CPA INTERMEDIATE LEVEL

FINANCIAL REPORTING AND ANALYSIS

WEDNESDAY: 4 December 2024. Morning Paper. Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.
Do NOT write anything on this paper.

QUESTION ONE
(a) With reference to International Financial Reporting Standard (IFRS) 9 “Financial Instruments: Recognition and
Measurement”, explain the following ways of measuring financial assets that are investments in debt securities:

(i) At amortised cost. (2 marks)

(ii) At fair value through other comprehensive income (OCI). (2 marks)

(iii) At fair value through profit or loss. (2 marks)

(b) Potters Ltd. borrowed Sh.120 million on 1 July 2023 at the rate of 9% per annum to finance two capital projects
namely; “Cometic” and “Robotic” projects. The funds were invested in the two projects as follows:

Project
Cometic Robotic
Sh.“000” Sh.“000”
1 July 2023 20,000 40,000
1 January 2024 20,000 40,000

Unutilised funds on 1 July 2023 were invested temporarily at the rate of 7% per annum.

Required:
(i) Determine borrowing costs to be capitalised for each of the project as at 30 June 2024. (4 marks)

(ii) Compute the value of the investment in the books of Potters Ltd. as at 30 June 2024. (2 marks)

(c) The following information was obtained from the Ministry of Finance of a developing country with a view of
presentation of budget information for the fiscal year ended 30 June 2024:

Budgeted amounts Actual amounts

Sh.“billion” Sh.“billion”
Receipts:
Taxes 1,175 968
Local borrowings 558 495
Overseas borrowings 630 716
Donations from foreign agencies 378 486
Trading activities 754 1,066
Sale of fixed assets 792 1,012
Other receipts 261 220

Payments:
Internal security 806 738
Education 797 810
Agriculture 263 291
Health 423 486
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 Sh.“billion” Sh.“billion”
Affordable housing 450 410
Social welfare 218 216
Transport 535 540
Defence 389 512
Other payments 475 627

Additional information:
During the year ended 30 June 2024, the National Assembly approved a supplementary budget for the following
votes:
Sh.“billion”
Overseas borrowings 54 Addition
Sale of fixed assets 140 Addition
Education 63 Addition
Health 37 Addition
Affordable housing (32) Reduction

Required:
Prepare a statement of comparison of budget and actual amounts for the fiscal year ended 30 June 2024 as per the
requirements of International Public Sector Accounting Standard (IPSAS) 24 “Presentation of Budget Information in
Financial Statements”. (8 marks)
(Total: 20 marks)

QUESTION TWO
(a) International Public Sector Accounting Standard (IPSAS) 4 “The effect of changes in foreign exchange rates”
provides clear guidance on how entities should translate monetary items and non-monetary items as well as the
treatment of the resultant exchange differences.

With reference to the above statement, explain how monetary items and non-monetary items should be translated and
the treatment of their respective exchange differences. (4 marks)

(b) On 1 November 2023, Kip Ltd. acquired a 75% of interest in Limah’s equity shares. The acquisition was completed
through a share for share transaction, where Kip Ltd. exchanged two of its own shares for every three Limah’s Ltd.
shares acquired. On the acquisition date, Kip Ltd.’s share price was Sh.40 per share.

Summarised below are the statements of profit or loss and other comprehensive income for Kip Ltd. and Limah Ltd.
for the financial year ended 30 April 2024:

Kip Ltd. Limah Ltd.

