3.
Required
(1) Compile a consolidated statement of financial position of the Robby Group
at 31 May 20X3 in accordance with Sri Lanka Financial Reporting Standards.
(35 marks)
In the above scenario (information point (e)), Robby holds a portfolio of trade
receivables and enters into a factoring agreement with a bank, whereby it
transfers the receivables in exchange for cash. Robby additionally agreed to other
terms with the bank as regards any collection shortfall and repayment of any
monies to Robby. Robby derecognised the receivables. This is an example of the
type of complex transaction that can arise out of normal terms of trade.
Required
(2) Advise when financial assets should be derecognised in accordance with
LKAS 39 and apply these rules to the portfolio of trade receivables in
Robby's financial statements. (9 marks)
(3) Assess the legitimacy of Robby selling land just prior to the year end in
order to show a better liquidity position for the group and whether this
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 63/230
KC1 | Practice Questions
CA Sri Lanka 49
transaction is consistent with an accountant's responsibilities to ensure
accurate presentation of financial statements in a given set of circumstances.
(Note. Your answer should include reference to the above scenario.)
(6 marks)
(LO 2.1.1, 2.2.2, 1.1.1, 5.1.1) (Total = 50 marks)
20 Ashanti
Preseen
Background
Ashanti PLC ('Ashanti') is a quoted public company listed on the Colombo Stock
Exchange. Ashanti and its subsidiaries operate in the textiles and apparel
manufacturing industry. This industry employs approximately 15% of Sri Lanka'sworkforce and accounts for approximately half of the country's exports. Within
this market, Ashanti operates at the mid-tier; it is not one of the 'Apparel Giants' of
Sri Lanka, but it has a significant presence.
The company was established 35 years ago by the Bhaskaran family, just as the Sri
Lankan apparel industry began to grow as a result of the country's open economic
policy and trade and investment friendly environment. The Bhaskaran family
developed Ashanti over the next 20 years, establishing a number of factories
throughout the country. From its inception the company had a good reputation fortreating its workforce well, with good working conditions, fair pay, medical
provision and generous holiday allowances.
In its 25th anniversary year, Ashanti shares were listed on the Columbo Stock
Exchange. As a result the company raised funds which allowed it to expand
through acquisition. After the listing, the Bhaskaran family retained a minority
shareholding in Ashanti and continued to manage the company.
Development of Ashanti Group
On 1 May 20X3, Ashanti acquired 70% of the equity interests of Bochem, another
public limited company operating in the textiles and apparel industry. This was a
strategic acquisition allowing Ashanti to move into a growth market, being
children's apparel, whilst also achieving a number of cost-cutting strategies. The
remaining 30% of Bochem was owned by a number of disparate investors, so
allowing Ashanti a dominant influence over the company.
Bochem acquired 80% of the equity interests of Ceram, a public limited company,
on 1 May 20X3. Ceram is an apparel retailer which Bochem had supplied with
goods for many years and the acquisition signalled a diversification of operations
for Bochem and the Ashanti Group. Since the acquisition, it has, however become
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 64/230
KC1 | Practice Questions
50 CA Sri Lanka
apparent that Ceram is not a good strategic fit with the rest of the group, and the
Ashanti Board is considering how best to deal with this issue.
Financial Reporting
Ashanti PLC prepares consolidated financial statements to 30 April in accordance
with Sri Lanka Financial Reporting Standards. The following is an extract of the
accounting policies section of Ashanti's financial statements:
2. Accounting policies
2.1 Property, plant and equipment
Land and buildings held for use in the production or supply of goods or
services, or for administrative purposes, are stated in the statement of
financial position at their revalued amounts, being the fair value at the date
of revaluation less any subsequent accumulated depreciation and
subsequent accumulated impairment losses. Revaluations are performed
with sufficient regularity such that the carrying amount does not differ
materially from that which would be determined using fair values at the
reporting date.
As a revaluation surplus is realised, it is transferred to retained earnings.
2.4 Loans and receivables
Trade receivables, loans and other receivables that have fixed or
determinable payments that are not quoted in an active market are classified
as 'loans and receivables'. Loans and receivables are measured at amortised
cost using the effective interest method, less any impairment. Interest
income is recognised by applying the effective interest rate, except for short-
term receivables when the recognition of interest would be immaterial.
2.8 Goodwill
Goodwill represents the excess of the cost of an acquisition (including the
non-controlling interest) over the fair value of the acquiree's identifiable net
assets at the date of acquisition.
Goodwill is tested for impairment at least annually. Any impairment isrecognised immediately in profit or loss. Subsequent reversals of
impairment losses for goodwill are not recognised.
2.15 Non-controlling interests
Non-controlling interests consist of the amount of those interests at the date
of the original business combination and the non-controlling shareholders'
share of changes in equity since the date of the combination. The interest of
non-controlling shareholders in the acquiree is initially measured at fair
value in accordance with SLFRS 3. Non-controlling interests are reported
separately from the equity of the owners of the parent.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 65/230
KC1 | Practice Questions
CA Sri Lanka 51
Social responsibility
Ashanti, together with the rest of the apparel industry of Sri Lanka, has invested
heavily in achieving a conscientious standpoint in apparel production. The
industry's trade association, Sri Lanka Apparel, runs a campaign called Garments
without Guilt which it uses to draw attention to its adherence to ethical
considerations. Sri Lanka is also a signatory to 39 conventions of the International
Labour Organisation, and it outlaws child labour. Sri Lankan law requires that an
employer contributes 3% of an employee's salary to a trust fund which the
employer receives after leaving the company.
These factors, together with Ashanti's generous human resources policies, have
led the Board of Ashanti to consider publishing a sustainability report as part of
the company's annual report.
Unseen
The following financial statements relate to Ashanti:
ASHANTI GROUP: STATEMENTS OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 APRIL 20X5
Ashanti Bochem Ceram Rs Mn Rs Mn Rs Mn
Revenue 810 235 142
Cost of sales (686) (137) (84)
Gross profit 124 98 58
Other income 31 17 12
Distribution costs (30) (21) (26)
Administrative costs (55) (29) (12)
Finance costs (8) (6) (8)
Profit before tax 62 59 24
Income tax expense (21) (23) (10)
Profit for the year 41 36 14
Other comprehensive income for the year,
net of tax –Items that will not be reclassified to
profit or loss:
AFS financial assets 20 9 6
Gains (net) on PPE revaluation 12 6 –
Actuarial losses on defined benefit plan (14) – –
Other comprehensive income for the 18 15 6
year, net of tax
Total comprehensive income 59 51 20
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 66/230
KC1 | Practice Questions
52 CA Sri Lanka
The following information is relevant to the preparation of the group statement of
profit or loss and other comprehensive income:
(i) The purchase consideration for Bochem comprised cash of Rs. 150 million
and the fair value of the identifiable net assets was Rs. 160 million at that
date. The fair value of the non-controlling interest in Bochem was Rs. 54
million on 1 May 20X3. The share capital and retained earnings of Bochem
were Rs. 55 million and Rs. 85 million respectively and other components of
equity were Rs. 10 million at the date of acquisition. The excess of the fair
value of the identifiable net assets at acquisition is due to an increase in the
value of plant, which is depreciated on the straight-line method and has a
five year remaining life at the date of acquisition. Ashanti disposed of a 10%
equity interest to the non-controlling interests (NCI) of Bochem on 30 April
20X5 for a cash consideration of Rs. 34 million. The carrying value of the net
assets of Bochem at 30 April 20X5 was Rs. 210 million before any
adjustments on consolidation. Goodwill had reduced in value by 15% at 30
April 20X4 and at 30 April 20X5 had lost a further 5% of its original value
before the sale of the equity interest to the NCI.
(ii) The purchase consideration for Ceram was cash of Rs. 136 million. Ceram's
identifiable net assets were fair valued at Rs. 115 million and the NCI of
Ceram attributable to Ashanti had a fair value of Rs. 26 million at that date.
On 1 November 20X4, Bochem disposed of 50% of the equity of Ceram for
cash consideration of Rs. 90 million. Ceram's identifiable net assets wereRs. 160 million and the consolidated value of the NCI of Ceram attributable
to Bochem was Rs. 35 million at the date of disposal. The remaining equity
interest of Ceram held by Bochem was fair valued at Rs. 45 million. After the
disposal, Bochem can still exert significant influence. Goodwill had been
impairment tested and no impairment had occurred. Ceram's profits are
deemed to accrue evenly over the year.
(iii) Ashanti has sold inventory to both Bochem and Ceram in October 20X4. The
sale price of the inventory was Rs. 10 million and Rs. 5 million respectively.
Ashanti sells goods at a gross profit margin of 20% to group companies and
third parties. At the year-end, half of the inventory sold to Bochem remained
unsold but the entire inventory sold to Ceram had been sold to third parties.
(iv) On 1 May 20X2, Ashanti purchased a Rs. 20 million five-year bond with semi-
annual interest of 5% payable on 31 October and 30 April. This was
classified as 'loans and receivables'. The purchase price of the bond was
Rs. 21·62 million. The effective annual interest rate is 8% or 4% on a semi-
annual basis. The bond is held at amortised cost. At 1 May 20X4 the
amortised cost of the bond was Rs. 21.046 million. The issuer of the bond didpay the interest due on 31 October 20X4 and 30 April 20X5, but was in
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 67/230
KC1 | Practice Questions
CA Sri Lanka 53
financial trouble at 30 April 20X5. Ashanti feels that as at 30 April 20X5, the
bond is impaired and that the best estimates of total future cash receipts are
Rs. 2.34 million on 30 April 20X6 and Rs. 8 million on 30 April 20X7. The
current interest rate for discounting cash flows as at 30 April 20X5 is 10%.
No accounting entries have been made in the financial statements for theabove bond since 30 April 20X4. (You should assume the annual compound
rate is 8% for discounting the cash flows.)
(v) Ashanti sold Rs. 5 million of goods to a customer who recently made an
announcement that it is restructuring its debts with its suppliers including
Ashanti. It is probable that Ashanti will not recover the amounts outstanding.
The goods were sold after the announcement was made although the order
was placed prior to the announcement. Ashanti wishes to make an additional
allowance of Rs. 8 million against the total receivable balance at the year-
end, of which Rs. 5 million relates to this sale.
(vi) Ashanti owned a piece of property, plant and equipment (PPE) which cost
Rs. 12 million and was purchased on 1 May 20X3. It is being depreciated
over ten years on the straight-line basis with zero residual value. On 30 April
20X4, it was revalued to Rs. 13 million and on 30 April 20X5, the PPE was
revalued to Rs. 8 million. The whole of the revaluation loss had been posted
to other comprehensive income and depreciation has been charged for the
year. It is Ashanti's company policy to make all necessary transfers for
excess depreciation following revaluation.
(vii) The salaried employees of Ashanti are entitled to 25 days paid leave each
year. The entitlement accrues evenly over the year and unused leave may be
carried forward for one year. The holiday year is the same as the financial
year. At 30 April 20X5, Ashanti has 900 salaried employees and the average
unused holiday entitlement is three days per employee. 5% of employees
leave without taking their entitlement and there is no cash payment when an
employee leaves in respect of holiday entitlement. There are 255 working
days in the year and the total annual salary cost is Rs. 19 million. No
adjustment has been made in the financial statements for the above and
there was no opening accrual required for holiday entitlement.
(viii) Investments in equity instruments (excluding shares group entities) have
been categorised as available for sale financial assets.
(ix) Ignore any taxation effects of the above adjustments and the disclosure
requirements of SLFRS 5 Non-current assets held for sale and discontinued
operations.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 68/230
KC1 | Practice Questions
54 CA Sri Lanka
Required
(1) Compile a consolidated statement of profit or loss and other comprehensive
income for the year ended 30 April 20X5 for the Ashanti Group. (35 marks)
(2) Outline the factors which provide encouragement to companies such asAshanti to disclose sustainability information in their financial statements,
briefly discussing whether the content of such disclosure should be at the
company's discretion.
(8 marks)
(3) Discuss the nature of and incentives for 'management of earnings' and
whether such a process can be deemed to be ethically acceptable, given the
requirement for accountants to ensure that financial statements are
accurately presented in a given set of circumstances. (7 marks)
(LO 2.1.1, 4.1.3, 5.1.1) (Total = 50 marks)
21 Rose
Preseen
Background
Rose PLC ('Rose') is a quoted public company listed on the Colombo Stock
Exchange. Rose and its subsidiaries operate in the mining sector, mainly
extracting and selling graphite.
Sri Lanka is the only country in the world that produces super-grade lump and
chippy dust graphite containing between 95% and 99% pure carbon. Lump and
chippy dust graphite products are the highest-value graphite products found
globally, and prices are considerably higher than those for other products such as
flake or amorphous graphite.
Development of Rose Group
Sri Lanka has been mining graphite for 200 years and was a significant graphiteproducer and exporter at the start of the last century. Rose was set up almost 100
years ago to take advantage of this available resource. The company grew steadily
until the graphite sector was nationalised almost 50 years ago. At this stage, Rose
transferred its mining expertise to gem mining.
When the private sector was allowed back into the graphite industry, after 20
years, Rose was quick to re-establish itself, and has since continued to grow in the
graphite sector, whilst retaining interests in gem mining.
On 1 May 20X7, Rose acquired 70% of the equity interests of Petal, a public limitedcompany. This shareholding was increased to 80% on 30 April 20X8. Petal also
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 69/230
KC1 | Practice Questions
CA Sri Lanka 55
operates in the graphite mining sector, and its acquisition allowed operations to
be streamlined and cost-cutting strategies to be put in place. In addition it
allowed Rose to access certain advanced mining methods and technologies that
Petal had protected by way of patents.
Rose acquired 52% of the ordinary shares of Stem on 1 May 20X7. Stem is located
in central Africa and operates a gold mine. The acquisition was viewed as a
strategic move to offset the possible negative effects of the Sri Lankan graphite
mining industry being opened up to newer companies.
The income of Stem is denominated and settled in dinars. The output of the mine
is routinely traded in dinars and its price is determined initially by local supply
and demand. Stem pays 40% of its costs and expenses in Sri Lankan Rupees with
the remainder being incurred locally and settled in dinars. Stem's management
has a considerable degree of authority and autonomy in carrying out theoperations of Stem and is not dependent upon group companies for finance.
Financial reporting
Rose PLC prepares consolidated financial statements to 30 April in accordance
with Sri Lanka Financial Reporting Standards. The following is an extract of the
accounting policies section of Ashanti's financial statements:
2. Accounting policies
2.15 Non-controlling interests
Non-controlling interests consist of the amount of those interests at the date
of the original business combination and the non-controlling shareholders'
share of changes in equity since the date of the combination. The interest of
non-controlling shareholders in the acquiree is initially measured at fair
value in accordance with SLFRS 3. Non-controlling interests are reported
separately from the equity of the owners of the parent.
2.22 Foreign currencies
The individual financial statements of each group company are presented in
its functional currency. For the purposes of the consolidated financial
statements, the results and financial position of each group company are
expressed in Sri Lankan Rupees, which is the functional currency of the
Company and the presentation currency for the consolidated financial
statements.
Financial highlights
The Stem Group has reported healthy profits over recent years, the majority of
which are retained and reinvested in the group's operations. Other funding
requirements are met by way of loan stock issues and long term bank loans.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 70/230
KC1 | Practice Questions
56 CA Sri Lanka
Future developments
Rose is considering acquiring a service company, MineConsult Co. This company
provides professional technical consultancy services to the mining and metals
sector throughout the world. It is experienced in providing multi-disciplinary
technical studies and due diligence for mineral assets including exploration
through to development, operation and mine closure. Rose, and the other
companies in the Group, have previously used the expertise of MineConsult Co.
The potential acquisition of the company would mark a change in group strategy
as, to date, the group has concentrated on expanding its mining operations. The
directors of Rose have stated that the acquisition is under consideration because
of the value of the human capital involved and the opportunity for synergies and
cross-selling opportunities.
Unseen
The draft statements of financial position of Rose, Petal and Stem are as follows, at
30 April 20X8.
Rose Petal Stem
Rs Mn Rs Mn Dinars Mn
Assets Non-current assets: Property, plant and equipment 370 110 380
Investment in subsidiaries
Petal 113 – –
Stem 46 – –
Financial assets 15 7 50
544 117 430
Current assets 118 100 330
Total assets 662 217 760
Equity and liabilities Stated capital 158 38 200
Retained earnings 256 56
300
Other components of equity 7 4 –
Total equity 421 98 500
Non-current liabilities 56 42 160
Current liabilities 185 77 100
Total liabilities 241 119 260
Total equity and liabilities 662 217 760
The following information is relevant to the preparation of the group financial
statements.
(a) The purchase consideration paid by Rose for Petal comprised cash of
Rs. 94 million. The fair value of the identifiable net assets recognised by Petal
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 71/230
KC1 | Practice Questions
CA Sri Lanka 57
was Rs. 120 million excluding the patent below. The identifiable net assets of
Petal at 1 May 20X7 included a patent which had a fair value of Rs. 4 million.
This had not been recognised in the financial statements of Petal. The patent
had a remaining term of four years to run at that date and is not renewable.
The retained earnings of Petal were Rs. 49 million and other components ofequity were Rs. 3 million at the date of acquisition. The remaining excess of
the fair value of the net assets is due to an increase in the value of land.
The fair value of the non-controlling interest in Petal was Rs. 46 million on
1 May 20X7. There have been no issues of ordinary shares since acquisition
and goodwill on acquisition is not impaired.
Rose paid cash consideration of Rs. 19 million for the further 10% interest in
Petal on 30 April 20X8.
(b) On 1 May 20X7 Stem's retained earnings were 220 million dinars. The fairvalue of the identifiable net assets of Stem on 1 May 20X7 was 495 million
dinars. The excess of the fair value over the net assets of Stem is due to an
increase in the value of land. The fair value of the non-controlling interest in
Stem at 1 May 20X7 was 250 million dinars.
There have been no issues of ordinary shares of Stem and no impairment of
goodwill in the company since acquisition.
The following exchange rates are relevant to the preparation of the group
financial statements.
Dinars to
Rs.
1 May 20X7 6
30 April 20X8 5
Average for year to 30 April 20X8 5.8
(c) Rose has a property located in the same country as Stem. The property was
acquired on 1 May 20X7 and is carried at a cost of 30 million dinars. The
property is depreciated over 20 years on the straight-line method. At 30
April 20X8, the property was revalued to 35 million dinars. Depreciation has
been charged for the year but the revaluation has not been taken into
account in the preparation of the financial statements as at 30 April 20X8.
(d) Rose commenced a long-term bonus scheme for employees at 1 May 20X7.
Under the scheme employees receive a cumulative bonus on the completion
of five years of service. The bonus is 2% of the total of the annual salary of
the employees. The total salary of employees for the year to 30 April 20X8
was Rs. 40 million and a discount rate of 8% is assumed. Additionally at 30
April 20X8, it is assumed that all employees will receive the bonus and that
salaries will rise by 5% per year.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 72/230
KC1 | Practice Questions
58 CA Sri Lanka
(e) Rose purchased plant for Rs. 20 million on 1 May 20X4 with an estimated
useful life of six years. Its estimated residual value at that date was
Rs. 1.4 million. At 1 May 20X7, the estimated residual value changed to
Rs. 2.6 million. The change in the residual value has not been taken into
account when preparing the financial statements as at 30 April 20X8.
Required
(1) Recommend which currency should be used as the functional currency of
Stem, applying the principles set out in LKAS 21 The effects of changes in
foreign exchange rates. (8 marks)
(2) Compile a consolidated statement of financial position of the Rose Group at
30 April 20X8 in accordance with Sri Lanka Financial Reporting Standards
(SLFRS), showing the exchange difference arising on the translation of
Stem's net assets. Ignore deferred taxation. (35 marks)
Rose's accountant has measured the fair value of the assets of MineConsult Co
based on what Rose is prepared to pay for them. The directors of Rose have
further stated that what the company is willing to pay is influenced by its future
plans for the business.
MineConsult Co has contract-based customer relationships with well-known
domestic and international companies and some mining companies. Rose's
accountant has measured the fair value of all of these customer relationships at
zero, because Rose already enjoys relationships with the majority of these
customers.
(3) Evaluate the validity of the accounting treatment for MineConsult Co
proposed by Rose's accountant and whether such a proposed treatment
raises any ethical issues.
(7 marks)
(LO 1.1.2, 2.1.1, 5.1.1) (Total = 50 marks)
22 WarrburtPreseen
Warrburt PLC is listed on the Columbo Stock Exchange and, together with its
subsidiaries, manufactures and distributes beverages. The company was
established over 50 years ago and after an initial period of organic expansion,
achieved speedy growth through acquisitions.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 73/230
KC1 | Practice Questions
CA Sri Lanka 59
Group structure
The parent company, Warburrt manufactures and distributes milkshake and fruit
juice style shrinks. It currently holds majority shareholdings in four subsidiaries.
The subsidiaries are:
• Fruitz, which makes fruit smoothie drinks which are distributed to
supermarkets and convenience stores throughout Sri Lanka;
• Chillz, which makes non-alcoholic bottled fruit cocktails that are sold to bars
and restaurants throughout Sri Lanka and marketed at older teenagers;
• Elephant Brewery, which brews and bottles a popular brand of lager and
distributes it throughout South East Asia; and
• Any14Tea, which makes canned iced tea drinks that are sold in Sri Lanka and
India.
Both Fruitz and Any14Tea are 100% owned by Warburrt; Chillz is 85% owned
and Elephant Brewery 95% owned. The minority shareholders in Chillz and
Elephant Group are, in both cases, the families that set the companies up.
At the start of December 20X7, Warburrt acquired a 25% interest in H200h, a
private family-run company that adds fruit extracts to mineral water in order to
create a high-end flavoured water product. The 25% shareholding acquired
afforded Warburrt significant influence over H200h.
Management and employees`
Warburrt is managed by a Board consisting of eight members, led by James
Dashani, the CEO. All Board members have extensive experience in the drinks and
beverages sector and are appropriately qualified in their respective fields.
The accounting team is led by Sharmini Cooper, a chartered accountant. Sharmini
has worked for Warburtt group companies for 15 years, progressing from
assistant financial accountant of Chillz to Group Finance Director.
The Group promotes fair employment policies and one of its continuing objectivesis to employ an ethnically diverse workforce with males and females represented
as equally as possible. Employees are encouraged to set personal development
objectives and receive training in order that they can achieve promotion
aspirations. All employees are rewarded with a generous remuneration package,
including holiday pay, paid sick leave, and an annual bonus. Certain employees are
also eligible to join the company's defined benefit pension scheme after an initial
period of employment.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 74/230
KC1 | Practice Questions
60 CA Sri Lanka
Financial performance and position
Although the Warburrt Group is well-established and a big player in the beverage
market, it suffered a small loss in the year ended 30 November 20X6. A further,
increased loss was reported in the following year and in the year ended 30
November 20X8, the reported operating loss was Rs. 47 million.
Management has attributed the losses to a number of factors, above all the need to
cut selling prices aggressively due to competitor activities and the increase in raw
materials costs as the result of a series of poor fruit and wheat harvests. These
factors have particularly affected Fruitz and Elephant Brewery and as a result
goodwill in both companies has become impaired in the year ended 30 November
20X8.
Related to the continued losses, Warburrt 's cash position is deteriorating. Despite
this, its liquidity position, based on amounts reported in the statement of financial
position at 30 November 20X8 is strong, with a current ratio of 3.3:1 compared to
a current ratio at 30 November 20X7 of 3.0.
Future strategy
The strategy of the Warburrt Group remains focused on growth by acquisition,
although the Board feel that the export market should be explored further,
particularly for the Elephant Brewery, as they have heard about the popularity of
unusual beers in Europe and Australia.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 75/230
KC1 | Practice Questions
CA Sri Lanka 61
Unseen
The following draft group financial statements relate to Warrburt:
WARRBURT GROUP: STATEMENT OF FINANCIAL POSITION AS AT 30 NOVEMBER 20X8
30 Nov 20X8 30 Nov 20X7 Rs Mn Rs Mn
Assets Non-current assets Property, plant and equipment 350 360
Goodwill 80 100
Other intangible assets 228 240
Investment in associate 100 –
Financial assets 142 150
900 850
Current assets Inventories 135 198
Trade receivables 92 163
Cash and cash equivalents 288 323
515 684
Total assets 1,415 1,534
Equity and liabilities
Equity attributable to owners of the parent: to
last million Stated capital 650 595
Retained earnings 371 454
Revaluation surplus 6 4
Other components of equity 39 16
1,066 1,069
Non-controlling interest 46 53
Total equity 1,112 1,122
Non-current liabilities Long-term borrowing
20
64
Deferred tax 28 26
Long-term provisions 100 96
Total non-current liabilities 148 186
Current liabilities: Trade payables 115 180
Current tax payable 35 42
Short-term provisions 5 4
Total current liabilities 155 226
Total liabilities
303
412 Total equity and liabilities 1,415 1,534
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 76/230
KC1 | Practice Questions
62 CA Sri Lanka
WARRBURT GROUP: STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 NOVEMBER 20X8
Rs Mn Revenue 910
Cost of sales (886) Gross profit 24
Other income 7
Distribution costs (40)
Administrative expenses (35)
Finance costs (9)
Share of profit of associate 6
Loss before tax (47)
Income tax expense (29)
Loss for the year from continuing operations (76) Loss for the year (76)
Other comprehensive income for the year (after tax)
Investment in AFS financial assets 27
Gains on property revaluation 2
Remeasurement losses on defined benefit plan (4)
Other comprehensive income for the year (after tax) 25
Total comprehensive income for the year (51)
Loss attributable to:
Owners of the parent (74) Non-controlling interest (2)
(76)
Total comprehensive income attributable to: Owners of the parent (49)
Non-controlling interest (2)
(51)
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 77/230
KC1 | Practice Questions
CA Sri Lanka 63
WARRBURT GROUP: STATEMENT OF CHANGES IN EQUITY FOR THE YEAR
ENDED 30 NOVEMBER 20X8
Stated
capital
Retained
earnings
Other
comp of
equity
Reval'n
surplus
Total NCI Total
equity
Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn
b/f 595 454 16 4 1,069 53 1,122
Share capital
issued
55 55 55
Dividends (9) (9) (5) (14)
Total
comprehensive
income for the
year
(74) 23 2 (49) (2) (51)
Balance at 30.11.X8 650 371 39 6 1,066 46 1,112
NOTE TO STATEMENT OF CHANGES IN EQUITY:
Rs Mn Profit/loss attributable to owners of parent (74)
Remeasurement losses on defined benefit plan (4)
Total comprehensive income for year – retained earnings (78)
The following information relates to the financial statements of Warrburt.
(i) Warrburt holds financial assets that are owned by the parent company. At
1 December 20X7, the total carrying amount of those investments was
Rs 150 Mn. Rs 112 Mn of this Rs 150 Mn are classified as available for sale
financial assets. The remaining Rs 38 Mn related to an investment in the
shares of Alburt, which has been designated as fair value through profit or
loss. During the year, the investment in Alburt was sold for Rs 45 Mn, with
the fair value gain shown in 'other income' in the financial statements. The
following schedule summarises the changes:
Alburt Other Total
Rs Mn Rs Mn Rs Mn Carrying amount at 1 December 20X7 38 112 150
Add gain on derecognition/reval'n 7 30 37
Less sales at fair value (45) – (45)
Carrying amount at 30 November 20X8 – 142 142
Deferred tax of Rs. 3 million arising on the Rs 30 Mn revaluation gain above
has been taken into account in other comprehensive income for the year.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 78/230
KC1 | Practice Questions
64 CA Sri Lanka
(ii) The retirement benefit liability is shown as a long-term provision in the
statement of financial position and comprises the following:
Rs Mn Net defined benefit liability at 1 December 20X7 96
Expense for period 10 Contributions to scheme (paid) (10)
Remeasurement losses 4
Net defined benefit liability at 30 November 20X8 100
Warrburt recognises remeasurement gains and losses in other
comprehensive income in the period in which they occur, in accordance with
LKAS 19. The benefits paid in the period by the trustees of the scheme were
Rs. 3 million. There is no tax impact with regards to the retirement benefit
liability.
(iii) The property, plant and equipment (PPE) in the statement of financial
position comprises the following:
Rs Mn Carrying amount at 1 December 20X7 360
Additions at cost 78
Gains on property revaluation 4
Disposals (56)
Depreciation (36)
Carrying amount at 30 November 20X8 350 Plant and machinery with a carrying amount of Rs. 1 million had been
destroyed by fire in the year. The asset was replaced by the insurance
company with new plant and machinery, which was valued at Rs. 3 million.
The machines were acquired directly by the insurance company and no cash
payment was made to Warrburt. The company included the net gain on this
transaction in 'additions at cost' and as a deduction from administrative
expenses.
The disposal proceeds were Rs. 63 million. The gain on disposal is includedin administrative expenses. Deferred tax of Rs. 2 million has been deducted
in arriving at the 'gains on property revaluation' figure in other
comprehensive income..
The remaining additions of PPE comprised imported plant and equipment
from an overseas supplier on 30 June 20X8. The cost of the PPE was 380
million dinars with 280 million dinars being paid on 31 October 20X8 and
the balance to be paid on 31 December 20X8. The outstanding amount is
included within the trade payables balance in the statement of financial
position.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 79/230
KC1 | Practice Questions
CA Sri Lanka 65
The rates of exchange were as follows:
Dinars to Rs. 1
30 June 20X8 5
31 October 20X8 4.9
30 November 20X8 4.8
Exchange gains and losses are included in administrative expenses.
(iv) The interest in H200h was acquired for cash on 1 December 20X7. The net
assets of H200h at the date of acquisition were Rs. 300 million. H200h made a
profit after tax of Rs. 24 million and paid a dividend of Rs. 8 million out of
these profits in the year ended 30 November 20X8.
(v) An impairment test had been carried out at 30 November 20X8 on goodwill
and other intangible assets. The result showed that goodwill was impaired
by Rs. 20 million and other intangible assets by Rs. 12 million.(vi) The short term provisions relate to finance costs which are payable within
six months.
Warrburt's CEO and Managing Director are concerned about the results for the
year in the statement of profit or loss and other comprehensive income and the
subsequent effect on the statement of cash flows. They have suggested that the
proceeds of the sale of property, plant and equipment and the sale of investments
in equity instruments should be included in 'cash generated from operations'. The
directors are afraid of an adverse market reaction to their results and aware of theimportance of meeting targets in order to ensure job security. They feel that the
adjustments for the proceeds would enhance the 'cash health' of the business.
Required
(1) Compile a group statement of cash flows for Warrburt for the year ended 30
November 20X8 in accordance with LKAS 7 Statement of cash flows, using
the indirect method. (35 marks)
(2) Outline the key issues which the statement of cash flows highlights
regarding the cash flow of the company. (10 marks)
(3) Assess the ethical responsibility of Sharmini Cooper in ensuring that
manipulation of the statement of cash flows, such as that suggested by the
directors, does not occur. (5 marks)
(LO 2.1.1, 3.2.1, 5.1.1) (Total = 50 marks)
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 80/230
KC1 | Practice Questions
66 CA Sri Lanka
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 81/230
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 82/230
KC1 | Corporate Financial Reporting
68 CA Sri Lanka
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 83/230
KC1 | Answers to Practice Questions
CA Sri Lanka 69
PART A: INTERPRETATION AND APPLICATION OF SRI LANKA ACCOUNTING
STANDARDS
Questions 1 to 6 cover Interpretation and Application of Sri Lanka Accounting
Standards.
1 Accounting queries
(1) Penn
Statement of financial position (extract) at 31 December 20X9
Non-current liabilities Rs'000
Net defined benefit liability(4,115 – 4,540) 425
Statement of comprehensive income (extract) for the year
ended 31 December 20X9
Rs'000
Charged to profit or loss Current service cost 275
Net interest on net defined benefit liability (344 – 288) 56
Curtailment cost 58
389
Other comprehensive income Actuarial gain on obligation 107
Return on plan assets (excluding amounts in net interest) 7
Disclosure Note – Employee benefits
Reconciliation of pension plan movement Rs'000
Plan deficit at 1 Jan 20X9 (3,600 – 4,300) (700)
Company contributions 550
Profit or loss total (389)
Other comprehensive income total (107 + 7) 114
Plan deficit at 31 Dec 20X9 (4,115 – 4,540) (425)
Rs'000 Changes in the present value of the defined benefit obligation Defined benefit obligation at 1 Jan 20X9 4,300
Interest cost (4,300 8%) 344
Pensions paid (330)
Curtailment 58
Current service cost 275
Remeasurement gain through OCI (bal. Fig.) (107)
Defined benefit obligation at 31 Dec 20X9 4,540
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 84/230
KC1 | Answers to Practice Questions
70 CA Sri Lanka
Changes in the fair value of plan assets Rs'000
Fair value of plan assets at 1 Jan 20X9 3,600
Contributions 550
Pensions paid (330)
Interest on plan assets (3,600 8%) 288 Remeasurement gain through OCI (295 – 288) 7
Fair value of plan assets at 31 Dec 20X9 (bal. fig.) 4,115
(2) Sion Co
Calculation of net defined benefit liability
Changes in the present value of the defined benefit obligation
Rs'000
1 January 20X8 b/f 40,000
Interest at 8% 3,200 Current service cost 2,500
Past service cost 2,000
Benefits paid (1,974)
45,726
Re-measurement losses through OCI 274
31 December 20X8 c/f 46,000
The improvement in the plan during 20X8 leads to an increase in the defined
benefit obligation.
