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No. of pages: 10

Business Level
Business Financial Reporting
Instructions to candidates
(1)

Time allowed: Reading and planning 15 minutes

Writing
3 hours

(2)

Total: 100 marks

(3)

Answer all questions.

(4)

This paper consists of two sections.

Section 1: 5 questions
Section 2: 2 questions

(5)

Answers should be in the English Language, in the answer booklet/s given

to you.

(6)

Begin each answer on a separate page in the answer booklet. Submit all
workings.

(7)

The examination will be conducted as an open book examination and only

the following publications of CA Sri Lanka will be permitted to be used at the
examination hall:

Sri Lanka Accounting Standards 2015 or 2016

Open Book Referential Student Version (Code of Best Practice on

Corporate Governance, Statement of Alternative Treatment, Sri
Lanka Statement of Recommended Practice, IFRICs and SICs)

Sri Lanka Accounting Standard for Small and Medium-sized Entities

2011

(8)

Students are allowed to bring permitted publications which are highlighted,

sidelined, or underlined. Short notes written on the permitted publications
will also be allowed. Page tabs may be used to refer the pages. Short notes
pasted on the permitted publications are not allowed.

(9)

Notes, text books (other than permitted publications) or any other materials
will not be allowed. Photocopies/extracts of the above publications will not
be allowed.

(10)

Answers written on the answer booklets, graph papers and any other
stationery, distributed at the examination hall, only are considered in
marking of the answer scripts. Any other attached documents are not taken
into account at the time of marking the answer scripts.

K
B
1
JUNE 2016

SECTION 1
All five questions are compulsory.
Total marks for Section 1 is 50 marks.
Recommended time for the section is 90 minutes.

Question 01
Reliance (Pvt) Limited (RPL) is a newly established private entity in Sri Lanka. The parent
company of RPL is incorporated in Sweden.
At a recent board meeting, the Chief Executive Officer (CEO) of RPL was told that the parent
company prepares financial statements in accordance with International Financial
Reporting Standards (IFRS). The CEO is of the view that RPL, being a multinational
company, needs to adopt IFRS for its reporting purposes as it is the international law for
accounting.
RPL is not a material subsidiary of its parent. RPL is required to prepare statutory financial
statements locally.

Required:
(a)

Discuss whether RPL should adopt IFRS for its financial reporting purposes with
reference to the view expressed by the CEO.
(5 marks)

At a recent board meeting, it was agreed to employ a chartered accountant to oversee the
financial reporting function of RPL.
Required:
(b)

Explain the responsibility of the chartered accountant who will be employed by

RPL.
(5 marks)
(Total: 10 marks)

KB1 June 2016

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Question 02
(a)

Readers Corner Bookshop (RCB) operates a loyalty programme for its customers
that allows them to earn loyalty points with every purchase.

These points must be redeemed with the bookshop.

The customers will earn Rs. 10 for every Rs. 100 purchases (i.e. if a customer
purchases books with a value of Rs. 5,000, he/she earns points worth
Rs. 500)

During May 2016, the first month of introducing the loyalty programme, RCB sold books
amounting to Rs. 10 million. This amount has been recognsied as sales related to May 2016
by RCB.
Required:
(i)

Advise the management of RCB the amount of revenue they should recognise for
May 2016.
(4 marks)
Small (Pvt) Limited has been in the business of manufacturing and selling cosmetic
items forall customers who earned loyalty points in May 2016 redeemed the points
(ii) Assume
in June 2016.
Prepare the journal entries for the recognition of sales for June 2016.
(2 marks)
(b)

Modern Homes (Pvt) Limited (MHL) sold household equipment amounting to

Rs. 5 million on 1 April 2015. This amount will be received on 1 April 2017.
The customer can borrow at an interest rate of 10% per annum.

Required:
Advise the management of MHL on following:
(i)
(ii)

The amount of revenue MHL should recognise on 1 April 2015.

