CHARTERED ACCOUNTANTS EXAMINATIONS

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PROFESSIONAL LEVEL
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P1: ADVANCED FINANCIAL REPORTING

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MONDAY 15TH DECEMBER 2014

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TOTAL MARKS – 100: TIME ALLOWED: THREE (3) HOURS

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INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question. You will be told when to
start writing.

2. This paper is divided into TWO sections:

Section A: Attempt this ONE (1) compulsory question.

Section B: Attempt any THREE (3) questions.

3. Enter your student number and your National Registration Card number on the front of
the answer booklet. Your name must NOT appear anywhere on your answer booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. The marks shown against the requirement(s) for each question should be taken as an
indication of the expected length and depth of the answer.

6. All workings must be done in the answer booklet.

7. Present legible and tidy work.

8. Graph paper (if required) is provided at the end of the answer booklet.

9. Present Value and Annuity tables are attached at the end of this question paper.
SECTION A

This question is compulsory and must be attempted

QUESTION ONE

The following consolidated financial statements relate to Satu Group for 2014.

Consolidated statement of profit or loss for the year ended 30th September 2014.

K’million

Revenue 1,800
Cost of sales (1,050)
Gross profit 750
Other income 250

Distribution costs (225)

Administrative cost (245)

Finance cost (35)
Share of associate profit after tax 90
Profit before tax 585
Taxation (85)

Profit for the period 500

Other comprehensive income

Revaluation surplus 37
Net actuarial gain or loss nil
Other comprehensive for the year 37
Total comprehensive income 537

Profit for the period attributable to:

Equity shares of parent 418

Non – controlling interest 82

500

Total comprehensive income attributable to:

Equity shares of parent 455

Non – controlling interest 82
Total comprehensive income 537

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Consolidated statements of financial position as at:

30th September 30th September

2014 2013
K’million K’million

Assets

Non – current
Property, plant & equipment 1,900 1,609

Goodwill 89 98
Investment in associate 170 55

Other investments 68 68

Financial assets 78 103

2,305 1,933

Current

Inventories 122 136

Trade receivables 230 256
Other receivables 36 45
Bank 170 166
558 603
Total assets 2,863 2,536

Equity & liabilities

Equity

Equity share K1.00 each 900 780

Share premium 320 140
Revaluation reserve – Land 103 66

Retained earnings 550 156

Non – controlling interest 400 259
Total equity 2,273 1,401

Liabilities
Non – current
Deferred tax 84 109
Defined benefit plan 48 45
12% Loan notes 187 407
319 561

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Current
Trade payables 148 400
Current tax 85 120
Interest payable 38 54
271 574
Total liabilities 590 1,135
Total equity & liabilities 2,863 2,536

The following information is relevant:

(i) On 30th June 2014, Satu acquired 80% of the equity shares of Mutumba PLC for a cash
consideration of K630 million. The fair value of non – controlling interest at that date
was K160 million. The fair value of net assets of Mutumba Plc at acquisition was K760
million. This is summarised below:

K’million

Property, plant and equipment 780

Inventory 23
Trade receivables 51
Bank 18
Trade payables (38)
Deferred tax (58)
Current tax (16)
760

(ii) On 30th September 2014, Satu disposed of 70% of the equity shares in Vaate PLC for
cash consideration of K589 million. This left Satu with 20% equity shares in Vaate PLC
fair valued at K150 million. Satu is able to exercise significant influence in Vaate PLC.

The fair value of net assets of Vaate PLC at the date of disposal are summarised below:

K’million
Property, plant and equipment 650
Inventory 32
Trade receivables 66
Bank 12
Trade payables (42)
Current tax (28)
690

Satu acquired the equity shares of Vaate PLC three (3) years ago for a cash
consideration of K603 million when the fair value of its net assets stood at K650 million.
The fair value of non – controlling interest at that date was K71 million.

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 The gain on the disposal of 70% equity shares in Vaate PLC has been included in other
income.

(iii) Consolidated goodwill impaired for the year to 30th September 2014 relates to Maate
PLC a subsidiary that was acquired two years ago. Satu has owned 75% of the equity
shares in Maate PLC since acquisition date. The goodwill in other subsidiaries did not
suffer any impairment loss.

(iv) A piece of land was revalued on 30th September 2014 by Satu.

(v) An item of plant, with a carrying value of K100 million, was disposed of on 31st August
2014 by Satu. 20% of the disposal value had not been paid by the buyer by 30th
September 2014. This amount is shown as other receivables. The gain on disposal has
been included in other income.

There was no other separate sale of an item of property, plant and equipment during
the year to 30th September 2014.

Depreciation charged to cost of sales for the year ended 30th September 2014 amounted
to K270 million.