1 January 20X9 b/f 46,000
Interest at 9% 4,140
Current service cost 2,860
Settlement (11,400)
Benefits paid (2,200)
39,400
Re-measurement losses 1,400
31 December 20X9 c/f 40,800
The transfer of the pension liability to the buyer constitutes a settlement
and, since Sion will no longer have an obligation to the employees within the
part of the business sold, the defined obligation is reduced.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 85/230
KC1 | Answers to Practice Questions
CA Sri Lanka 71
Changes in the fair value of plan assets
Rs'000
1 January 20X8 b/f 40,000
Interest at 8% 3,200
Benefits paid (1,974) Contributions paid in 2,000
43,226
Remeasurement losses (226)
31 December 20X8 c/f 43,000
1 January 20X9 b/f 43,000
Interest at 9% 3,870
Settlement (10,800)
Benefits paid (2,200)
Contributions paid in 2,200
36,070
Re-measurement losses (390)
31 December 20X9 c/f 35,680
As Rs 10.8 Mn of plan assets are withdrawn from Sion’s plan and transferred
to the purchaser, this reduces the value of the plan assets.
The overall gain on settlement is calculated as:
Rs'000
Present value of obligation settled 11,400
Fair value of plan assets transferred on settlement (10,800)
Cash transferred on settlement (400)
Gain 200
The pension fund will be presented in the financial statements as follows:
Financial statements extracts
STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20X8 20X9
Rs'000 Rs'000
Net defined benefit liability:
(46,000 – 43,000)/(40,800 – 35,680) 3,000 5,120
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 86/230
KC1 | Answers to Practice Questions
72 CA Sri Lanka
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER
20X8 20X9
Rs'000 Rs'000
Profit or lossCurrent service cost 2,500 2,860
Past service cost 2,000 –
Gain on settlement – (200)
Net interest: (3,200 – 3,200)/(4,140 – 3,870) – 270
Other comprehensive income
Re-measurement loss on defined pension
plan: (274 + 226)/(1,400 +390) 500 1,790
(3) Classification of financial instruments
Bed's investment is a financial asset, since it carries a contractual right to
receive cash from Em Bank.
There is also an embedded derivative, in the form of the possible receipt of
further cash, contingent upon the movement of the Ruritanian Kroner. This
meets the definition of a derivative in that it derives its value from the price
or rate of an underlying item, ie the exchange rate.
LKAS 39 requires that an embedded derivative be separated from its host
contract and accounted for separately if:
(a)
The economic characteristics and risks of the embedded derivative are
not closely related to those of the host contract; and
(b) A separate instrument with the same terms as the embedded
derivative would meet the definition of a derivative; and
(c) The hybrid instrument is not measured at fair value with changes
recognised in profit or loss (in which case there is no benefit to
separating the embedded derivative).
In this case, the value of the derivative is dependent on exchange rate
movements, so the economic characteristics and risks are different and
condition (a) is met.
Condition (b) is also met, in that there could be a separate instrument with
the same terms.
To assess condition (c), we must consider the classification of the host
instrument, ie the deposit with EM Bank. The deposit is a non-derivative
financial asset with fixed or determinable payments, it is not quoted in an
active market and Bed Investment Co does not intend to sell the investment
in the short term. Therefore, assuming that it has not been designated asavailable-or-sale, the deposit fits the “loans and receivables” classification,
and is measured at amortised cost.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 87/230
KC1 | Answers to Practice Questions
CA Sri Lanka 73
As the deposit is not measured at fair value through profit or loss, the
embedded derivative should be separated out and accounted for separately.
It is classified as a financial asset at fair value through profit or loss. As the
name suggests, it is measured at fair value and changes in value are
recognised in profit or loss for the year.
2 Prochain
Model areas
LKAS 16 Property, plant and equipment is the relevant standard here. The model
areas are held for use in the supply of goods and are used in more than one
accounting period. The company should recognise the costs of setting up the
model areas as tangible non-current assets and should depreciate the costs over
their useful lives. Subsequent measurement should be based on cost. In theory the
company could measure the model areas at fair value if the revaluation model of
LKAS 16 were adopted, but it would be difficult to measure fair value reliably in
this case.
LKAS 16 states that the initial cost of an asset should include the initial estimate of
the costs of dismantling and removing the item and restoring the site where the
entity has an obligation to do so. A present obligation appears to exist, as defined
by LKAS 37 Provisions, contingent liabilities and contingent assets and therefore
the entity should also recognise a provision for that amount. The provision shouldbe discounted to its present value, and this amount initially recognised as both
part of the cost of the asset and a separate provision. The subsequent unwinding
of the discount on the provision is recognised in profit or loss.
At 31 May 20X6, the entity should recognise a non-current asset of Rs. 15.7 million
(cost of Rs. 23.6 million (W) less accumulated depreciation of Rs. 7.9 million (W))
and a provision of Rs. 3.7 million (W).
Working
PPE Rs Mn
Cost of model areas 20.0
Plus provision (20 20% 2
1
1.055(= 0.898)
3.6
Cost on initial recognition 23.6
Less accumulated depreciation (23.6 8/24) (7.9)
Carrying amount at 31 May 20X6 15.7
Provision
Provision: on initial recognition (20 20% 0.898) 3.6 Plus unwinding of discount (3.6 5.5% 8/12) 0.1
Provision at 31 May 20X6 3.7
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 88/230
KC1 | Answers to Practice Questions
74 CA Sri Lanka
Purchase of Badex
SLFRS 3 Business Combinations states that the consideration transferred in a
business combination must be measured at fair value at the acquisition date.
The Rs. 100 million cash paid on the acquisition date, 1 June 20X5 is recognised aspurchase consideration. The Rs. 25 million payable on 31 May 20X7 (two years
after acquisition) is split into the Rs. 10 million deferred consideration which is
discounted to its present value by two years (Rs. 10m 1/1.0552 = Rs. 8.98m) and
the contingent consideration of Rs. 15 million. The contingent consideration is
measured at its acquisition-date fair value. Here, as the profit forecast targets are
unlikely to be met, the fair value would be significantly less than Rs. 15 million but
as the percentage chance of the targets being met and other relevant information
is not given, it is not possible to establish a fair value.
Prochain should also recognise a corresponding financial liability for the deferred
and contingent consideration as this meets the definition of a financial liability in
LKAS 32 Financial Instruments: Presentation. This is because Prochain has a
contractual obligation to deliver cash on 31 May 20X7 providing the conditions of
the contingent consideration are met. At the year end 31 May 20X6, any changes
in the contingent consideration as a result of changes in expectations of the targets
being met are recognised in profit or loss (rather than as an adjustment to
goodwill).
Under SLFRS 3, any associated transaction costs are expensed to profit or lossunless they are the costs of issuing debt or equity, which are accounted for in
accordance with LKAS 32.
A further issue concerns the valuation and treatment of the 'Badex' brand name.
LKAS 38 Intangible Assets prohibits the recognition of internally generated brands
and therefore the brand will not be recognised in Badex's individual statement of
financial position prior to the acquisition. SLFRS 3, however, requires the
intangible assets of an acquiree to be recognised in a business combination if they
meet the identifiability criteria in LKAS 38. For an intangible to be identifiable, the
asset must be separable or it must arise from contractual or legal rights. Here,
these criteria appear to have been met as the brand could be sold separately from
the entity. Therefore, the 'Badex' brand should be recognised as a separate
intangible asset measured at Rs. 20m in the consolidated statement of financial
position, rather than subsumed within the measurement of goodwill.
Development of own brand
LKAS 38 Intangible assets divides a project such as this into a research phase and a
development phase. The research phase of a project involves investigation to gain
new scientific or technical knowledge and understanding. At this stage, an entity
cannot demonstrate that any expenditure incurred will generate probable future
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 89/230
KC1 | Answers to Practice Questions
CA Sri Lanka 75
economic benefits. Therefore expenditure on research must be recognised as an
expense when it occurs.
Development expenditure is the application of research findings to a plan or
design for the production of new or improved materials, products and processes
prior to the start of commercial production. Development costs are capitalised
when an entity demonstrates all the following.
(a) The technical feasibility of completing the project
(b) Its intention to complete the asset and use or sell it
(c) Its ability to use or sell the asset
(d) That the asset will generate probable future economic benefits
(e) The availability of adequate technical, financial and other resources to
complete the development and to use or sell it
(f) Its ability to reliably measure the expenditure attributable to the asset.
Once these criteria are met, subsequent development costs must be capitalised;
costs incurred prior to the criteria being met cannot be capitalised retrospectively.
Capitalised development costs should comprise all directly attributable costs
necessary to create the asset and to make it capable of operating in the manner
intended by management. Directly attributable costs do not include selling or
administrative costs, or training costs or market research. The cost of upgrading
existing machinery can be recognised as property, plant and equipment.
Therefore the expenditure on the ‘Pro’ project should be treated as follows:
Recognised in statement of financial position
Intangible Property, plant Expense (P/L) Assets and equipment
Rs Mn Rs Mn Rs Mn Research 3
Prototype design 4
Employee costs 2
Development work 5
Upgrading machinery 3
Market research 2
Training 1
6 11 3
Prochain should recognise Rs. 11 million as an intangible asset.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 90/230
KC1 | Answers to Practice Questions
76 CA Sri Lanka
Apartments
The apartments are leased to persons who are under contract to the company.
Therefore they cannot be classified as investment property. LKAS 40 Investment
property specifically states that property occupied by employees is not investmentproperty. This is the case regardless of whether rent is paid at a market rate or
not. The apartments are property, plant and equipment, measured using the cost
or revaluation model and depreciated over their useful lives.
Although the rent is below the market rate the difference between the actual rent
and the market rate is simply income foregone (or an opportunity cost). In order
to recognise the difference as an employee benefit cost it would also be necessary
to gross up rental income to the market rate. The financial statements would not
present fairly the financial performance of the company. Therefore the company
cannot recognise the difference as an employee benefit cost.
3 Panel
(1) The impact of changes in accounting standards
LKAS 12 Income taxes is based on the idea that all changes in assets and
liabilities have unavoidable tax consequences. Where the recognition criteria
in SLFRS are different from those in tax law, the carrying amount of an asset
or liability in the financial statements is different from the amount at whichit is stated for tax purposes (its 'tax base'). These differences are known as
'temporary differences'. The practical effect of these differences is that a
transaction or event occurs in a different accounting period from its tax
consequences. For example, income from interest receivable is recognised in
the financial statements in one accounting period but it is only taxable when
it is actually received in the following accounting period.
LKAS 12 requires a company to make full provision for the tax effects of
temporary differences. Where a change in an accounting standard results in
a change to the carrying value of an asset or liability in the financial
statements, the amount of the temporary difference between the carrying
value and the tax base also changes. Therefore the amount of the deferred
tax liability is affected.
(2) Calculation of deferred tax on first time adoption of SLFRS
SLFRS 1 First time adoption of International Financial Reporting Standards
requires a company to prepare an opening SLFRS statement of financial
position and to apply LKAS 12 to temporary differences between the
carrying amounts of assets and liabilities and their tax bases at that date.
Panel prepares its opening SLFRS statement of financial position sheet at
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 91/230
KC1 | Answers to Practice Questions
CA Sri Lanka 77
1 November 20X3. The carrying values of its assets and liabilities are
measured in accordance with SLFRS 1 and other applicable SLFRSs in force
at 31 October 20X5. The deferred tax provision is based on tax rates that
have been enacted or substantially enacted by the end of the reporting
period. Any adjustments to the deferred tax liability under previous GAAPare recognised directly in equity (retained earnings).
(3) (i) Share options
Under SLFRS 2 Share based payment the company recognises an
expense for the employee services received in return for the share
options granted over the vesting period. The related tax deduction does
not arise until the share options are exercised. Therefore a deferred tax
asset arises, based on the difference between the intrinsic value of the
options and their carrying amount (normally zero).
At 31 October 20X4 the tax benefit is as follows:
Rs Mn
Carrying amount of share based payment –
Less: tax base of share based payment (16 ÷ 2) (8)
Temporary difference (8)
The deferred tax asset is Rs. 2.4 million (30% 8). This is recognised at
31 October 20X4 provided that taxable profit is available against which
it can be utilised.
Because the remuneration expense of $20m ($40,/2) is greater than
the tax deduction ($8m), deferred tax is recognised in profit or loss.
At 31 October 20X5 there is no longer a deferred tax asset because the
options have been exercised. The tax benefit receivable is
Rs. 13.8 million (30% Rs. 46 million). Therefore the deferred tax
asset of Rs. 2.4 million is no longer required.
(ii) Leased plant
An asset leased under a finance lease is recognised for accounting
purposes as:
(i) An asset owned by the company (initially recognised at the lower
of fair value or the present value of minimum lease payments and
subsequently depreciated), and
(ii) The related obligation to pay lease rentals (initially measured at
the same amount as the asset and subsequently increased by
interest accruing and decreased by lease payments.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 92/230
KC1 | Answers to Practice Questions
78 CA Sri Lanka
The carrying amount of the lease for accounting purposes is therefore
the net of these two balances.:
Rs Mn Rs Mn Carrying amount in financial statements:
Asset: Net present value of future lease payments
at inception of lease
12
Less depreciation (12 ÷ 5) (2.4)
9.60
Less finance lease liability Liability at inception of lease 12.00
Interest (8% 12) 0.96
Lease rental (3.00)
(9.96)
(0.36)
For tax purposes:
• The tax base of an asset is the amount deductible for tax in future,
which is zero in this case, as capital allowances are not given on
leased assets.
• The tax base of a liability is its carrying amount less any future tax
deductible amounts,. In this case the carrying amount of the
liability is $9.96 million and the full amount of this is tax
deductible in the future, giving a tax base of zero.
• The net tax base of the lease arrangement is therefore zero.
Therefore at 31 October 20X5 a net temporary difference is calculated as:
Carrying amount (0.36)
Less tax base 0.00
Temporary difference (0.36)
This is a deductible temporary difference as the tax base is greater than
the carrying amount. Therefore a deferred tax asset of Rs. 108,000
(30% 360,000) arises.
(iii) Intra-group sale
Panel will recognise the goods at cost of Rs. 9 million in its individual
financial statements. The tax base of the goods for Panel is Rs. 9 million,
being the amount deductible for tax purposes in the future (the cost to
Panel). This is equal to the goods’ carrying amount and therefore no
deferred tax arises in Panel’s separate financial statements
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 93/230
KC1 | Answers to Practice Questions
CA Sri Lanka 79
From an accounting point of view, the separate financial statements of
Pins and Panel are consolidated and the unrealised profit of
Rs. 2 million is eliminated. Therefore the carrying amount of the goods
is Rs. 7 million in the consolidated financial statements. For tax
purposes, however, Pins and Panel remain two separate entities andeach is taxed separately on its reported results. Therefore the tax base
remains Rs. 7 million. As a result a deductible temporary difference of
Rs. 2 million arises and an associated deferred tax asset of Rs. 600,000
(30% Rs. 2 million) is recognised in the consolidated financial
statements.
(iv) Impairment loss
The impairment loss in the financial statements of Nails reduces the
carrying amount of property, plant and equipment, but is not allowablefor tax. Therefore the tax base of the property, plant and equipment is
different from its carrying amount and there is a temporary difference.
Under LKAS 36 Impairment of assets the impairment loss is allocated
first to goodwill and then to other assets:
Property,
plant and
Goodwill equipment Total
Rs Mn Rs Mn Rs Mn
Carrying amount at 1 6.0 7.0 31 October 20X5
Impairment loss (1) (0.8) (1.8)
– 5.2 5.2
LKAS 12 states that no deferred tax should be recognised on goodwill
and therefore only the impairment loss relating to the property, plant
and equipment affects the deferred tax position.
The effect of the impairment loss is as follows:
Before After Difference impairment impairment
Rs Mn Rs Mn Rs Mn Carrying amount 6 5.2
Tax base (4) (4)
Temporary difference 2 1.2 0.8
Tax liability (30%) 0.6 0.36 0.24
Therefore the impairment loss reduces deferred the tax liability by
Rs. 240,000.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 94/230
KC1 | Answers to Practice Questions
80 CA Sri Lanka
4 Ambush
(1) Impairment of financial assets
LKAS 39 states that at each reporting date, an entity should assess whether
there is any objective evidence that a financial asset or group of assetsmeasured at amortised cost is impaired. Indications of impairment include
significant financial difficulty of the issuer; the probability that the borrower
will enter bankruptcy; or a default in interest or principal payments.
Where there is objective evidence of impairment, the entity should
determine the amount of any impairment loss, which is recognised
immediately in profit or loss. Only losses relating to past events can be
recognised. Two conditions must be met before an impairment loss is
recognised: There is objective evidence of impairment as a result of one or more
events that occurred after the initial recognition of the asset; and
The impact on the estimated future cash flows of the asset can be
reliably estimated.
This model whereby losses relating to past events only are recognised is
referred to as the ‘incurred loss’ model.
The SLFRS 9 approach differs from this in that an ‘expected loss’ model is
applied. Under this approach, expected credit losses are accounted for from
the date when financial instruments are first recognised. Entities must
recognise 12 month expected credit losses or, where credit risk has
increased significantly since initial recognition, lifetime expected credit
losses.
Expected credit losses are measured in a way that reflects:
An unbiased and probability weighted amount that is determined by
evaluating a range of possible outcomes;
The time value of money; and
Reasonable and supportable information that is available without
undue cost or effort at the reporting date about past events, current
conditions and forecasts of future economic conditions.
Under both approaches, for financial assets carried at amortised cost the
impairment loss is the difference between the asset's carrying amount and
its recoverable amount. The asset's recoverable amount is the present value
of estimated future cash flows, discounted at the financial instrument'soriginal effective interest rate.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 95/230
KC1 | Answers to Practice Questions
CA Sri Lanka 81
For assets at fair value, changes in fair value are automatically recognised
immediately in profit or loss or other comprehensive income.
(2) Loan to Bromwich
The financial difficulties and reorganisation of Bromwich are objectiveevidence of impairment. The impairment loss is the difference between the
carrying amount of the loan at 30 November 20X5 and the present value of
the estimated future cash flows. As the stated and effective interest rate for
the loan are both 8%, the carrying amount at 30 November 20X5 is
Rs. 200,000. The present value of estimated future cash flows is Rs. 100,000
(on 30 November 20X7), discounted at the original effective interest rate of
8%.
This is Rs. 85,730 (100,000 1/1.082). Therefore the impairment loss is
Rs. 114,270 (200,000 – 85,730) and this is recognised immediately in profit
or loss.
(3) Trade receivables
LKAS 39 classifies trade receivables as loans and receivables.
LKAS 39 requires that loans and receivables are initially measured at fair
value (normally being the invoiced amount) and subsequently measured at
amortised cost using the effective interest rate method. This method, which
spreads the interest income over the life of the financial asset, may not seem
appropriate for short-term trade receivables with no stated interest rate, as
they do not normally bring in any interest income. It is therefore normally the
case that such receivables continue to be measured at the original invoiced
amount.
As with other financial assets, however, LKAS 39 requires an annual
impairment test, in order to assess, at each reporting date, whether the
receivable is impaired. The carrying amount of the trade receivable must be
compared with the present value of the estimated future cash flows. For other
assets, the cash flows would be discounted at the effective interest rate, butthis is not normally required for trade receivables unless the balance is not
due for an extended period such that the effect of discounting is material.
General allowance
Ambush has calculated a general allowance using a formulaic approach. This
is only acceptable if it produces an estimate sufficiently close to that
produced by the LKAS 39 method. It is not acceptable to use a formula based
on possible trends. The general allowance of two percent is not permitted
under LKAS 39, because it is not based on past experience and is unlikely tobe an accurate estimate of the cash flows that will be received.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 96/230
KC1 | Answers to Practice Questions
82 CA Sri Lanka
Tray
Where it is probable that payment will not be received in full for an
individually significant balance, an allowance for impairment must be made.
Tray is expected to pay the full amount owed plus a penalty. However, thepayment will be in a year's time, and so discounting should be used to
calculate any impairment.
Milk
Where, as in the case of Milk, there is no objective evidence of impairment,
the individual asset is included in a group of assets with a similar credit risk,
and the group as a whole is assessed for impairment. Milk has a similar
credit risk to 'other receivables' and so will be grouped in with those.
Allowance for impairment
This is calculated as follows.
Cash to be
Balance Received
Rs Mn Rs Mn
Tray 4 3.9*
Milk and other receivables 7 6.6
11 10.5
*Rs 4.1 Mn 1/1.05
Ambush should reduce trade receivables by Rs 11 Mn – Rs 10.5 Mn =
Rs. 500,000 (or recognise a balance of Rs. 500,000 on the allowance
account).
(4) Buildings
Under LKAS 16 Property, plant and equipment, an increase in the carrying
amount of an asset measured using the revaluation model is recognised in
other comprehensive income (items that will not be reclassified to profit or
loss) and accumulated in equity under the heading of revaluation surplus.
An exception to this rule is where an increase reverses a revaluation
decrease (an impairment) of the same asset and this was previously
recognised in profit or loss. In this case the increase is recognised in profit or
loss, subject to the LKAS 36 Impairment of assets restrictions, to the extent
that it reverses the previously recognised loss. Thereafter it is recognised in
other comprehensive income. LKAS 36 Impairment of assets restricts the
reversal of an impairment loss recognised in profit or loss by stating that it
must not result in the asset having a carrying amount that exceeds the
carrying amount at that date as if no impairment had taken place.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 97/230
KC1 | Answers to Practice Questions
CA Sri Lanka 83
If an asset's carrying amount is decreased as a result of a downwards
revaluation (impairment), the decrease is recognised in profit or loss. An
exception to this rule arises where the revaluation decrease reverses a
revaluation increase previously recognised as other comprehensive income.
In this case the decrease is recognised in other comprehensive income to theextent of any credit balance existing in the revaluation surplus in respect of
that asset. The decrease recognised in other comprehensive income reduces
the amount accumulated in equity under the heading of revaluation surplus.
These requirements are applied to the buildings of Ambush as follows:
Y/e 30.11.X4 Y/e 30.11.X5
Rs Mn Rs Mn
Cost/valuation 10.0 8.00
Depreciation (Note 1) (0.5) (0.42)
9.5 7.58
Impairment charged to profit or loss (1.5) –
Reversal of impairment charged to profit or
loss (Note 2)
– 1.42
Gain on revaluation to revaluation surplus 2.00
Carrying amount 8.0 11.00
Notes
1 Depreciation charged in the year to 30 November 20X5 is based on the
carrying amount at 30 November 20X4 spread over the remaining lifeof 19 years: Rs 8 Mn 19 = Rs. 421,053 rounded to Rs. 420,000.
2 The gain on revaluation in 20X5 is recognised in profit or loss to the
extent that it reverses the revaluation loss (impairment) charged in
20X4. However, as described above, LKAS 36 Impairment of Assets
restricts the reversal that is recognised in profit or loss to the amount
required to restore the asset’s carrying amount to that which would be
recognised if no impairment loss had occurred. Here the carrying
amount of the buildings at 30 November 20X5 would be Rs. 9 million
(Rs. 9.5 million – Rs. 500,000 depreciation) had no loss arisen in 20X4.
Therefore only Rs. 1.42 million (Rs. 9 million – Rs. 7.58 million) of the
gain in fair value is recognised as a reversal of the previous loss; the
remainder is recognised as a revaluation gain in other comprehensive
income.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 98/230
KC1 | Answers to Practice Questions
84 CA Sri Lanka
5 Engina
(1) Sale of goods to the director
• Mr Satay is a director of Engina. As such he is likely to have authority
and responsibility for planning, directing and controlling the activitiesof Engina. Therefore as a member of Engina’s key management
personnel, Mr Satay is a related party of the company.
• Mr Satay has purchased Rs. 600,000 (12 Rs. 50,000) worth of goods
from the company and a car for Rs. 45,000, which is just over half its
market value.
• The issue is whether this is a related party transaction requiring
disclosure.
• A related party transaction is a transfer of resources, services or
obligations between a reporting entity and a related party, regardless
of whether a price is charged. Therefore the sale of goods and the car
do qualify as related party transactions.
• In this case a price is charged, but we must consider whether the
transaction is material; although LKAS 24 does not address the issue of
materiality, accounting standards do not apply to immaterial
transactions and therefore if the sale of goods and the car are deemed
immaterial, no disclosure is required.
• LKAS 1 states that omissions or misstatements are material if they
could individually or collectively influence the economic decisions that
users make on the basis of the financial statements. Materiality
depends on the size or nature of an item or a combination of both.
• The size of the transactions means that they are not material to the
company, and because Mr Satay has considerable personal wealth, they
are unlikely to be material to him either.
• It is, however, normally the case that a transaction with a director
(other than remuneration) is material by nature, and therefore
disclosure of the transactions is required. Disclosure should include the
amount of the transactions and any outstanding balances.
• In addition, LKAS 24 requires disclosure of compensation paid to
directors. Compensation includes subsidised goods and benefits in
kind.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 99/230
KC1 | Answers to Practice Questions
CA Sri Lanka 85
Hotel property
• As Managing Director, Mr Soy is a member of the key management
personnel of Engina and so qualifies as a related party. It is not,
however, clear whether Mr Soy’s brother is related party or not.
• LKAS 24 states that close family members of key management
personnel are related parties of an entity, and so the answer depends
on whether Mr Soy’s brother qualifies as a close family member.
• LKAS 24 defines close family members as those who may influence or
be influenced by the key personnel in their dealings with the entity. It
says that this includes children and dependants and spouse, but does
not limit the definition to these people.
• Whether an individual is under the influence of his brother depends on
their relationship in individual circumstances. In this case the fact that
Mr Soy’s brother was given a substantial discount on the property
purchase would appear to suggest that he can influence Mr Soy.
• Therefore Mr Soy’s brother is a related party and the hotel property
sold to the Managing Director's brother should be treated as a related
party transaction.
• LKAS 24 requires disclosure of 'information about the transaction and
outstanding balances necessary for an understanding of the potential
effect of the relationship upon the financial statements'.
• The sale of the property was for Rs. 4 million, and it is this amount that
must be disclosed. This would highlight the nature of the transactions
within the existing property market conditions.
• The question of impairment also needs to be considered. The value of
the hotel has become impaired due to the fall in property prices, so the
carrying amount needs to be adjusted in accordance with LKAS 36
Impairment of assets. The hotel should be measured at the lower of
carrying amount (Rs 5 Mn) and the recoverable amount. The
recoverable amount is the higher of fair value less costs of disposal
(Rs 4.3 Mn – Rs 0.2 Mn = Rs 4.1 Mn) and value in use (Rs 3.6 Mn).
Therefore the hotel should be measured at Rs 4.1 Mn.
Group structure
• In addition to his role as Finance Director of Engina, Mr Satay controls
Wheel, which owns 100% of Engina. Therefore Mr Satay has indirect
control of Engina
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 100/230
KC1 | Answers to Practice Questions
86 CA Sri Lanka
• LKAS 24 requires disclosure of an entity’s 'ultimate controlling party'.
Therefore in Engina’s financial statements, Mr Satay is disclosed as the
ultimate controlling party..
• LKAS 24 requires disclosure of the related party relationship between
a parent and its subsidiary. Therefore Engina must disclose that Wheel
is its parent company.
• Engina must also disclose any transactions during the year with related
parties, and any outstanding balances at the period end and provisions
thereon.
• Therefore sales to Wheel Ltd must be disclosed.
• Engina's transactions with Car Ltd must also be disclosed. LKAS 24
states that companies under common control are related parties, and
the two companies are under the common control of Mr Satay.
(2) Dividend payment
• This payment is covered by IFRIC 17 Distribution of non-cash assets to
owners.
• IFRIC 17 applies only where all shareholders of the same class of equity
instruments are treated equally. Exhaust Limited is the sole Class B
shareholder in Wheel Limited and therefore it applies in this case.
• IFRIC 17 does not apply where the asset being transferred is controlled
by the same parties before and after the transfer. In this case Exhaust
does not control Wheel and so there is no common control. However, if
the transfer had been to Mr Satay, it would fall outside the scope of
IFRIC 17 since Mr Satay controls Wheel.
• IFRIC 17 states that the dividend payment should be recorded at the
fair value of the asset transferred, being Rs. 520,000.
• The difference of Rs. 70,000 between the fair value and the carrying
amount of the asset is recognised in profit and loss and disclosed.
6 Masham
(1) Fair value of assets
Farm machinery
The farm machinery is classified as held for sale and therefore it must be
measured at the lower of carrying amount or fair value less costs to sell.
SLFRS 13 requires that the fair value of an asset is established by reference
to exit, or selling, prices. In establishing the fair value of an asset, it is
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 101/230
KC1 | Answers to Practice Questions
CA Sri Lanka 87
assumed that the asset will be sold in its principal market. This is the market
with the greatest volume and level of activity for the asset.
It is made clear that neither India nor Thailand exceeds the other in terms of
sales volume of similar machines. Therefore neither is the principal market.
Therefore fair value is established by reference to the most advantageous
market.
The most advantageous market is that which maximises the amount that
would be received to sell the asset after taking into account transaction costs
and transport costs. The most advantageous market is therefore Thailand:
India
Rs.
Thailand
Rs.
Selling price 244,680 237,800
Transaction costs (4,600) (3,900)Transport costs (29,300) (18,660)
Net receipt 210,780 215,240
SLFRS 13 is clear that transaction costs do not form part of the calculation of
fair value, although they are used in order to establish the most
advantageous market. It is also clear that transport costs are not transaction
costs and therefore they do form part of the calculation of fair value.
The fair value of the machine is therefore equal to the selling price of the
asset less transport costs in the most advantageous market ie Thailand.
Therefore the fair value of the machine is Rs. 219,140 (237,800 – 18,660).
SLFRS 5 requires measurement of an asset held for sale at the lower of
carrying amount and fair value less costs to sell. Although the transaction
costs do not form part of fair value, they are costs to sell and therefore the
machine has a fair value less costs to sell of Rs. 215,240.
This is greater than the carrying amount of Rs. 220,000 and therefore the
machine must be written down to Rs. 215,240 and an impairment loss of Rs.
4,760 must be recognised in profit or loss in the year ended 31 December
20X3.
Land
SLFRS 13 requires that measurement of the fair value of non-financial assets
is based on the highest and best use of the asset. It would initially seem that
the highest and best use of the land is for commercial development as this
results in a higher market value.
We must, however, consider the impact of the neighbour’s right of way and
the restriction on use. The highest and best use takes into account the use of
the asset that is physically possible, legally permissible and financial feasible.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 102/230
KC1 | Answers to Practice Questions
88 CA Sri Lanka
The legal right of way is related to the land and as such the neighbour
continues to have this right even if the land is passed on to a purchaser. The
fair value of the land must therefore take this into account.
If the restriction on the use of the land is specific to Masham and would not
pass to a purchaser, it would be permissible to develop the land for
commercial purposes and therefore its fair value at 31 December 20X3
would be based on this use. If the restriction on the use of land is transferred
with title, the land may not be used for anything other than agricultural
purposes and as such its fair value is lower.
(2) Food processing plants – impairment test
The first step in establishing whether an impairment loss has arisen is to
determine the carrying amount of each CGU.
In order to determine carrying amounts, the shared or ‘corporate’ assets are
allocated to the cash-generating units to which they relate ‘on a reasonable
and consistent basis’. It is therefore not appropriate to allocate the
Rs. 4.5million brand carrying amount to CGU 2 on the basis of its carrying
amount seeming low otherwise. A common way to allocate corporate assets
is based on the carrying amount of the net assets in each department.
In addition, the issue of the goodwill in CGU 1 must be addressed. As there is
a non-controlling interest and it is measured as a proportion of net assets,
the Rs. 5 million carrying amount of goodwill is parent goodwill only.
Goodwill within the recoverable amount will include all goodwill relevant to
the department and therefore the carrying amount of goodwill is notionally
increased for the non-controlling interest.
The revised carrying amount of each department is therefore as follows:
CGU1
Rs'000
CGU 2
Rs'000
CGU 3
Rs'000
PPE 30,000 46,000 16,000
Goodwill 5,000 - -
Net current assets 16,000 24,000 13,000
51,000 70,000 29,000
Brand
Rs 4.5 Mn split
51:70:29
1,530 2,100 870
Notional goodwill
20/80 5,000 1,250 - -
Carrying amount 53,780 72,100 29,870
Having established carrying amount, recoverable amount is determined.