Sh.“000” Sh.“000”
Revenue 1,800,000 960,000
Cost of sales (1,040,000) (440,000)
Gross profit 760,000 520,000
Distribution costs (94,400) (48,000)
Administrative expenses (108,000) (92,000)
Finance cost (6,000) (4,800)
Profit before tax 551,600 375,200
Income tax expense (192,000) (111,200)
Profit for the year 359,600 264,000
Other comprehensive income:
Gain on revaluation of land 10,000 4,000
Loss on fair value of equity financial assets (2,800) (1,600)
7,200 2,400
Total comprehensive income 366,800 266,400

Additional information:
1. Details of equity as at 1 November 2023 before acquisition:
Kip Ltd. Limah Ltd.
Sh.“000” Sh.“000”
Ordinary shares of Sh.10 each 1,000,000 640,000
Share premium 400,000 -
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 Sh.“000” Sh.“000”
Revaluation reserve 33,600 -
Equity reserve (financial asset) 12,800 8,800
Retained earnings 360,000 500,000
2. Kip Ltd, follows a policy of revaluing land to market value at the end of each reporting period. Limah Ltd.
had previously measured its land at historical cost before being acquired. Since the acquisition, Limah Ltd.’s
land increased by Sh.4 million in value, which it has recorded in its financial statements.
3. After the acquisition on 1 November 2023, Kip Ltd. transferred plant equipment to Limah Ltd. at an agreed
value of Sh.20 million. This equipment had a carrying amount of Sh.16 million at the transfer date and a
remaining useful life of 2.5 years. Kip Ltd. accounted for the gain from this transaction by reducing its
depreciation expenses. Depreciation is charged to cost of sales.
4. Following the acquisition, Limah Ltd. sold goods to Kip Ltd. worth Sh.160 million, which had originally
cost Limah Ltd. Sh.120 million. Of these, goods worth Sh.48 million remained in Kip Ltd.’s inventory at the
year end.
5. There has been no impairment in the goodwill arising from Kip Ltd.’s acquisition of Limah Ltd.
6. All items within the profit or loss and other comprehensive income statements are considered to accrue
evenly throughout the year.
7. Non-Controlling Interest (NCI) in Limah Ltd. was valued at Sh.400 million during acquisition.

Required:
(i) Calculate the value of goodwill arising on acquisition of Limah Ltd. (4 marks)

(ii) Prepare a consolidated statement of profit or loss and other comprehensive income for the year ended
30 April 2024. (12 marks)
(Total: 20 marks)

QUESTION THREE
(a) Outline the accounting treatment of government grants related to income in accordance with International Accounting
Standard (IAS) 20 “Accounting for Government Grants”. (4 marks)

(b) The draft financial statements set out below relate to Betlite Limited, a public limited entity:

Statement of financial position as at 31 October:

Assets: 2024 2023

Non-current assets: Sh.“000” Sh.“000”
Property, plant and equipment 72,475 54,160
Intangible assets 15,700 12,240
Investments at fair value 5,825 5,500
94,000 71,900
Current assets:
Inventory 7,485 7,040
Accounts receivable 6,030 5,830
Cash and cash equivalents 2,485 2,230
Total assets 110,000 87,000
Equity and liabilities:
Equity:
Ordinary share capital (Sh.10 par value) 50,000 40,000
Share premium 12,500 10,000
Revaluation reserve 9,500 5,000
Retained profit 17,505 14,755
Total equity 89,505 69,755
Non-current liabilities:
Long-term borrowings 11,600 10,300
Deferred tax 2,370 1,955
Current liabilities:
Accounts payable 4,645 3,505
Current tax 1,880 1,485
Total equity and liabilities 110,000 87,000

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 Extract of statement of profit or loss and other comprehensive income for the year ended 31 October 2024:

Sh.“000”
Operating profit 5,540
Finance costs (1,200)
Fair value gain on investments 325
Profit before tax 4,665
Income tax expense (1,330)
Profit for the year 3,335
Other comprehensive income:
Gain on property revaluation 4,500
Total comprehensive income for the year 7,835

Additional information:
1. During the year ended 31 October 2024, the directors of the company accepted a property revaluation report
at a gain of Sh.4,500,000. The company does not make inter-reserve transfer for excess depreciation upon
revaluation.
2. Depreciation on non-current tangible assets charged to profit or loss for the year amounted to Sh.2,780,000.
3. During the year to 31 October 2024 new patent rights were acquired at a cost of Sh.4,000,000.
4. The investments held by Betlite Limited are measured at fair value through profit or loss. Neither purchase
nor sale of the investments occurred during the year.