(vi) The financial assets figure relates to financial assets classified as ‘through profit or loss’.
During the year to 30th September 2014, Satu sold for cash financial asset with a
carrying value of K25 million at a profit of K50 million. This has been included in other
income.

There was no acquisition of financial assets.

(vii) Satu acquired 22% equity shares in Meta PLC for cash consideration of K25 million on
30th December 2013. Satu is able to exercise significant influence in Meta PLC.
Investments in associate were not impaired in the year to 30th September 2014.

There was no disposal of any investment in associate during the year.

(viii) Satu paid total contribution amounting to K15 million to a defined benefit plan. Pension
benefits amounting to K19 million were paid during the year to 30th September 2014.

(ix) Satu maintains two accounts, Zambian Kwacha account and United States Dollars
account. The company has maintained $1 million in the dollar account since 30th
September 2013. This figure has been translated to Kwacha and included in total bank
balance.

Kwacha to dollar exchange rates:

30th September 2013 K5.8000

Average rate for the year to 30th September 2014 K6.0000

30th September 2014 K6.2000

The exchange difference has been included in other income.

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(x) Satu issued equity shares for cash on 31st May 2013.

(xi) The balance of other income relates to cash interest received from other investments.
There was no acquisition and disposal of other investments.

(xii) Satu, its subsidiaries and associated companies paid dividends on 1st September 2014.

(xiii) It is Satu’s policy to value non – controlling interest at fair value.

Required:

Prepare a consolidated statement of cash flow of Satu Group using the indirect method for the
year ending 30th September 2014 in accordance with the requirements of IAS 7 ’Statement of
cash flows’. [Total: 40 marks]

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SECTION B

Attempt any three questions in this section.

QUESTION TWO

Explain the accounting treatment of the transactions below for the year ended 30th September
2014.

(a) Lavada Limited commenced construction of a factory on 1st January 2014 after having
surveyed and dug the foundation. The factory is expected to be completed on 31st
December 2015 at a cost of K2,500 million. The factory will house the new machine,
though yet to be acquired, needed to manufacture a new detergent paste to be called
‘Wonders of washing’.

On 1st October 2013, the company got a bank loan of K2,500 million with annual interest
of 10% which was equal to its effective interest rate. Its repayment period was 20 years
starting 28th September 2015.

The following has been incurred from 1st January 2014 to 30th September 2014.

K’million

Surveyors’ fees 60
Material purchases 600
Labour costs 250
Overheads 200

Note:

 20% of materials purchased are yet to be used by 30th September 2014.

 10% of labour costs were paid on 1st November 2014.

 30% of overhead costs relate to general overheads while the balance is directly
attributable to the factory construction.

 Interest cost for the period to 30th September 2014 is not included in the figures
above. It was paid on 15th October 2014.

 The company had no other loan.

 Buildings are depreciated at 10% per annum on cost.

Note: all the activities relating to the construction of the factory commenced on 1st
January 2014. (7 marks)

(b) Vadala PLC acquired a piece of land at a cost of K200 million on 1st July 2014. The
company has by 30th September 2014, not decided what to do with this land. The land
has a fair value of K220 million on 30th September 2014. (2 marks)

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(c) Meda PLC has owned a drilling machine for the past three (3) years. The machine has
been used on several projects, generating 12% of the company’s total revenue. In
recent years, the company has experienced unprecedented competition in the drilling
business which has led to a drastic reduction in revenue from this business to about 6%
of the total company revenue. This trend is expected to continue in the foreseeable
future. The directors of Meda PLC are therefore, thinking of abandoning the drilling
machine on 31st October 2014 and have thus classified it as ‘held for sale’ as at 30th
September 2014. (7 marks)

(d) Nadana Enterprises buys goods on credit from Tedana PLC. The terms of the contract
are that:

i) The goods are insured by Nadana Enterprises.

ii) Nadana Enterprises pays for the goods after it has sold them and cash has been
received in respect of those goods.

iii) Nadana Enterprises has the right to return unsold goods to Tedana PLC within
one month from the date of purchase. Nadana Enterprises has returned goods to
Tedana PLC before.

All the goods that Nadana Enterprises still has in its books, for the period to 30th
September 2014, were bought on 20th September 2014. The goods have not yet
been sold by Nadana Enterprises as at 30th September 2014. (4 marks)
[Total: 20 marks]

QUESTION THREE

Maambana Limited introduced two pension plans, ‘Push’ plan and ‘Mega’ plan on 1st January
2013 for Management staff and for the rest of the employees respectively.