The amount receivable as at 31 March 2016 and the necessary journal entries.
(4 marks)
(Total: 10 marks)

KB1 June 2016

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(Total: 10 marks)

Question 03
Sans (Pvt) Limited is a medium sized company which is in the business of selling spare
parts and servicing vehicles.
Sans provides a warranty for some of its spare parts, mainly for high value items. The
warranty is given only for manufacturing defects that become apparent within 3 years from
the date of sale. On the basis of experience, it is probable that there will be some claims
under the warranties.
In 2015, Sans had sold service equipment for Rs. 15 million. Experience indicates the
following:

80% of the products sold require no warranty provisions.

10% of the products sold require minor repairs costing 20% of the sale price.
10% of the products sold require major repairs/replacement costing 50% of the
sale price.
The cost of warranty repairs and replacement of items sold in 2015 are expected to
be incurred as follows;
2016: 50%
2017: 30%
2018: 20%

Government bond rates are given below for your information.

2015: 6%
2016: 7%

2017: 8%
2018: 8%

Sans is qualified to follow SLFRS for SMEs for the preparation of its financial statements.
Required:
(a)

Calculate the estimated cost of warranty provisions.

(4 marks)

(b)

Calculate the warranty obligation to be included in the financial statements for

the year ended 31 March 2015.
(4 marks)

(c)

Explain whether your answers would change if you use full SLFRS in above
situation.
(2 marks)
(Total: 10 marks)

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(Total: 10 marks)

Question 04
(a)

Alankara PLC (Alankara) recently had the following transactions:

(1)

A newly constructed building was leased out to another company for a

period of 3 years for a monthly rental of Rs. 200,000.

(2)

200,000 redeemable preference shares were issued at Rs. 50 each.

Cumulative dividend is paid at 10%.

(3)

Alankara granted an interest free loan of Rs. 2.5 million to its subsidiary
company Rainbow (Pvt) Limited. The loan is payable in 5 years.

(4)

An additional tax liability of Rs. 1.2 million is to be paid for the year of
assessment 2013/14 as assessed by the Inland Revenue Department.
Alankara recognised a liability as at 31 March 2016 in this regard.

Required:
Explain whether each of the items stated in (1) to (4) above should be classified
as financial assets or financial liabilities in the statement of financial position of
Alankara PLC.
(4 marks)
(b)

On 1 January 2016 Alankara PLC purchased 100,000 shares of another entity listed
on the Colombo Stock Exchange. The management does not intend to trade these
shares. Therefore they decided to classify the investment as available-for-sale in
Alankaras statement of financial position.
The following expenses were incurred on the date of purchase:
Price paid per share: Rs. 50
Commission on purchase: Rs. 50,000
The quoted price per share as at 31 March 2016 was Rs. 60. If Alankara intends to
sell the investment, it has to incur a cost of Rs. 30,000.
Required:
(i)

Calculate the fair value gain/loss arising on the subsequent measurement

of the investment as at 31 March 2016.
(3 marks)

(ii)

Instead of investing in quoted shares, assume that Alankara made the

investment in non-quoted shares and the same was classified as availablefor-sale.
Assess the impact of this decision on the subsequent measurement of the
available-for-sale investment.
(3 marks)
(Total: 10 marks)

KB1 June 2016

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Question 05
You are given the following information on Quick PLC for financial years 2015/16 and
2014/15.
Debt ratio (as at the end of the reporting period)
Gearing ratio (as at the end of the reporting period)
Interest cover
Average market price
Market price as at the end of the reporting period
Average number of shares
EBIT
Net profit
Dividend declared

2015/16
60%
70%
2.3 times
Rs. 55
Rs. 57
1 million
Rs. 65 million
Rs. 36 million
Rs. 1.5 million

2014/15
50%
60%
4 times
Rs. 60
Rs. 65
1 million
Rs. 60 million
Rs. 30 million
Rs. 2 million

During the recent years investors have been increasingly interested in not only the
profitability of a business organisation but also its social, environmental and ethical impact
on the society at large. Consequently, sustainability reporting, triple bottom line reporting,
integrated reporting etc. have gained popularity.
Required:
(a)
(b)
(c)