Recoverable amount is the higher of fair value less costs of disposal and
value in use.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 103/230
KC1 | Answers to Practice Questions
CA Sri Lanka 89
In the case of fair value less costs of disposal, LKAS 36 is clear that certain
costs do not constitute costs of disposal. Theses excluded costs comprise
termination benefits, and restructuring and reorganisation expenses.
Therefore the recoverable amount of each unit is as follows:
CGU 1
Rs'000
CGU 2
Rs'000
CGU 3
Rs'000
Fair value – costs of disposal 44,900 79,810 33,050
Value in use 43,950 79,500 33,500
Recoverable amount (higher) 44,900 79,810 33,500
Where carrying amount exceeds recoverable amount, an impairment loss is
recognised in profit or loss. The recoverable amount of CGUs 2 and 3 exceed
their carrying amount and therefore they are not impaired.
The recoverable amount of CGU 1 is less than its carrying amount and
therefore it is impaired. The impairment loss is Rs 53.78 Mn – Rs 44.9 Mn =
Rs. 8.88 million.
LKAS 36 requires that the impairment loss is allocated firstly to goodwill,
meaning that Rs 6.25 Mn is allocated to actual and notional goodwill. The
remaining Rs 2.63 Mn is allocated on a pro rata basis to the other assets of
the CGU that are within the scope of the standard. Note that the standard
scopes out current assets such as inventories and receivables.
Therefore the impairment loss is allocated as follows:
Pre
impairment
Rs'000
Impairment
Rs'000
Post
impairment
Rs'000
PPE (2.63 30/31.53) 30,000 (2,502) 27,498
Goodwill – actual 5,000 (5,000) 0
Goodwill – notional 1,250 (1,250) 0
Brand (2.63 1.53/31.53) 1,530 (128) 1,402
Net current assets 16,000 0 16,000
53,780 (8,880) 44,900
Amounts reported in Masham’s financial statements for the year ended 31December 20X3 are therefore as follows:
Statement of financial position
Rs'000
Property, plant and equipment
(27,498 + 46,000 + 16,000)
89,498
Brand (1,402+ 2,100 + 870) 4,372
Net current assets (16,000 + 24,000 + 13,000) 53,000
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 104/230
KC1 | Answers to Practice Questions
90 CA Sri Lanka
Statement of profit or loss
Rs'000
Impairment loss (8,880 – 1,250 re notional goodwill) 7,630
(3) Biological assets
A biological asset is defined as a living plant or animal and therefore both tea
bushes and dairy cattle are classified as biological assets.
It is however relevant that, with effect from 1 January 2016, LKAS 41 is
amended to identify certain types of biological asset as bearer plants. These
are living plants that:
• Are used in the production or supply of agricultural produce
• Are expected to bear produce for more than one period, and
• Have a remote likelihood of being sold as agricultural produce otherthan incidental scrap sales.
Therefore tea bushes are bearer plant biological assets; dairy cattle are not.
This distinction is important, because from 1 January 2016, bearer plants are
scoped out of LKAS 41 and will instead be accounted for as property, plant
and equipment within the scope of LKAS 16.
As regards the dairy cattle (and the tea bushes for the time being, unless
Masham chooses to adopt the LKAS 41 amendment early), LKAS 41 requires
that they are measured at fair value less costs to sell at initial recognition
and at each reporting date.
Changes in fair value are recognised as part of profit or loss for the year; they
are not recognised directly in equity.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 105/230
KC1 | Answers to Practice Questions
CA Sri Lanka 91
PART B: PREPARATION AND PRESENTATION OF CONSOLIDATED FINANCIAL
STATEMENTS
Questions 7 to 11 cover the Preparation and Presentation of Consolidated
Financial Statements.
7 Glove
GLOVE GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MAY 20X7
Rs Mn
Non-current assets
Property, plant and equipment 320.0
Goodwill 10.1
Other intangibles: trade name 4.0
Investments in equity instruments 10.0
Current assets: 344.1
114.0
Total assets 458.1
Equity and liabilities Equity attributable to owners of parent
Ordinary shares 150.0
Other reserves 30.7 Retained earnings 150.9
Equity reserve 1.6
333.2
Non-controlling interests 28.9
362.1
Non-current liabilities 49.0
Current liabilities: 47.0
96.0
Total equity and liabilities 458.1
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 106/230
KC1 | Answers to Practice Questions
92 CA Sri Lanka
Workings
GLOVE GROUP – CONSOLIDATION SCHEDULE AS AT 31 MAY 20X7
Glove Body Fit Total (W2(i)) (W2(ii)) (W3(i)) (W3 (ii)) (W4) (W5) (W6) (W7) Consolidated
Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn
PPE 260 20 26 306 6 5 2 319
Goodwill 8 2.16 10.16Intangibles 5 (1) 4
Inv in B 60 60 (60) –
Inv in F 30 30 (24) (6) –
Inv in eq ins 10 10 10
C assets 65 29 20 114 114
395 79 46 520 457.16
St capital 150 40 20 210 (40) (20) 150
Other res 30 5 8 43 (4) (8) (0.2) (0.1) 30.7
Equity
reserve
1.6 1.6
Ret’d
earnings
135 25 10 170 (10) (6) (4.76) (0.8) (0.5) 2 149.94
315 70 38 423 332.24NCI 13 17.16 4.96 (6) (0.2) 28.92
361.16
Non-current
liabilities
45 2 3 50 0.1 (1.1) 49
Current
liabilities
35 7 5 47 47
80 9 8 97 96
395 79 46 520 457.16
1 Group structure
Glove
1 June 20X5 80% Retained earnings Rs 10 Mn Other reserves Rs 4 Mn
Body 1 June 20X5 70% Retained earnings Rs 6 Mn
Other reserves Rs 8 Mn
Fit %
Effective interest: 80% × 70% 56
... Non-controlling interest 44
100
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 107/230
KC1 | Answers to Practice Questions
CA Sri Lanka 93
2 Goodwill
Glove in Body Body in Fit
Rs Mn Rs Mn Rs Mn Rs Mn Consideration
transferred 60 (30 × 80%) 24.00 Non-controlling interests (65 × 20%) 13 (39 × 44%) 17.16 Fair value of net
assets at acq'n:
Stated capital 40 20
Retained earnings 10 6
Other reserves 4 8
Fair value uplift – land 6 5
Trade name (W6) 5 –
(65) (39.00)
8 2.16
10.16
Note: The trade name is an internally generated intangible asset. While these are
not normally recognised under LKAS 38 Intangible assets, SLFRS 3 Business
combinations allows recognition if the fair value can be measured reliably.
Therefore an intangible asset is recognised on acquisition of Body (at 1 June
20X5). This will reduce the value of goodwill.
(i) The standing journal to recognise goodwill in Body is therefore (Rs Mn):
DEBIT Goodwill 8DEBIT Stated capital 40
DEBIT Retained earnings 10
DEBIT Other reserves 4
DEBIT PPE 6
DEBIT Intangible assets 5
CREDIT Investment in B 60
CREDIT NCI 13
To recognise the acquisition of Body.
(ii) The standing journal to recognise goodwill in Fit is therefore (Rs Mn):
DEBIT Goodwill 2.16
DEBIT Stated capital 20
DEBIT Retained earnings 6
DEBIT Other reserves 8
DEBIT PPE 5
CREDIT Investment in F 24
CREDIT NCI 17.16
To recognise the acquisition of Fit.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 108/230
KC1 | Answers to Practice Questions
94 CA Sri Lanka
3 Allocation of post-acquisition profits and reserves to the NCI
Body Fit
Retained
earnings
Other
reserves
Retained
earnings
Other
reserves
Rs Mn Rs Mn Rs Mn Rs Mn At reporting date 25 5 10 8
At acquisition (10) (4) (6) (8)
Post-acquisition 15 1 4 -
NCI % (20% / 44%) 3 0.2 1.76
(i) These amounts are allocated to the NCI by (Rs Mn):
DEBIT Retained earnings ( 3 + 1.76) 4.76
DEBIT Other reserves 0.20
CREDIT NCI 4.96To allocate the NCI its share of retained earnings and reserves since
acquisition.
(ii) The carrying amount of the NCI is adjusted for its share of Body’s
investment in Fit (Rs Mn):
DEBIT NCI (30 × 20%) 6
CREDIT Investment in F 6
To eliminate the NCI in Body’s share of the cost of the investment in Fit.
4 Amortisation of intangible assets
The intangible assets recognised at acquisition are amortised over 10 years
therefore at the reporting date cumulative amortisation is Rs 5 Mn 2/10
years = Rs. 1 million.
The amortisation expense is allocated between the group and NCI interests
in Body. Therefore (Rs Mn)
DEBIT Retained earnings (80%) 0.8
DEBIT NCI (20%) 0.2
CREDIT Intangibles 1
To recognise amortisation of the intangible asset.
5 Defined benefit pension scheme
The amount to be recognised is as follows
Rs Mn
Loss on remeasurement through OCI on defined benefit obligation
(1.0)
Gain on remeasurement through OCI on plan assets 0.9
(0.1)
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 109/230
KC1 | Answers to Practice Questions
CA Sri Lanka 95
Therefore (Rs Mn):
DEBIT Other reserves Rs 0.1 Mn
CREDIT Net defined benefit liability Rs 0.1 Mn
To account for the remeasurement of the net defined benefit liability
6 Convertible loan stock
Under LKAS 32, the loan stock must be split into a liability and an equity
component:
Rs Mn Rs Mn
Proceeds: 30,000 × Rs. 1,000 30
Present value of principal in three years' time
Rs 30 Mn × 3
1
1.08
23.815
Present value of interest annuity Rs 30 Mn × 6% = Rs. 1,800,000
11.08
1.667
2
1
1.08
1.543
3
1
1.08
1.429
Liability component (28.454)
∴ Equity component 1.546
Rounded to Rs 1.5 Mn
Balance of liability at 31 May 20X7
Rs'000
Balance b/f at 1 June 20X6 28,454
Effective interest at 8% 2,276
Coupon interest paid at 6% (1,800) Balance c/f at 31 May 20X7 28,930
The accounting entries that have been made in respect of the loan stock are
(Rs Mn):
DEBIT Cash 30
CREDIT Non-current liability 30
And
DEBIT Finance cost (retained earnings) 1.8
CREDIT Cash 1.8
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 110/230
KC1 | Answers to Practice Questions
96 CA Sri Lanka
The accounting entries should have been (Rs Mn):
DEBIT Cash 30
CREDIT Non-current liability 28.4
CREDIT Equity reserve 1.6
AndDEBIT Finance cost 2.3
CREDIT Cash 1.8
CREDIT Non-current liability 0.5
Therefore a correction journal is (Rs Mn):
DEBIT Finance cost (retained
earnings)
0.5
DEBIT Non-current liability 1.6
CREDIT Non-current liability 0.5
CREDIT Equity reserve 1.67 Exchange of assets
The plant should be measured at initial recognition at its fair value, rather
than the carrying amount of the asset given up. An adjustment must be made
to the value of the plant, and to retained earnings.
Rs.
Fair value of plant 6 Carrying amount of land (4)
∴ Adjustment required (Rs Mn) 2
DEBIT PPE 2
CREDIT Retained earnings 2
8 Angel
ANGEL GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31.12.X8
Rs'000 Non-current assets Property, plant and equipment 200.00
Investment in Shane 133.15
333.15
Current assets 1,010.00
1,343.15
Equity attributable to owners of the parent Stated capital 500.00
Retained reserves 533.15
1,033.15
Current liabilities 310.00
1,343.15
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 111/230
KC1 | Answers to Practice Questions
CA Sri Lanka 97
ANGEL GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31.12.X8
Rs'000
Profit before interest and tax 110.00 Profit on disposal of shares in subsidiary 80.30
Share of profit of associate 2.10
Profit before tax 192.40
Income tax expense (44.00)
Profit for the year 148.40
Other comprehensive income (not reclassified to P/L) net of tax 13.00
Share of other comprehensive income of associate 1.05
Other comprehensive income for the year 14.05
Total comprehensive income for the year 162.45
Profit attributable to: Owners of the parent 146.60
Non-controlling interests 1.80
148.40
Total comprehensive income attributable to: Owners of the parents 159.75
Non-controlling interests 2.70
162.45
ANGEL GROUP
CONSOLIDATED RECONCILIATION OF MOVEMENT IN RETAINED RESERVES
Rs'000
Balance at 31 December 20X7 (W7) 373.40
Total comprehensive income for the year 159.75
Balance at 31 December 20X8 533.15
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 112/230
KC1 | Answers to Practice Questions
98 CA Sri Lanka
Workings
Consolidation schedule for Angel – statement of financial position at
31 December 20X8
Angel (W2) (W3(i)) (W6) ConsolidatedRs'000 Rs'000 Rs'000 Rs'000 Rs'000
PPE 200 200
Investment
in Shane/Ass
120 (60) 70 3.15 133.15
320 333.15
Current
assets
890 120 1,010
1,210 1,343.15
Stated capital 500 500
Retained
reserves
400 60 70 3.15 533.15
900 1,033.15
Current
liabilities
310 310
1,210 1,343.15
Consolidation schedule for Angel – statement of profit or loss and other
comprehensive income for the year ended 31 December 20X8
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 113/230
KC1 | Answers to Practice Questions
CA Sri Lanka 99
Angel Shane
(6/12)
Total (W2) (W3
(ii))
(W6) Consolidated
Rs'000 Rs'000 Rs'000 Rs'000 Rs'000 Rs'000 Rs'000
PBIT 100 10 110 110
Profit on
disposal
60 20.3 80.3
Share of
profit of
Shane
2.1 2.1
Tax (40) (4) (44) (44) Profit for
year
60 6 66 148.4
OCI net of
tax
10 3 13 13
Share ofOCI of
associate
1.05 1.05
TCI 70 9 79 162.45
Profit
attributable
to:
Owners of
Angel
60 4.2 64.2 60 20.3 2.1 146.6
NCI 1.8 1.8 1.8TCI
attributable
to:
Owners of
Angel
70 6.3 76.3 60 20.3 3.15 159.75
NCI 2.7 2.7 2.7
1 Timeline
1.1.X8 31.12.X8
Subsidiary – 6/12
Group gain
on disposal
Equity
account in
SOFP
30.6.X8
SOCIAssociate – 6/12
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 114/230
KC1 | Answers to Practice Questions
100 CA Sri Lanka
2 Parent gain on disposal
The disposal has not been recognised in Angel’s accounts. This is achieved by
(RS'000):
DEBIT Cash 120
CREDIT Investment (120/2) 60CREDIT Gain on disposal 60
To recognise the disposal in Angel’s accounts.
Note that the gain on disposal is accumulated in retained earnings in the
statement of financial position.
3 Group gain on disposal
The group gain on disposal is calculated as follows:
Rs'000
Rs'000 Fair value of consideration received 120.0
Fair value of 35% investment retained 130.0
Less share of carrying amount when control lost Net assets 190 – (18 × 6/12) 181.0
Goodwill (W4) 61.4
Less non-controlling interests (W5) (72.7)
(169.7)
80.3
This incorporates two elements:
(i) A gain of Rs. 70,000 on the revaluation of the retained holding from
cost of Rs. 60,000 to fair value of Rs. 130,000
(ii) A gain of Rs. 10.300 on the disposal.
The parent and group gains on the disposal of the 35% holding are
reconciled as follows:
Rs'000 Rs'000
Group gain on disposal 10.3
Group share of S’s profits from acquisition to disposal date
Disposal date (90 – (18 6/12)) 81
Acquisition date (10)
70% 49.7
Parent gain on disposal 60
Therefore by recognising the parent’s gain (see working 2), we have already
recognised the group gain on disposal together with 70% of the profits made
by Shane for the period that it was a subsidiary of Angel.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 115/230
KC1 | Answers to Practice Questions
CA Sri Lanka 101
(i) Adjustment must, however, be made for the Rs70,000 gain on the
revaluation of the retained 35% (Rs’000):
DEBIT Investment in associate 70
CREDIT Retained earnings 70
To recognise the fair value uplift to the retained holding.
(ii) In addition for reporting purposes, the group gain on disposal rather
than the parent gain must be reported in the consolidated statement of
profit or loss (Rs’000):
DEBIT Retained earnings (80.3-60) 20.3
CREDIT Profit on disposal (SPLOCI) 20.3
To ensure that the group gain is reported in profit or loss.
Note that this journal cancels out within retained earnings; the journal
is to achieve the correct presentation only.
4 Goodwill – Shane
Rs'000 Rs'000
Consideration transferred 120.0
Non-controlling interests (FV) 51.4
Less: Stated capital 100
Retained reserves 10
(110.0) 61.4
5 Non-controlling interests at date of disposal
Rs'000 Rs'000
Non-controlling interest at acquisition (FV) 51.4
NCI share of post-acqn retained earnings (30% 71(W4)) 21.3
72.7
6 Investment in associate
The group share of the profits in the associate since 30 June 20X8 are 35% of
(6/12m Rs. 12,000) ie Rs. 2,100. The group share of OCI is 35% 6/12m
Rs. 6,000 = Rs. 1,050. These are recognised by (Rs’000):
DEBIT Investment in associate 4.20
CREDIT Share of profits of associate 3.15
CREDIT Share of OCI of associate 1.05
To recognise group share of the associate’s profits since the disposal date.
The credit entries accumulate in retained reserves in the statement of
financial position.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 116/230
KC1 | Answers to Practice Questions
102 CA Sri Lanka
7 Retained reserves b/f - proof
Angel Shane Rs'000 Rs'000
Per Q 330.0 72
Less: Pre-acquisition retained reserves (10) 330.0 62
Shane – Share of post-acq. ret'd reserves (62 70%) 43.4
373.4
9 Ejoy
EJOY: CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MAY 20X6
Rs Mn Continuing operations Revenue 4,000
Cost of sales (3,034.4)
Gross profit 965.6
Other income 77 Distribution costs (250)
Administrative expenses (190)
Finance income 5.8
Finance costs (133.9)Profit before tax 474.5
Income tax expense (226)
Profit for period from continuing operations 248.5
Discontinued operations Profit for the year from discontinued operations 13
Profit for the year 261.5
Other comprehensive income for the year (not reclassified to P/L):
Gain on property revaluation net of tax: 94
Total comprehensive income for the year 355.5
Profit attributable to: Owners of the parent 256.9
Non-controlling interest 4.6
261.5
Total comprehensive income for the year attributable to: Owners of the parent 347.3
Non-controlling interest 8.2
355.5
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 117/230
KC1 | Answers to Practice Questions
CA Sri Lanka 103
Workings
Consolidation schedule for Ejoy – statement of profit or loss and other
comprehensive income for the year ended 31 May 20X6
Ejoy Zbay Tbay
(6m)
Total (W2) (W3) (W4) (W5(i)) (W5(ii)) (W6(i)) (W6(ii)) (W6(iii)) (W6(iv)) (W7) Consolidated
Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn
Revenue 2,500 1,500 400 4,400 (400) 4,000
COS (1,800) (1,200) (300) (3,300) 300 (34.4) (3,034.4)
Gross profit 700 300 100 1,100 965.6
Other income
70 10 - 80 (3) 77
Distribution costs
(130) (120) (35) (285) 35 (250)
Admin expenses
(100) (90) (30) (220) 30 (190)
Finance income
1.1 2.5 1.7 0.5 5.8
Finance costs
(50) (40) (10) (100) 10 (42.2) (1.7) (133.9)
PBT 490 60 25 575 474.5
Tax (200) (26) (10) (236) 10 (226) Profit – continuing
operations
290 34 15 339 248.5
Profit – discontinued
operations
15 (2) 13
Profit for yr 290 34 15 339 261.5
OCI net of tax
80 10 4 94 94
TCI 370 44 19 433 355.5
Profit to: Owners of ejoy
(80%/60%)
290 27.2 9 326.2 (2) (3) (33.8) 0.9 2.5 (1.7) 1.7 0.5 (34.4) 256.9
NCI (20%/40%) 6.8 6 12.8 (8.4) 0.2 4.6
TIC to: Owners of Ejoy
(80%/60%)
370 35.2 11.4 416.6 (2) (3) (33.8) 0.9 2.5 (1.7) 1.7 0.5 (34.4) 347.3
NCI (20%/40%)
8.8 7.6 16.4 (8.4) 0.2 8.2
1 Group structure
Ejoy
160200 = 80% 72120 = 60% (owned for six months)
Zbay Tbay
Tbay is a discontinued operation (SLFRS 5).
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 118/230
KC1 | Answers to Practice Questions
104 CA Sri Lanka
Timeline
1.6.X5 1.12.X5 31.5.X6
Ejoy
Zbay
Tbay
2 Tbay
Tbay has been classified as a discontinued operation and therefore its profits
must be presented as a single line item in the statement of profit or loss
(Rs Mn):
DEBIT Revenue 400
CREDIT Cost of sales 300
CREDIT Distribution costs 35
CREDIT Administrative expenses 30
CREDIT Finance costs 10
CREDIT Tax 10
CREDIT Profit from discontinued
operations
15
To reclassify items of Tbay’s income and expenses as profits of discontinued
operations.
3 Re-measurement of Tbay
As Tbay is a disposal group, it is measured in accordance with SLFRS 5 at the
lower of fair value less costs to sell and carrying amount.
When comparing these amounts, care must be taken to ensure that like is
being compared with like; we are given the fair value of the whole of Tbay
and therefore must ensure that costs to sell and carrying amount (including
goodwill) also represent 100% of Tbay.
Fair value less costs to sell
Rs Mn
Fair value 344
Costs to sell 100/60% x 5 (8.3)
335.7
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 119/230
KC1 | Answers to Practice Questions
CA Sri Lanka 105
Carrying amount
Rs Mn
Fair value of net assets at acquisition (1 December 20X5) 310
Post-acquisition TCI (38 6/12) 19
Notional (unrecognised) NCI goodwill 100/60% x 6 (W4) 10 339
Working: Goodwill in Tbay
Rs Mn
Consideration transferred 192
NCI (310m 40%) 124
Fair value of net assets at acquisition (310)
6
Therefore an impairment loss of Rs 339 Mn – Rs 335.7 Mn = Rs 3.3 Mnarises. This is allocated against goodwill. As 60% of total goodwill is
recognised in the consolidated financial statements, 60% of the impairment
loss is recognised (Rs Mn):
DEBIT Profits of discontinued
operations (60% Rs 3.3 Mn)
2
CREDIT Assets of disposal group
(SOFP)
2
To recognise the impairment loss in Tbay.
The loss is allocated to the owners of the parent company.
4 Investment in joint venture
A gain of Rs. 6million has been recognised on a disposal to a joint venture.
LKAS 28 requires that only that part of the gain that is attributable to other
investors is recognised. Therefore 50% of the gain (Rs 3 Mn) is eliminated
against the cost of investment in the joint venture (Rs Mn):
DEBIT Other income 3
CREDIT Investment in joint venture 3
To eliminate the gain attributable to Ejoy against the investment in the joint
venture.
The adjustment is attributable to the owners of the parent company.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 120/230
KC1 | Answers to Practice Questions
106 CA Sri Lanka
5 Loan asset
The loan asset was impaired at the start of the year.
Rs Mn
Carrying amount of loan at 1.6.X5 (a financial asset) 60.0
Impairment loss (balancing figure) (42.2) Present value of expected future cash flows 17.8 (20 1/1.062 ) 1.6.X5
(i) The loss is recognised by:
DEBIT Finance costs 42.2
CREDIT Loan asset 42.2
To recognise the impairment of the loan asset in Zbay.
The loan is held by Zbay and therefore the impairment loss is allocated
between the owners of Ejoy and the NCI in Zbay in proportion to their
ownership interests.
(ii) Interest income is recognised on the loan asset, calculated based on the
impaired amount:
Interest income (6% 17.8) 1.1
This is recognised by:
DEBIT Loan asset 1.1
CREDIT Finance income 1.1
To recognise income on the loan asset.
The loan is held by Zbay and therefore the income is allocated between
the owners of Ejoy and the NCI in Zbay in proportion to their
ownership interests.
6 Hedged bond
The carrying amount of the hedged bond at the period end is calculated as:
Rs Mn
1.6.X5 50.0 Interest income (5% × 50) 2.5
Interest received (2.5)
Fair value loss (balancing figure) (1.7)
Fair value at 31.5.X6 (per question) 48.3
(i) The interest income is recognised by (Rs Mn):
DEBIT Bond /cash 2.5
CREDIT Finance income 2.5
To recognise income on the bond.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 121/230
KC1 | Answers to Practice Questions
CA Sri Lanka 107
(ii) The fair value loss is recognised by (Rs Mn):
DEBIT Finance costs 1.7
CREDIT Bond 1.7
To recognise the remeasurement of the bond to fair value.
(iii) Since the interest rate swap is 100% effective as a fair value hedge, it
exactly offsets the loss in value of Rs. 1.7 million on the bond. Therefore
finance income of this amount is recognised by (Rs Mn):
DEBIT Swap financial asset 1.7
CREDIT Finance income 1.7
To recognise the swap at fair value at the reporting date.
(iv) The net settlement of interest is recognised by:
DEBIT Cash 0.5
CREDIT Finance income 0.5
To recognise settlement of interest.
All amounts recognised in profit or loss in respect of the bond are
allocated to owners of the parent, since the bond is held by Ejoy.
7 Impairment of Zbay
Zbay is tested for impairment by comparing the carrying amount of the
investment in the consolidated financial statements with its recoverable
amount of Rs. 630m.
Carrying amount
Rs Mn Fair value of net assets at acquisition (1 June 20X4) 600
Post-acquisition TCI(20 + 44) 64
Impairment of loan asset (W5) (42.2)
Interest income on loan asset 1.1
Notional (unrecognised) NCI goodwill 100/80% x 40 (W8) 50
672.9 Therefore an impairment loss of Rs 672.9 Mn – Rs 630 Mn = Rs 42.9 Mn
arises. This is allocated against goodwill. As 80% of total goodwill is
recognised in the consolidated financial statements, 80% of the impairment
loss is recognised (Rs Mn):
DEBIT Cost of sales (80% × Rs 42.9 Mn) 34.4
CREDIT Goodwill 34.4
To recognise the impairment loss in Zbay
The loss is allocated to the owners of the parent company.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 122/230
KC1 | Answers to Practice Questions
108 CA Sri Lanka
8 Goodwill in Zbay
Rs Mn
Consideration transferred 520
NCI (310m 40%) 120
Fair value of net assets at acquisition (600) 40
10 Memo
MEMO
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 30 APRIL 20X4
Rs Mn
Assets Property, plant and equipment: 366.5
Goodwill 8
Current assets 403
777.5
Equity and liabilities Equity attributable to owners of the parent: Stated capital 110
Foreign exchange reserve 11.2
Retained earnings 362
483.2
Non-controlling interest 18
501.2
Non-current liabilities 43.6
Current liabilities: 232.7
777.5
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 123/230
KC1 | Answers to Practice Questions
CA Sri Lanka 109
MEMO
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 30 APRIL 20X4
Rs Mn
Revenue 250.8 Cost of sales (153)
Gross profit 97.8 Distribution costs and administrative expenses (38)
Impairment of goodwill (2)
Interest receivable 4
Finance costs (0.8)
Exchange gains 1.5
Profit before tax 62.5
Income tax expense (23.6)Profit for the year 38.9
Other comprehensive income (items that may subsequently be
reclassified to profit or loss) Exchange differences on foreign operations 13.1
Total comprehensive income for the year 52.0
Profit attributable to Owners of the parent 37.0
Non-controlling interest (25% 7.9) (W4) 1.9
38.9 Total comprehensive income for the year attributable to
Owners of the parent 47.2
Non-controlling interest (7.9 + 9.7) 25% 4.8
52.0
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 124/230
KC1 | Answers to Practice Questions
110 CA Sri Lanka
Workings
Consolidation schedule – consolidated statement of financial position at 30 April 20X4
Memo Random
(W2)
Total (W6(i)) (W6(ii)) (W6(iii)) (W7) (W8(ii)) (W8(iii)) Consolidated
Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn PPE 297 69.5 366.5 366.5
Goodwill 8.4 1.6 (2) 8
Inv in R 48 48 (48) –
Loan to R 5 5 (5)
C assets 355 48.6 403.6 (0.6) 403
705 118.1 823.1 777.5
St capital 110 20.8 130.8 (20.8) 110
FX reserve
11.5 11.5 1.6 (1.9) 11.2
Ret’d earnings
360 39.5 399.5 (32) (2) (2.9) (0.6) 362
470 71.8 541.8 483.2 NCI 13.2 4.8 18
501.2
Non current
liabilities
30 18.6 48.6 (5) 43.6
Current liabilities
205 27.7 232.7 232.7
235 46.3 281.3 276.3
705 118.1 823.1 777.5
Consolidation schedule – consolidated statement of profit or loss and other
comprehensive income for the year ended 30 April 20X4Memo Random Total (W6(ii)) (W6(iii)) (W8(i)) W8(ii)) Consolidated
Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Revenue 200 56.8 256.8 (6) 250.8
Cost of sales (120) (38.4) (158.4) 6 (0.6) (153)
Gross profit 80 18.4 98.4 97.8
Expenses (30) (8) (38) (38)
Impairment of
goodwill
(2) (2)
Interest receivable
4 4 4
Interest payable – (0.8) (0.8) (0.8)
Exchange gains
____
1.5
1.5
1.5
PBT 54 11.1 65.1 62.5
Tax (20) (3.6) (23.6) (23.6)
Profit for the year
34 7.5 41.5 38.9
OCI 11.5 11.5 1.6 13.1
TCI 34 19 53 52
Profit attributable to:
Owners of M 34 5.6 39.6 (2) (0.6) 37
NCI 1.9 1.9 1.9
TCI attributable to:
Owners of M 34 14.2 48.2 1.6 (2) (0.6) 47.2
NCI 4.8 4.8 4.8
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 125/230
KC1 | Answers to Practice Questions
CA Sri Lanka 111
1 Group structure
Memo
1 May 20X3 75%
Random
2 Exchange differences arising in Random’s separate financial statements
(i) Memo loaned Random Rs. 5 million at the start of the year and Random
recorded this at Rs 5 Mn 2.5 = CR 12.5 million.
In Random’s accounts, at the year-end, the loan is retranslated using
the closing rate to Rs 5 Mn 2.1 = CR 10.5 million.
The gain is recognised by (CR Mn):
DEBIT Loan account 2CREDIT Exchange difference (profit or loss) 2
To recognise the gain on retranslation of the loan.
(ii) Memo sold Random goods from Rs 6 Mn during the year and Random
recorded the purchase and current liability at Rs 6 Mn 2.5 =
CR 15 Mn.
DEBIT Purchases 15
CREDIT Current liabilities 15
To recognise the purchase of goods at the spot rate.
Random paid the outstanding balance when the exchange rate was
2.2:1 and recorded the transaction by:
DEBIT Current liabilities (6 2.2) 13.2
CREDIT Cash 13.2
To recognise the payment of the balance outstanding at the spot rate
on settlement date.
Therefore a credit balance of CR 1.8m (15m – 13.2m) remains incurrent liabilities. This must be transferred to be recognised as an
exchange gain by:
DEBIT Current liabilities 1.8
CREDIT Exchange gain 1.8
To recognise the exchange gain on settlement.
The total exchange gain is therefore CR 3.8m
Cost = 120m crowns
PAR = 80m crowns
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 126/230
KC1 | Answers to Practice Questions
112 CA Sri Lanka
3 Translation of statement of profit or loss and other comprehensive income
CR Mn Rate Rs Mn
Revenue 142 2.5 56.8
Cost of sales (96) 2.5 (38.4)
Gross profit 46 18.4 Distribution and administrative
expenses
(20) 2.5 (8)
Interest payable (2) 2.5 (0.8)
Exchange gain (W2) 3.8 2.5 1.5
Profit before tax 27.8 11.1
Income tax expense (9) 2.5 (3.6)
Profit/total comprehensive income
for the year
18.8 7.5
OCI (W5) 11.5 Total comprehensive income for
the year
19.0
4 Translation of statement of financial position
CR Mn Rate Rs Mn Property, plant and equipment 146.0 2.1 69.5
Current assets 102.0 2.1 48.6
248.0 118.1
Stated capital 52.0 2.5 20.8
Retained earnings: Pre-acquisition 80.0 2.5 32.0
Post-acquisition: 15 + 3.8 (W2) 18.8 2.5 7.5
FX reserve (W5) 11.5
71.8
Non-current liabilities (41 – 2
(W2(i)))
39.0 2.1 18.6
Current liabilities (60 - 1.8
(W2(ii)))
58.2 2.1 27.7
248.0 118.1
5 Exchange difference on translation of financial statements
Rs Mn Rs Mn
Opening net assets at opening rate (52+80)/2.5 52.8 Opening net assets at closing rate (52+80)/2.1 62.9 Gain 10.1 Retained profit at average rate (18.8/2.5) 7.5
Retained profit at closing rate (18.8/2.1) 8.9
Gain 1.4
Gain on translation 11.5
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 127/230
KC1 | Answers to Practice Questions
CA Sri Lanka 113
In accordance with LKAS 21 the gain on translation of the financial
statements is recognised as other comprehensive income of the subsidiary
and accumulated in a separate foreign exchange reserve of the subsidiary.