Details of each plan are as follows:

Push plan

Under this plan, Maambana Limited is required to make a fixed annual contribution to the fund.
In addition, its legal or constructive obligation is limited to the fixed contribution it has to make
to the fund. Moreover, employees are required to contribute 10% of the total pension
contribution to the scheme.

On 1st January 2013, total contributions of K100 million were paid into the fund. This represents
pension contributions for three (3) years. The company expensed the all amount to the
statement of profit or loss for the year ending 30th September 2013. Conversely, no amount has
been expensed in the year to 30th September 2014.

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The scheme had fair value of plan assets of K100 million and present value of plan obligation of
K120 million at 1st January 2013. The balances for the fair value of plan assets and present
value of plan obligations increased to K110 million and K140 million respectively as at 30th
September 2014. These have not been recorded anywhere in the books of Maambana Limited.

Mega plan

The terms of this plan require Maambana Limited to guarantee post employment benefits to its
employees.

The fair value of plan assets and the present value of plan obligations amounted to K140million
and K190 million respectively at 30th September 2013. The balances at 30th September 2014
were K195 million for the fair value of plan assets and K210 million for the present value of plan
obligations. On 1st January 2013, fair value of plan assets was equal to the contribution paid by
Maambana Limited into the fund amounting to K100million. The present value of plan obligation
was valued at K120 million at the same date.

During the year to 30th September 2014 the company reduced the benefits which employees
are entitled to under this plan by K20 million. This amounted to K12 million in the previous
year. The present value of plan obligation increased by K18 million and K19 million in the years
ended 30th September 2013 and 30th September 2014 respectively. Further, the company
contributed a total sum of K40 million at 1st October 2013.

No pension benefits have been paid out by the company in both years.

The company recorded in its financial statements for the years to 30th September 2013 and 30th
September 2014 fair value of plan assets under non-current assets and present value of plan
obligation under non-current liabilities. The differences between present value of plan
obligations and fair value of plan assets were taken to statement of profit or loss as either
income or expense items. The contributions paid were correctly accounted for in the financial
statements. However, the other items relating to the pension plan were not recorded in the
financial statements.

The annual discount rate for the year to 30th September 2013 was 10% and 12% for the year
to 30th September 2014.

Required

(i) Distinguish between a defined contribution plan and a defined benefit plan.
(5 marks)

(ii) Explain the accounting treatment of the two plans in the financial statements of
Maambana Limited and the accounting entries required to correctly account for them in
both 2013 and 2014 financial statements. (15 marks)
[Total: 20 marks]

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QUESTION FOUR

IFRS 9 ‘Financial Assets’ covers recognition, derecognition, classification and measurement of

financial assets and financial liabilities. The way financial assets and financial liabilities are
accounted for in the financial statements depends on their classification. Their classification
depends on meeting certain criteria.

(a) Explain the criteria that have to be met for a financial asset to be classified as either fair
value through profit or loss, fair value through other comprehensive income or
amortised cost. (6 marks)

(b) Explain the adjustments that should be made to the financial statements of Batara
Limited for the year ending 30th November 2014 to correctly account for the following
transactions.

(i) Batara Limited issued a three-year convertible bond of K100 million on 1st
December 2013. The issue costs amounted to 10% of the bond value. The bond
has an annual coupon rate of 12%. The effective interest rate of a bond without
conversion rights and excluding the effects of issue costs is 14% per annum.
16% is the estimated annual effective interest rate of the bond with no
conversion rights, after taking into account the effects of issue costs.

The accountant of Batara Limited accounted for the cash raised correctly.
However, the bond is shown under non-current liabilities at a value of K100
million. The issue costs have been expensed. Interest for the year to 30th
November 2014 has been calculated based on K100 million using the annual
interest rate of 10%. The interest has been expensed and duly paid.

Batara Limited is only interested in payments of annual interest and principal

repayment at the end of three years. (7 marks)

(ii) Batara Limited acquired 18% of the equity shares in Kalala PLC for cash
consideration of K30 million on 1st December 2013. Transaction costs amounting
to K2 million were incurred to acquire the shares. The company has no intention
of selling these shares and it does not have significant influence in Kalala PLC.

The cash paid by Batara Limited to acquire the shares was correctly accounted
for in its books. The transaction costs have been expensed while the 18%
shareholding accounted for using the equity method. The fair value of these
shares at 30th November 2014 was K43 million.

Kalala Plc profit for the year to 30th November 2014 amounted to K400 million. It
paid out total dividends of K100 million to all of its shareholders for the year to
30th November 2014. (7 marks)
[Total: 20 marks]

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QUESTION FIVE

(a) IFRS 11 ’Joint arrangements’ classifies joint arrangements as either joint ventures or
joint operations. This classification is important for them to be accounted for correctly in
both separate and consolidated financial statements.