Required:
A statement of cash flows for Betlite Limited for the year ended 31 October 2024 using the indirect method in
accordance with International Accounting Standard (IAS) 7 “Statement of Cash Flows”. (16 marks)
(Total: 20 marks)

QUESTION FOUR
Farmland Ltd. has been in operation for the past 15 years dealing in agricultural produce processing business. The following
trial balance was extracted from the books of the company as at 31 October 2024:

Sh.“000” Sh.“000”
Revenue 278,400
Income from investment 4,500
Ordinary shares of Sh.20 each 150,000
Retained earnings 119,500
8% loan stock 50,000
Accounts payable 33,400
Deferred tax 12,500
Bank balance 15,400
Land and building at cost 270,000
Plant at cost 156,000
Accumulated depreciation : Building 60,000
Plant 26,000
Purchases 78,200
Distribution cost 10,000
Administrative expenses 5,500
Loan interest paid 2,000
Leased plant rental 22,000
Dividends paid 15,000
Inventory (1 November 2023) 37,800
Accounts receivable 63,200
Investments (Long-term) 90,000 ______
749,700 749,700

Additional information:
1. As at 31 October 2024, the inventories were valued at Sh.43.2 million.
2. The land and buildings were purchased on 1 November 2008. The cost of land at the date of purchase was Sh.70
million. However, on 1 November 2023, the land and buildings were professionally valued at Sh.175 million and
Sh.80 million respectively. The estimated useful life of the buildings before revaluation was 50 years. However, the
revaluation did not change the useful life of the buildings. Plant is depreciated at 15% per annum using the reducing
balance method.
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 Depreciation expenses are to be included under cost of sales in the income statement.
3. On 1 November 2023, Farmland Ltd. entered into a five year lease agreement for an item of plant. This item had an
estimated useful life of five years. The annual rental which was payable in advance with effect from 1 November
2023 was Sh.22 million. The fair value of the plant is Sh.92 million and the implicit interest rate is 10% per annum.
4. The 8% loan stock was issued on 1 January 2024 and interest is payable six months in arrears.
5. The income tax for the year ended 31 October 2024 is estimated at Sh.28.3 million. The deferred tax provision as at
31 October 2024 was to be increased to Sh.14.1 million.

Required:
(a) Statement of profit or loss for the year ended 31 October 2024. (8 marks)

(b) Statement of changes in equity for the year ended 31 October 2024. (4 marks)

(c) Statement of financial position as at 31 October 2024. (8 marks)

(Total: 20 marks)

QUESTION FIVE
(a) In relation to International Accounting Standard (IAS) 41 “Agriculture”, explain the following:

(i) Recognition of biological assets. (2 marks)

(ii) Measurement of biological assets. (2 marks)

(b) Explain the TWO types of post-employment benefits plans in accordance with International Accounting Standard
(IAS) 19 “Employee Benefits”. (4 marks)

(c) Baraka Ltd. is a private limited company that operates in the hospitality industry.

The following statements of financial position have been extracted from accounting records of the company for
analysis purposes:

Statement of financial position as at 31 August:

2024 2023
Assets: Sh.“000” Sh.“000”
Non-current assets:
Property, plant and equipment 23,760 13,440
Intangible assets 16,720 11,760
40,480 25,200
Current assets:
Inventories 20,240 14,560
Trade receivables 17,600 10,640
Cash and cash equivalents 9,680 5,600
Total assets 88,000 56,000
Equity and liabilities:
Equity:
Ordinary share capital 17,600 14,000
Share premium 1,760 1,400
Retained profit 15,840 9,240
Total equity 35,200 24,640
Non-current liabilities:
Long term loans 14,080 7,840
Deferred tax 7,040 3,360
Current liabilities:
Trade payables 18,480 12,880
Current tax 13,200 7,280
Total equity and liabilities 88,000 56,000

Required:
Prepare common-size vertical statements of financial position as at 31 August 2023 and 31 August 2024. (12 marks)
(Total: 20 marks)
…………………………………………………………………………
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