6 Goodwill
CR Mn Rate Rs Mn Consideration transferred 120.0 2.5 48
Non-controlling interests (132 25%) 33.0 2.5 13.2
Less fair value of net assets at acq'n: Share capital 52 2.5 (20.8)
Retained earnings 80 2.5 (32)
21.0 8.4
Impairment losses (4.2) 2.1 (2.0)
FX gain – 1.6 At 30.4.X4 16.8 2.1 8.0
(i) Goodwill is recognised on the acquisition of Random by (Rs Mn):
DEBIT Goodwill 8.4
DEBIT Share capital 20.8
DEBIT Retained earnings 32
CREDIT Investment in Random 48
CREDIT NCI 13.2
To recognise goodwill on the acquisition of Random.
(ii) The goodwill is retranslated to Rs 10 Mn using the closing rate at the
period end (CR 21 Mn/2.1). The gain is recognised as other
comprehensive income (Rs Mn):
DEBIT Goodwill 1.6
CREDIT Other comprehensive income 1.6
To retranslate goodwill to the closing rate.
Goodwill is attributable to the parent company only as the NCI is
measured as a proportion of net assets; therefore the gain is
attributable to the owners of the parent company and accumulated in
the foreign exchange reserve.
(iii) The impairment loss of CR 4.2 Mn is recognised at the period end by
(Rs Mn):
DEBIT Impairment loss (4.2m/2.1) 2
CREDIT Goodwill 2
To recognise the impairment loss in goodwill.
The loss is again attributable to the owners of the parent company
only, and accumulated in retained earnings.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 128/230
KC1 | Answers to Practice Questions
114 CA Sri Lanka
7 Allocate profits and OCI since acquisition to the NCI
25% of the Rs 7.5 Mn profits (W4) since acquisition as reported by Random
are allocated to the NCI. In addition 25% of the Rs 11.5 Mn other
comprehensive income is allocated.
By (Rs Mn):
DEBIT Retained earnings (7.5m × 25%) 1.9
DEBIT FX reserve (11.5m × 25%) 2.9
CREDIT NCI 4.8
To allocate a share of profits and OCI since acquisition to the NCI.
8 Intragroup transactions
(i) During the year Memo sold goods to Random for Rs. 6m. These were
translated at the spot rate and recognised at CR 15 Mn by Random. At theperiod end expenses are translated to the presentation currency using the
average rate for the year and these purchases translate to CR15 Mn/2.5 =
Rs 6 Mn. Therefore the sales and purchases are eliminated by (Rs Mn):
DEBIT Revenue 6
CREDIT Cost of sales 6
To eliminate intragroup sales.
(ii) As some of the items remain in stock at the period end, an unrealised
profit arises of Rs 6 Mn 20% ½ = Rs. 0.6 million. This is eliminated
by (Rs Mn):
DEBIT Cost of sales 0.6
CREDIT Current assets 0.6
To eliminate the unrealised profit.
The selling company was the parent and therefore the additional
expense in profit or loss is allocated to the owners of the parent and
accumulated in retained earnings.
(iii) The intragroup loan must be eliminated. Memo has recognised a loan
asset of Rs 5 Mn and Random, on receiving the loan, recorded it at
Rs 5 Mn × 2.5 = CR 12.5 Mn. At the period end this is retranslated in
Random’s accounts using the closing rate to Rs 5 × 2.1 = CR 10.5 Mn
(W2). Then on translation of Random’s accounts to the presentation
currency, the loan is translated to CR 10.5 Mn/2.1 = Rs 5 Mn
Therefore to eliminate the loan (Rs Mn):
DEBIT Non-current liabilities 5CREDIT Loan asset 5
To eliminate the intragroup loan.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 129/230
KC1 | Answers to Practice Questions
CA Sri Lanka 115
11 Swing
Rs'000 Rs'000 Cash flows from operating activities Profit before tax
16,500
Adjustments for: Depreciation 5,800
Impairment losses (W1) 240
22,540
Increase in trade receivables (W4) (1,700)
Increase in inventories (W4) (4,400)
Increase in trade payables (W4) 1,200
Cash generated from operations 17,640
Income taxes paid (W3)
(4,200) Net cash from operating activities 13,440
Cash flows from investing activities Acquisition of subsidiary net of cash acquired (600)
Purchase of property, plant and equipment (W1) (13,100)
Net cash used in investing activities (13,700)
Cash flows from financing activities Proceeds from issue of share capital (W2) 2,100 Dividends paid (W2) (900)
Dividends paid to non-controlling interest (W2) (40)
Net cash from financing activities 1,160
Net increase in cash and cash equivalents 900
Cash and cash equivalents at the beginning of the period 1,500
Cash and cash equivalents at the end of the period 2,400
Workings
1 Assets
Property,
plant and
equipment GoodwillRs'000 Rs'000
b/f 25,000 –
OCI (revaluation) 500
Depreciation/ Impairment – balancing figure (5,800) (240)
Acquisition of sub/assoc 2,700 1,640 (W5)
Cash paid/(rec'd) – balancing figure 13,100 –
c/f 35,500 1,400
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 130/230
KC1 | Answers to Practice Questions
116 CA Sri Lanka
2 Equity
Share
capital
Retained
earnings
Non-
controlling
interest
Rs'000
Rs'000
Rs'000 b/f 12,000 21,900 –
SPLOCI 11,100 350
Acquisition of subsidiary 4,000 1,440 (W5)
Cash (paid)/rec'd – balancing
figure
2,100 (900)* (40)
c/f 18,100 32,100 1,750
*Dividend paid is given in question but working shown for clarity.
3 Liabilities
Tax payableRs'000
b/f 4,000
SPLOCI 5,200
Acquisition of subsidiary 200-
Cash (paid)/rec'd – balancing figure (4,200)
c/f 5,200
4 Working capital changes
Inventories Receivables Payables
Rs'000 Rs'000 Rs'000 Balance b/f 10,000 7,500 6,100
Acquisition of subsidiary 1,600 600 300
11,600 8,100 6,400
Increase/(decrease) – balancing
figure
4,400 1,700 1,200
Balance c/f 16,000 9,800 7,600
5 Purchase of subsidiary
Rs'000
Cash received on acquisition of subsidiary 400 Less cash consideration (1,000)
Cash outflow (600)
Note. Only the cash consideration is included in the figure reported in the
statement of cash flows. The shares issued as part of the consideration are
reflected in the share capital working (W2) above.
Goodwill on acquisition (before impairment):
Rs'000
Consideration 5,000
Non-controlling interest: 4,800 × 30% 1,440 Net assets acquired (4,800)
Goodwill 1,640
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 131/230
KC1 | Answers to Practice Questions
CA Sri Lanka 117
PART C: ANALYSIS, INTERPRETATIONS AND COMMUNICATION OF
FINANCIAL RESULTS
Questions 12 to 13 cover Analysis, Interpretations and Communication of
Financial Results.
12 Ghorse
(a) The criteria in SLFRS 5 Non-current assets held for sale and discontinued
operations have been met for Cee and Gee. As the assets are to be disposed of
in a single transaction, Cee and Gee together are deemed to be a disposal
group under SLFRS 5.
The disposal group as a whole is measured on the basis required for non-
current assets held for sale. Any impairment loss reduces the carryingamount of the non-current assets in the disposal group, the loss being
allocated in the order required by LKAS 36 Impairment of assets. Before the
manufacturing units are classified as held for sale, impairment is tested for
on an individual, cash generating unit basis. Once classified as held for sale,
the impairment testing is done on a disposal group basis.
A disposal group that is held for sale should be measured at the lower of its
carrying amount and fair value less costs to sell. Immediately before
classification of a disposal group as held for sale, the entity must recognise
impairment in accordance with applicable SLFRS. Any impairment loss is
generally recognised in profit or loss, but if the asset has been measured at a
revalued amount under LKAS 16 Property, plant and equipment or LKAS 38
Intangible assets, the impairment will be treated as a revaluation decrease.
Once the disposal group has been classified as held for sale, any impairment
loss will be based on the difference between the adjusted carrying amounts
and the fair value less cost to sell. The impairment loss (if any) will be
recognised in profit or loss.
A subsequent increase in fair value less costs to sell may be recognised inprofit or loss only to the extent of any impairment previously recognised. To
summarise:
Step 1 Immediately prior to classification as held for sale (on 30
September 20X7), calculate carrying amount under the individual
standard, here given as Rs. 105m.
Step 2 Classify as held for sale. Compare the carrying amount (Rs. 105m)
with fair value less costs to sell (Rs. 125m). Measure at the lower
of carrying amount and fair value less costs to sell, here Rs. 105m.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 132/230
KC1 | Answers to Practice Questions
118 CA Sri Lanka
Step 3 At 31 October 20X7 determine fair value less costs to sell (see
below) and compare with carrying amount of Rs. 105m.
Ghorse has not taken account the increase in fair value less costs
to sell, but only part of this increase can be recognised, calculated
as follows.
Rs Mn Fair value less costs to sell: Cee 40
Fair value less costs to sell: Gee 95
135
Carrying amount (105)
Increase 30
Impairment previously recognised in Cee: Rs 15 Mn
(Rs 50 Mn – Rs 35 Mn)
Step 4 The change in fair value less costs to sell is recognised but the
gain recognised cannot exceed any impairment losses to date.
Here the gain recognised is Rs 50 Mn – Rs 35 Mn = Rs 15 Mn
Therefore carrying amount can increase by Rs 15 Mn to Rs 120 Mn as loss
reversals are limited to impairment losses previously recognised (under
SLFRS 5 or LKAS 36).
After adjusting for the increase in fair value less costs to sell, profit for the
year increases to Rs 45 Mn and capital employed increases to Rs 235 Mn;
ROCE can therefore be recalculated as 19%. This adjustment therefore
results in a significant improvement to ROCE.
(b) LKAS 12 Income taxes requires that deferred tax liabilities are recognised for
all taxable temporary differences. Deferred tax assets are recognised for
deductible temporary differences to the extent that taxable profits will be
available against which the deductible temporary differences may be utilised.
The differences between the carrying amounts and the tax base represent
temporary differences. These temporary differences are revised in the light of
the revaluation for tax purposes to fair value permitted by the government.
Deferred tax liability before revaluation
Carrying Taxable temporary
amount Tax base difference
Rs Mn Rs Mn Rs Mn
Property 50 48 2
Vehicles 30 28 2
4
Other taxable temporarydifferences 5
9
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 133/230
KC1 | Answers to Practice Questions
CA Sri Lanka 119
Deferred tax liability: 30% Rs 9 Mn = Rs 2.7 Mn
Deferred tax asset after revaluation
Carrying Deductible
temporary
amount Tax base differenceRs Mn Rs Mn Rs Mn
Property 50 65 15
Vehicles 30 35 5
Other taxable temporary
differences
(5)
15
Deferred tax asset: Rs 15 Mn 30% = Rs 4.5 Mn
This will have a considerable impact on ROCE. While the reversal of the
liability of Rs 2.7 Mn and the creation of the asset of Rs 4.5 Mn do not affect
the numerator, profit before interest and tax (although it will affect profit or
loss for the year), capital employed increases by Rs 7.2 Mn. Therefore ROCE
can be recalculated (after the effects of this adjustment alone, and ignoring
issue (a)) to be 13.2% (Rs 30 Mn/Rs 227.2 Mn). Therefore ROCE decreases
as a result of this adjustment.
(c) LKAS 36 Impairment of assets requires that no asset should be carried at
more than its recoverable amount. At each reporting date, Ghorse must
review all assets for indications of impairment, i.e. indications that thecarrying amount may be higher than the recoverable amount. Such
indications include fall in the market value of an asset or adverse changes in
the technological, economic or legal environment of the business. (LKAS 36
has an extensive list of criteria.) These indications may also be identified
during the accounting period. If impairment is indicated, either at the
reporting date or during the accounting period, then the asset's recoverable
amount must be calculated immediately. Here the manufacturer has reduced
the selling price, but this does not automatically mean that the asset is
impaired.
The recoverable amount is defined as the higher of the asset's fair value less
costs to sell and its value in use. If the recoverable amount is less than the
carrying amount, then an impairment loss is recognised. Unless the asset in
question has been revalued, this impairment loss is recognised in profit or
loss as an expense.
Value in use is the discounted present value of estimated future cash flows
expected to arise from the continuing use of an asset and from its disposal at
the end of its useful life. The value in use of the equipment is calculated asfollows:
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 134/230
KC1 | Answers to Practice Questions
120 CA Sri Lanka
Year ended 31 October Cash flows Discounted (10%)
Rs Mn Rs Mn
20X8 1.3 1.2
20X9 2.2 1.8
20Y0 2.3 1.7 Value in use 4.7
The fair value less costs to sell of the asset is estimated at Rs 2 Mn. The
recoverable amount must be the value in use of Rs. 4.7m, as this is higher.
Since the recoverable amount is higher than the carrying amount of Rs. 3m
(Rs 4 Mn 75%), the asset is not impaired.
Consequently there will be no effect on ROCE as neither capital employed
not profit before interest and tax is adjusted.
(d) The manufacturing property was held under an operating lease. LKAS 17Leases requires that operating lease payments are charged to profit or loss
over the term of the lease, generally on straight line basis.
The renegotiation of the lease means that its terms have changed
significantly, and it now falls to be classified as a finance lease. Reasons for
reclassification are as follows.
(i) The lease is for the major part of the economic life of the assets.
(ii) At the inception of the lease, the present value of the minimum lease
payments is Rs 5 mn 6.8137 = Rs 34.1 Mn. The fair value of the asset
is Rs 35 mn. Thus the present value of the minimum lease payments is
substantially all the fair value of the asset.
(iii) A finance lease does not require transfer of legal title.
Since the lease is now a finance lease, it is recognised as both an asset and an
associated finance lease obligation in the statement of financial position.
Both items are measured at the lower of fair value (Rs 35 Mn) and present
value of the minimum lease payments (Rs 34.1 Mn), ie at Rs 34.1 Mn. Since
both assets and liabilities increase, the effect on capital employed is nil and
this reclassification does not affect ROCE in the current year.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 135/230
KC1 | Answers to Practice Questions
CA Sri Lanka 121
Cumulative effects of adjustments on ROCE
Rs Mn
Profit before interest and tax 30.0
Add increase in fair value less costs to sell of disposal group 15.0
45.0 Capital employed 220.0
Add increase in fair value less costs to sell of disposal group 15.0
Add reversal of deferred tax liability and recognition of deferred tax asset: 4.5 + 2.7 7.2
242.2
ROCE is 45/242.2 = 18.6%
The directors were concerned that the above changes would adversely affect
ROCE. In fact, the effect has been favourable, as ROCE has risen from 13.6%
to 18.6%, so the directors' fears were misplaced.
13 Commonsizing
(1) Common size statements
20X1 20X0 % %
Revenue 100.0 100.0
Cost of sales 72.0 69.5
Gross profit 28.0 30.5
Distribution costs 2.9 2.2
Administrative expenses 13.3 13.6
Operating profit 11.8 14.7
Interest payable 2.0 1.4
Profit before tax 9.8 13.3
Tax 3.2 4.1
Profit for the year 6.6 9.2
Dividends paid2.8 3.1
(2) Assessment of performance
Before looking at the information conveyed by the common size statements,
it should be noted that the absolute level of activity, as measured by revenue,
has increased by 16.9% from 20X0 to 20X1.
Turning to the common size statements, the following aspects of
performance in 20X1, as compared with that in 20X0, may be noted:
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 136/230
KC1 | Answers to Practice Questions
122 CA Sri Lanka
There is a significant fall in the gross profit margin, from 30.5% to
28%. The reasons behind the increased cost of sales need further
analysis and investigation. It may be that the number of units sold has
increased by a greater percentage than the 16.9% increase in revenue
as a result of a reduction in selling prices. If this is the case, andvolumes have increased by more than 16.9% but costs have not fallen,
it follows that costs will increase by a greater amount than revenue.
Relatively, distribution costs have increased, whilst administrative
expenses have fallen, resulting in a small increase in operating expense
percentage from 15.8% to 16.2%. Further analysis of these costs
between their fixed and variable elements will help to determine the
underlying causes of the changes. Although the increase in distribution
costs may be related to poor cost control or inefficient distribution
networks, it may equally be the case that the increase in these costs is
related to the increase in revenue and results from operating in a new
market. This would be beneficial for the company in the long term,
despite the immediate negative effect.
The total operating profit margin has fallen from 14.7% to 11.8%. This
is as a result of the increase in cost of sales and distribution costs as a
percentage of revenue, as discussed above.
Interest payable has increased from 1.4% (interest cover = 10.4 times)
to 2.0% (interest cover = 5.8 times). The extent to which this is due to
increases in interest rates and to increases in the amounts of
borrowing would be apparent from the statement of financial position.
If the increase is the result of increased borrowing levels, the reason
for the borrowings should be investigated; these may be related to
product or market development and be beneficial for the company in
the long-term.
There is a fall in the tax charge as a percentage of sales; however, this is
not a particularly helpful measure, as the tax charge is based upon
profits. Looking instead at the effective rate of tax on profits, an
increase from 30.6% in 20X0 to 32.5% in 20X1 is observed. Tax is,
however, outside the control of the company.
Again, whilst the level of dividends as a percentage of sales has fallen in
20X1, this is misleading. As a percentage of profits, dividends have
risen from 34% (dividend cover = 2.9 times) to 42.4% (dividend cover
= 2.4 times). This is likely to be in line with a policy of steadily
increasing dividends to maintain shareholder confidence and thusmarket value.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 137/230
KC1 | Answers to Practice Questions
CA Sri Lanka 123
(3) Limitations
Limitations in general of using common size statements as an analysis of
performance include
Common size statements conceal underlying changes in absolutemeasures that may be of significance, erg the level of activity as
measured by revenue
The expression of figures as a percentage of sales is not appropriate in
some cases, and can be misleading. Examples of this are seen in (b) in
the cases of tax and dividends
As with all ratio analysis, care must be taken not to look at percentages,
and changes thereon, in isolation of the environment within which they
were generated. For example, it would be useful to look at the changes
highlighted in (b) in comparison with those of the industry within
which the company operates, or with other similar firms.
Using common size statements to analyse performance over a ten-year
period will have limitations that are brought about by changes in the
internal and external environment over the period, which are not reflected
in the percentage figures, including factors such as:
Market and competition
Relative price levels and other economic factors
Taxation legislation
Product range and mix
Group structure – acquisitions, disposals etc.
Accounting issues
(4) Criticism of statements
(i) The current and quick ratios provide an indication of a company’s
liquidity position. This does help with an assessment of whether a
company can meet its short-term liabilities as they fall due – for
example trade payables and other amounts due within a year. It will
not, however provide an indication of whether a company is in a
position to meet its longer-term debt commitments. For example a
bank loan due for repayment 13 months after a reporting date is not
considered in the calculation of the current and quick ratios; these may
reveal healthy liquidity, which is not representative of the true
position.
The assertion that the ‘higher these ratios are the better placed the
company is’ should also be considered.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 138/230
KC1 | Answers to Practice Questions
124 CA Sri Lanka
Whilst liquidity ratios of 1 to 1.5 indicate that a company has sufficient
current assets to meet current liabilities as they fall due, an excessively
high current ratio means that resources are tied up in inventory,
receivables and cash instead of producing profits. Current assets
should generally be kept as low as is compatible with efficientproduction and paying liabilities as they fall due.
Liquidity ratios are also affected by the type of industry that a company
operates within. For example, companies in the service industry that
have no inventory are likely to have low liquidity ratios. Equally large
retailers are unlikely to have trade receivables (as customers are not
given credit) and they invest cash in long-term assets rather than
retain it, however they do have high levels of trade payables. This
business model results in very low liquidity ratios, however it must be
remembered that on any given trading day, the retailer will receive
cash from customers and therefore a low ratio should not immediately
be viewed as an indicator that it cannot pay amounts it owes.
(ii) There is some truth in this statement; high gearing refers to a high level
of debt, and where the borrowed money has been invested in
profitable projects, it may result in immediate dividend growth for
shareholders, together with longer-term capital growth as income
levels grow. This outcome is, however, dependent on borrowed funds
being invested in such profitable projects. As well as the potential for
high returns, high gearing means greater risk for the shareholders.
By taking on debt, a company is committing to pay its lenders interest,
and eventually repay the principal. Where invested funds do not
increase profits and cash flows, it may be that the shareholders’
dividends are cut to meet these obligations. In some cases high levels
of debt, which are not invested wisely, will even result in the failure of
a company.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 139/230
KC1 | Answers to Practice Questions
CA Sri Lanka 125
PART D: CORPORATE GOVERNANCE AND RECENT DEVELOPMENTS IN
FINANCIAL REPORTING
Questions 14 to 15 cover Corporate Governance and Recent Developments in
Financial Reporting.
14 Calcula
(1) Benefits of integrated reporting at Calcula
Confusion
As a result of the recent management changes at Calcula, the company has
struggled to communicate its 'strategic direction' to key stakeholders. The
company's annual accounts have made it hard for shareholders tounderstand Calcula's strategy, which in turn has led to confusion.
Uncertainty among shareholders and employees is likely to increase the risk
of investors selling their shares and talented IT developers seeking
employment with competitors.
Communicating strategy
The introduction of integrated reporting may help Calcula to overcome these
issues as it places a strong focus on the organisation's future orientation. An
integrated report should detail the company's mission and values, the nature
of its operations, along with features on how it differentiates itself from its
competitors.
Including Calcula's new mission to become the market leader in the
specialist accountancy software industry would instantly convey what the
organisation stands for.
In line with best practice in integrated reporting, Calcula could supplement
its mission with how the board intend to achieve this strategy. Such detail
could focus on resource allocations over the short to medium term. For
example, plans to improve the company's human capital through hiring
innovative software developers working at competing firms would help to
support the company's long term mission. To assist users in appraising the
company's performance, Calcula should provide details on how it will
measure value creation in each 'capital'. 'Human capital' could be measured
by the net movement in new joiners to the organisation compared to the
previous year.
A key feature of integrated reporting focuses on the need for organisations
to use non-financial customer-oriented key performance measures (KPIs) to
help communicate the entity's strategy. The most successful companies in
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 140/230
KC1 | Answers to Practice Questions
126 CA Sri Lanka
Calcula's industry are committed to enhancing their offering to customers
through producing innovative products. Calcula could report through the use
of KPIs how it is delivering on this objective, measures could be set which for
example measure the number of new software programs developed in the
last two years or report on the number of customer complaints concerningnewly released software programs over the period.
Improving long term performance
The introduction of integrated reporting may also help Calcula to enhance its
performance. Historically, the company has not given consideration to how
decisions in one area have impacted on other areas. This is clearly indicated
by former CEO's cost cutting programme, which served to reduce the staff
training budget. Although, this move may have enhanced the company's
short-term profitability, boosting financial capital, it has damaged long termvalue creation.
The nature of the software industry requires successful organisations to
invest in staff training to ensure that the products they develop remain
innovative in order to attract customers. The decision to reduce the training
budget will most likely impact on future profitability if Calcula is unable to
produce what software customers' demand.
Finance Director's comments
As illustrated in the scenario, the Finance Director's comments indicate a
very narrow understanding of how the company's activities and 'capitals'
interact with each other in delivering value. To dismiss developments in
integrated reporting as simply being a 'fad', suggest that the Finance Director
is unaware of the commitment of many accounting bodies in promoting its
introduction.
However, some critics refute this and argue that the voluntary nature of
integrated reporting increases the likelihood that companies will choose not
to pursue its adoption. Such individuals highlight that until companies arelegally required to comply with integrated reporting guidelines, many will
simply regard it as an unnecessary effort and cost.
The Finance Director's assertion regarding shareholders is likely to some
degree to be correct. Investors looking for short-term results from an
investment might assess Calcula's performance based on improvements in
profitability. However, many shareholders will also be interested in how the
board propose to create value in the future. Ultimately, Calcula's aim to
appease both groups is its focus on maximising shareholder value, the
achievement of which requires the successful implementation of both short
and long term strategies.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 141/230
KC1 | Answers to Practice Questions
CA Sri Lanka 127
Furthermore, unlike traditional annual reports, integrated reports highlight
the importance of considering a wider range of users. Key stakeholder
groups such as Calcula's customers and suppliers are likely to be interested
in assessing how the company has met or not met their needs beyond the
'bottom line'. Integrated reporting encourages companies to reportperformance measures that are closely aligned to the concepts of
sustainability and corporate social responsibility. This is implied by the
different capitals used: consideration of social relationships and natural
capitals do not focus on financial performance but instead are concerned, for
example, with the impact an organisation's activities have on the natural
environment.
Ultimately, as integrated reporting provides senior management with a
greater quantity of organisational performance data this should help in
identifying previously unrecognised areas which are in need of
improvement.
Clearly, a major downside to generating extensive additional data concerns
determining which areas to report on. This is made especially difficult as
there is no recognised criteria for determining the level of importance of
each 'capital'. As we shall explore in part (b), the Finance Director's remark
regarding the increase in the Calcula's employee workload to comply with
integrated reporting practices may have some merit.
It is debatable as to whether the production of an integrated report
necessarily leads to an improvement in organisational performance or
whether it simply leads to an improvement in the reporting of performance.
However, focusing management's attention on the non-financial aspects of
Calcula's performance as well as its purely financial performance, could be
expected to lead to performance improvements in those areas. For example,
if innovation is highlighted as a key factor in sustaining Calcula's long-term
value, a focus on innovation could help to encourage innovation within the
company.
(2) Implications of implementing integrated reporting
IT and IS costs
The introduction of integrated reporting at Calcula will most likely require
significant upgrades to be made to the company's IT and information system
infrastructure. Such developments will be needed to assist Calcula in
capturing both financial and non-financial KPI data. Due to the broad range
of business activities reported on using integrated reporting (customer,
finance and human resources) the associated costs in improving the
infrastructure to deliver relevant data about each area is likely to be
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 142/230
KC1 | Answers to Practice Questions
128 CA Sri Lanka
significant. It may, however, be the case that Calcula's existing information
systems are already capable of producing the required non-financial
performance data needed in which case it is likely that the focus here will be
on investigating which data sets should be included in the integrated report.
Time implications
The process of gathering and collating the data to include in an integrated
report is likely to require a significant amount of staff time. This may serve
to decrease staff morale especially if staff are expected to undertake this
work in addition to completing existing duties. In some cases this may
require Calcula to pay employees overtime to ensure all required
information is published in the report on time.
Staff costs
To avoid overburdening existing staff the board may decide to appoint
additional staff to undertake the work of analysing data for inclusion in the
integrated report. This will invariably lead to an increase in staff costs.
Consultancy costs
As this will be Calcula's first integrated report the board may seek external
guidance from an organisation that provides specialist consultancy on
reporting. Any advice is likely to focus on the contents of the report. The
consultant's fees are likely to be significant and will increase the associated
implementation costs of introducing integrated reporting.
Disclosure
A potential downside of adopting integrated reporting centres on Calcula
potentially volunteering more information about its operations than was
actually needed. In the event that Calcula fully disclosed the company's
planned strategies it is likely that this could be used by competitors. Such a
move is likely to undermine any future moves to out-manoeuvre other
industry players. In the event that Calcula have hired an external consultant
to support the introduction of integrated reporting it is likely that the advice
given by the consultant will stress the need to avoid disclosure of
commercially sensitive information.
(3) Content of the integrated report
The <IR> Framework prescribes the eight key content elements of an
integrated report:
1. Organisational overview and external environment: what Calcula
does and the circumstances under which it operates. Calcula couldexplain that it develops specialist accounting software and give
information about its customer types.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 143/230
KC1 | Answers to Practice Questions
CA Sri Lanka 129
2. Governance: how Calcula’s governance structure supports its ability
to create value in the short, medium and long term. Calcula could
explain, for example, the composition of its board of directors and how
directors are selected on the basis of their experience and expertise. It
could explain how their remuneration is linked to value added withinthe company.
3. Business model: the organisation’s business model should be
explained. Calcula could explain how it identifies the need for and
develops its programs.
4. Risks and opportunities: the specific risks facing Calcula should be
identified and its risk management approach explained. Calcula could
discuss the intense competition in the market and how it responds by
investing in its employees.
5. Strategy and resource allocation: how Calcula intends to achieve its
strategic objectives. Calcula has stated that its mission is to become the
market leader of specialist accounting software so it should provide
information as to how it plans to achieve this.
6. Performance: whether Calcula achieved its strategic objectives for the
period and what its outcomes are in terms of effects on its different
types of capitals. For example, Calcula could mention its increased
intellectual capital due to new products patented and human capital interms of employee knowledge.
7. Outlook : the challenges and uncertainties that Calcula is likely to
encounter in pursuing its strategy. Calcula could discuss the challenges
faced from lower cost competitors and the problems of protecting its
intellectual property.
8. Basis of preparation and presentation: how Calcula determines
what matters to include in the report and how these matters are
quantified or evaluated. Calcula could explain the process by whichAsha Alexander and (presumably) other directors compile the report.
15 Glowball
(1) Environmental and sustainability reports
Environmental reports typically only contain information about an entity’s
impact on the environment ie air, water and land. Glowball, for example,
could disclose information about the effect of toxic gases in the air, chemicals
leaking into the sea, or damage to land caused by construction works.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 144/230
KC1 | Answers to Practice Questions
130 CA Sri Lanka
Sustainability reports also provide information on economic, social and
governance issues.
Economic issues might include disclosure of economic performance (ie
profit, value added), market share and procurement practices.
Social issues can be considered in terms of a number of areas according to
the GRI G4 guidelines:
• Labour practices and decent work disclosures might include details of
health and safety, training and education and diversity and equal
opportunity practices.
• Human rights disclosures might include details of policies on child
labour, indigenous rights and supplier human rights.
• Society disclosures might detail the impact of the business and itssuppliers’ businesses on society and anti-corruption policies
• Product responsibility might include disclosure of customer health and
safety practices, product labelling and compliance procedures..
Governance issues might include disclosure of directors’ recruitment and
remuneration policies.
(2) Issues that could be considered in the sustainability report
Note: In each case, performance should be compared to previous years andagainst targets. Any unexpected performance should be explained.
Economic
• Market presence: Glowball could measure its market share in each of
its key markets. Market share would have increased in the current
period due to the acquisition of a competitor, so that should be
explained.
• New pipelines installed: Since this is a driver of revenue, a measure
would be useful. Glowball could measure the number of kilometres ofpipe laid, volume of gas transported in the new lines or the number of
new installations served. A distinction should be made between
organic growth and growth due to acquisition.
• Economic impacts: Glowball could discuss the impact of climate change
on the demand for its services, and how it tries to predict future
demand under conditions of uncertainty.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 145/230
KC1 | Answers to Practice Questions
CA Sri Lanka 131
Environmental
• Supplier environmental assessment: Glowball could discuss the
number and type of assessments of its suppliers’ environmental
practices it has performed, for example of the suppliers of materials
that are used to construct the pipelines.
• Biodiversity: Glowball could provide detail of the impact of its pipe
laying on ocean bioversity and the practices it adopts to try to
minimise that impact.
• Energy: Glowball could detail its energy usage and measures taken to
establish energy efficient alternatives.
Social
• Training and education: Glowball could detail the amount spent ontraining, any education support given to employees (eg paying for
MBAs) and measures taken to retain well-trained staff.
• Occupational health and safety: Glowball could detail accidents,
perhaps distinguishing between fatal and non-fatal, and lost days due
to accidents.
• Security practices: As it may operate in dangerous parts of the world,
Glowball could detail the type and cost of security measures it has in
place to protect its assets and employees.
Governance
• Director selection: Glowball could detail how directors are recruited
and selected and could provide data on educational qualifications and
years of experience.
• Directors’ remuneration: Glowball could explain how directors’
remuneration is determined and could provide data on and
explanations for remuneration compared to performance.
• Risk assessment process: Glowball could provide information on howthe directors assess risks facing the company and the adequacy of
internal controls.
(3) Comments on 'environmental events'
(a) Glowball could explain how this issue arose. It could explain that,
although there is no legal obligation to restore the farmland, its policy
is to be environmentally responsible (the question refers to Glowball’s
reputation for preserving the environment). The report could mention
the cost of Rs. 150 million and the fact that a provision has been madein the financial statements, assuming that it has been made on the basis
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 146/230
KC1 | Answers to Practice Questions
132 CA Sri Lanka
of the constructive obligation. Specific examples of other restorations
of land could be included in the sustainability report.