Required

i) Distinguish between a joint venture and a joint operation. (4 marks)

ii) Explain how joint ventures and joint operations are accounted for in both
separate and consolidated financial statements. (6 marks)

(b) Bacata Plc acquired 18,000 of 112,500 issued equity shares of Catala PLC on 1st March
2014 for a cash consideration of K54 million. Bacata PLC was given one seat on Catala
PLC’s board of directors.

During the year to 30th November 2014, sales between Bacata PLC and Catala PLC
accounted for 30% of Bacata PLC’s total sales.

Catala PLC had made a loss of K10 million for the year to 30th November 2014. It did not
therefore pay out any dividends in the year to 30th November 2014.

The investment in Catala PLC was fair valued at K70 million on 30th November 2014.

Required

Discuss how equity shares acquired in Catala PLC should be accounted for in the
separate and consolidated financial statements of Bacata PLC for the year to 30th
November 2014. (10 marks)
[Total 20 marks]

END OF PAPER

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 P1 SUGGESTED SOLUTIONS

SOLUTION ONE

Satu Group
Consolidated statement of cash flow for the year ended 30th September
2014.
K’million K’million

Cash flow from operating activities

Profit before tax 585
Adjustments for:
Interest expense 35
Goodwill impairment loss W8 15
Depreciation charge 270

Share of associate profit (90)

Other income (250)

Defined benefit plan expense W5 18
583

Decrease in inventories 136+23-32-122 5

Decrease in trade receivables 256+51-66-230 11

Decrease in other receivables 45

Decrease in trade payables 400+38-42-148 (248)

Cash generated from operations 396

Tax paid W9 (191)
Interest paid W10 (51)
Contribution paid – defined benefit plan (15)
Net cash inflow from operating activities 139

Cash flow from investing activities

Dividends from investment in associate W7 150
Cash paid to acquire property, plant and equipment W6 (494)
Proceeds from disposal of plant (80/20 x K36m) 144
Cash paid to acquire Mutumba Plc 630-18 (612)
Proceeds from disposal of Vaate Plc 589-12 577
Interest from other investment W4 19.6
Proceeds from disposal of financial assets W4 75
Cash paid to acquire shares in Meta Plc (25)

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Net cash outflow from investing activities (165.4)

Cash flow from financing activities

Dividends paid to non-controlling interest W1 (26)
Dividends paid W11 (24)
Repayment of 12% loan notes 407-187 (220)
Proceeds from issue of shares 900+320-780-140 300
Net cash inflow from financing activities 30
Cash flow changes in cash and cash equivalent 3.6
Non-cash flow changes in cash & cash equivalents 6.2-5.8 0.4
Total changes in cash & cash equivalents 4.0
Opening cash and cash equivalent 166

Closing cash and cash equivalent 144 -0.4 170

Workings
W1 Non-controlling interests
K’million
Opening balance 259
Other comprehensive income 82
Mutumba Plc 160
Vaate Plc 71+{10% x (690-650)} (75)
Dividends paid (bal. fig) (26)
Closing balance 400

W2 Disposal of 70% equity shares in Vaate Plc

K’million
Proceeds 589
Fair value of retained interest 150
Non-controlling interest W1 75
Fair value of net assets at disposal:
Tangible assets (690)
Goodwill (603+71)-650 (24)
Gain on disposal 100

W3 Disposal of plant
K’million
Proceeds 100/20 x K36m 180
Carrying amount (100)
Profit on disposal 80

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W4 Disposal of financial assets
K’million
Proceeds (bal.fig) 75
Carrying amount (25)
Profit on disposal 50

Therefore, Cash interest received = 250-100-80-50-0.4(6.2-5.8) = K19.6million

W5 Defined benefit plan

K’million
Opening balance 45
Net expense (bal.fig) 18
Net actuarial gain 0
Contribution paid (15)
Closing balance 48

W6 Property, plant and equipment

K’million
Opening balance 1,609
Revaluation surplus 37
Mutumba Plc 780
Vaate Plc (650)
Disposal of plant (100)
Depreciation charge (270)
Cash paid (bal.fig) 494
Closing balance 1,900

W7 Investment in associate
K’million
Opening balance 55
Vaate Plc 150
Meta Plc 25
Statement of profit or loss 90
Dividends received (bal.fig) (150)
Closing balance 170

W8 Goodwill
K’million
Opening balance 98
Mutumba Plc (630+160)-760 30
Vaate Plc (603+71) -650 (24)
Impairment loss (bal.fig) (15)
Closing balance 89

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W9 Taxation
K’million

Opening balances 109+120 229

Statement of Profit or loss 85
Mutumba Plc 58+16 74
Vaate Plc (28)
Cash paid (bal.fig) (191)
Closing balance 84+85 169

