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BSc. (Hons) Accounting with Finance

Cohorts:

BACF/13B/14A/15A/14B/15B/16A/16B/17A/FT/PT

Examinations for Academic Year 2018 – 2019

Semester I / Academic Year 2018 Semester II

MODULE : ADVANCED FINANCIAL REPORTING

MODULE CODE : ACCF3114
DURATION : 2 1/2 HOURS 15 MINUTES

Instructions to Candidates:
1. This paper consists of THREE (3) QUESTIONS.
2. ANSWER ALL QUESTIONS.
3. Non programmable calculators are allowed.
4. It is important to show each step in any calculation, even if you
have used a calculator.
5. Any necessary assumptions introduced in answering a question
are to be stated.
6. Start each question on a fresh page.
7. Total Marks: 100.
This Question Paper is printed on BOTH SIDES.
This Question Paper Contains 3 questions and 10 pages.
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ANSWER ALL QUESTIONS

QUESTION 1: (50 MARKS)

PART A
You are the Group Financial Reporter at Bauble, an investment holding company, which
has investments in shares in Jewel, Gem and Micro. You are given the following draft
statements of financial position at 30 November 2018 to consolidate:

Bauble Jewel Gem

MUR MUR MUR
Notes
million million million
ASSETS
Non-current assets
Property, plant and equipment 1 and 2 329 185 64
Investment 1 and 2 11 50 -
Current assets 120 58 40
TOTAL ASSETS 460 293 104
EQUITY AND LIABILITIES
EQUITY
Share capital at MUR1 each 280 110 50
Share premium 30 20 10
Retained earnings 120 138 35
TOTAL EQUITY 430 268 95
LIABILITIES
Non-current liabilities
Deferred tax liabilities 20 20 5
Current liabilities 10 5 4
Total liabilities 30 25 9
TOTAL EQUITY AND LIABILITIES 460 293 104

Note 1 – Bauble’s investment in Jewel, Gem and Micro:

On 1 December 2017, Bauble acquired ninety per cent of the ordinary share capital of
Jewel and twenty-six per cent of the ordinary share capital of Gem in a share for share
exchange when the retained earnings were Jewel MUR 136 million and Gem MUR 30
million.

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The fair value of the net assets at 1 December 2017 was Bauble MUR 650 million,
Jewel MUR 330 million and Gem MUR 128 million. Any increase in the consolidated fair
value of the net assets over the carrying value is deemed to be attributable to property
held by the companies. Property is depreciated within the group at 5% per annum.

Bauble issued 150m of its own shares to purchase Jewel and 30m to purchase Gem.
There have been no new issue of shares since 1 December 2017. On 1 December
2017, before the share for share exchange, the market price of Bauble’s share was
MUR 2.30 per share. The share for share exchange on the purchase of Jewel and Gem
on 1 December 2017 has not yet been recorded in Bauble's books.

On 1 December 2017, Bauble purchase a forty per cent interest in Micro, a limited
liability investment company for MUR 11 million paid in cash. The carrying value of the
net assets of Micro on 1 December 2017 was MUR 18 million and their fair value was
MUR 20 million. On 30 November 2018, the fair value of the net assets was MUR 24
million.

Note 2 – Jewel’s investment in Gem

Jewel had acquired a sixty per cent holding in Gem on 1 December 2014 for
a consideration of MUR 50 million when the retained earnings reserve of Gem was
MUR 10 million. The fair value of the net assets at that date was MUR 80 million with
the increase in fair value attributable to property held by the companies. Property is
depreciated within the group at 5% per annum.
Jewel has included a brand name in its property, plant and equipment at the cost of
MUR 9 million. The brand earnings can be separately identified and could be sold
separately from the rest of the business. The fair value of the brand at 30 November
2018 was MUR 7 million and the fair value at the time of acquisition by Bauble was
MUR 9 million.

It is the group’s policy to value the non-controlling interest at its proportionate share of
the fair value of the subsidiary’s identifiable net assets.
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REQUIRED:
To Prepare: the consolidated statement of financial position for Bauble Group at 30
November 2018. (40 marks)

N.B. Figures are to be reported to 2 decimal places in MUR million.

PART B
A school friend you have not seen for a number of years is attempting a financial
reporting exam paper and has asked for guidance on the business combinations
achieved in stages (piecemeal acquisition).

Situation 1
Jeremy acquired 40% of the equity interest of David MUR 40 million several years ago.
On 1 January 2018, Jeremy acquired an additional 35% for MUR 45 million when the
fair value of identifiable net assets were MUR 105 million.
The fair value of the non-controlling interest on 1 January 2018 was MUR 32 million and
the fair value of the original 40% holding was MUR 52 million.
Situation 2
On 31 December 2018, Jeremy acquired a further 5% of David for MUR 8 million.
David had made profits since being acquired by Jeremy of MUR 10 million. There has
been no impairment of goodwill.

REQUIRED:
Write a report to your friend explaining:
(i) the goodwill on the acquisition of David that will appear in the consolidated
statement of financial position at 31 December 2018. (5 marks)

(ii) the profit on the de-recognition of any previously held investment in David to
be reported in group profit or loss for the year 31 December 2018. (5 marks)

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QUESTION 2: (30 MARKS)

The following draft financial statements relate to Portal, a public limited company:
PORTAL DRAFT GROUP STATEMENTS OF FINANCIAL POSITION AT 31 May

2018 2017
MUR MUR
million million
ASSETS
Non-current assets
Property, plant and equipment 2,630 2,010
Intangible assets 105 65
Investment in associate 535 550
3,270 2,625
Current assets
Inventories 1,322 1,176
Trade receivables 1,220 1,060
Cash at bank and cash
90 280
equivalents
TOTAL ASSETS 5,902 5,141
EQUITY AND LIABILITIES
EQUITY
Share capital at MUR1 each 200 170
Share premium 60 30
Revaluation reserve 92 286
Retained earnings 533 505