(b) The LKAS 37 criteria to recognise a provision are met: there is a legal
obligation as a result of a past event, an outflow of economic resources
is probable and the amount can be estimated reliably. A provision
should therefore be recognised in the financial statements for the
estimated fine of Rs. 5m. This should be mentioned in the sustainability
report. The report might also put the fines into context by stating how
many tests have been carried out and how many times the company
has passed the tests. The directors may wish to point out the fact that
the number of prosecutions has been falling from year to year.
(c) These statistics are good news and need to be covered in the
sustainability report. However, the emphasis should be on accuratefactual reporting rather than boasting. It would be useful to provide
target levels for comparison, or an industry average if available. The
emissions statistics should be split into three categories:
Acidity to air and water
Hazardous substances
Harmful emissions to water
As regards the aquatic emissions, the Rs. 70m planned expenditure on
research should be mentioned in the sustainability report as it shows acommitment to benefiting the environment.
(d) The environmental report should mention the steps that the company
is taking to minimise the harmful impact on the environment in the
way it sites and constructs its gas installations. The report should also
explain the policy of dismantling the installations rather than sinking
them at the end of their useful life.
The sustainability should be referenced to the financial statements,
where an explanation of the accounting treatment and detail of thedecommissioning provision can be found.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 147/230
KC1 | Answers to Practice Questions
CA Sri Lanka 133
PART E: CASE STUDY QUESTIONS
Questions 16 to 22 are case study questions, each one covering a variety of
syllabus areas.
16 Johan
(1) Costs incurred in extending the network
LKAS 16 states that the cost of an item of property, plant and equipment
should be recognised when two conditions have been fulfilled:
• It is probable that future economic benefits associated with the item
will flow to the entity.
• The cost of the item can be measured reliably.
The cost, according to LKAS 16, includes directly attributable costs of
bringing the asset to the location and condition necessary for it to be capable
of operating in a manner intended by management. Examples of such
directly attributable costs are site preparation costs and installation and
assembly costs.
The feasibility study relates to general site selection, ie selecting a general
geographical area in which the base station may be installed. Applying the
first criterion (probability of economic benefits) would exclude the
feasibility study costs, both internal and external, because (by definition) the
economic benefits of a feasibility study are uncertain. These costs, Rs.
250,000 in total, should be expensed as incurred.
The costs incurred to select a specific site within the chosen geographical
area are treated differently. Applying the LKAS 16 definition of directly
attributable costs, the selection of a base station site that meets the technical
conditions required for the optimal operation of the network is an inherent
part of the process of bringing the network assets to the location andcondition necessary for operation. The Rs. 50,000 paid to third party
consultants to find a suitable site is part of the cost of constructing the
network, and may therefore be capitalised.
(2) Lease
The other costs – a payment of Rs. 300,000 followed by Rs. 60,000 a month
for twelve years – is a lease, and is governed by LKAS 17. LKAS 17 defines a
lease as an agreement whereby the lessor conveys to the lessee, in return for
a payment or series of payments, the right to use an asset for an agreedperiod of time.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 148/230
KC1 | Answers to Practice Questions
134 CA Sri Lanka
The question arises as to whether the payments are to be treated as a
finance lease or as an operating lease. LKAS 17 defines a finance lease as a
lease that transfers substantially all of the risks and rewards incidental to
ownership of the leased asset to the lessee. An operating lease is a lease
other than a finance lease.
In the case of the contract with the government for access to the land, there
is no transfer of ownership. The term of the lease is not for the major part of
the asset's life, because the land has an indefinite economic life. The lease
cannot therefore be said to transfer substantially all the risks and rewards of
ownership to Johan.
Accordingly, the contract should be treated as an operating lease. The initial
payment of Rs. 300,000 should be treated as a prepayment in the statement
of financial position, and charged to profit or loss for the year on a straight-line basis over the life of the contract. The monthly payments of Rs. 60,000
should be expensed as incurred. No amount is recognised for the lease
contract in the statement of financial position.
(3) Inventory of handsets
LKAS 2 states that inventories must be valued at the lower of cost and net
realisable value. The handsets cost Rs. 200, and the net realisable value is
selling price of Rs. 150 less costs to sell of Rs. 1, which is Rs. 149. All
handsets held in inventory by the Retail Division must be written down toRs. 149 per handset.
(4) Revenue recognition
Call cards
Under LKAS 18, revenue is recognised by reference to the stage of
completion of the transaction at the reporting date.
In the case of the call cards, revenue is generated by the provision of
services, not the sale of the card itself, and accordingly revenue should be
recognised as the services are provided.
The Rs. 21 received per call card is recognised as deferred revenue at the
point of sale. Of this, Rs. 18 per card is released and recognised as income
over the six month period from the date of the sale.
The Rs. 3 of unused credit – an average figure may be used rather than the
figure for each card – is recognised as revenue when the card expires, that is
when Johan has no further obligation to the customer.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 149/230
KC1 | Answers to Practice Questions
CA Sri Lanka 135
Sales to dealers
Johan bears the risk of loss in value of the handset, as the dealer may return
any handsets before a service contract is signed with a customer. In addition,
Johan sets the price of the handset. Therefore the dealer, in this case, is
acting as an agent for the sale of the handset and service contract.
The handset cannot be sold separately from the service contract, so the two
transactions must be taken together because the commercial effect of either
transaction cannot be understood in isolation. Johan earns revenue from the
service contract with the final customer, not from the sale of the handset to
the dealer.
LKAS 18 deals with the issue of agency, and states that revenue for an agent
is not the amounts collected on behalf of the principal, but the commission
earned for collecting them.
From Johan's point of view revenue is not earned when the handsets are
transferred to the dealer, so revenue should not be recognised at this point.
Instead the net payment of Rs. 130 (commission paid to the agent less cost of
the handset) should be recognised as a customer acquisition cost, which may
qualify as an intangible asset under LKAS 38.
If it is so recognised, it will be amortised over the 12-month contract.
Revenue from the service contract will be recognised as the service is
rendered.
(5) Shares issued to the directors
The three million shares issued to the directors on 1 June 20X6 as part of the
purchase consideration for Hash are accounted for by Johann in accordance
with SLFRS 3 Business combinations rather than SLFRS 2 Share-based
payment. This is because the shares issued are not remuneration or
compensation, but simply part of the purchase price of the company.
The cost of the business combination is the total of the fair values of the
consideration given by Johan. The total fair value here is the market value of
the shares, being Rs. 6m.
The contingent consideration – 5,000 shares per director, to be received on
31 May 20X7 if the directors are still employed by Leigh – may, however, be
seen as compensation accounted for in accordance with SLFRS 2. The fact
that the additional payment of shares is linked to continuing employment
suggests that it is a compensation arrangement, and therefore SLFRS 2 does
apply.
SLFRS 2 requires that the transaction is measured at the fair value of the
instruments granted at at the grant date. The market value of each share at
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 150/230
KC1 | Answers to Practice Questions
136 CA Sri Lanka
that date is Rs. 2. (three million shares are valued at Rs. 6m.) Therefore the
total value of the compensation is 5 directors 5,000 shares Rs. 2 =
Rs. 50,000.
In the year ended 31 May 20X7, Rs. 50,000 is recognised in profit or loss as
part of staff costs with a corresponding increase in equity recognised in the
statement of financial position.
Shares issued to employees
These shares are remuneration and are accounted for under SLFRS 2.
The transaction is measured at the fair value of the instruments issued at the
date on which they are granted. Here, the grant date and issue date are the
same, and the fair value of each instrument at that date is Rs. 3 per share.
Therefore the transaction is measured at Rs. 3 million. As the shares are
given as a bonus they vest immediately and are presumed to be
consideration for past services.
Therefore the total of Rs 3 Mn is recognised in profit or loss as a staff cost
when the shares are issued with a corresponding increase to equity.
Purchase of property, plant and equipment
In accordance with SLFRS 2, the purchase of property, plant and equipment
is treated as a share-based payment in which the counterparty has a choice
of settlement, in shares or in cash.
Such transactions are treated as the issue of a compound financial
instrument, with a debt and an equity element.
The fair value of the equity element is the fair value of the goods or services
(in this case the property) less the fair value of the debt element of the
instrument. The fair value of the property is Rs. 4m. The fair value of the
liability component at 31 May 20X7, based on the share price at that date, is
1.3m × Rs. 3 = Rs. 3.9 million.
The journal entries are:
DEBIT Property, plant and equipment Rs 4 Mn
CREDIT Liability Rs 3.9 Mn
CREDIT Equity Rs 0.1 Mn
To recognise the acquisition of PPE and the share-based transaction.
In three months' time, the debt component is remeasured to its fair value.
Assuming the estimate of the future share price was correct at Rs. 3.50, the
liability at that date will be 1.3 million × Rs. 3.5 = Rs. 4.55. An adjustment is
recognised as follows:
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 151/230
KC1 | Answers to Practice Questions
CA Sri Lanka 137
DEBIT Expense (4.55 – 3.9) Rs 0.65 Mn
CREDIT Liability Rs 0.65 Mn
To re-measure the liability to fair value.
Choice of share or cash settlement
The share-based payment to the new director, which offers a choice of cash
or share settlement, is also treated as the issue of a compound instrument. In
this case, the fair value of the services is determined by the fair value of the
equity instruments given.
The fair value of the equity alternative is Rs. 2.50 50,000 = Rs. 125,000. The
cash alternative is valued at 40,000 Rs. 3 = Rs. 120,000. The difference
between these two values – Rs. 5,000 – is deemed to be the fair value of the
equity component. At the settlement date, the liability element is measured
at fair value and the method of settlement chosen by the director determines
the final accounting treatment.
At 31 May 20X7, the accounting entries are:
DEBIT Profit or loss – directors'
remuneration
Rs. 125,000
CREDIT Liability Rs. 120,000
CREDIT Equity Rs. 5,000
To recognise the share-based transaction.
In effect, the director surrenders the right to Rs. 120,000 cash in order to
obtain equity worth Rs. 125,000.
(6) Provision
A provision is defined by LKAS 37 Provisions, contingent liabilities and
contingent assets as a liability of uncertain timing or amount. LKAS 37 states
that a provision should only be recognised if:
There is a present obligation as the result of a past event
An outflow of resources embodying economic benefits is probable, and A reliable estimate of the amount can be made
If these conditions apply, a provision must be recognised.
The past event that gives rise, under LKAS 37, to a present obligation, is
known as the obligating event. The obligation may be legal, or it may be
constructive (as when past practice creates a valid expectation on the part of
a third party). The entity must have no realistic alternative but to settle the
obligation.
As at 31 May 20X7, Hash has no legal obligation to pay compensation to third
parties. No legal action has been brought in respect of the accident. Nor can
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 152/230
KC1 | Answers to Practice Questions
138 CA Sri Lanka
Hash be said to have a constructive obligation at the year end, because the
investigation has not been concluded, and the expert report will not be
presented to the civil courts until 20X8. Therefore under LKAS 37 Provisions,
contingent liabilities and contingent assets no provision is recognised.
The possible payment does, however, fall within the LKAS 37 definition of a
contingent liability, which is:
A possible obligation depending on whether some uncertain future
event occurs, or
A present obligation for which payment is not probable or the amount
cannot be measured reliably
There is uncertainty as to the outcome of the investigation and findings of
the report, and the extent of the damages and any compensation arising
remain to be confirmed. However, the uncertainty over these details is not so
great that the possibility of an outflow of economic benefits is remote.
Therefore in respect of the contingent liability, the details and, if possible an
estimate of the amount payable, must be disclosed in the notes to the
financial statements.
The question arises as to whether the possible recovery of the compensation
costs from the insurance company should be disclosed as a contingent asset
under LKAS 37.
LKAS 37 provides specific guidance on reimbursements ie where some or all
of the expenditure required to settle a provision is expected to be
reimbursed by another party. In this case, the standard states that the
reimbursement is recognised only when it is virtually certain that
reimbursement will be received if the entity settles the obligation.
As no provision has been recognised at the reporting date in respect of costs
associated with the airport’s collapse, it follows that no reimbursement asset
can be recognised either.
17 Carpart
(1) Vehiclex
Generally, LKAS 18 Revenue looks at each transaction as a whole. Sometimes,
however, transactions are more complicated, and it is necessary to break a
transaction down into its component parts.
In this case, the selling price charged per car seat related to two parts- the
provision of the car seat and a recharge to cover the cost of construction of
the machinery.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 153/230
KC1 | Answers to Practice Questions
CA Sri Lanka 139
The selling price per car seat should be split into its component parts for
accounting purposes. LKAS 18 does not address the issue of splitting
revenue where goods are provided with the price including a recharge for a
capital item. It does however state that revenue should be measured at fair
value. It therefore follows that the part of the selling price allocated to theprovision of the car seat should be the fair value (standalone selling price) of
that car seat. This may be determined as the cost of the car seat (excluding
the cost of the machinery) plus Carpart’s standard margin.
The sale price allocated to each component part then needs to be assessed
separately in terms of recognition.
Provision of the car seat
The contract to manufacture and sell seats is a contract for the sale of goods,
not a service contract or a construction contract. Therefore, in accordance
with LKAS 18, that part of the selling price relating to the provision of a car
seat is recognised as revenue when the following LKAS 18 criteria are met:
(a) the significant risks and rewards of ownership have been transferred
by Carpart
(b) Carpart does not retain managerial involvement or effective control
over the goods
(c) The amount of revenue can be estimated reliably
(d) It is probable that economic benefits associated with the sale of the
seat will transfer to Carpart
(e) The costs associated with the transaction can be measured reliably.
Recharge for the machinery
In effect, Carpart has paid for the machinery and, through the sale of car
seats, is charging Vehiclex a total of some or all of the price it has paid
(dependent on the number of car seats sold).
Carpart is not selling the machinery to Vehiclex:
(i) There is no contract to sell the machinery to Vehiclex.
(ii) The machinery is for the use of Carpart only, and will not be sold
elsewhere.
(iii) The contract with Vehiclex is not a construction contract under LKAS
11 Construction contracts.
Equally it can be argued that the recharge amount does not meet the LKAS
18 definition of revenue, being the gross inflow of economic benefits during
the period arising in the course of the ordinary activities of an entity when
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 154/230
KC1 | Answers to Practice Questions
140 CA Sri Lanka
those inflows result in increases in equity. Here the inflow of economic
benefits directly compensates for an outflow of economic benefits (the
purchase of the machine) rather than increasing equity.
Therefore Carpart should not recognise revenue in respect of the machinery.
The question therefore remains as to how that part of the selling price is
accounted for, and what the credit entry to the accounts should be.
There is no relevant accounting standard and therefore the principles of the
Conceptual Framework should be applied. As a result an appropriate solution
would be to recognise the receipt of recharged amounts as a credit balance
in the statement of financial position and release it to profit or loss as income
to match depreciation over the useful life of the machinery.
(2) Vehicle sales
Sale and repurchase agreements
Carpart enters into a sale and repurchase agreement with its customers.
According to LKAS 18, such agreements must be analysed to determine
whether the seller has transferred the significant risks and rewards of
ownership to the buyer.
The transfer of risks and rewards can only be decided by examining each
transaction. If the risks and rewards of ownership have been transferred to
the customer, then revenue can be recognised; if significant risks andrewards remain with the seller, then the transaction is not a sale and
revenue cannot be recognised, even if legal title has been transferred. In such
cases, the substance of the transaction is a financing arrangement.
In the case of the vehicles that are repurchased by Carpart after 4 years,
there is evidence that the significant risks and rewards have been
transferred. Carpart's obligation to repurchase the vehicles at 20% of the
original selling price is not retention of significant risks because this is
considerably below the market price.
In addition, this repurchase takes place four years into the vehicles economic
life of five years, and the purchaser must maintain and service the vehicle
and return it in good condition.
Since the significant risks and rewards have been transferred, Carpart must
recognise revenue, measured at the fair value of consideration received,
when the LKAS 18 recognition criteria for the sale of goods are met..
The vehicles sold with an option for the buyer to require repurchase by
Carpart after two years are treated differently, as there is evidence thatCarpart has not transferred the risks and rewards of ownership.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 155/230
KC1 | Answers to Practice Questions
CA Sri Lanka 141
The repurchase period is less than substantially all of the vehicles' economic
life (only two years into the five year life), and the repurchase price of 70%
of the original purchase price is greater than the fair value, which is 55% of
the original price. Importantly, the option is expected to be exercised, and so
the transaction should be accounted for as if it will be.
Until the option expires, the vehicles must be accounted for as operating
leases. They should be removed from inventories and debited to 'assets
under operating leases'. They should be depreciated over the two-year
period of the option, with the depreciable amount being adjusted for the
residual value.
The cash received is not recognised as revenue in the year, as it would be for
a sale, but is instead split between rentals received in advance (30%) and
long-term liabilities (70%). The rentals received in advance balance isreleased and recognised as operating lease income in profit or loss over the
two years on a straight-line basis.
Demonstration vehicles
These are not conventional inventory, but have the characteristics of
property, plant and equipment, because they are held for use in the business
(demonstrations) and are expected to be used in more than one accounting
period. They should be capitalised as property, plant and equipment and
depreciated over the 18 month period during which they are being used asdemonstration vehicles. At the end of the 18 month period, the vehicles are
reclassified back into inventories and are no longer depreciated. When the
LKAS 18 recognition criteria for the sale of goods are met, revenue is
recognised and the carrying amount of the cars is transferred to cost of sales.
(3) Venue
Under LKAS 18, revenue of Rs. 1m is recognised on the sale of the exhausts,
being the fair value of consideration receivable. A trade receivable of Rs. 1m
is also recognised.
At this stage Carpart believes that there is a 5% risk, based on experience
with other customers, that Venue will default. This is a general market risk
for which current standards make no arrangements and therefore no
adjustment is made to the recognised receivables balance.
The trade receivable is a financial asset within the scope of LKAS 39 and
therefore Carpart must assess at the end of each reporting period whether
there is objective evidence of an impairment. The deteriorating financial
situation of the customer is identified as an indicator of impairment by LKAS39.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 156/230
KC1 | Answers to Practice Questions
142 CA Sri Lanka
The impairment loss is measured as the difference between the carrying
amount of the receivable (Rs 1 Mn) and the present value of estimated future
cash flows that it will give rise to (Rs. 0.8 million).
Therefore an impairment of Rs. 200,000 is recognised in profit or loss.
(4) Other sales
Revenue is measured at the fair value of consideration received or
receivable; where payment is deferred, LKAS 18 states that the fair value of
consideration may be less than the nominal value of cash receivable. In other
words, the substance of the arrangement is that there is both a sale and a
financing transaction. In this case, the fair value of the consideration is
determined by discounting future receipts to present value using the more
clearly determinable of:
• the prevailing interest rate for a similar instrument of an issuer with a
similar credit rating, or
• a rate of interest that discounts the nominal amount to the current cash
sale price.
In this case, receipt of the selling price of Rs 2 Mn is deferred for two years.
Using the 4% discount rate given, the present value of the consideration is
Rs 2 Mn/1.042 = Rs 1.85 Mn.
This is recognised by:
DEBIT Receivable Rs 1.85 Mn
CREDIT Revenue Rs 1.85 Mn
To recognise the revenue receivable at the discounted amount.
The unwinding of the discount is credited to profit or loss as finance income
over the two-year period as follows:
Year 1 Year 2
DEBIT Receivable (1.85 × 0.04/(1.85 × 1.04) × 0.04) Rs. 74,000 Rs. 76,960
CREDIT Finance income Rs. 74,000 Rs. 76,960
Regarding the Rs 3 Mn payment in advance, revenue is not recognised
immediately because the LKAS 18 revenue recognition criteria are not met;
instead a deferred income liability is recognised:
DEBIT Cash Rs 3 Mn
CREDIT Revenue Rs 3 mn
On delivery in a year's time, (and when the LKAS 18 revenue recognition
critier are met) revenue is recognised by:
DEBIT Deferred income Rs 3 MnCREDIT Revenue Rs 3 Mn
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 157/230
KC1 | Answers to Practice Questions
CA Sri Lanka 143
(5) Lease with Elpres
Inflation adjustments are effectively contingent rent, defined in LKAS 17
Leases as 'that part of the rent that is not fixed in amount, but based on the
future amount of a factor that changes other than with the passage of time'.
LKAS 17 provides no guidance on accounting for contingent rent and
operating leases. It does however state that where contingent rent is related
to finance leases, it is recognised as incurred. This guidance is normally
extended to operating leases.
On this basis, Carpart will recognise operating rental expenses as follows:
Year 1 Rs. 5 million
Year 2 Rs. 5 million plus (Rs 5 Mn × 4%) = Rs 5.2 Mn
Year 3 Rs. 5.2 million plus (Rs 5.2 Mn × 4%) = Rs 5.408 Mn
As LKAS 17 does not provide clear guidance in respect of contingent rent and
operating leases, it would not be incorrect to revert to standard guidance for
operating leases and recognise associated costs on a straight line basis over
the term of the lease.
(6) Lease with Brooke
LKAS 17
This lease meets the definition of an operating lease. Therefore no asset or
liability would be recognised in respect of the leased asset, and payments of
Rs. 13,000 would be recognised as expense on a straight-line basis in each of
the three years of the lease term.
ED/2013/6
The basic principle of the 2013 ED is that all leases are recognised in the
statement of financial position and entities do not distinguish between an
operating and finance lease.
A lessee is required to recognise a right-of-use asset and a lease liability for
all leases of more than 12 months, as the lease with Brooke is.
For leases of 12 months or less, a lessee is not required to recognise a right-
of-use asset and a lease liability, but may choose to do so.
A single accounting model for lessees would not reflect the true economics of
different assets. Accordingly, the IASB has developed a dual approach,
whereby leases are either Type A or Type B, with the type of lease based on
the amount of consumption of the underlying asset.
Type A leases are leases in which the lessee consumes part of the leasedasset. These are leases of depreciating assets, for example vehicles or
equipment, whose value declines over its useful life, generally faster in the
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 158/230
KC1 | Answers to Practice Questions
144 CA Sri Lanka
earlier years. They are not normally property, however, property will be
classified as a Type A lease in either of the following circumstances.
(1) The lease term is for the major part of the remaining economic life of
the underlying asset.
(2) The present value of the lease payments accounts for substantially all
of the fair value of the underlying asset at the commencement date.
Type B leases are leases in which the lessee consumes only an insignificant
part of the asset. Type B leases normally relate to property., however, leases
for assets other than property will be classified as type B leases in either of
the following circumstances.
(1) The lease term is for an insignificant part of the total economic life of
the underlying asset.
(2) The present value of the lease payments is insignificant relative to the
fair value of the underlying asset at the commencement date of the
lease.
In effect, therefore:
• The lessee pays for that part of a Type A leased asset that it consumes.
• The lessee pays for the use of a Type B leased asset.
Carpart should classify the lease of the machine as a Type A lease for the
following reasons.
(1) The underlying asset (the machine) is not property.
(2) The present value of the lease payments is 19% of the fair value of the
machine at the commencement date (Rs. 21,700/Rs. 113,600).
Although the term insignificant is not defined in ED/2013/6, 19% is
unarguably insignificant..
(3) The lease term is for more than an insignificant part of the total
economic life of the machine (3 years out of 20).In the case of a Type A asset, the proposed new standard requires that
Carpart would initially recognise a “right-of-use” asset and a lease liability at
the present value of the lease payments of Rs. 21,700.
In subsequent periods, the right-of-use asset would be amortised over the
lease term on a straight-line basis unless another systematic basis were
more representative of the consumption of the asset.
The carrying amount of the lease liability would be increased in each period
by the unwinding of the interest payment and decreased by the amount ofthe payments made. Therefore a finance cost would be recognised in profit
or loss.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 159/230
KC1 | Answers to Practice Questions
CA Sri Lanka 145
Essentially this treatment is that currently applied to finance leases.
(7) Disclosure
In order to meet the objective of SLFRS 12 Disclosure of interests in other
entities, entities are required to make the following disclosures.(i) Significant judgements and assumptions made in determining control,
joint control or significant influence and type of joint arrangement
(ii) Information on interests in subsidiaries such that the composition of
the group and non-controlling interest is understood and restrictions,
risks and changes in ownership can be evaluated
(iii) Information on interests in associates and joint arrangements such that
the nature and extent of the interests, financial effects and associated
risks can be evaluated
(iv) Information on interests in unconsolidated structured entities such
that the nature and extent of the interests and associated risks can be
evaluated
18 Mica
(1) Maintenance contract
LKAS 18 states that where the outcome of a transaction involving therendering of services can be estimated reliably, the associated revenue
should be recognised by reference to the stage of completion of the
transaction at the end of the reporting period. The outcome of a transaction
can be estimated reliably when all of the following conditions are satisfied:
(a) the amount of revenue can be measured reliably;
(b) it is probable that the economic benefits associated with the
transaction will flow to the entity;
(c) the stage of completion of the transaction at the end of the reportingperiod can be measured reliably; and
(d) the costs incurred for the transaction and the costs to complete the
transaction can be measured reliably.
Where the outcome of the transaction involving the rendering of services
cannot be estimated reliably, revenue shall be recognised only to the extent
of the expenses recognised that are recoverable.
Ama Balachandran is wrong to believe that the whole of this revenue can be
recognised in 20X4, as the service will be provided over a 5 year term from 1January 20X4 to 31 December 20X8.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 160/230
KC1 | Answers to Practice Questions
146 CA Sri Lanka
At the start of the contract, it seems likely that the first 3 conditions are met,
since the contractual revenue has been agreed and there is no reason to
suppose that Matara will not pay, provided that the agreed service is
performed .
LKAS 18 states that the stage of completion may be measured by reference
to:
• Surveys of work performed;
• Services performed to date as a percentage of total services to be
performed; or
• The proportion that costs to date bear to expected total costs
LKAS 18 also states that, when services are performed by an indeterminate
number of acts over a specified period of time, revenue is recognised on astraight line basis over the specified period unless there is evidence that
some other method better represents the stage of completion.
In this case it is suggested that services will be performed by an
indeterminate number of acts, and so revenue should be recognised on a
straight line basis over the life of the contract, i.e. at 20% per year.
It may be arguably uncertain as to whether the costs incurred can be
measured reliably, but Mica may be able to base estimates on similar
contracts in the past. Alternatively the total costs of fulfilling the contractcould be estimated based on costs incurred to date. For example at 31
December 20X4, total costs could be estimated as 5 x the costs incurred
during 20X4.
Assuming that Mica recognises the revenue on a straight-line basis according
to the stage of completion, the amount of revenue would be Rs. 300,000 per
year.
However, because the consideration is deferred until 31 December 20X7,
this must be discounted to present value and the discounted amount must berecorded in the periods preceding 20X7, and the discount unwound each
year.
Entries will be as follows:
Debit Credit
Rs. Rs.
31 December 20X4
Receivable 259,151
Revenue (300k/1.053) 259,151
To record the revenue for 20X4
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 161/230
KC1 | Answers to Practice Questions
CA Sri Lanka 147
Debit Credit
Rs. Rs.
31 December 20X5
Receivable 12,958
Interest income (259,151 × 5%) 12,958
To unwind the discount in respect of the receivable
Receivable 272,109
Revenue (300k/1.052) 272,109
To record the revenue for 20X5
31 December 20X6
Receivable 27,211
Interest income ((259,151 + 12,958 + 272,109) ×
5%)
27,211
To unwind the discount in respect of the receivable
Receivable 285,714Revenue (300k/1.05) 285,714
To record the revenue for 20X6
31 December 20X7
Receivables 42,857
Interest income 42,857
((259,151 + 12,958 + 272,109 + 27,211 + 285,714)
× 5%)
To unwind the discount in respect of the receivable
Cash 1,500,000Receivables 900,000
Revenue 300,000
Deferred income 300,000
To recognise receipt of cash, revenue for the year and
deferred income
20X8
Deferred income 300,000
Revenue 300,000
To recognise revenue for 2018
(2) Off-plan sales
Although Mica’s previous construction contracts would have been accounted
for in accordance with LKAS 11 Construction Contracts, the nature of these
contracts may be different.
Since each sale represents a sale of land plus an agreement for the
construction of real estate, the two components must be treated separately.
The total fair value of consideration received or receivable must be allocated
to each component.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 162/230
KC1 | Answers to Practice Questions
148 CA Sri Lanka
LKAS 18 (para. 14) states that revenue from the sale of goods is recognised
when all the following conditions have been satisfied:
(a) the entity has transferred to the buyer the significant risks and rewards
of ownership of the goods;
(b) the entity retains neither continuing managerial involvement to the
degree usually associated with ownership nor effective control over
the goods sold;
(c) the amount of revenue can be measured reliably;
(d) it is probable that the economic benefits associated with the
transaction will flow to the entity; and
(e) the costs incurred or to be incurred in respect of the transaction can be
measured reliably.
In this case, the risks and rewards relating to the sale of land will pass to the
purchaser when a binding sales agreement is signed. Mica recognises
revenue in respect of the sale of land at this point.
The remaining component of the transaction is an agreement for the
construction of real estate and directly related services. This transaction falls
within the scope of either LKAS 11 Construction Contracts or LKAS 18
Revenue. IFRIC 15 Agreements for the Construction of Real Estate provides
guidance to determine which standard should be applied.
An agreement for the construction of real estate is within the scope of LKAS
11 when the buyer is able to specify the major structural elements of the
design of the real estate before construction begins and/or specify major
structural changes once construction is in progress (whether or not it
exercises that ability) (IFRIC 15 para 11).
An agreement for the construction of real estate is within the scope of LKAS
18 when buyers have limited ability to influence the design of real estate and
can specify only minor variations to the basic design.
Since the houses will be built to a standard design and the buyers of the
houses are likely to have only minimal input into design features (such as
kitchen styles), the sale falls within the scope of LKAS 18 rather than LKAS
11.
Next Mica should consider whether this component is an agreement only for
the rendering of services or is for the sale of goods. Since Mica will be
supplying the (standard) construction materials rather than the purchaser
supplying materials, this is an agreement for the sale of goods therefore theprovisions of LKAS 18 in relation to the sale of goods apply.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 163/230
KC1 | Answers to Practice Questions
CA Sri Lanka 149
(3) Former hospitality division
SLFRS 5 states that an entity shall classify a non-current asset as held for sale
if its carrying amount will be recovered principally through a saletransaction rather than through continuing use.
For this to be the case:
1. the asset must be available for immediate sale in its present condition
2. its sale must be highly probable, meaning
(a) an appropriate level of management must be committed to a plan
to sell the asset
(b) there must be an active programme to locate a buyer(c) the asset (or disposal group) must be actively marketed for sale
at a price that is reasonable in relation to its current fair value
(d) the sale should be expected to qualify for recognition as a
completed sale within one year from the date of classification
(e) it must be unlikely that significant changes to the plan will be
made
Cookery equipment
Since the decision has not fully been made as to whether to sell the
equipment or retain it and lease it, it cannot be categorised as held for sale.
The asset therefore continues to be classified as PPE, and must be tested for
impairment at each period end, if indicators of impairment exist. According
to LKAS 36, an indicator of possible impairment is a change in operations
resulting in a change in use of the asset. The cookery equipment is currently
idle and therefore an impairment test must be performed.
The carrying amount of the equipment is Rs. 750,000. The recoverable
amount, being the higher of fair value less costs of disposal and value in use,
is the value in use of Rs. 710,000. Therefore the equipment is impaired. An
impairment loss of Rs. 40,000 must be recognised in profit or loss, and
depreciation should continue to be charged on the written down amount
over the remaining useful life. If the decision is made to sell the equipment, it
will be transferred to be an asset held for sale when the SLFRS 5 criteria are
met, and will be measured and presented in accordance with that standard.
Vans
Although the vans were in fact sold in January 20X5, there is no indication
that they were intended to be sold as at 31 December 20X4.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 164/230
KC1 | Answers to Practice Questions
150 CA Sri Lanka
SLFRS 5 states that if the criteria for assets to be classified as held for sale
are met after the reporting period, an entity must not classify a non-current
asset as held for sale in those financial statements i.e. it is a non-adjusting
event.
When those criteria are met after the reporting period but before the
authorisation of the financial statements for issue, the entity must make
additional disclosures. Therefore Mica shall disclose:
• a description of the vans
• a description of the facts and circumstances of their sale, and
• if relevant, the reportable segment in which the vans are presented in
accordance with SLFRS 8.
The vans are therefore presented in the statement of financial position as at31 December 20X4 within property, plant and equipment rather than assets
held for sale.
The sale so soon after the year-end at a price lower than carrying amount
could be an indicator that the vans were actually impaired at the year-end. If
the sale at less than carrying amount was due to conditions that existed at
the reporting date, then this is an adjusting event and the value of the vans
should be written down to Rs. 270,000 as at 31 December 20X4. If the loss of
value is due to events occurring after the year-end, then this is a non-
adjusting event, and should be disclosed if material.
Headquarters
Although Mica have clearly intended to sell the property since June 20X4, the
company decided to renovate the property prior to the sale. As a result of the
discovery of asbestos, the renovations are ongoing at the reporting date.
Therefore at no stage has the property been available for immediate sale in
its present condition. Furthermore, it was not advertised for sale until
February 20X5, meaning there was (understandably) not an active
programme to find a buyer.