W10 Interest payable

K’million
Opening balance 54
Statement of profit or loss 35
Cash paid (bal.fig) (51)
Closing balance 38

W11 Retained earnings

K’million
Opening balance 156
Profit for period attributable to parent 418
Dividends paid (bal.fig) (24)
Closing balance 550

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SOLUTION TWO

a) Construction of factory
The factory will be recognised as part of non-current assets in the statement of
financial position at the total costs incurred that is directly related to
construction. The surveyors’ fees of K60million will be capitalised. Only 80% of
material costs amounting to K480million should be capitalised while 20% of the
cost amounting to K120million should be shown under current assets as part of
inventory figure. This is because the materials have to yet been used.
K250million of labour cost will be part of the cost of the factory. In addition, the
10% of the labour cost of K25million will be shown under current liabilities as it
has not yet been paid. Only overheads that are directly attributable to the
construction of the factory should be capitalised. This is equal to K140million.
The amount of K60million relating to general overheads should be expensed. The
interest cost to be capitalised should be for the period when activities relating to
the construction of the factory were taking place. This is only nine (9) months for
the year to 30th September 2014. This gives a cost of K187.5million to be
capitalised. The amount of K62.5million should be expensed. There is no need to
compute the capitalisation rate as there is only one loan. The total interest cost
of K250million should be shown under current liabilities as it had not been paid
at 30th September 2014. The first capital repayment of the loan is on 28th
September 2015. This means that the total loan of K2,500 million should be split
into two, the amount payable in the year to 30th September 2015 and that
payable after 30th September 2015. This gives K125million and K2,375 million to
be recognised under current liabilities and non-current liabilities respectively in
the statement of financial position.
The factory will thus be capitalised at a cost of K992.5million. No depreciation
will be charged as the factory has not yet been completed.

b) Piece of land
The land acquired for use in business operations is shown as part of property,
plant and equipment and accounted for under IAS 16 ’Property, plant and
equipment’. However, where an entity is yet to decide on its use, then it should
be classified as investment property and accounted for under IAS 40 ‘Investment
property’. The land will initially be recognised at K200 million on 1st July 2014
and subsequently at K220 million to reflect its fair value at 30th September 2014.
The increase in fair value of K20 million will be recognised as a gain in the
statement of profit or loss. This is in accordance with the fair value model of IAS
40 ‘Investment property’. However, under the cost model of IAS40, the land will
be carried at its cost of K200million subject to impairment review. The land
should not be revalued under this model.

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c) Drilling machine
IFRS 5 “Non-current assets held for sale and discontinued operations’ requires an
asset whose value will be realised through sale to be classified as held for sale as
long as certain criteria are met. These include the following:
 The asset must be available for immediate sale in its present condition.
 Its sale must be highly probable.
For the sale to be highly probable,

 Management must be committed to a plan of sale.

 There must be an active programme to locate a buyer.
 The price of the asset should be reasonable in relation to its current fair
value.
 The sale must be expected to take place within one year from the date of
classification.
Conversely, an asset that is to be abandoned, except for a disposal group,
should not be classified as held for sale. This is because its carrying amount will
be recovered by continuing use.

The drilling machine should therefore not be classified as held for sale as it does
not meet the recognition criteria. Its carrying value will be realised through
continued use and not through sale. Meda Plc should continue accounting for the
machine under IAS 16 ‘Property, plant and equipment’. In addition, the
continued reduction in the revenue contribution of the asset is an indicator of
impairment. The asset should therefore, be reviewed for impairment. If its
carrying value turns out to be more than its recoverable value, it should be
reduced to its recoverable amount and impairment loss taken to the statement of
profit or loss.

d) Goods bought from Tenada Plc

For the goods to be recognised in the books of Nadana Enterprises, ownership
has to be established. It is vital to determine the point at which ownership of
goods is transferred to Nadana Enterprises. Looking at the terms of the
transaction, it seems Nadana Enterprises owns the goods immediately they are
bought. This is because it is responsible for insuring them. In addition we are not
told if Nadana Enterprises gets to be refunded or the selling price reduced to
reflect insurance cost borne by Nadana Enterprises. However, the risk of
irrecoverable debts is not transferred to Nadana Enterprises as it only pays for
the goods once paid for by its customers. This means that, in an instance where
Nadana Enterprises customers fail to pay, the cost is borne by Tenada Plc.
Moreover, Nadana Enterprises has a right to return the goods to Tenada Plc

19
 within one month from the date of purchase and this has been exercised before.
These show that the risks and rewards of ownership of goods are not transferred
to Nadana Enterprises till after one month.
Nadana Enterprises should recognise sales revenue from these goods once
customers have paid. For the goods not yet paid for, a sale recognised after a
month has elapsed. In addition, goods that have not yet been sold by Nadana
Enterprises will only be part of its inventory figure after one month has passed.
The goods in question should therefore, not be recognised as part of its
inventory figure in its financial statements as they are yet to be sold and paid for
and are less than one month from the date of purchase.

