Open University of Mauritius

BA (HONS) BUSINESS ACCOUNTING AND FINANCE [OUba001]

EXAMINATION FOR: November/December 2018

MODULE: Advanced Financial Reporting [OUba001421]

DATE: Tuesday 04 December 2018

DURATION: 2 Hours

READING TIME: 10 Minutes

INSTRUCTIONS TO CANDIDATES

1. The paper consists of Section A and Section B.

2. Section A is COMPULSORY.
3. Answer ANY TWO (2) questions from Section B.
4. Always start a new question on a fresh page.
5. Total marks: 100

This question paper consists of 4 questions and 6 pages.

Page 1 of 6
 SECTION A
COMPULSORY

QUESTION 1 [50 MARKS]

The statements of financial position as at 30 June 2016 and the statements of comprehensive
income for the year ended 30 June 2016 for Panna Ltd., Sanna Ltd. and Anna Ltd. are given
as follows:
Statements of financial position as at 30 June 2016

Panna Ltd Sanna Ltd Anna Ltd

$ 000 $ 000 $ 000
ASSETS
Non-current assets
Intangible asset 2,880 250 100
Property, plant and equipment 12,000 5,000 250
Investment in Sanna Ltd. at cost 2,100 - -
Investment in Anna Ltd. at cost 120 - -
17,100 5,250 350
Current assets 2,000 1,000 75
TOTAL ASSETS 19,100 6,250 425

EQUITY AND LIABILITIES

EQUITY
Share capital at $1 each 2,500 1,000 75
Share premium 1,600 500 -
Group retained earnings 11,500 1,750 300
Total equity 15,600 3,250 375

LIABILITIES
Non-current liabilities 2,000 2,500 15
Current liabilities 1,500 500 35
TOTAL LIABILITIES 3,500 3,000 50
TOTAL EQUITY AND LIABILITIES 19,100 6,250 425

Panna Ltd Sanna Ltd Anna Ltd

$ 000 $ 000 $ 000

Sales 15,000 6,300 250

Cost of sale - 11,000 - 4,000 - 190
Gross profit 4,000 2,300 60
Operating expenses - 2,500 - 1,250 - 45
Operating profit 1,500 1,050 15
Interest expense - 600 - 400 - 6
Profit before tax 900 650 9
Income tax charge - 200 - 400 - 4
Net Profit 700 250 5
Page 2 of 6
The following information is relevant:

(i) On 1 July 2013 acquired 25%of Anna Ltd. ordinary shares. Anna Ltd. retained earnings
stood at $310,000 on that date.
(ii) Panna Ltd. acquired 70% of Sanna Ltd. ordinary shares on 1 January 2015, when the
latter’s retained earnings were $1.3 million. The fair value of the non-controlling interest
was evaluated as at $1 million on the acquisition date.
(iii) During the year Panna Ltd. directors estimated that its investment in Anna Ltd. was
impaired by $5,000 and the goodwill acquired in respect of Sanna Ltd. was also
impaired by $50,000. There was no prior year impairment accounted yet.
(iv) In April 2016, Panna Ltd. sold some goods which it bought at $1 million with a mark-up
of 25% to Sanna Ltd. A quarter of these goods remained unsold in Sanna Ltd.
inventories on 30 June 2016.

(v) During the quarter ended 30 June 2016, Anna Ltd. sold goods which it bought at
$25,000 for $50,000 to Panna Ltd. 20% of these goods remained unsold in Panna Ltd.
inventories on 30 June 2016.

REQUIREMENT

(a) Prepare the consolidated statement of financial position for Panna Group as at 30
June 2016.
(25 Marks)

(b) Prepare the consolidated statement of profit or loss for Panna Group for the year
ended 30 June 2016.
(25 Marks)

Page 3 of 6
 SECTION B
ANSWER ANY TWO (2) QUESTIONS

QUESTION 2 [25 MARKS]

(a) IAS 16 Property Plant and Equipment sets out the accounting requirements of tangible non-
current assets while IAS 40 – Investment Property, deals with properties held for their
investment’s potential only. The distinction between investment property and non-investment
property is very important, as the accounting treatment required is significantly different in each
case.

REQUIREMENT

(i) Explain the definition of ‘Investment Property’ according to IAS 40.

(6 marks)

(ii) In the context of IAS 40, there are two options given under IAS 40 for accounting
for investment properties namely ‘cost model’ or fair value’.
Explain the key differences between of both models.

(12 marks)

(b) The objective of IAS 36 – Impairment of Assets is to prescribe the procedures that an
entity applies to ensure that its assets are not impaired.

Explain what is meant by an impairment review.

(7 marks)

Page 4 of 6
QUESTION 3 [25 MARKS]

IAS 37 Provisions, Contingent Liabilities and Contingent Assets sets out the accounting
treatment and disclosures for these transactions and events. The standard discusses
general principles of recognition, measurement and presentation as well as specific
application guidance for certain issues. This guidance aims to assist preparers of financial
statements in applying IAS 37.

The following situation has arisen during the preparation of the draft financial statements of
Hollywood Plc for year ended 31 July 2017:

During the year ended 31 July 2017, Hollywood Plc decided to close both its coal burning
power generating plants in October 2017. This decision has been announced publicly, and a
detailed formal plan prepared. The plan proposes to make 75 employees redundant, retrain
25 other staff to work in the nuclear plant, and sell the coal-fired plants in their current
condition. It is anticipated that the redundancy costs will amount to $7.5 million, and the
retraining will cost $1 million. The coal plants will be disposed of for zero consideration as the
new owner will be expected to dismantle the plants and clean up the sites. The carrying value
of these plants is $12 million at 31 July 2017.

REQUIREMENT

(a) Discuss the accounting treatment in relation to provisions, contingent liabilities and
contingent assets required by IAS 37.
(15 marks)

(b) In the case of (i) above, set out the appropriate accounting treatment as at 31 July
2017 by applying IAS 37.
(10 marks)

Page 5 of 6
QUESTION 4 [25 MARKS]

IAS 2 Inventories was first issued in October 1975, and most recently revised in December
2003. Its most important principle is that inventories be measured at the lower of their cost
and their net realisable value.

Herald plc (Herald) manufactures plastic water tanks for the farming industry. On 31 May
2013, its closing inventory consisted of 950kg of plastic resin raw material, and also 250
finished units (plastic water tanks).

Plastic:

The purchase price of plastic resin was $3 per kg throughout the year to 31 May 2013.

Herald has a policy of always keeping plenty of plastic resin in inventory, as its supply can
be unreliable. However, close to the year-end, the price of plastic resin collapsed due to
market oversupply.

Tanks:

Each tank requires 10 kg of plastic to manufacture, plus each unit incurs $25 in conversion
costs (labour and overhead).

Herald sells the tanks for $100. It is expected that this price will drop to $90 as a result of the
fall in the market price of plastic.

All completed units sold by Herald incur a $6 selling and distribution cost.

REQUIREMENT

(a) Describe how the “cost” of inventory is determined in accordance with under IAS 2

(9 marks)

(b) Discuss the principles for determining the “Net Realisable Value” of inventory under
IAS 2.
(10 marks)

(c) Calculate the Cost and Net Realisable value per unit and thirdly advise on the value of
closing inventory of Tanks for Herald plc at 31 May 2013 by applying the principles of
IAS 2.
(6 marks)

Page 6 of 6