Accordingly the property may not be designated as held for sale at 31
December 20X4, and should be recorded at carrying amount of Rs 6.7 Mn.
(4) SLFRS for SMEs
The SLFRS for SMEs may be applied by any company that meets the
definition of a Small or Medium Sized Entity (SME) and is not a Specified
Business Entity (SBE).
An SME is an entity that does not have public accountability and publishes
general purpose financial statements for external users.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 165/230
KC1 | Answers to Practice Questions
CA Sri Lanka 151
Mica has retained its private status rather than seek a listing and therefore
does not have public accountability; equally it does produce general purpose
financial statements for external users.
An SBE is a company such as a bank or insurance company; it does not
include a property construction and management company.
Therefore Mica is eligible to apply the SLFRS for SMEs.
Purchased goodwill
SLFRS 3 requires that the NCI is measured as a proportion of the net assets
of the acquiree; there is no option to measure it at fair value. Therefore
recognised goodwill always represents the parent share of goodwill only.
SLFRS 3 requires that transaction costs on an acquisition are recognised in
profit or loss; the SLFRS for SMEs requires that these costs form part of theacquisition cost. As a result goodwill calculated in accordance with the
SLFRS for SMEs may be greater than that calculated in accordance with
SLFRS 3.
Full SLFRS require that recognised goodwill is not amortised, but instead is
tested for impairment annually. The SLFRS for SMEs simplifies this
treatment in a practical sense by requiring that goodwill is amortised over a
finite life (presumed to be 10 years) and is tested for impairment only if
there is an indicator of impairment.
Goodwill is therefore measured at cost less accumulated amortisation
charges less accumulated impairment losses.
Owned properties held at revalued amount
Unlike full SLFRS, the SLFRS for SMEs does not provide a choice of
measuring properties under either the revaluation or cost model. Instead it
requires all property, plant and equipment to be measured using the cost
model.
Provisions
The guidance contained within the SLFRS for SMEs on accounting for
provisions is identical to that contained within LKAS 37.
(5) Adequacy of disclosures
The applicable standards here are SLFRS 7 Financial instruments:
disclosures, and LKAS 10 Events after the reporting period.
According to SLFRS 7, Mica should have included additional information
about the loan covenants sufficient to enable the users of its financialstatements to evaluate the nature and extent of risks arising from financial
instruments to which the entity is exposed at the end of the reporting period.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 166/230
KC1 | Answers to Practice Questions
152 CA Sri Lanka
Such disclosure is particularly important in Mica’s case because there was
considerable risk at the year-end (31 December 20X4) that the loan
covenants would be breached in the near future, as indicated by the
directors' and auditor’s doubts about the company continuing as a going
concern. Information should have been given about the conditions attachedto the loans and how close the entity was at the year-end to breaching the
covenants.
SLFRS 7 requires disclosure of additional information about the covenants
relating to each loan or group of loans, including headroom (the difference
between the amount of the loan facility and the amount required).
The actual breach of the loan covenants at 31 March 20X4 is a material event
after the reporting period as defined in LKAS 10. The breach, after the date of
the financial statements but before those statements were authorised, is anon-adjusting event, as it does not provide additional information
concerning year-end conditions. Therefore the event should have been
disclosed in accordance with LKAS 10.
Although the breach is a non-adjusting event, where such an event means
that an entity is no longer a going concern, LKAS 10 requires that the
financial statements are not prepared on a going concern basis. Here both
the directors' and auditor’s reports express going-concern doubts however
the information in the financial statements is prepared on a going-concern
basis. The directors should therefore assess the going concern status of the
company.
19 Robby
(1) ROBBY GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MAY 20X3
Rs Mn
AssetsNon-current assets Property, plant and equipment: + 12 (W13) 241.13
Goodwill 6.00
Financial assets 29.00
276.13
Current assets + 4 (W12) 36.00
Total assets 312.13
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 167/230
KC1 | Answers to Practice Questions
CA Sri Lanka 153
Rs Mn
Equity and liabilities Equity attributable to owners of the parent
Ordinary shares 25.00
Other components of equity 2.00 Retained earnings 81.45
108.45
Non-controlling interests 27.64
136.09
Non-current liabilities 94.84
Current liabilities+ 3.6 (W12)+16 (W13) 81.20
Total equity and liabilities 312.13
Workings
Consolidation schedule – consolidated statement of financial position at
31 May 20X3Robby Hail Zinc (W2(i)) (W2(ii)) (W3) (W4(i)) (W4(ii)) (W5) (W6) (W7) (W8) (W9) (W10) Consolidated
Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn
PPE 112 60 26 198 24 4 (0.4) 6.12 (2.59) 12 241.13
Goodwill 5 1 6
Inv in H 55 55 (5) (50) –
Inv in Z 19 19 (1) 3 (21) –
Financial assets
9 6 14 29 29
Joint operation
6 6 (6) -
C assets 5 7 12 24 8 4 36
206 73 52 331 312.13
St capital 25 20 10 55 (20) (10) 25
OC Equity 11 – – 11 (7) (2) 2 Ret’d earnings
70 27 19 116 2 (1) (16) 3 (15) (3.8) (0.24) 0.68 (0.59) 0.4 (4) 81.45
106 47 29 182 108.45
NCI 15 9 3.8 (0.16) 27.64
136.09
Non current
liabilities
53 20 21 94 0.84 94.84
Current liabilities
47 6 2 55 6.6 3.6 16 81.20
100 26 23 149 176.04
206 73 52 331 312.13
1 Group structure
1 June
X1
Robby 1 June
X2
1 Dec X2
80%
(sub)
5%
(IEI)
+ 55% = 60%
Pre-
acquisition
retained
earnings
Rs 16
MnHail Zinc
Pre-
acquisition
retained
earnings
N/A Rs 15 Mn
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 168/230
KC1 | Answers to Practice Questions
154 CA Sri Lanka
2 (i) Carrying amount of Hail
Hail was initially recognised at purchase consideration of Rs. 55
million and is subsequently classified as available for sale and
measured at fair value with changes recognised in other
comprehensive income. At the reporting date it is measured at its
fair value of Rs 55 Mn and therefore a cumulative revaluation
gain of Rs 55 Mn – Rs 50 Mn = Rs 5 Mn is represented in other
components of equity. This must be eliminated on consolidation.
In addition, Robby has recognised a dividend from Hail in other
comprehensive income (and so accumulated in other components
of equity). This must be transferred to retained earnings.
These are achieved by (Rs Mn):
DEBIT Other components of
equity (%m + 2m)
7m
CREDIT Investment in H 5m
CREDIT Retained earnings 2m
To eliminate the fair value gain on Hail in Robby’s separate
financial statements and transfer the dividend to retained
earnings.
(ii) Carrying amount of Zinc
Total consideration for the 60% investment in Zinc was
Rs. 18million. Whilst the second investment is carried at cost of
Rs. 16 million, the initial investment was measured at FVTPL and
a re-measurement of Rs 1 Mn was recognised at 31 May 20X2.
This is reversed by (Rs Mn):
DEBIT Retained earnings 1m
CREDIT Investment in Zinc 1m
To eliminate the fair value gain on Zinc in Robby’s separate
financial statements.
3 Goodwill (Hail)
Rs Mn Rs Mn
Consideration transferred 50
Non-controlling interest (fair value per q) 15
FV of identifiable net assets at acq'n: Stated capital 20
Retained earnings 16
Fair value adjustment - land 24
(60) 5
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 169/230
KC1 | Answers to Practice Questions
CA Sri Lanka 155
The standing journal to recognise this is (Rs Mn):
DEBIT Goodwill 5m
DEBIT Stated capital 20m
DEBIT Retained earnings 16m
DEBIT PPE 24mCREDIT Investment in H 50m
CREDIT NCI 15m
To recognise the acquisition of Hail and resulting goodwill.
4 Goodwill (Zinc)
(i) The previously held interest in Zinc has a carrying amount of
Rs. 2 million; on the acquisition date it is remeasured to its fair
value of Rs5m and, a gain of Rs. 3million is recognised in profit or
loss and accumulated in retained earnings (Rs Mn):DEBIT Investment in Z 3m
CREDIT Retained earnings 3m
To recognise the remeasurement to fair value of the existing
interest.
(ii) Goodwill is calculated as follows:
Rs Mn
Consideration transferred (55%) 16
Non-controlling interest at fair value (per question ) 9 Fair value of previously held interest (5%) 5
FV of identifiable net assets at acq'n:
Stated capital 10
Retained earnings 15
Fair value adjustment (1 + 3)* 4
(29)
1
. * The fair value adjustment is provisionally Rs. 1 million at the
acquisition date, however is determined to be Rs. 3million higherwhen the final valuations are received 3 months later. This
adjustment takes place in the measurement period and SLFRS 3
requires that goodwill is retrospectively adjusted.
The standing journal to recognise this is (Rs Mn):
DEBIT Goodwill 1m
DEBIT Stated capital 10m
DEBIT Retained earnings 15m
DEBIT PPE 4m
CREDIT Investment in Z (16 + 5) 21m
CREDIT NCI 9m
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 170/230
KC1 | Answers to Practice Questions
156 CA Sri Lanka
To recognise the acquisition of Hail and resulting goodwill.
5 Allocation of post-acquisition retained earnings to the NCI
Hail
Rs Mn
Zinc
Rs Mn
Retained earnings at reporting date 27 19
Retained earnings at acquisition (16) (15)
Post-acquisition 11 4
NCI share (20%/40%) 2.2 1.6
Therefore a total Rs 3.8 million (2.2m + 1.6m) of profits are allocated to
the NCI by (Rs Mn):
DEBIT Retained earnings 3.8m
CREDIT NCI 3.8m
To allocate profits since acquisition to the NCI.
6 Depreciation of fair value adjustment in Zinc
(Note the fair value adjustment in Hail was to non-depreciable land)
The fair value uplift of Rs. 4 million in Zinc is depreciated over a
remaining useful life of 5 years. Therefore the charge from acquisition
to the period end is Rs. 4m/5 years 6/12m = Rs. 400,000. This
additional expense is attributable to the group and NCI in their
ownership proportions and is recognised by:
DEBIT Retained earnings (60%) 0.24m
DEBIT NCI (40%) 0.16m
CREDIT PPE 0.4m
To recognise depreciation on the fair value uplift.
7 Joint operation (in Robby's books)
The accounting treatment of a joint operation is prescribed by SLFRS
11 Joint arrangements. Robby must recognise on a line-by-line basis itsassets, liabilities, revenues and expenses plus its share (40%) of the
joint assets, liabilities, revenue and expenses. The figures are calculated
as follows:
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 171/230
KC1 | Answers to Practice Questions
CA Sri Lanka 157
Profit or loss for the year
Rs Mn
Revenue: 20 × 40% 8.00
Cost of sales: 16 × 40% (6.40)
Operating costs: 0.5 × 40% (0.20)Depreciation (0.68)
Finance cost (unwinding of discount) (0.04)
Profit from joint operation (to retained earnings (W10) 0.68
Statement of financial position
Rs Mn
Property, plant and equipment: 1 June 20X2 cost: gas station (15 × 40%) 6.00
dismantling provision (2 × 40%) 0.80
6.80
Accumulated depreciation: 6.8/10 (0.68)
31 May 20X3 carrying amount 6.12
Trade receivables (from other joint operator):
20 (revenue) × 40%
8.00
Trade payables (to other joint operator):
16 + 0.5 (costs) × 40%
6.60
Dismantling provision:
At 1 June 20X2 (as above) 0.80 Finance cost (unwinding of discount): 0.8 × 5% 0.04
At 31 May 20X3 0.84
Robby has accounted only for its share of the construction cost of
Rs 6 Mn. The journal to correct this is therefore as follows (Rs Mn):
DEBIT Property, plant and equipment 6.12
DEBIT Trade receivables 8.00
CREDIT Joint operation 6.00
CREDIT Trade payables 6.60CREDIT Provision 0.84
CREDIT Retained earnings (Robby) 0.68
To recognise the joint operation in accordance with SLFRS 11.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 172/230
KC1 | Answers to Practice Questions
158 CA Sri Lanka
8 Property, plant and equipment
Carrying
amount
Reval.
surplus
Rs Mn Rs Mn
1 June 20X0 Cost 10.00 Acc. depreciation 2/20 × 10
(1.00)
9.00
Revaluation gain(balancing figure ) 2.00 2.00
31 May 20X2 Revalued PPE c/d 11.00
Depreciation for year 1/18 × 11
(0.61)
Transfer to retained earnings: 0.61 – 0.50 (0.11)
31 May 20X3 Balance 10.39 1.89
Impairment loss
(balancing figure)
(2.59)
Recoverable amount 7.80
The impairment loss is charged to other comprehensive income and
therefore to other components of equity to the extent of the
revaluation surplus. The remainder is taken to profit or loss and
therefore to retained earnings. Therefore Rs. 1.89 is recognised as a
reduction in other components of equity and Rs. 2.59 – Rs. 1.89 =
Rs. 0.7 as a reduction in retained earnings.
The reserve transfer for excess depreciation is recorded by (Rs Mn):
DEBIT Other components of equity 0.11
CREDIT Retained earnings 0.11
To transfer the excess depreciation charge from OCE to retained
earnings.
The impairment loss is recognised by (Rs Mn):
DEBIT Other components of equity 1.89
DEBIT Retained earnings 0.70
CREDIT Property, plant and equipment 2.59
To recognise the impairment loss.
The net journal is therefore (Rs Mn):
DEBIT Other components of equity 2.00
DEBIT Retained earnings 0.59
CREDIT Property, plant and equipment 2.59
To recognise the impairment and excess depreciation transfer.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 173/230
KC1 | Answers to Practice Questions
CA Sri Lanka 159
9 Debt factoring
Robby should not have derecognised the receivables because the risks
and rewards of ownership have not been transferred. The receivables
must therefore be reinstated, the loss reversed and the proceeds
recognised as a liability (Rs Mn):
DEBIT Trade receivables 4.0
CREDIT Current liabilities 3.6
CREDIT Retained earnings (to reverse
loss)
0.4
To reverse the incorrect entry and recognise the factoring arrangement
correctly.
10 Sale and repurchase of land
Robby should not have derecognised the land from the financial
statements because the risks and rewards of ownership have not been
transferred. The substance of the transaction is a loan of Rs 16 Mn, and
the 5% 'premium' on repurchase is effectively an interest payment.
This is an attempt to manipulate the financial statements in order to
show a more favourable cash position. The sale must be reversed and
the land reinstated at its carrying amount before the transaction. The
repurchase, ie the repayment of the loan takes place one month after
the year end, and so this is a current liability (Rs Mn):
DEBIT Property, plant and equipment 12
DEBIT Retained earnings (to reverse profit on
disposal)(16 – 12) 4
CREDIT Current liabilities 16
To reverse the incorrect entry and recognise the sale and repurchase
arrangement correctly.
(2) Derecognition of a financial asset
Derecognition is the removal of a previously recognised financial instrumentfrom an entity's statement of financial position.
An entity should derecognise a financial asset when:
(1) The contractual rights to the cash flows from the financial asset expire,
or
(2) The entity transfers the financial asset or substantially all the risks and
rewards of ownership of the financial asset to another party.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 174/230
KC1 | Answers to Practice Questions
160 CA Sri Lanka
LKAS 39 gives examples of where an entity has transferred substantially all
the risks and rewards of ownership. These include:
(1) An unconditional sale of a financial asset
(2) A sale of a financial asset together with an option to repurchase thefinancial asset at its fair value at the time of repurchase.
The standard also provides examples of situations where the risks and
rewards of ownership have not been transferred:
(1) A sale and repurchase transaction where the repurchase price is a fixed
price or the sale price plus a lender's return
(2) A sale of a financial asset together with a total return swap that
transfers the market risk exposure back to the entity
(3) A sale of short-term receivables in which the entity guarantees to
compensate the transferee for credit losses that are likely to occur.
It is possible for only part of a financial asset or liability to be derecognised.
This is allowed if the part comprises:
(1) Only specifically identified cash flows, or
(2) Only a fully proportionate (pro rata) share of the total cash flows
For example, if an entity holds a bond it has the right to two separate sets of
cash inflows: those relating to the principal and those relating to the interest.It could sell the right to receive the interest to another party while retaining
the right to receive the principal.
In the case of Robby, the substance of the transaction needs to be considered
rather than its legal form. Robby has transferred the receivables to the factor
in exchange for Rs 3.6 Mn cash, but it is liable for any shortfall between
Rs 3.6 Mn and the amount collected. In principle, Robby is liable for the
whole Rs 3.6 Mn, although it is unlikely that the default would be as much as
this. Robby therefore retains the credit risk. In addition, Robby is entitled to
receive the benefit (less interest) of repayments in excess of Rs 3.6 Mn once
the Rs. 3.6m has been collected. Therefore for amounts in excess of
Rs 3.6 Mn Robby also retains the late payment risk. Substantially all the risks
and rewards of the financial asset therefore remain with Robby, and the
receivables should continue to be recognised.
(3) Sale of land
Ethical behaviour in the preparation of financial statements, and in other
areas, is of paramount importance. This applies equally to preparers of
accounts, to auditors and to accountants giving advice to directors. Financial
statements may be manipulated for all kinds of reasons, for example to
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 175/230
KC1 | Answers to Practice Questions
CA Sri Lanka 161
enhance a profit-linked bonus. In this case, the purpose of the sale and
repurchase is to present a misleadingly favourable picture of the cash
position, which hides the fact that the Robby Group has severe liquidity
problems. The extent of the liquidity problems can be seen in the current
ratio of Rs 36 Mn/Rs 81.2 Mn = 0.44:1, and the gearing ratio of 0.83,calculated as follows:
-53 + 20 + 21 non current liabilities + 3.6 factored receivables + 16 land option
Equity interest including NCI
113.60= = 0.83
136.09
The effect of the sale just before the year-end was intended to eliminate the
bank overdraft and improve these ratios, although when the sale of land is
correctly accounted for as a loan, there is no improvement to gearing. Thesale as originally accounted for might forestall proceedings by the bank, but
as the substance of the transaction is a loan, it does not alter the true
position and gives a misleading impression of it.
Company accountants act unethically if they use 'creative' accounting in
accounts preparation to make the figures look better. To act ethically, the
directors must put the interests of the company and its shareholders first,
and must also have regard to other stakeholders such as potential investors
or lenders. If a treatment does not conform to acceptable accounting
practice, it is not ethical. Acceptable accounting practice includes conformity
with the qualitative characteristics set out in the Conceptual Framework
particularly fair presentation and verifiability. Conformity with the
Conceptual Framework precludes window-dressing transactions such as this,
and so the land needs to be reinstated in the accounts and a current liability
recognised for the repurchase.
20 Ashanti
(1) ASHANTI GROUP
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 APRIL 20X5
Rs Mn
Revenue
1,096.00
Cost of sales
(851.00)
Gross profit 245.00
Other income 57.80
Distribution costs (64.00) Administrative costs (96.01)
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 176/230
KC1 | Answers to Practice Questions
162 CA Sri Lanka
Rs Mn
Finance income 1.68
Finance costs
(32.70)
Share of profit of associate
2.10
Profit before tax 113.87 Income tax expense
(49.00)
Profit for the year 64.87
Other comprehensive income (items that will not be reclassified
to profit or loss) Gain on AFS financial assets
32.00
Gain/loss on property revaluation 19.60
Remeasurement of defined benefit plan (14.00)
Share of other comprehensive income of associate
0.90
Other comprehensive income for the year net of tax 38.5 Total comprehensive income for the year 103.37
Profit attributable to: Owners of the parent 50.48
Non-controlling interests 14.39
64.87
Total comprehensive income attributable to: Owners of the parent 82.89
Non-controlling interests 20.48
103.37
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 177/230
KC1 | Answers to Practice Questions
CA Sri Lanka 163
Workings Ashanti Bochem Ceram Total (W2) (W3) (W5(i)) (W5(ii)) (W7(i)) (W7(ii)) (W8) (W9) (W10) (W11) Consolidated
Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn
Revenue 810 235 71 1,116 (15) (5) 1,096
Cost of sales (686) (137) (42) (865) 15 (1) (851)
Gross profit 124 98 29 251 245
Other
income
31 17 6 54 3.8 57.8
Distribution
costs
(30) (21) (13) (64) (64)
Admin costs (55) (29) (6) (90) (2.2) (2) (1.6) (0.21) (96.01)
Finance income
– – – – 1.68 1.68
Finance costs
(8) (6) (4) (18) (11.70) (3) (32.70)
Share of profit of
associate
–
_____
–
_____
–
__ _
–
__ __
2.1 2.10
PBT 62 59 12 133 113.87
Tax (21) (23) (5) (49) (49)
Profit for the
year
41 36 7 84 64.87
OCI AFS 20 9 3 32 32
Revaluation 12 6 – 18 1.6 19.6 Remeas’t of
DBP
(14) – – (14) (14)
Share of OCI
of associate
–
_____
–
_____
–
_____
–
______
0.9 0.9
TCI 59 51 10 120 103.37
Profit attributable
to:
Owners of A 41 25.2 3.92 70.12 (1.54) (1.4) 2.66 1.47 (1) (10.02) (8) (1.6) (0.21) 50.48
NCI (30%/44%)
10.8 3.08 13.88 (0.66) (0.6) 1.14 0.63 14.39
TCI attributable
to:
Owners of A 59 35.7 5.6 100.3 (1.54) (1.4) 2.66 2.1 (1) (10.02) (8) - (0.21) 82.89
NCI
(30%/44%)
15.3 4.4 19.7 (0.66) (0.6) 1.14 0.9 20.48
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 178/230
KC1 | Answers to Practice Questions
164 CA Sri Lanka
1 Group structure
Ashanti
1 May 20X3 30 April 20X5
70% – 10% = 60%
Bochem
1 May 20X3 1 Nov 20X4
80% – 50% = 30%
Effective interest to
1 Nov 20X4 56%
NCI (bal) 44%
Ceram 100%
Ashanti
Bochem Subsidiary with 30% NCI for whole year
Ceram
Subsidiary with 44% NCI 612
30% associate (with 30% NCI by
Ashanti)
2 Goodwill in Bochem
Rs Mn
Consideration transferred: per 150.0
question/136
70%
Fair value of non-controlling interest 54.0
Fair value of net assets (160.0)
44.0
Impairment loss to 30.4. 20X4: 44 15% (6.6)
37.4
Impairment loss to 30.4.20X5: 44 5% (2.2)
35.2
The impairment loss in the year is recognised by (Rs Mn):
DEBIT Administrative costs 2.2
CREDIT Goodwill (SOFP) 2.2
To recognise the impairment of goodwill in the year.
1.5.X41.11.X4 30.4.X5
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 179/230
KC1 | Answers to Practice Questions
CA Sri Lanka 165
As the goodwill is attributable to both the group and the NCI, the loss is
allocated between the owners of Ashanti and the NCI in proportion to
their ownership interests.
3 Fair value adjustment
Rs Mn
Fair value of net asset at acquisition 160
Book value of net assets at acquisition (55+85+10) (150)
Fair value upift 10
The fair value uplift is depreciated over 5 years, therefore (Rs Mn):
DEBIT Administrative costs
(10m/5yrs)
2
CREDIT PPE (SOFP) 2
To recognise additional depreciation in the year.
4 Disposal of 10% of Bochem
As control is not lost, there is no effect on the consolidated statement of
profit or loss and other comprehensive income.
The sale is, in effect, a transfer between owners (Ashanti and the non-
controlling interest). It is accounted for as an equity transaction
directly in equity, and only reflected in the statement of changes in
equity.
Although no adjustment is required, the disposal journal is shown for
completeness (Rs Mn):
DEBIT Cash 34
CREDIT Non-controlling interest (251.2 * 10%) 25.12
CREDIT Adjustment directly to parent's equity 8.88
* Net assets of Bochem at date of sale:
Rs Mn
Net assets at 30 April 20X5
210.0 FV adjustments (W3) 6.0
216.0
Goodwill (W2) 35.2
251.2
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 180/230
KC1 | Answers to Practice Questions
166 CA Sri Lanka
5 Disposal of Ceram
Rs Mn Rs Mn
Fair value of consideration received 90.0
Fair value of equity interest retained 45.0
Carrying amount of Ceram at date of disposal Net assets 160.0
Goodwill (W6) 6.2
166.2
Less NCI per question (35.0)
(131.2)
3.8
(i) The disposal is recognised by (Rs Mn):
DEBIT Cash (SOFP) 90
DEBIT NCI (SOFP) 35
DEBIT Interest in associate
(SOFP)
45
CREDIT Net assets (SOFP) 160
CREDIT Goodwill (SOFP) 6.2
CREDIT Other income 3.8
To recognise the gain on the part-disposal of Ceram.
The gain is attributable between the owners of the parent and the
NCI in Bochem in proportion to their ownership interests.
(ii) Ceram is now an associate and therefore after the disposal, the
group share of its profit after tax and OCI is recognised as income
from an associate (Rs Mn):
DEBIT Investment in associate
(SOFP)
3
CREDIT Share of profit of
associate (Rs 14 Mn ×30% × 6/12m)
2.1
CREDIT Share of OCI of associate
(Rs 10 Mn × 30% ×
6./12m)
0.9
To recognise income from Ceram as an associate.
This income is attributable to the owners of Ashanti and the NCI in
Bochem in proportion to their ownership interests.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 181/230
KC1 | Answers to Practice Questions
CA Sri Lanka 167
6 Goodwill on acquisition of Ceram
Rs Mn
Consideration transferred (136m
70%) 95.2
Fair value of non-controlling interest 26.0
Fair value of net assets (115.0) Goodwill on acquisition 6.2
7 Intragroup sales
(i) Intragroup sales/purchases must be eliminated by (Rs Mn):
DEBIT Revenue (10m + 5m) 15
CREDIT Cost of sales 15
To eliminate intragroup sales.
(ii) The unrealised profit on sales from Ashanti to Bochem is
cancelled by (Rs Mn):
DEBIT Cost of sales (10 ½ 20%) 1
CREDIT Inventory (SOFP) 1
To eliminate the unrealised profit in inventory.
As the selling company was Ashanti, the adjustment is attributable to
the owners of Ashanti only.
8 Bond impairment
In order to calculate the impairment, the carrying amount of the bondat 30 April 20X5 is compared with the present value of future cash
flows associated with the bond. Therefore
Carrying amount Rs m
1 May 20X4 amortised cost 21.046
Effective interest @ 4% 0.842
31 October 20X4 cash received (20 5%) (1.000)
20.888
Effective interest @ 4% 0.836
30 April 20X5 cash received (1.000) 30 April 20X5 carrying amount 20.724
As no accounting entries have been made in the year, the amortisation
of the bond must be recognised by (Rs Mn):
DEBIT Cash 2
CREDIT Financial asset (SOFP) (21,046 – 20,724) 0.32
CREDIT Finance income (0.842 + 0.836) 1.68
To recognise amortisation of the bond for the year
Present value of future cash flows Rs Mn
30 April 20X6 Rs 2.34 Mn 1/1.08 2.167
30 April 20X7 Rs 8 Mn 1/1.082 6.859
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 182/230
KC1 | Answers to Practice Questions
168 CA Sri Lanka
9.026
Therefore an impairment loss of Rs 11.698 Mn (Rs 20.724 Mn –
Rs 9.026 Mn) arises. This is rounded and recognised by (Rs Mn):
DEBIT Finance costs 11.70
CREDIT Financial asset (SOFP) 11.70To recognise the impairment loss on the bond.
All amounts are attributable to the owners of Ashanti.
9 Allowance for receivables
The revenue of Rs. 5m should not have been recorded, as it is not
probable that future economic benefits from the sale will flow to
Ashanti. The revenue should only be recorded when the customer pays
for the goods.
It is not appropriate to include the Rs 5 Mn in the allowance fordoubtful debts of Rs 8 Mn, and so the allowance must be limited to
Rs 3 Mn.
The required adjustments are recorded by (Rs Mn):
DEBIT Revenue 5
CREDIT Receivables (SOFP) 5
DEBIT Finance costs (impairment of
receivable)
3
CREDIT Allowance for receivables
(SOFP)
3
To reverse the recorded revenue and recognise the increase in
allowance for receivables.
The costs are allocated to the owners of Ashanti.
10 Property, plant and equipment
SOFP
Reval’n
surplus
Rs Mn Rs Mn 1 May 20X3 Cost 12.000
Depreciation (12m/10yrs)
(1.200)
Revaluation (balancing figure) 2.200 2.200
30 April 20X4 Revalued PPE c/f 13.000
Depreciation for year (13m/9 years)
(1.444)
Transfer to retained earnings: 1.444 – 1.2 (0.244)
1.956
Revaluation loss (balancing figure) (3.556) (1.956)
30 April 20X5 Revalued PPE c/f 8.000 0.000
Ashanti has recorded the revaluation loss by (Rs Mn):
DEBIT Other comprehensive income 3.56
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 183/230
KC1 | Answers to Practice Questions
CA Sri Lanka 169
CREDIT Property, plant and equipment 3.56
It should have (Rs Mn):
DEBIT Other comprehensive income 1.96
DEBIT Profit or loss (balancing figure) 1.6
CREDIT Property, plant and equipment 3.56
Therefore the journal required to correct the entry is (Rs Mn):
DEBIT Administrative costs Rs 1.6 Mn
CREDIT Other comprehensive income Rs 1.6 Mn
To correctly recognise the downwards revaluation.
The PPE is owned by Ashanti and therefore the loss is attributable to
the owners of the parent only.
11 Holiday pay accrual
LKAS 19 Employee benefits requires that an accrual be made for holiday
entitlement carried forward to next year.
Number of days c/f: 900 3 95% = 2,565 days
Number of working days: 900 255 = 229,500
Accrual =2,565
229,500 Rs 19 Mn = Rs 0.21 Mn
Therefore (Rs Mn):
DEBIT Administrative costs 0.21
CREDIT Accruals 0.21
To recognise the holiday accrual.
This is attributable to the owners of Ashanti.
(2) Sustainability reporting
Sustainability may also be known as corporate citizenship or social
responsibility. It includes anything from environmental awareness to
involvement in local community issues to modifying business processes toreduce the operational use of energy resources.
A sustainability report is an organisational report that provides information
about a company’s economic, social and environmental performance and
impact. Such reports are becoming increasingly important to stakeholders
who use them to evaluate the long term viability of a company.
There are a number of factors that encourage companies to provide a
sustainability report with their financial statements.
As stated, public interest in corporate social responsibility is steadilyincreasing. Although financial statements are primarily intended for
investors and their advisers, there is growing recognition that companies
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 184/230
KC1 | Answers to Practice Questions
170 CA Sri Lanka
actually have a number of different stakeholders. These include customers,
employees and the general public, all of whom are potentially interested in
the way in which a company's operations affect the natural environment and
the wider community.
These stakeholders can have a considerable effect on a company's
performance. As a result many companies now deliberately attempt to build
a reputation for social, economic and environmental responsibility.
Therefore the disclosure of sustainability information is essential. There is
also growing recognition that corporate social responsibility is actually an
important part of an entity's overall performance. Responsible practice in
areas such as reduction of damage to the environment and the promotion of
good employee relations increase shareholder value. Companies that act
responsibly and provide sustainability reports are perceived as better
investments than those that do not.
In the Sri Lanka textiles and apparel industry, and particularly in Ashanti, it
is also the case that excellent practice in employee recruitment and relations
has already been established. This is, in itself, an incentive to promote
sustainability reporting, in that there exists good practice to report upon.
Another factor is growing interest by governments and professional bodies.
Although there are no SLFRSs that specifically require sustainability
reporting, it may be required by company legislation. There are now a
number of awards for high quality sustainability disclosure in financial
statements. These provide further encouragement to disclose information.
At present companies are normally able to disclose as much or as little
information as they wish in whatever manner that they wish. This causes a
number of problems. Companies tend to disclose information selectively and
it is difficult for users of the financial statements to compare the
performance of different companies. However, there are good arguments for
continuing to allow companies a certain amount of freedom to determine the
information that they disclose. If detailed rules are imposed, companies arelikely to adopt a 'checklist' approach and will present information in a very
general and standardised way, so that it is of very little use to stakeholders.
(3) Management of earnings
'Earnings management' involves exercising judgement with regard to
financial reporting, and structuring transactions so as to achieve stable and
predictable result, and in some cases, give a misleadingly optimistic picture
of a company's performance. This is done with the intention, whether
consciously or not, of influencing outcomes that depend on stakeholders'assessments. For example, a bank, or a supplier or customer may decide to
do business with a company on the basis of a favourable performance or
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 185/230
KC1 | Answers to Practice Questions
CA Sri Lanka 171
position. A director may wish to delay a hit to profit or loss for the year in
order to secure a bonus that depends on profit. Indeed earnings
management, sometimes called 'creative accounting' may be described as
manipulation of the financial reporting process for private gain.