SOLUTION THREE

a) Distinction between defined benefit plan and defined contribution plan

Under a defined benefit plan the company guarantees post employment benefits
to the employees. That is, if the fund’s assets are not adequate to cover
employees’ benefits, then the employer may be required to settle the shortfall.
This means that investment risk of the plan rests with the employer. In addition,
the employer accounts for net pension assets or net pension liability in its
financial statements.

Under a defined contribution plan, the employer’s obligation is limited to what

has been agreed as its contribution to the plan. The investment risk, therefore,
rests with the employees. The employer only accounts for the contribution in its
financial statements.

b) Push Plan
This is a defined contribution plan as the obligation of Maambana Limited is
limited to fixed contribution it has to make to the plan. It should only account for
the contribution made by it to the fund. The contribution made by the employees
to the fund has to be excluded from its financial statements.
The total contribution of K90million (90% x K100m) made by the company for
covering a three year period should not be accounted for in one accounting year
but spread over the period to which the amount relates, that is three years.
Amounts of K22.5million (K90m/3yrs x 9/12) and K30million (K90m/3yrs) should
be recognised in the statement of profit or loss for the years to 30th September
2013 and 30th September 2014 respective. This implies that an amount of
K77.5million (K100m – K22.5m) has to be reversed in the period to 30th
September 2013. A prepayment of K67.5million and K37.5million should be
recognised in the statements of financial position as at 30th September 2013 and
30th September 2014 respectively. The net plan assets or net plan obligation will
not be recognised in the financial statements of Maambana Limited.
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Mega Plan
This is a defined benefit plan. This is because Maambana Limited guarantees
post employment benefits to its employees. That is, investment risk of the fund
rests with Maambana Limited.

The company should have recognised a net plan liability of K50m (W5) as at 30th
September 2013 and K15m (W5) at 30th September 2014. Therefore, K140m
(190 – 50) and K195m (210 – 15) should be deducted from non-current liabilities
as at 30th September 2013 and 30th September 2014 respectively. Further,
Maambana Limited should not have recognised any asset as at 30th September
2013 and 30th September 2014. K140m and K195m recorded in non-current
assets should thus be reversed in the statements of financial position as at 30th
September 2013 and 30th September 2014 respectively.

Moreover, Maambana Limited should have recognised net expense of K127.5m

(W3) and K0.2m (W3) in the statements of profit or loss for the year ending 30th
September 2014 and 30th September 2014 respectively. K50m (190 – 140) loss
and K15m (210 – 195) loss were recognised in the statements of profit or loss
for the year ending 30th September 2013 and 30th September 2014 respectively.
K42.5m (50 – 7.5) and K14.8m (15 – 0.2) have to be credited to the statements
of profit or loss or retained earnings for the year to 30th September 2013 and
30th September 2014 respectively.

Workings

W1 Fair value of plan assets

K’million
st
1 Jan. 2013 Contribution paid 100
30th Sept. 2013 Return 10% x 100 x 9/12 7.5
th
30 Sept. 2013 Actuarial gain (bal.fig) 32.5
th
Balance at 30 Sept. 2013 140
1st Oct. 2013 Contribution paid 40
30th Sept. 2014 Return 12% x (140+40) 21.6
th
30 Sept. 2014 Actuarial loss (bal.fig) (6.6)
th
Balance at 30 Sept. 2014 195

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W2 Present value plan obligation
K’million
st
Balance at 1 January 2013(past service cost) 120
30th Sept. 2013 Interest 10% x 120 x 9/12 9
th
30 Sept. 2013 Current service cost 18
th
30 Sept. 2013 Past service cost (12)
th
30 Sept. 2013 Actuarial loss (bal.fig) 55
th
Balance at 30 Sept. 2013 190
30th Sept. 2014 Interest 12% x 190 22.8
th
30 Sept. 2014 Current service cost 19
th
30 Sept. 2014 Past service cost (20)
th
30 Sept. 2014 Actuarial gain (bal.fig) (1.8)
th
Balance at 30 September 2014 210

W3 Net expense
30th September
2013 2014
K’million K’million
Interest W2 9 22.8
Return W1 (7.5) (21.6)
Current service cost 18 19
Past service cost (120-12) 108 (20)
Net expense 127.5 0.2