Non-controlling interest 522 345

TOTAL EQUITY 1,407 1,336
LIABILITIES
Non-current liabilities 1,675 1,320
Deferred tax liabilities 200 175
Current liabilities 2,620 2,310
Total liabilities 4,495 3,805
TOTAL EQUITY AND LIABILITIES 5,902 5,141

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PORTAL DRAFT GROUP STATEMENTS OF COMPREHENSIVE INCOME FOR

YEAR ENDED 31 May 2018

2018

MUR million
Revenue 8,774
Cost of sales (7,310)
Gross profit 1,464
Distribution and administration
(1,014)
expenses
Finance costs (75)
Share of profit in associate 45
Profit before tax 420
Income tax expense (205)
Profit for the year 215

Other comprehensive income

Foreign exchange difference of
(10)
associate
Impairment losses on property, plant
and equipment offset against (194)
revaluation surplus
Total comprehensive income for the
11
year

Profits attributable to:

Owners of parent 123
Non-controlling interest 92
215
Total comprehensive income attributable to:
Owners of parent (20)
Non-controlling interest 31
11

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The following information relates to Portal:

(i) Portal acquired a seventy per cent holding in Hunsten Holdings, a public limited
company, on 1 June 2017. The fair values of the net assets acquired were as follows:

MUR million
Property, plant and equipment 150
Inventories and work in progress 180
Provisions for onerous contracts (30)
300

The purchase consideration was MUR200 million in cash and MUR50 million (present
value) deferred consideration which is payable on 1 June 2019.

The provision for the onerous contracts was no longer required at 31 May 2018 as
Squire had paid compensation of MUR30 million in order to terminate the contact on 1
December 2017.

The intangible asset in the group statement of financial position comprises goodwill
only. The difference between the discounted value of the deferred consideration
(MUR50m) and the amount payable (MUR54m) is included in 'finance costs'.

(ii) There had been no disposals of property, plant and equipment during the year. Depr
eciation for the period charged in cost of sales was MUR129 million.

(iii) Current liabilities comprised the following items.

2018 2017
MUR million MUR million
Trade Payables 2,355 2,105
Interest Payables 65 45
Taxation 200 160
2,620 2,310

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(iv) Non current liabilities comprised the following items.

2018 2017
MUR million MUR million
Deferred consideration 54 -
Liability for purchase of non-current assets 351 -
Loans repayable 1,270 1,320
1,675 1,320

(v) Dividends paid by Portal amounted to MUR 90 million.

REQUIRED:
Prepare:
i. the consolidated statement of cash flows using the indirect method for
Portal group for the year ended 31 May 2018 in accordance with IAS 7
Statement of cash flows. (25 marks)

ii. Discuss the issues which would determine whether Hunsten Holdings
should be considered by Portal in the consolidated financial
statements. (5 marks)

QUESTION 3: (20 MARKS)

You are the Financial Controller of the Abby Ltd, a domestic company which prepares
financial statements in accordance with IFRS in MUR. One of your assistants, a trainee
accountant, who is currently working on the 2018 financial statements, has sent you an
email with the following queries:

Query 1
The accountant has discovered that the finance director has purchased goods from a
company, Diary, which the director jointly owns with his wife and the accountant
believes that this purchase should be disclosed.
The director refuses to disclose the transaction as in his opinion it is an ‘arm’s length’
transaction and feels that if the transaction is disclosed, it will be harmful to business
and feels that the information asymmetry caused by such non-disclosure is irrelevant as
most entities undertake related party transactions without disclosing them.
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When preparing the financial statements for the recent year end, the accountant noticed
that Diary has not paid an invoice for several million dollars and it is significantly
overdue for payment. It appears that the entity has liquidity problems and it is unlikely
that Diary will pay. The accountant believes that a loss allowance for trade receivables
is required. The finance director has refused to make such an allowance and has told
the accountant that the issue must not be discussed with anyone within the trade
because of possible repercussions for the credit worthiness of the company.

Query 2
The accountant noticed that the provisions balance as at 31 December 2018 is
significantly higher than in the prior year. She made enquiries of the finance director,
who explained that the increase was due to substantial changes in food safety and
hygiene laws which become effective during 2018. As a result, the company must
retrain a large proportion of its workforce. This retraining has yet to occur, so a provision
has been recognised for the estimated cost of MUR2 million. The finance director then
told the accountant that such enquiries were a waste of time and would not be looked at
favourably when deciding on her future pay rises and bonuses.

Query 3
While searching for some invoices, the accountant found a contract which Abby Ltd had
entered into on 1 January 2018 with Gustoso, another entity.
The contract allows Calendar to use a specific aircraft owned by Gustoso for a period of
three years. Calendar is required to make annual payments. On 1 January 2018, costs
were incurred negotiating the contract.
The first annual payment was made on 31 December 2018. Both of these amounts
have been expensed to the statement of profit or loss. There are contractual restrictions
concerning where the aircraft can fly. Subject to those restrictions, Abby Ltd determines
where and when the aircraft will fly, and the cargo and passengers which will be
transported.

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Gustoso is permitted to substitute the aircraft at any time during the three-year period
for an alternative model and must replace the aircraft if it is not working. Any substitute
aircraft must meet strict interior and exterior specifications outlined in the contract.
There are significant costs involved in outfitting an aircraft to meet Abby’s specifications.

REQUIRED:
(i) Advise the accountant on the matters set out above with reference to International
Financial Reporting Standards. (6 marks each =18 marks)

(ii) Professional marks will be awarded for clarity and quality of presentation. (2 marks)

***END OF QUESTION PAPER***

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