A director may also wish to present the company favourably in order to
maintain a strong position within the market. The motive is not directly
private gain – he or she may be thinking of the company's stakeholders, such
as employees, suppliers or customers – but in the long term earnings
management is not a substitute for sound and profitable business, and
cannot be sustained.
'Aggressive' earnings management is a form of fraud and differs from
reporting error. Nevertheless, all forms of earnings management may be
ethically questionable, even if not illegal.
A more positive way of looking at earnings management is to consider the
benefits of not manipulating earnings:
(i) Stakeholders can rely on the data. Word gets around that the company
'tells it like it is' and does not try to bury bad news.
(ii) It encourages management to safeguard the assets and exercise
prudence.
(iii) Management set an example to employees to work harder to make
genuine profits, not arising from the manipulation of accruals.
(iv) Focus on cash flow rather than accounting profits keeps management
anchored in reality.
Earnings management goes against the principle of corporate social
responsibility. Companies have duty not to mislead stakeholders, whether
their own shareholders, suppliers, employees or the government. Because
the temptation to indulge in earnings management may be strong,
particularly in times of financial crisis, it is important to have ethical
frameworks and guidelines in place. The letter of the law may not be enough.
21 Rose
(1) Factors to consider in determining functional currency of Stem
LKAS 21 The effects of changes in foreign exchange rates defines functional
currency as 'the currency of the primary economic environment in which the
entity operates'. Each entity, whether an individual company, a parent of a
group, or an operation within a group, should determine its functionalcurrency and measure its results and financial position in that currency.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 186/230
KC1 | Answers to Practice Questions
172 CA Sri Lanka
An entity should consider the following factors:
(1) What is the currency that mainly influences sales prices for goods and
services (this will often be the currency in which sales prices for its
goods and services are denominated and settled)?
(2) What is the currency of the country whose competitive forces and
regulations mainly determine the sales prices of its goods and services?
(3) What is the currency that mainly influences labour, material and other
costs of providing goods or services? (This will often be the currency in
which such costs are denominated and settled.)
Applying the first of these, it appears that Stem's functional currency is the
dinar. The price it charges is denominated and settled in dinars and is
determined by local supply and demand. However, when it comes to costs
and expenses, Stem pays in a mixture of dollars, dinars and the localcurrency, so that aspect is less clear- cut.
Other factors may also provide evidence of an entity's functional currency:
(1) It is the currency in which funds from financing activities are
generated.
(2) It is the currency in which receipts from operating activities are usually
retained.
Stem does not depend on group companies for finance. Furthermore, Stem
operates with a considerable degree of autonomy, and is not under the
control of the parent as regards finance or management. It also generates
sufficient cash flows to meet its cash needs. These aspects point away from
the dollar as the functional currency.
The position is not clear cut, and there are arguments on both sides.
However, on balance it is the dinar that should be considered as the
functional currency, since this most faithfully represents the economic
reality of the transactions, both operating and financing, and the autonomy
of Stem in relation to the parent company.
(2) ROSE GROUPCONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT
30 APRIL 20X8
Rs Mn Non-current assets Property, plant and equipment 603.65
Goodwill 22.20
Intangible assets 3.00
Financial assets 32.00
660.85 Current assets 284.00
944.85
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 187/230
KC1 | Answers to Practice Questions
CA Sri Lanka 173
Rs Mn Equity and liabilities Share capital 158.00
Retained earnings 277.39
Other components of equity 6.98 442.37
Non-controlling interests 89.83
532.20
Non-current liabilities 130.65 Current liabilities 282.00
412.65
944.85
Workings
Consolidation schedule – consolidated statement of financial position at
30 April 20X8Rose Petal Stem Total (W4(i) ) (W4(ii)) (W5(i)) (W5(ii)) (W5(iii)) (W6) (W7) (W8) (W9) (W10) Consolidated
Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn
PPE 370 110 76 556 30 12.5 2.5 2.25 0.4 603.65
Goodwill 16 5.17 1.03 22.2
Inv in P 113 113 (94) (19) -
Inv in S 46 46 (46) -
Intangible
assets
4 (1) 3
Financial assets
15 7 10 32 32
Current assets
118 100 66 284 284
662 217 152 1,031 944.85
St capital 158 38 33.33 229.33 (38) (33.33) 158
OCE 7 4 11 (3) (0.3) 2.25 (2.97) 6.98
FX reserve 16.21 16.21 0.54 1 .3 (7.78) 10.27
Ret’d earnings
256 56 50.46 362.46 (49) (0.7) (36.67) (8.72) (0.65) 0.4 267.12
421 98 100 619
NCI 46 (0.3) 41.67 0.49 1.2 16.8 (16.03) 89.93
532.2
Non current
liabilities
56 42 32 130 0.65 130.65
Current liabilities
185 77 20 282 282
241
119
52
412
412.65
662 217 152 1,031 944.85
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 188/230
KC1 | Answers to Practice Questions
174 CA Sri Lanka
1 Group structure
Cost
FV NCI
FV NA
RE
OCE
Rs94m
Rs46m
Rs120m
Rs49m
Rs3m
Rs19m80% 52%
+
1 May 20X7
70%
1 May 20X7
52%
Cost
FV NCI
FV NA
RE
OCE
Rs46m
250m
495m
220m
dinars
dinars
dinars
Rose
Petal Stem
30 April 20X8
10% = 80%
2 Translation of SOFP of Stem at 30 April 20X8
Dinars (m) Rate Rs Mn
Property, plant and equipment 380 5 76.00
Financial assets 50 5 10.00
Current assets 330 5 66.00
760 152.00
Share capital 200 6 33.33
Retained earnings Pre-acqn 220
6 36.67
Post-acqn 80 5.8 13.79
FX Reserve
-
(W3)
16.21
500 100.00
Non-current liabilities 160 5 32.00
Current liabilities 100 5 20.00
760 152.00
3 Exchange difference arising on translation
Rs Mn Rs Mn Opening net assets (200m +220m) At opening rate of 6 70
At closing rate of 5 84 Gain 14
Retained profit for the year (80m) At average rate of 5.8 13.79
At closing rate of 5 16
Gain 2.21
Gain recognised as OCI of Stem and accumulated in foreign exchange reserve
16.21
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 189/230
KC1 | Answers to Practice Questions
CA Sri Lanka 175
4 Acquisition of Petal
(i) Goodwill Rs Mn Consideration transferred 94
Fair value of non-controlling interests 46
Fair value of identifiable net assets at acquisition: Stated capital (38)
Retained earnings (49)
Other components of equity (3)
Patent (4)
Fair value adjustment – land (120 – 38 – 49 – 3) (30)
16
This is recognised by (Rs Mn):
DEBIT Goodwill 16
DEBIT Stated capital 38
DEBIT Retained earnings 49
DEBIT Other components of equity 3
DEBIT Intangible assets 4
DEBIT PPE 30
CREDIT Investment in P 94
CREDIT NCI 46
To recognise the acquisition of Petal and resulting goodwill.
(ii) The intangible asset is amortised over 4 years. Amortisation to date is
Rs. 1 million (4m/4years). It is recognised by (Rs Mn):
DEBIT Retained earnings (70% 1m) 0.7
DEBIT NCI (30% 1m) 0.3
CREDIT Intangible assets 1
To recognise amortisation on the intangible asset recognised on
consolidation.
5 Acquisition of Stem
(i) Goodwill is calculated as:
Dinars(m) Rate Rs Mn
Consideration transferred (Rs 46 Mn 6) 276 6 46.00
Non-controlling interests 250 6 41.67
Less fair value of net assets at acq'n
Stated capital (200) 6 (33.33)
Retained earnings (220) 6 (36.67)
FV adjustment to land (75) 6 (12.5)
At 1 May 20X7 31 6 5.17
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 190/230
KC1 | Answers to Practice Questions
176 CA Sri Lanka
This is recognised by (Rs Mn):
DEBIT Goodwill 5.17
DEBIT Stated capital 33.33
DEBIT Retained earnings 36.67
DEBIT PPE 12.5
CREDIT Investment in P 46
CREDIT NCI 41.67
To recognise the acquisition of Stem and resulting goodwill.
(ii) Goodwill is retranslated at the year-end using the closing rate to
Rs 6.2 Mn (31m/5). Therefore a gain of Rs 1.03 Mn is recognised. This
is allocated between the owners of Rose and the NCI in Stem by
(Rs Mn):
DEBIT Goodwill 1.03
CREDIT NCI (48% 1.03m) 0.49CREDIT FX reserve (52% 1.03m) 0.54
To recognise the retranslation of goodwill using the closing rate.
(iii) The fair value adjustment is also retranslated at the year-end using the
closing rate to Rs 15 Mn(75m/5). The Rs 2.5 Mn gain is allocated
between the owners of Rose and the NCI. It is recognised by (Rs Mn):
DEBIT PPE 2.5
CREDIT FX Reserve (52% 2.5) 1.3
CREDIT NCI (48% 2.5) 1.2
To recognise the retranslation of the fair value adjustment using the
closing rate.
6 Allocation of post-acquisition reserves movements to the NCI
Petal Stem
Retained earnings
Rs Mn
OCE Rs Mn
Retained earnings
Rs Mn
FX reserve Rs Mn
At reporting date 56 4 50.46 16.21
At acquisition (49) (3) (36.67) –
Post-acquisition 7 1 13.79 16.21
NCI share
(30%/48%)
2.1 0.3 6.62 7.78
The NCI share of reserves movements are allocated by:
DEBIT Retained earnings (2.1 + 6.62) 8.72
DEBIT Other components of equity 0.3
DEBIT FX reserve 7.78CREDIT NCI 16.8
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 191/230
KC1 | Answers to Practice Questions
CA Sri Lanka 177
To allocate the NCI its share of post-acquisition profits and OCI.
7 Rose – property
Dinars m Rs Mn
Cost at 1 May 20X7 30 @ 6 dinars: Rs. 1 5.00
Depreciation (30m/20) (1.5) 5m / 20yrs (0.25)
Carrying amount at 30 April 20X8 28.5 4.75
Revaluation (balancing figure) 6.5 2.25
Revalued amount at 30 April 20X8 35 @ 5 dinars: Rs. 1 7.00
The revaluation surplus of Rs 2.25 Mn is recognised in other components of
equity by (Rs Mn):
DEBIT PPE 2.25
CREDIT OCE 2.25
To recognise the revaluation surplus.
8 Bonus scheme
The cumulative bonus payable is Rs 4.42 Mn, calculated as follows, with a
5% annual increase:
Bonus as at: Rs Mn
30 April 20X8 Rs 40 Mn × 2% 0.800
30 April 20X9 Rs 0.8 Mn × 1.05 0.840
30 April 20Y0 Rs 0.8 Mn × 1.052 0.882
30 April 20Y1 Rs 0.8 Mn × 1.053 0.926 30 April 20Y2 Rs 0.8 Mn × 1.054 0.972
4.420
This is Rs. 884,000 (Rs. 4.42/5 years) per year. The current service cost is
the present value of Rs. 884,000 at 30 April 20X8: Rs. 884,000 × 1/1.084 =
Rs 0.65 Mn
This is recorded by (Rs Mn):
DEBIT Retained earnings 0.65
CREDIT Non-current liabilities 0.65
To recognise the long-term bonus scheme.
9 Rose – plant
The change in residual value is a change in accounting estimate and is
applied prospectively from the date of change (1 May 20X7):
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 192/230
KC1 | Answers to Practice Questions
178 CA Sri Lanka
Rs Mn Rs Mn
Depreciation for the year based on
original residual value
(20 – 1.4) ÷ 6 3.10
Depreciation for the year based on
revised amount
(20 – (3.1 × 3 years) – 2.6) ÷ 3 years
2.70
Adjustment 0.40
The adjustment is recognised by (Rs Mn):
DEBIT PPE 0.4
CREDIT Retained earnings 0.4
To record depreciation correctly based on the revised residual value.
10 Increased shareholding in Petal
The subsequent acquisition of a 10% holding in Petal for Rs. 19 million hasbeen recognised by Rose by:
DEBIT Investment in P 19
CREDIT Cash 19
In the consolidated accounts this acquisition is dealt with as a transaction
between shareholders and is accounted for by adjusting the carrying amount
of the NCI from 30% to 20%. The amount of the decrease is calculated in W5
as Rs. 16.03m. The adjustment to parent's equity, which is recognised in
other components of equity is calculated as follows:
Rs Mn
NCI at acquisition (W4(i)) 46.00
NCI share of amortisation of intangible (W4(ii)) (0.3)
NCI share of post-acq. retained earnings (W6) 2.1
NCI share of post-acquisition OCE (W6) 0.3
48.10
Adjustment 10%/30% x Rs. 48.1m 16.03
The adjustment to NCI is recognised in the parent’s equity by (Rs Mn):
DEBIT Non-controlling interest 16.03
DEBIT Other components of equity (balancing
figure)
2.97
CREDIT Investment in P 19
To eliminate the cost of the 10% investment in Petal and adjust equity to
reflect the acquisition.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 193/230
KC1 | Answers to Practice Questions
CA Sri Lanka 179
(3) Acquisition of MineConsult Co
Rose's proposed valuation of MoneConsult Co's assets (based on what it is
prepared to pay for them, which is, in turn, influenced by future plans for the
business) does not comply with SLFRS.
Such a valuation needs to be based on the following SLFRS:
(i) SLFRS 3 Business combinations. Under SLFRS 3, an acquirer must
allocate the cost of a business combination by recognising the
acquiree's identifiable assets, liabilities and contingent liabilities that
satisfy the recognition criteria at their fair values at the date of the
acquisition.
(ii) SLFRS 13 Fair value measurement defines fair value as as 'the price that
would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement
date.' This is also known as 'exit price'.
(iii) LKAS 38 Intangible assets states that intangible assets acquired in
business combinations can normally be measured sufficiently reliably
to be recognised separately from goodwill.
Measuring MineConsult Co's assets on the basis of their value to Rose does
not accord with the above standards. First, the standards may recognise as
assets items that Rose does not identify. Secondly, there has been no attempt
to apply the SLFRS 13 definition of fair value, which specifies the price that
would be paid by market participants, and implies that Rose's judgement
alone would not be sufficient.
With respect to the contract-based customer relationships that MineConsult
Co has, in proposing to value these at zero on the grounds that Rose already
has good relationships with customers, Rose is failing to apply LKAS 38.
Under LKAS 38, part of the cost of the acquisition should be allocated to
these relationships, which will have a value separate from goodwill at the
date of the acquisition. The fair value of the customer relationships should
not be based on Rose's judgement of their worth but on that of a market
participant such as a well-informed buyer.
Ethical behaviour in the preparation of financial statements, and in other
areas, is of paramount importance. Directors and company accountants act
unethically if they use 'creative' accounting in accounts preparation to make
the figures look better, in particular if their treatment would mislead users,
as here. Motivation for misleading treatments can include market
expectations, market position or expectation of a bonus.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 194/230
KC1 | Answers to Practice Questions
180 CA Sri Lanka
To act ethically, the directors must put the interests of the company and its
shareholders first, and must also have regard to other stakeholders such as
potential investors or lenders. If a treatment does not conform to acceptable
accounting practice, it is not ethical.
If the aim of the proposed treatment is to deliberately mislead users of
financial statements, then it is unethical, and should not be put into practice.
It is possible that non-compliance with SLFRS 3, SLFRS 13 and LKAS 38 is a
genuine mistake. If so, the mistake needs to be corrected in order to act
ethically. There is, in any case a duty of professional competence in the
preparation of financial statements, which would entail keeping up to date
with SLFRS and local legislation.
22 Warrburt(1) WARRBURT GROUP
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 NOVEMBER 20X8
Rs Mn Rs Mn Operating activities Net loss before tax (47)
Adjustments for Gain on revaluation of investment in equity instruments (Alburt – fair value on disposal less FV at 1.12.X7 (W1) (7)
Retirement benefit expense 10
Depreciation 36
Profit on sale of property plant and equipment:
Rs 63 Mn – Rs 56 Mn
(7)
Profit on insurance claim: Rs 3 Mn – Rs 1 Mn (2)
Foreign exchange loss (W6) Rs 1.1 Mn + Rs 0.83 Mn 2
Share of profit of associate (6)
Impairment losses: Rs 20 Mn + Rs 12 Mn 32
Interest expense 9
20 Decrease in trade receivables (W4) 71
Decrease in inventories (W4) 63
Decrease in trade payables (W4) (86)
Cash generated from operations 68
Retirement benefit contributions* (10)
Interest paid (W5) (8)
Income taxes paid (W3) (39)
Net cash from operating activities 11
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 195/230
KC1 | Answers to Practice Questions
CA Sri Lanka 181
Rs Mn Rs Mn Investing activities Purchase of PPE: Rs 56 Mn (W1) + Rs 1.1 Mn (W6) (57)
Proceeds from sale of property, plant and equipment 63
Proceeds from sale of financial asset investments 45 Acquisition of associate (W1) (96)
Dividend received from associate: (W1) 2
Net cash used in investing activities (43)
Financing activities Proceeds from issue of ordinary shares (W2) 55
Repayment of long-term borrowings (W3) (44)
Dividends paid (9)
Dividends paid to non-controlling shareholders (W3) (5)
Net cash used in financing activities (3) Net decrease in cash and cash equivalents (35)
Cash and cash equivalents at beginning of year 323
Cash and cash equivalents at end of year 288
*Note. Only the contributions paid are reported in the cash flow, because this is
the only movement of cash. The amounts paid by the trustees are not included,
because they are not paid by the company.
Workings
1 Assets
PPE Goodwill
Intan.
assets Associate
Financial
assets
Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn
b/f 360 100 240 0 150
P/L 6
OCI (revaluation) 4 30**
FV gain on investment in Alburt
7
Dep'n/Impairment/ (36) (20) β (12) βAcquisition of
associate
96
Asset destroyed (1)
Replacement from ins. company (at FV)
3
Disposals (56)
Non-cash additions (on credit)*
20
8 × 25%
Cash paid/(rec'd) 56 0 0 (2) (45)
c/f 350 80 228 100 142
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 196/230
KC1 | Answers to Practice Questions
182 CA Sri Lanka
Bold figures in the table above are calculated as balancing figures.
Notes
* The additions are translated at the historic rate. Adjustment for exchange
rate differences are dealt with in (W9). Rs Mn
Additions (cash)280
5= 56
Additions (credit)
1005
20
Total (excluding destroyed assets replaced): 78 – (3 – 1) 76
** This is the gain on revaluation, which is shown in the statement of profit
or loss and other comprehensive income net of deferred tax of Rs 3 Mn (W3),
that is at Rs 27 Mn. The gross gain is therefore Rs 30 Mn and is the amount
reflected in this working.
2 Equity
Stated
capital
Retained
earnings
Reval
Surplus OCE NCI
Rs Mn Rs Mn Rs Mn Rs Mn Rs Mn b/f 595 454 4 16 53
P/L (74) (2)
OCI 2 23
Cash (paid)/rec'd 55 (9) ** (5) **
c/f 650 371 6 39 46
* *Cash flow given in question, but working shown for clarity
3 Liabilities
Long-term
borrowings
Tax payable
Retirement benefit
liability
Rs Mn Rs Mn Rs Mn b/f 64 (26 + 42) 68 96
P/L
29
10 OCI ( 3 + 2) *
5
4
Cash (paid)/rec'd (44) (39) (10)**
c/f 20 63
(28+ 35)
100
Bold figures in the table above are calculated as balancing figures.
* On revaluation gain on PPE + revaluation gain on AFS financial assets
** Only the contributions paid are reported in the cash flow, because this is
the only movement of cash. The amounts paid by the trustees are not
included, because they are not paid by the company.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 197/230
KC1 | Answers to Practice Questions
CA Sri Lanka 183
4 Working capital changes
Inventories Trade receivables Trade payables
Rs Mn Rs Mn Rs Mn
b/f 198 163 180.00
Exchange loss (W6) 20.83 Increase/(decrease) (63) (71) (85.83)
c/f 135 92 115
Bold figures in the table above are calculated as balancing figures.
5 Interest payable
Rs Mn Balance b/f (short-term provisions) 4
Profit or loss for year 9
Cash paid (balancing figure)
(8) Balance c/f (short-term provisions) 5
6 Exchange loss
At 30 June 20X8:
DEBIT Property, plant and equipment (W1)380
5 Rs 76 Mn
CREDIT Payables380
5 Rs 76 Mn
To record purchase of property, plant and equipment
At 31 October 20X8;
DEBIT Payables280
5 Rs 56 Mn
DEBIT Profit/loss (loss) Rs 1.1 Mn
CREDIT Cash2804.9
Rs 57.1 Mn
To record payment of 280 million dinars
At 30 November 20X8:
DEBIT P/L (loss) Rs 0.83 MnCREDIT
Payables
100 100= 20.83 – = 20
4.8 5
Rs 0.83 Mn
To record loss on re-translation of payable at the year end.
Notes
1 The Rs. 20.83m was wrongly included in trade payables, so must be
removed from the decrease in trade payables in the SOCF.
2 The unrealised loss on retranslation of the payable (Rs 0.83 Mn) must
always be adjusted. The realised loss on the cash payment of Rs 1.1would not normally be adjusted, but it relates to a non-operating item,
so is transferred to 'purchase of PPE'.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 198/230
KC1 | Answers to Practice Questions
184 CA Sri Lanka
(2) Key issues arising from the statement of cash flows
Cash is the life-blood of business, and is less able to be manipulated than
profit. It is particularly important to look at where the cash has come from
and what it has been spent on.
If cash coming into a business is from trading activity, rather than, for
example, a share issue, this is sustainable and is likely to continue into the
future.
If cash has been spent on, for example, acquiring non-current assets, this is
investment in the future of the company and is likely to increase or maintain
revenue levels in coming years. Conversely, cash spent on the payment of
dividends, although it provides a necessary return to investors, is lost to the
company.
Although Warrburt has made a loss before tax of Rs. 47m, net cash generated
by operations is Rs. 68m. This indicates that the loss is in some part due to
the effect of accounting policies and conventions. In the case of Warburrt,
for example, the non-cash expenses of depreciation and impairment total Rs.
68 million.
Having taken account of these and other items, but before adjusting for
changes in working capital, the loss before tax becomes a positive cash
inflow of Rs. 20m.
The question arises, however, as to whether this cash generation can
continue if profitability does not improve.
The cash inflow from operations further benefits from decreasing the levels
of cash tied up in receivables and inventories. The Rs. 134m cash released by
this action more than offsets the cash used to achieve a reduction in the level
of trade payables.
Although the effect of working capital management on the cash flows of
Warburrt is beneficial, the effect on the business should also be considered.
A decrease in trade receivables and inventories in this case may be related to
a fall in trading levels; the reduction of trade receivables, whilst releasing
cash, may be the result of aggressively chasing (and so alienating)
customers; the reduction of inventories may result in future supply
problems.
The Rs. 68million cash generated by operations adequately covers the
mandatory operating cash outflows to meet interest and tax commitments,
as well as the defined benefit pension contribution. This leaves a ‘free cash
flow’ of Rs. 11million.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 199/230
KC1 | Answers to Practice Questions
CA Sri Lanka 185
Other than those arising from operating activities, further cash inflows arise
from the sale of PPE and financial asset investments, and the proceeds of
share issues. None of these are sustainable sources of cash in the long term,
however they are acceptable where ‘matched’ with a cash outflow.
The proceeds from sale of PPE, for example, is offset to some extent by
expenditure on new PPE, indicating that Warburrt has not decreased its non-
current asset base and continues to invest in PPE for the future good of the
group.
The proceeds from sale of financial asset investments have clearly been used
to invest in H200h, which will provide dividend income as well as capital
growth in the future.
Equally, the proceeds of the share issue appear to have been used in part to
fund the repayment of long-term borrowings. This is encouraging because
gearing will reduce, which is particularly important in the light of possible
problems sustaining profitability and cash flows from trading activities.
The level of dividends is modest given other cash flows, and appears to
provide shareholders with an acceptable return on their investment.
Overall, there is a net cash outflow of Rs. 35 million. It can be concluded that
this is largely due to the high cost of the investment in H200h, which is not
wholly covered by the cash raised from the sale of other assets; in other
words, cash is tied up in long-term rather than short-term investment.
It will be the intention of the directors of Warburrt that this investment
should generate future profits that will sustain and increase the operating
cash flow of the group, however whether this is achieved remains to be seen.
(3) Ethical responsibility of Sharmini Cooper
Directors may, particularly in times of falling profit and cash flow, wish to
present a company's results in a favourable light. This may involve
manipulation by creative accounting techniques such as window dressing,
or, as is proposed here, an inaccurate classification.
If the proceeds of the sale of financial asset investments and property, plant
and equipment are presented in the statement of cash flows as part of 'cash
generated from operations', the picture is misleading. Operating cash flow is
crucial, in the long term, for the survival of the company, because it derives
from trading activities, which is the purpose of the company’s existence. .
Sales of assets generate short term cash flows that cannot be repeated year-
on-year, unless there are to be no assets left to generate trading profits with.
As a professional, Ms Cooper has a duty, not only to the company she works
for, but to CASL, stakeholders in the company, and to the principles of
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 200/230
KC1 | Answers to Practice Questions
186 CA Sri Lanka
independence and fair presentation of financial statements. It is essential
that Ms Cooper tries to persuade the CEO and Managing Director not to
proceed with the adjustments, which she must know violates LKAS 7, and
may well go against the requirements of local legislation. If, despite Sharmini
Cooper’s protests, the two directors insist on the misleading presentation,then Ms Cooper has a duty to bring this to the attention of the auditors.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 201/230
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 202/230
KC1 | Corporate Financial Reporting
188 CA Sri Lanka
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 203/230
KC1 | Mock Exam Questions
CA Sri Lanka 189
SECTION A
There are 2 questions of 25 marks each. Both questions are compulsory.
This section has 50 marks in total.
Recommended time for this section is 90 minutes.
Question 1
(a) Havanna owns a chain of health clubs and has entered into binding contracts
with sports organisations, which earn income over given periods. The
services rendered in return for such income include access to Havanna's
database of members, and admission to health clubs, including the provision
of coaching and other benefits. These contracts are for periods of betweennine and 18 months. Havanna feels that because it only assumes limited
obligations under the contract mainly relating to the provision of coaching,
this could not be seen as the rendering of services for accounting purposes.
As a result, Havanna's accounting policy for revenue recognition is to
recognise the contract income in full at the date when the contract was
signed. (7 marks)
(b) In May 20X3, Havanna decided to sell one of its regional business divisions
through a mixed asset and share deal. The decision to sell the division at a
price of Rs. 40 million (net of costs to sell)_was made public in November
20X3 and gained shareholder approval in December 20X3. It was decided
that the payment of any agreed sale price could be deferred until 30
November 20X5. The business division was presented as a disposal group in
the statement of financial position as at 30 November 20X3. At the initial
classification of the division as held for sale, its net carrying amount was Rs.
90 million. In writing down the disposal group's carrying amount, Havanna
accounted for an impairment loss of Rs. 30 million which represented the
difference between the carrying amount and value of the assets measured inaccordance with applicable Sri Lanka Financial Reporting Standards
(SLFRS).
In the financial statements at 30 November 20X3, Havanna showed the
following costs as provisions relating to the continuing operations. These
costs were related to the business division being sold and were as follows.
(i) A loss relating to a potential write-off of a trade receivable owed by
Cuba Sport, which had gone into liquidation. Cuba Sport had sold the
goods to a third party and the division had guaranteed the receipt ofthe sale proceeds to the Head Office of Havanna
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 204/230
KC1 | Mock Exam Questions
190 CA Sri Lanka
(ii) A provision was recognised relating to the expected transaction costs
of the sale including legal advice and lawyer fees
The directors wish to know how to treat the above transactions. (9 marks)
(c) Havanna has decided to sell its main office building to a third party and leaseit back on a ten-year lease. The lease has been classified as an operating
lease. The current fair value of the property is Rs. 5 million and the carrying
amount of the asset is Rs. 4.2 million. The following prices have been
achieved in the market during the last few months for similar office
buildings.
(i) Rs. 5 million
(ii) Rs. 6 million
(iii) Rs. 4.8 million
(iv) Rs. 4 million
Havanna would like advice on how to account for the sale and leaseback,
with an explanation of the effect which the different selling prices would
have on the financial statements. (9 marks)
Advise Havanna on how the above transactions should be dealt with in its
financial statements with reference to Sri Lanka Financial Reporting Standards
where appropriate. (Note. The mark allocation is shown against each of the three
issues above.) (Total = 25 marks)
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 205/230
KC1 | Mock Exam Questions
CA Sri Lanka 191
Question 2
(a) Bental, a listed bank, has a subsidiary, Hexal, which has two classes of shares,
A and B. A-shares carry voting powers and B-shares are issued to meet
Hexal's regulatory requirements. Under the terms of a shareholders'agreement, each B shareholder is obliged to capitalise any dividends in the
form of additional investment in B-shares. The shareholder agreement also
stipulates that Bental agrees to buy the B-shares of the minority
shareholders through a put option under the following conditions
(i) The minority shareholders can exercise their put options when their
ownership in B-shares exceeds the regulatory requirement, or
(ii) The minority shareholders can exercise their put options every three
years. The exercise price is the original cost paid by the shareholders.
In Bental's consolidated financial statements, the B-shares owned by
minority shareholders are to be reported as a non-controlling interest.
(8 marks)
(b) Bental entered into a number of swap arrangements during 20X3. Some of
these transactions qualified for cash flow hedge accounting in accordance
with LKAS 39 Financial instruments: recognition and measurement. The
hedges were considered to be effective. At 30 November 20X3, Bental
decided to cancel the hedging relationships and had to pay compensation.The forecast hedged transactions were still expected to occur and Bental
recognised the entire amount of the compensation in profit or loss.
Additionally, Bental also has an investment in a foreign entity over which it
has significant influence and therefore accounts for the entity as an
associate. The entity's functional currency differs from Bental's and in the
consolidated financial statements, the associate's results fluctuate with
changes in the exchange rate. Bental wishes to designate the investment as a
hedged item in a fair value hedge in its individual and consolidated financial
statements. (7 marks)
(c) On 1 September 20X3, Bental entered into a business combination with
another listed bank, Lental. The business combination has taken place in two
stages, which were contingent upon each other. On 1 September 20X3,
Bental acquired 45% of the share capital and voting rights of Lental for cash.
On 1 November 20X3, Lental merged with Bental and Bental issued new A-
shares to Lental's shareholders for their 55% interest.
On 31 August 20X3, Bental had a market value of Rs. 70 million and Lental a
market value of Rs. 90 million. Bental's business represents 45% and
Lental's business 55% of the total value of the combined businesses.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 206/230
KC1 | Mock Exam Questions
192 CA Sri Lanka
After the transaction, the former shareholders of Bental excluding those of
Lental owned 51% and the former shareholders of Lental owned 49% of the
votes of the combined entity. The Chief Operating Officer (COO) of Lental is
the biggest individual owner of the combined entity with a 25% interest. The
purchase agreement provides for a board of six directors for the combinedentity, five of whom will be former board members of Bental with one seat
reserved for a former board member of Lental. The board of directors
nominates the members of the management team. The management
comprised the COO and four other members, two from Bental and two from
Lental. Under the terms of the purchase agreement, the COO of Lental is the
COO of the combined entity.
Bental proposes to account for the transaction as a business combination
and identify Lental as the acquirer. (10 marks)
Evaluate the accounting practices and policies outlined above and consider
whether they are acceptable under Sri Lanka Financial Reporting Standards.
(Note. The mark allocation is shown against each of the three issues above.)
(Total = 25 marks)
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 207/230
KC1 | Mock Exam Questions
CA Sri Lanka 193
SECTION B
This section has one question which is compulsory.
This section has 50 marks.
Recommended time for this section is 90 minutes.
Question 3
Preseen
Minny is a public limited company that operates in the pharmaceuticals sector,
producing and distributing pharmaceuticals, biologics, vaccines and consumer
healthcare. The company was formed 60 years ago and has since grown
significantly. Its head office is in Kandy, Sri Lanka.
Operations
Minny is operated as four distinct divisions: Drugs and Vaccines, Healthcare
Products, Consumer Products and Home Consumables.
Minny manufactures drugs and vaccines for major diseases including diabetes,
asthma and cancer. These drugs and vaccines take years to develop, with only a
small proportion of candidate vaccines progressing to be licensed for clinical use
by the authorities. The drugs developed by Minny’s Drugs and Vaccines division
are protected by patent; these patents allow only Minny to sell the drugs that it
has developed. During this period Minny is normally able to generate sufficient
profit to recoup the cost of developing a particular drug or vaccine. After the
expiry of a patent (between 10 and 15 years), competitors can produce and sell
generic versions of the drug.
The company’s over-the-counter health-care products, manufactured and sold by
the Healthcare Products division include generic cold and flu remedies, nicotine
replacements and pain relief products.