W4 Net actuarial gain

30th September
2013 2014
K’million K’million

Actuarial loss/(gain): Fair value of plan assets W1 (32.5) 6.6

Present value of plan obligation W2 55 (1.8)
Net actuarial loss 22.5 4.8

22
 W5 Net plan liability
30th September
2013 2014
K’million K’million
Present value of plan obligation 190 210
Fair value of plan assets (140) (195)
Net plan liability 50 15

SOLUTION FOUR

a) The criteria that have to be met for a financial asset to be classified as either fair
value through profit or loss, fair value through other comprehensive income or
amortised cost are as follows:

Fair value through profit or loss

i. The classification is applicable to both debt or equity instruments
ii. The debt or equity instrument must be held for trading. This means that
an entity may realise the value of a financial asset at anytime through
selling.
iii. The classification also applies to derivative instruments. All derivative
instruments are classified as fair value through profit or loss.

Fair value through other comprehensive income

i. This only applies to equity instruments and not debt instruments. Usually
debt instrument that is not held for trading is classified under amortised
cost. This however, is subject to meeting the business model and cash
flow characteristics tests.
ii. It must not be held for trading. An entity should not be interested in
realising the value of a financial asset through a sale but in deriving
economic benefits through receipt of dividends and capital gains as the
fair value of shares increase.

Amortised cost
i. This is a restrictive classification as it only applies to debt instruments
and not to equity instruments.
ii. The debt instrument should of course not be held purely for trading. The
entity should not acquire it for the sole purpose of realising its value
through selling.
iii. The two tests of business model and cash flow must be met. Under the
cash flow characteristic test, the contractual terms of the financial asset

23
 should give rise on specified dates to cash flows that are solely payments
of principal and interest on the principal amount outstanding. While
under the business model test, a financial asset is held within a business
model whose objective is achieved by both collecting contractual cash
flows and selling financial assets.

b) i) Convertible bonds
The company is interested in payments of annual interest and principal.
The convertible bond should therefore, have been carried at amortised
cost. The bond should have been split into two, liability component and
equity component. The liability component should have been recognised
under non-current liabilities at amortised cost while the equity component
under equity.
The liability component should have been calculated by getting the sum of
interest and principal discounted at 14% giving K95.36million (W1). The
equity component represents residual interests of K4.64million (W1). The
two components should have been adjusted for issue costs of K10million
(10% x K100million). This is allocated to the components based on their
book values; K9.54million (W2) to liability and K0.46million (W2) to
equity. This gives revised liability and equity components figures of
K85.82million (W2) and K4.18million (W2) respectively. The liability
component of K85.82million is amortised at 16% to get K89.55million
(W3) the balance that should have been shown under non-current
liabilities at 30th November 2014. In addition, interest cost of
K13.73million (W3) should have charged to the statement of profit or loss.

Adjustments to be made to the financial statements:

I. Equity should be increased by K4.18million (W2) to reflect the
equity component of the convertible bond.
II. The bond amount under non-current liabilities should be reduced
by K10.45million (K100million – K89.55million).
III. Retained earnings increased by K6.27million (W4).

ii) Equity shares

The 18% equity shares should have been classified as financial assets
through profit or loss. This is because the company has no significant
influence in Kalala Plc and the shares are not for trading. The shares
should have initially been recognised at a value of K32million (30+2)
inclusive of transaction costs. At 30th November 2014 should have been
fair valued to K43million and the increase in fair value of K11million taken
to other comprehensive income and other components of equity.

24
Dividends of K18million (18% x K100million) would have been the income
recognised in the statement of profit or loss.

Adjustments to be made to the financial statements

I. The investment in associate amounting to K84million (W5) should
be reversed and financial assets through other comprehensive
income recognised at a fair value of K43million. This will result in
non-current assets reducing by K41million.
II. Other components of equity should be increased by K11million.
III. Profit for the year and retained earnings should be reduced by
K52million (W6).

Workings

1. Liability and equity components

Years K’m DF@14% K’m
1-3 Interest (12%xK100m) 12 2.322 27.86
3 Principal 100 0.675 67.50
Liability component 95.36
Equity component (bal.fig) 4.64
Bond proceeds 100

2. Allocation of K10million (10% xK100million) issue costs

Liability Equity
K’m K’m
As per W2 95.36 4.64
Transaction cost (9.54) (0.46)
85.82 4.18

3. Amortisation of liability component

K’m
st
Balance at 1 December 2013 85.82
Interest @16% 13.73
Cash flow (10% x K100m) (10.00)
Balance at 30th November 2014 89.55

4. Retained earnings adjustment

K’m
Issue costs reversal 10
Interest @ 10% reversal 10

25
 Interest @ 16% (W3) (13.73)
6.27

5. Investment in associate
K’m
Cost of investment 30
Share of profit for period (18% x K400m) 72
Share of dividends (18% x K100m) (18)
84

6. Retained earnings adjustment

K’m
Transaction costs reversal 2
Share of profit reversal (72)
Share of dividends 18
(52)

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SOLUTION FIVE

a) (i) Distinction between joint venture and joint operation

Under a joint venture the parties with joint control of the arrangement
have rights to the net assets of the arrangement. While under a joint
operation, the parties with a joint control of the arrangement have rights
to the assets and obligations for the liabilities relating to the arrangement.
In addition, in a joint venture the assets brought into the arrangement or
subsequently acquired by the joint arrangement are arrangement’s assets.
The parties have no title or ownership to the assets. While in a joint
operation, the parties share all interests in the assets relating to the
arrangement in a specified proportion. Creditors of the joint arrangement
do not have rights of recourse against any party in a joint venture.
However, parties to the joint operation are liable for claims by third
parties.

(ii) Accounting for joint operations

Joint ventures
These are accounted for in consolidated financial statements of the
investor using the equity method. While in separate financial statements,
the investor accounts for them under IFRS 9’ Financial instruments’, as
either financial assets through profit or loss or financial assets through
other comprehensive income.

Joint operations
The joint operator recognises line by line, in both separate financial
statements and consolidated financial statements, the following items:
 Its assets, including its share of any assets held jointly,
 Its liabilities, including its share of any liabilities incurred jointly,
 Its revenue from the sale of its share of the output of the joint
operation,
 Its share of the revenue from the sale of the output by the joint
operation,
 Its expenses, including its share of any expenses incurred jointly.
In addition, a joint operator accounts for the assets, liabilities, revenues
and expenses relating to its interest in the joint operation in accordance
with the IFRSs applicable to the particular assets, liabilities, revenues and
expenses.

27
b) Equity shares acquired in Catala Plc
It is important to establish whether the acquired equity shares in Catala Plc give
rise to Bacata Plc having an associated company or simply a trade investment.
IAS 28 states that significant influence has to exist for an investment to be
accounted for as an associated company in consolidated financial statements.
Otherwise it may either be accounted for as investment in a subsidiary, if control
exists, or as trade investment. IAS 28 states that significant influence is
presumed to exist if the investor owns atleast 20% of the voting power, equity
shares, of the investee. However, if the investor owns less than 20% of the
equity shares of the investee, then significant influence has to be demonstrated.
This is evidenced in one or more of the following ways:
i) Bacata Plc should have representation on the board of directors of Catala
Plc
ii) Bacata Plc’s participation in the policy making process of Catala Plc
iii) There should be material transactions between Bacata Plc and Catala Plc
iv) There should be interchange of management personnel between the two
companies and
v) Provision of technical information
Bacata Plc acquired 16% (18,000/112,500) of Catala Plc. This is less than 20%
prescribed by IAS 28 for significant influence to be presumed to exist. However,
Bacataa Plc has one seat on the board of director that may enable it participate
in the decision making process of Catala Plc. In addition, sales of 30% of Bacata
Plc are significant. These two points demonstrate that there is significant
influence despite the shareholding being less than 20%.

Catala Plc will therefore, be carried in the consolidated financial statements of

Bacata Plc as an associated company.

Accounting

In separate financial statements of Bacata Plc, investment in Catala Plc will be

recognised in the statement of financial position as at 30th November 2014 at a
fair value of K70million under non-current assets. The shares will either be
classified as financial assets through profit or loss or financial assets through
other comprehensive income. The choice of classification will largely depend on
whether the shares are held for trading or not. If they are for trading then
financial assets through profit or loss will be appropriate. Otherwise, they should
be classified as financial assets through other comprehensive income. The
K16million (K70million – K54million) increase in fair value for the year to 30th

28
November 2014, is recognised as a gain in the statement of profit or loss if
classified as financial assets through profit or loss and in other comprehensive
income if classified as financial assets through other comprehensive income.

In consolidated financial statements, K52.80million (W1) is recognised as

investment in associate company as at 30th November 2014, under non-current
assets in the consolidated statement of financial position and K1.20million (W1)
Bacata Plc’s share of loss for the year in Catala Plc will be taken to the
consolidated statement of profit or loss and deducted from or added to group’s
profit before tax or group’s loss figure for the year.

Working

W1 Investment in associate
K’million
Cost of investment 54
Share of post acquisition retained earnings 16% x 10 x 9/12 (1.20)
Balance to statement of financial position 52.80

END OF SUGGESTED SOLUTIONS

29