The Consumer Products division of Minny manufactures and sells oral healthcare
products (toothpastes, mouthwashes etc) and nutritional products (such as high
fibre bars, protein shakes, energy drinks and weight loss shakes). The company
invests a considerable amount of money in developing new nutritional products,
as the route to market is more straightforward than that for regulated drugs and
vaccines, and as a result returns arise more quickly.
Minny also manufactures and sells a small number of cleaning products for
consumers through its Home Consumables division. These include anti-bacterial
sprays, bleach products and furniture and floor polishes.
Development of the group
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 208/230
KC1 | Mock Exam Questions
194 CA Sri Lanka
Minny acquired 70% of the equity shares in Bower (a public limited company) on
1 December 20X0 for a cash price of Rs. 730 million. This was a strategic
acquisition, made with the intention of acquiring know-how and patents owned by
Bower. As a result of the acquisition, Minny was able to develop its product base
and access the market for drugs for blood disorders such as anaemia, lymphomaand myeloma (blood cancers).
An 80% share in the equity of Heeny (a public limited company) was acquired on
1 December 20X1 at a cost of Rs. 320 million, paid in cash. This acquisition was
made in order that Minny could achieve rapid market expansion. Heeny has a
well-established sales and distribution network in Africa, a market that Minny had
not previously entered.
Minny acquired a 14% interest in Puttin, a public limited company, on 1 December
20X0 for a cash consideration of Rs. 21 million. The investment was accounted forat cost. On 1 June 20X2, Minny acquired an additional 16% interest in Puttin for a
cash consideration of Rs. 27 million and achieved significant influence. Puttin
operates in consumer healthcare products such as shampoos, conditioners and
toothpastes. As such this investment was seen to be a good strategic fit for
Minny’s Consumer Products division. In time it is expected that the investment
may be increased and control over Puttin achieved.
Financial reporting and accounting policies
The financial statements of Minny are prepared to a reporting date of 30November. Financial statements are prepared in accordance with SLFRS and
Columbo Stock Exchange regulations. They are presented in an annual report
together with a social and environmental impact report, which the Board of Minny
intends to develop into a full sustainability report.
The Board of Minny is aware that SLFRS 3 allows a choice of method to measure
the non-controlling interest on an acquisition-by-acquisition basis. In order to
maximise reported goodwill, it has elected to measure the non-controlling interest
in both subsidiaries at fair value at the acquisition date.
Goodwill arising from the acquisitions is not amortised, but is tested for
impairment at each reporting date in accordance with the requirements of SLFRS.
Development costs are capitalised when the LKAS 38 criteria are met. They are
amortised over a relevant period. In the case of drugs and vaccines, this is the
period for which the product is patent protected; for nutritional products it is
usually 10 years.
The company adopts the LKAS 16 revaluation model for its properties, and
revaluation exercises are performed with sufficient frequency that carryingamounts are in line with fair values at each reporting date.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 209/230
KC1 | Mock Exam Questions
CA Sri Lanka 195
Financial performance
Analysis of the recent financial performance of Minny Group indicates strong
performance from the Drugs and Vaccines division. This is largely due to the
launch to market of a drug to treat the effects of a new strain of flu. This drug has
been licensed for use by a number of healthcare authorities throughout Asia and
as a result has generated significant revenues since its launch.
The Healthcare Products division is considered to be a ‘cash cow’ by the Board of
Minny; it continues to require little investment in comparison to other divisions
and returns steady profits.
The Consumer Products division has shown steady growth in revenue over the
past year, which can be attributed to the continued consumer trend towards
exercise and weight loss plans, and Minny’s ability to respond to consumer
demand in these areas.
In recent years the Home Consumables division has not performed as well as the
other divisions of Minny, contributing the lowest profit margins of the group.
Revenue is relatively stagnant, and the Board consider that there are two viable
routes for this division: either dispose of it or commit to invest in it and develop it.
Unseen
(a) The draft statements of financial position of Minny, Bower and Heeny are as
follows at 30 November 20X2:
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 210/230
KC1 | Mock Exam Questions
196 CA Sri Lanka
Minny Bower Heeny Rs Mn Rs Mn Rs Mn
Assets Non-current assets
Property, plant and equipment 920 300 310 Investment in subsidiaries:
Bower 730 Heeny 320
Investment in Puttin 48
Intangible assets 198 30 35
1,896 650 345
Current assets 895 480 250
Total assets 2,791 1,130 595
Equity and liabilities Stated capital 920 400 200
Other components of equity 73 37 25
Retained earnings 895 442 139
Total equity 1,888 879 364
Non-current liabilities 495 123 93
Current liabilities 408 128 138
Total liabilities 903 251 231
Total equity and liabilities 2,791 1,130 595
The following information is relevant to the preparation of the group
financial statements.
(i) At acquisition, the fair value of the non-controlling interest in Bower
was Rs. 295 million. On 1 December 20X0, the fair value of the
identifiable net assets acquired was Rs. 835 million and retained
earnings of Bower were Rs. 319 million and other components of
equity were Rs. 27 million. The excess in fair value is due to non-
depreciable land.
(ii) The fair value of a 20% non-controlling interest in Heeny at 1
December 20X1 was Rs. 72 million; a 30% holding was Rs. 108 million
and a 44% holding was Rs. 161 million. At the date of acquisition, the
identifiable net assets of Heeny had a fair value of Rs. 362 million,
retained earnings were Rs. 106 million and other components of equity
were Rs. 20 million. The excess in fair value is due to non-depreciable
land.
(iii) Both Bower and Heeny were tested for impairment at 30 November
20X2. The recoverable amounts of both cash generating units as statedin the individual financial statements at 30 November 20X2 were
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 211/230
KC1 | Mock Exam Questions
CA Sri Lanka 197
Bower, Rs. 1,425 million, and Heeny, Rs. 604 million, respectively. The
directors of Minny felt that any impairment of assets was due to the
poor performance of the intangible assets. The recoverable amount has
been determined without consideration of liabilities which all relate to
the financing of operations.
(iv) Puttin made profits after tax of Rs. 20 million and Rs. 30 million for the
years to 30 November 20X1 and 30 November 20X2 respectively. On
30 November 20X2, Minny received a dividend from Puttin of Rs. 2
million, which has been credited to other components of equity.
(v) Minny purchased patents of Rs. 10 million to use in a project to develop
a new weight loss shake product on 1 December 20X1. Minny has
completed the investigative phase of the project, incurring an
additional cost of Rs. 7 million, and has determined that the productcan be developed profitably. An effective test batch was created at a
cost of Rs. 4 million and in order to put the shake into a condition for
sale, a further Rs. 3 million was spent. Finally, marketing costs of Rs. 2
million were incurred. All of the above costs are included in the
intangible assets of Minny.
(vi) Minny intends to dispose of the Home Consumables division. At the
date the held for sale criteria were met, the carrying amount of the
assets and liabilities comprising the division were:
Rs Mn
Property, plant and equipment (PPE) 49 Inventory 18 Current liabilities 3
It is anticipated that Minny will realise Rs. 30 million for the business.
No adjustments have been made in the financial statements in relation
to the above decision.
Prepare the consolidated statement of financial position for the Minny
Group as at 30 November 20X2. (35 marks)
(b) Minny intends to dispose of the Home Consumables division and has stated
that the held for sale criteria were met under SLFRS 5 Non-current assets
held for sale and discontinued operations. The criteria in SLFRS 5 are very
strict and regulators have been known to question entities on the application
of the standard. The two criteria which must be met before an asset or
disposal group will be defined as recovered principally through sale are: that
it must be available for immediate sale in its present condition, and the sale
must be highly probable.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 212/230
KC1 | Mock Exam Questions
198 CA Sri Lanka
Outline what is meant in SLFRS 5 by 'available for immediate sale in its
present condition' and 'the sale must be highly probable', setting out briefly
why regulators may question entities on the application of the standard.
(7 marks)
(c) Bower has a property which has a carrying amount of Rs. 2 million at 30
November 20X2. This property had been revalued at the year-end and a
revaluation surplus of Rs. 400,000 had been recorded in other components
of equity. The directors intended to sell the property to Minny for Rs. 1
million shortly after the year-end. Bower previously used the historical cost
basis for measuring property.
Evaluate the ethical and accounting implications of the above intended sale
of assets to Minny by Bower. You are not required to adjust your answer to
part (a). (8 marks)
(Total = 50 marks)
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 213/230
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 214/230
KC1 | Mock Exam Answers
200 CA Sri Lanka
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 215/230
KC1 | Mock Exam Answers
CA Sri Lanka 201
SECTION A
Question 1
(a) Contracts with sports organisations
The applicable standard relating to the contracts is LKAS 18 Revenue. In
general revenue is recognised when it is probable that future economic
benefits will flow to the entity and these benefits can be measured reliably.
This applies to services as well as goods.
The rendering of services typically involves the performance by the entity of
a contractually agreed task over an agreed period of time. The basic
principles of LKAS 18 are applied differently for the provision of goods and
services:
– revenue is recognised at a point in time in respect of the provision of
goods
– revenue is recognised over a period of time in respect of the provision
of services.
Therefore in the first instance it is important to establish whether Havanna
is providing goods or services.
Havanna argues that the 'limited obligations' under the contracts (coaching
and access to its membership database) do not constitute rendering of
services. The Illustrative Guidance that accompanies LKAS 18 does, however,
identify that admission fees, initiation and membership fees and franchise
fees constitute the provision of services and associated revenue is
recognised over time. Therefore the contracts with sports organisations
should be considered as for the provision of services.
Under LKAS 18, when the outcome of a transaction involving services
rendered can be estimated reliably, the revenue from this transaction mustbe recognised by reference to the stage of completion of the transaction at
the reporting date. This applies to all transactions, regardless of the length of
the contract term.
The recognition of revenue by reference to the stage of completion of a
transaction is often referred to as the percentage of completion method.
Under this method, revenue is recognised in the accounting periods in which
the services are rendered, that is on a basis that 'reflects the extent to which
services are performed'. LKAS 18 also requires that when services are
performed by an indeterminate number of acts over a specified period of
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 216/230
KC1 | Mock Exam Answers
202 CA Sri Lanka
time, as is the case for Havanna, revenue is recognised on a straight-line
basis over the specified period unless there is evidence that some other
method better represents the stage of completion.
When a specific act is much more significant than any other acts, the
recognition of revenue is postponed until the significant act is executed.
However, in Havanna's case there is no evidence that one act is much more
significant than any other act.
There is no justification for Havanna's treatment, that is recognising the
contract income in full when the contract is signed. The 'limited obligations'
argument is not supported by LKAS 18. Accordingly, Havanna must
apportion the income arising from the contracts over the period of the
contracts, as required by the standard.
(b) Sale of division
Impairment loss
A division (or disposal group) is classified as held for sale when it is available
for immediate sale in its present condition and the sale is highly probable.
For a sale to be probable, management must be committed to a sale plan, and
the plan must have been announced or its implementation begun.
Here the plan has been announced and so the division to be sold meets the
criteria in SLFRS 5 to be classified as held for sale. It has therefore been
correctly classified as a disposal group under SLFRS 5.
Measurement of a disposal group on classification as held for sale is
determined in two steps:
Step 1
Immediately before classification as held for sale, the assets and liabilities of
a disposal group are re-measured in accordance with applicable SLFRS. Any
impairment loss is generally recognised in profit or loss, but if the asset has
been measured at a revalued amount under LKAS 16 Property, plant andequipment or LKAS 38 Intangible assets, the impairment is treated as a
revaluation decrease.
Step 2
On classification as held for sale, a disposal group is measured at the lower of
its carrying amount and fair value less costs to sell.
At this stage an impairment loss will arise if the adjusted carrying amount of
the disposal group exceeds its fair value less costs to sell. The impairment
loss (if any) is recognised in profit or loss.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 217/230
KC1 | Mock Exam Answers
CA Sri Lanka 203
For assets carried at fair value prior to initial classification, the requirement
to deduct costs to sell from fair value will result in an immediate charge to
profit or loss.
Havanna has calculated the step 1 impairment as Rs. 30m, being the
difference between the carrying amount at initial classification and the value
of the assets measured in accordance with SLFRS.
Step 1 Calculate carrying amount under applicable SLFRS: Rs. 90m – Rs.
30m = Rs. 60m
Step 2 Classified as held for sale. Compare the adjusted carrying amount
under applicable SLFRS (Rs. 60m) with fair value less costs to sell
(Rs. 40m). Measure at the lower of carrying amount and fair
value less costs to sell, here Rs. 40m. Recognise a Rs. 20m
impairment loss in profit or loss.
Other costs
Certain other costs relating to the division being sold are currently
recognised as provisions relating to continuing operations. This treatment is
not correct:
(i) The trade receivable from Cuba Sports should have been tested for
impairment immediately before classification of the division as held for
sale.An impairment loss equal to the amount of the trade receivable should
have been recognised; this would have reduced the carrying amount of
the division prior to its initial classification as held for sale. The write
down of the receivable balance replaces the provision recognised in the
books of the continuing operations.
In addition, the division has guaranteed the sale proceeds to
Havanna's Head Office.
As the amount owing has not been collected and the receivable isimpaired, the regional business division must bear the cost of making
good the guarantee.
Therefore a liability should be recognised for the disposal group.
Additionally, the sales price of the division (and hence the fair value
less costs to sell) should be adjusted to reflect this amount.
(ii) The provision for transaction costs should not have been recognised in
continuing operations. The costs (legal advice and lawyers' fees)
should be considered as part of 'costs to sell' when calculating fairvalue less costs to sell.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 218/230
KC1 | Mock Exam Answers
204 CA Sri Lanka
Both items affect fair value less costs to sell, and item (i), the trade
receivable, also affects the carrying amount of the division on classification
as held for sale.
(c) Sale and leaseback
Where, as here, a lessee enters a sale and leaseback transaction resulting in
an operating lease, the original asset should be derecognised.
If the transaction is at fair value then the profit or loss is recognised as it
arises.
If the transaction is at a price above fair value, then the profit based on fair
value is recognised immediately and sales proceeds in excess of fair value
are deferred and amortised over the period for which the asset is expected
to be used.
If the sales price is below fair value, the operating lease rentals may have
been adjusted downwards to compensate for the loss. The accounting
treatment depends on whether this is the case.
If this is not the case, any resulting profit or loss is recognised immediately.
If this is the case, and a loss is made, that loss is deferred and amortised over
the period that the asset will be used.
Havanna has been given a range of selling prices, and should in each case
compare the potential sales proceeds with the fair value (Rs 5 million) in
order to determine the accounting treatment as well as comparing the sales
price with the carrying amount (Rs. 4.2m) to determine the gain.
(i) Sales price Rs. 5 million
In this case the sales price is equal to the fair value. In effect, this is a
normal sales transaction and the whole gain of Rs. 0.8m (Rs. 5m – Rs.
4.2m) is recognised immediately in profit or loss.
(ii) Sales price Rs. 6 millionHere the sales price is greater than fair value. Therefore the profit
based on fair value of Rs. 0.8m (see (i) above) is recognised
immediately. The excess of sales price over fair value of Rs. 1m (Rs. 6m
– Rs. 5m) is deferred and amortised over the period for which the asset
is expected to be used (ten years), giving an amortisation charge of Rs.
100,000 per annum..
(iii) Sales price Rs. 4.8 million
Here the sales price is below fair value. The difference is small, andgiven that property valuations are estimates, Rs. 4.8m may simply be a
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 219/230
KC1 | Mock Exam Answers
CA Sri Lanka 205
better reflection of genuine fair value than Rs. 5m. In this case,
therefore, the sales proceeds are recognised in full and a gain of Rs.
0.6m (Rs. 4.8m – Rs. 4.2m) is recognised.
(iv) Sales price Rs. 4 million
Here the sales price is also below fair value. However, the difference is
significant, and cannot be explained by estimation tolerances in the
valuation. The price appears to be artificially low, and it is likely that
the lease rentals are low to reflect this. Therefore it is appropriate to
recognise the sales proceeds of Rs. 4m, but the Rs. 200,000 loss on
disposal is not recognised, being an artificial loss. Instead, it is deferred
and amortised over the ten year life of the lease, that is at Rs. 20,000
per annum.
Question 2
(a) Classification of B-shares
It is not always easy to distinguish between debt and equity in an entity's
statement of financial position, partly because many financial instruments
have elements of both.
The distinction is important, since the classification of a financial instrument
as either debt or equity can have a significant impact on the entity's reportedearnings and gearing ratio, which in turn can affect debt covenants.
Companies may wish to classify a financial instrument as equity, in order to
give a favourable impression of gearing, but this may in turn have a negative
effect on the perceptions of existing shareholders if it is seen as diluting
existing equity interests.
LKAS 32 Financial instruments: presentation brings clarity and consistency to
this matter, so that the classification is based on principles rather than
driven by perceptions of users.
Bental has classified the B-shares as non-controlling interest (equity) but
this does not comply with LKAS 32. LKAS 32 defines an equity instrument as:
'any contract that evidences a residual interest in the assets of an entity after
deducting all of its liabilities'. It must first be established that an instrument
is not a financial liability, before it can be classified as equity.
A key feature of the LKAS 32 definition of a financial liability is that it is a
contractual obligation to deliver cash or another financial asset to another
entity.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 220/230
KC1 | Mock Exam Answers
206 CA Sri Lanka
A financial instrument is an equity instrument if there is an unconditional
right to avoid delivering cash or another financial asset to another entity.
An instrument may be classified as an equity instrument if it contains a
contingent settlement provision requiring settlement in cash or a variable
number of the entity's own shares only on the occurrence of an event which
is very unlikely to occur – such a provision is not considered to be genuine.
If the contingent payment condition is beyond the control of both the entity
and the holder of the instrument, then the instrument is classified as a
financial liability.
The shareholders' agreement imposes on Bental a clear contractual
obligation to buy B-shares from the non-controlling shareholders on the
terms set out in the agreement.
It does not have an unconditional right to avoid delivering cash or another
financial asset to settle the obligation. The circumstance above, where the
contingent settlement provision is not considered genuine because an event
is unlikely to occur, does not apply here: the minority shareholders' can
exercise their put option at least every three years, and more frequently if
their ownership in B-shares exceeds the regulatory requirement.
Accordingly, the minority shareholders' holdings of B shares should be
treated as a financial liability in the consolidated financial statements of
Bental.
(b) Hedging
Swap arrangements
LKAS 39 Financial instruments: recognition and measurement sets out
requirements for when hedge accounting is discontinued.
Cash flow hedge accounting should be discontinued if the hedging
instrument expires or is sold, terminated or exercised, if the criteria for
hedge accounting are no longer met, a forecast transaction is no longerexpected to occur or if the entity revokes the designation.
If hedge accounting ceases for a cash flow hedge relationship because the
forecast transaction is no longer expected to occur, gains and losses deferred
in other components of equity are recognised in profit or loss immediately. If
the transaction is still expected to occur and the hedge relationship ceases,
the amounts accumulated in equity are retained in equity until the hedged
item affects profit or loss.
In the case of Bental, the forecast hedged transactions are still expected tooccur. Bental should recognise the cash payments of compensation against
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 221/230
KC1 | Mock Exam Answers
CA Sri Lanka 207
the fair value of the swaps, so there is no immediate effect on profit or loss.
The amounts accumulated in equity are reclassified to profit or loss in the
period when the item that was hedged affects profit or loss.
Investment in foreign entity
The foreign entity is an associate and Bental therefore accounts for it using
the equity method in its consolidated accounts.
Under LKAS 39, an equity method investment cannot be a hedged item in a
fair value hedge because the equity method recognises in profit or loss the
investor's share of the associate's profit or loss, rather than changes in the
investment's fair value.
A hedge of a net investment in a foreign operation is different because it is a
hedge of the foreign currency exposure, not a fair value hedge of the
change in the value of the investment.
Bental may, however, be able to designate the investment as a hedged item
in a fair value hedge in its individual financial statements, provided its fair
value can be measured reliably.
(c) Business combination
SLFRS 3 Business Combinations requires an acquirer to be identified in all
business combinations, even where the business combination looks like a
merger of equals. The acquirer is the combining entity that obtains control ofthe entity with which it is combined.
It is not always easy to determine which party is the acquirer, and SLFRS 3
defers to IFRS 10 in respect of guidance on the matter. The key point is
control, rather than mere ownership, but this may not be easy to assess.
SLFRS 10 states that an investor controls an investee if and only if it has all
of the following.
(i) Power over the investee
(ii) Exposure, or rights, to variable returns from its involvement with the
investee, and
(iii) The ability to use its power over the investee to affect the amount of
the investor's returns.
Power is defined as existing rights that give the current ability to direct the
relevant activities of the investee. There is no requirement for that power to
have been exercised.
Relevant activities are activities of the investee that significantly affect theinvestee’s returns. They may include selling and purchasing goods or
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 222/230
KC1 | Mock Exam Answers
208 CA Sri Lanka
services, managing financial assets, electing, acquiring and disposing of
assets, researching and developing new products and processes and
determining a funding structure or obtaining funding.
In some cases assessing power is straightforward, for example, where power
is obtained directly and solely from having the majority of voting rights or
potential voting rights, and as a result the ability to direct relevant activities.
In other cases, assessment is more complex and more than one factor must
be considered. SLFRS 10 gives the following examples of rights, other than
voting or potential voting rights, which individually, or alone, can give an
investor power.
(i) Rights to appoint, reassign or remove key management personnel who
can direct the relevant activities
(ii) Rights to appoint or remove another entity that directs the relevant
activities
(iii) Rights to direct the investee to enter into, or veto changes to
transactions for the benefit of the investor
(iv) Other rights, such as those specified in a management contract.
If it is not clear which is the acquirer from applying SLFRS 10. SLFRS 3
Business combinations gives a number of other factors to consider; in
particular the acquirer is usually the entity which transfers cash or otherassets.
Applying the above criteria produces arguments in favour of either party
being the acquirer.
Arguments in favour of Bental being the acquirer
(i) Bental is the entity giving up cash amounting to 45% of the purchase
price, which is a significant share of the total purchase consideration.
(ii) In a business combination effected primarily by exchanging equityinterests, as here, the acquirer is usually the entity that issues its equity
interests. Thus Bental appears to be the acquirer.
(ii) Other factors need to be taken into consideration in determining which
of the combining entities has the power to govern the financial and
operating policies of the other entity. Usually that is the one whose
shareholders retain or receive the largest proportion of the voting
rights in the combined entity, here Bental which has 51% immediately
after the transaction.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 223/230
KC1 | Mock Exam Answers
CA Sri Lanka 209
(iv) A controlling share does not always mean that the party that has it has
the power to govern the combined entity's financial and operating
policies so as to obtain benefits from its activities. Power may also be
given by rights to appoint, reassign or remove key management
personnel who can direct the relevant activities of the combined entity.Five out of the six directors of the combined entity are former board
members of Bental, which points to Bental being the acquirer.
Arguments in favour of Lental being the acquirer
(i) Despite the above, arguably the former management of Lental has
greater representation on the management team. The management
team consists of the Chief Operating Officer and two former employees
of Lental, while Bental has only two former employees on the
management team.
(ii) The Chief Operating Officer of Lental has, as an individual, the largest
share of the combined entity, which at 25%, gives him a great deal of
influence over the team, especially taking into account the composition
of the team. Although the board nominates the team, this individual
influence points towards Lental being the acquirer.
(iii) Lental may also be seen as the acquirer when the relative size of the
combining entities is taken into account, for example in terms of assets,
revenue or profit.. The fair value of Lental is Rs. 90m, which issignificantly greater than that of Bental, (Rs. 70m) and this is an
indication of control.
Conclusion
Identifying the acquirer is not easy, and there are arguments on both sides.
In the case of Lental, the Chief Operating Officer of Lental is the source of
much of Lental's power, whereas Bental has a balance of other factors in its
favour, the most important of which are:
(i) Bental is the entity transferring the cash
(ii) Bental issued the equity interest
(iii) Bental has the marginal controlling interest.
It is possible to conclude that Bental is the acquirer, but this is not a clear-cut
case.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 224/230
KC1 | Mock Exam Answers
210 CA Sri Lanka
SECTION B
Question 3
(a) MINNY GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30.11.20X2
Rs Mn Non-current assets Property, plant and equipment 1,606.0
Goodwill 190.0
Intangible assets 227.0
Investment in associate: 48 + 4.5 – 2 50.5
2,073.5
Current assets 1,607.0
Disposal group held for sale 33.0
Total assets 3,713.5
Equity and liabilities Equity attributable to owners of the parent
Stated capital 920.00
Retained earnings 936.08
Other components of equity 77.80
1,933.88
Non-controlling interests 394.62
2,328.50
Non-current liabilities 711.00
Current liabilities 671.00
Current liabilities associated with disposal group 3.00
Total equity and liabilities 3,713.50
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 225/230
KC1 | Mock Exam Answers
CA Sri Lanka 211
Workings
1 Group structure
Minny 1 Dec 20X0 70% (Consideration =
Rs. 730m)
FV NA Rs 835 Mn
Retained earnings Rs 319 Mn
OCE Rs 27 Mn
FV NCI Rs 295 Mn
Bower
1 Dec 20X1 80% (Consideration =
Rs. 320m)
FV NA Rs 362 Mn
Retained earnings Rs 106 Mn
OCE Rs 20 Mn
FV NCI Rs 161 Mn Heeny
%
Effective interest: 70% × 80% 56
... Non-controlling interest 44
100
2 Goodwill
Bower Heeny
Rs Mn Rs Mn
Consideration transferred 730 320 70% 224
Non-controlling interests 295 (44%) 161
FV of identifiable net assets at acq'n:
Stated capital (400) (200)
Retained earnings (319) (106)
OCE (27) (20)
FV uplift – land (89) (36)
190 23
Impairment losses (W4) (-) (23)
190 -
(i) The acquisition of Bower is recognised by (Rs Mn):
DEBIT Goodwill 190
DEBIT Stated capital 400
DEBIT Retained earnings 319
DEBIT OCE 27
DEBIT PPE 89CREDIT Investment in B 730
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 226/230
KC1 | Mock Exam Answers
212 CA Sri Lanka
CREDIT NCI 295
(ii) The acquisition of Heeny is recognised by (Rs Mn):
DEBIT Goodwill 23
DEBIT Stated capital 200
DEBIT Retained earnings 106
DEBIT OCE 20
DEBIT PPE 36
CREDIT Investment in Heeny 224
CREDIT NCI 161
3 Allocation of profits to the NCI
The increase in retained earnings and OCE since acquisition in both
companies is calculated as follows (Rs Mn):
Bower Heeny
Retained
earnings
OCE Retained
earnings
OCE
At reporting date 442 37 139 25
At acquisition (319) (27) (106) (20)
Increase 123 10 33 5
NCI share
(30%/44%)
36.9 3 14.52 2.2
(i) The allocation of these amounts to the NCI is recognised by(Rs Mn):
DEBIT Retained earnings
(36.9 + 14.52)
51.42
DEBIT OCE (3 + 2.2) 5.2
CREDIT NCI 56.62
(ii) The NCI cost of Bower’s investment in Heeny is eliminated
against the NCI by (Rs Mn):
DEBIT NCI (30% 320) 96
CREDIT Investment in Heeny 96
4 Impairment
Bower Heeny
Rs Mn Rs Mn Carrying amount Assets (separate SOFP) 1,130 595
Fair value adjustments (W2) 89 36
Goodwill (W2) 190 23
1,409 654 Recoverable amount (1,425) (604)
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 227/230
KC1 | Mock Exam Answers
CA Sri Lanka 213
Bower Heeny
Rs Mn Rs Mn Impairment loss – 50
Allocated to: goodwill
23 Intangible assets (balancing figure) 27
50
Bower is not impaired as the carrying amount is below the recoverable
amount, but Heeny's assets are impaired.
The impairment loss is allocated first to goodwill and then to the
intangible assets, because the directors believe that it is the poor
performance of the intangible assets that is responsible for the
reduction in the recoverable amount.
The impairment loss is recognised by (Rs Mn):
DEBIT Retained earnings (56%) 28
DEBIT NCI (44%) 22
CREDIT Goodwill 23
CREDIT Intangible assets 27
Note that the loss is allocated to the NCI as well as group retained
earnings. This includes the impairment loss in respect of goodwill
because goodwill is ‘full goodwill’ ie it includes NCI goodwill.
5 Investment in associate
The associate is already measured at cost in the financial statements of
Minny. In order to apply equity accounting, the group share of Puttin’s
profits since gaining significant influence are recognised by (Rs Mn):.
DEBIT Investment in associate
(30% Rs 30 Mn 6/12m)
4.5
CREDIT Retained earnings 4.5
In addition the dividend received and credited to OCE is transferred to
reduce the carrying amount of the investment in the associate (Rs Mn):
DEBIT OCE 2
CREDIT Investment in associate 2
6 Disposal group
Assets and liabilities of the disposal group are re-classified as current
and shown as separate line items in the statement of financial position.
The disposal group is impaired, and the impairment loss is calculatedas follows.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 228/230
KC1 | Mock Exam Answers
214 CA Sri Lanka
Rs Mn
Property, plant and equipment 49
Inventory 18
Current liabilities (3)
Carrying amount 64Anticipated proceeds (FV less costs to sell) (30)
Impairment loss 34
This is recognised by (Rs Mn):
DEBIT Current liabilities 3
DEBIT Assets of disposal group
(49 + 18 – 34)
33
DEBIT Retained earnings 34
CREDIT PPE 49CREDIT Inventory 18
CREDIT Liabilities of disposal group 3
7 Development costs
Rs Mn
Patent 10 Intangible asset
Investigation phase 7 Profit or loss
Prototype 4 Intangible asset: development costs
Preparation for sale 3 Intangible asset: development costsMarketing 2 Profit or loss
The adjustment required to eliminate the items which should be
recognised in profit or loss is (Rs Mn):
DEBIT Profit or loss (retained earnings) 9
CREDIT Intangible assets 9
(b) Held for sale criteria under SLFRS 5 Non-current assets held for sale and
discontinued operations
The held for sale criteria in SLFRS 5 Non-current assets held for sale anddiscontinued operations are very strict, and often decision to sell an asset or
disposal group is made well before they are met. It may be difficult for
regulators, auditors or users of accounts to determine whether an entity
genuinely intends to dispose of the asset or group of assets.
SLFRS 5 requires an asset or disposal group to be classified as held for sale
where it is available for immediate sale in its present condition subject only
to terms that are usual and customary and the sale is highly probable.
The standard does not give guidance on terms that are usual and customarybut the guidance notes give examples. Such terms may include, for example,
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 229/230
KC1 | Mock Exam Answers
CA Sri Lanka 215
a specified period of time for the seller to vacate a headquarters building
that is to be sold, or it may include contracts or surveys. However, they
would not include terms imposed by the seller that are not customary, for
example, a seller could not continue to use its headquarters building until
construction of a new headquarters building had taken place.
For a sale to be highly probable:
• Management must be committed to the sale.
• An active programme to locate a buyer must have been initiated.
• The asset must be marketed at a price that is reasonable in relation to
its own fair value.
• Completion of the sale must be expected within one year from the date
of classification.
• It is unlikely that significant changes will be made to the plan or the
plan withdrawn.
Regulators may question entities' application of this standard because the
definition of highly probable as 'significantly more likely than probable' is
subjective. Entities may wish to separate out an unprofitable/impaired part
of the business in order to show a more favourable view of continuing
operations, and so regulators have reason look very closely at whether the
classification as held for sale is genuine.
(c) Transfer of property
The proposed transfer of property from Bower to its parent Minny is not a
normal sale. The property's carrying amount of Rs. 2m reflects the current
value as it was revalued at the year end, but the 'sale' price is only Rs. 1m. In
effect, this is a distribution of profits of Rs. 1m, the shortfall on the transfer.
Distributions of this kind are not necessarily wrong or illegal. Bower's
retained earnings of Rs. 442m, plus the 'realised' revaluation surplus of Rs.
400,000 more than cover the distribution, so, depending on the distributable
profits rules in the jurisdiction in which it operates, it is likely to be legal.
Certain SLFRS may apply to the transfer.
(i) If the asset meets the held for sale criteria under SLFRS 5 Non-current
assets held for sale and discontinued operations, it will continue to be
included in the consolidated financial statements, but it will be
presented separately from other assets in the consolidated statement
of financial position. An asset that is held for sale should be measured
at the lower of its carrying amount and fair value less costs to sell.
8/17/2019 KC-01 Practice Revision Kit
http://slidepdf.com/reader/full/kc-01-practice-revision-kit 230/230
KC1 | Mock Exam Answers
Immediately before classification of the asset as held for sale, the entity
must update any impairment test carried out.
(ii) As the transfer is from a subsidiary to its parent, LKAS 24 Related party
disclosures will apply and in the individual financial statements of
Bower and Minny, although it would be eliminated on consolidation.Knowledge of related party relationships and transactions affects the
way in which users assess a company's operations and the risks and
opportunities that it faces. Even if the company's transactions and
operations have not been affected by a related party relationship,
disclosure puts users on notice that they may be affected in future, but
in this case the related party relationship clearly has affected the price