Calculate three (03) investor ratios using the above information for the financial
year 2015/16.
(3 marks)
Analyse the solvency of the company using the given information.
(4 marks)
Prepare a brief note to your subordinate highlighting the importance of
integrated reporting.
(3 marks)
(Total: 10 marks)

(Total: 10 marks)

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SECTION 2
Both questions are compulsory.
Total marks for Section 2 is 50 marks.
Recommended time for the section is 90 minutes.
Question 06
The statement of financial position of Arrow PLC and its investee companies Brown PLC
and Crown (Pvt) Limited as at 31 March 2016 are given below.
Rs. 000
Arrow
ASSETS
Non-current assets
Freehold property
Plant and machinery
Investments
Current assets
Inventories
Trade receivables
Cash and cash equivalents
Total assets
EQUITY AND LIABILITIES
Equity
Stated capital
Retained earnings
Non-current liabilities
15% borrowings
Current liabilities
Trade payables
Borrowings
Total equity and liabilities

KB1 June 2016

Brown

Crown

290,000
109,000
480,000

250,000
75,000
-

100,000
57,000
-

879,000

325,000

157,000

115,000
66,000
10,000
191,000
1,070,000

60,000
58,000
24,000
142,000
467,000

53,000
74,000
4,000
131,000
288,000

400,000
292,000
692,000

200,000
177,000
377,000

150,000
78,000
228,000

130,000

20,000

136,000
112,000
248,000
1,070,000

70,000
70,000
467,000

60,000
60,000
288,000

Page 7 of 10

Additional information
(i)
(ii)

Arrow PLC acquired 16 million out of the 20 million ordinary shares of Brown PLC
on 1 April 2015 for Rs. 400 million, when the retained earnings of Brown were
Rs. 120 million.
The total consideration includes a further payment of Rs. 50 million on 1 April 2017.
Arrows cost of capital is 10%. It has not recorded the deferred consideration.

(iii)

Brown has internally developed a brand name, which was valued at Rs. 50 million at
the date of acquisition. It is deemed to have a useful life of 5 years.

(iv)

At the date of acquisition, the fair value of Browns freehold property was
considered to be Rs. 75 million greater than the value in Browns statement of
financial position. Brown has acquired this property on 1 April 2010 and the
building element (comprising 50% of the total value) is depreciated on cost over 50
years.

(v)

There have been no changes in the stated capital of Brown since the date of
acquisition.

(vi)

On 1 April 2015 Arrow acquired 6 million out of the 15 million ordinary shares in
Crown for Rs. 80 million, when the retained earnings of Crown were Rs. 55 million.

(vii)

Brown manufactures a product used by both Arrow and Crown. Transfers are made
by Brown at cost plus 25%. Arrow held Rs. 40 million worth of inventory of these
components as at 31 March 2016.

(viii) During the period Brown sold goods to Crown of which Crown had Rs. 25 million
inventory as at 31 March 2016. Brown had marked these goods by 25%.
(ix)

Brown had invoiced Arrow for goods valued at Rs. 40 million. Although Arrow had
sent a payment in full, it had not been received by Brown by 31 March 2016.

(x)

Arrow sold some machinery on 1 April 2015 for Rs. 100 million to Brown. These had
a carrying amount of Rs. 75 million in Arrows books as at that date. The remaining
useful life of the assets at the date of disposal was 4 years.

(xi)

Non-controlling interest is measured at fair value. Browns shares were trading at

Rs. 20 just prior to the acquisition by Arrow.

(xii)

The management assessed that 60% of the value of goodwill in Brown was impaired
as at 31 March 2016.

Required:
(a)

Prepare the consolidated statement of financial position of Arrow PLC as at

31 March 2016.
(20 marks)

(b)

Joint arrangements are classified as either joint operations or joint ventures. The
terms of the contractual arrangements are key to deciding whether the
arrangement is a joint venture or a joint operation
Differentiate joint operations and joint ventures in terms of:
(i)
The terms of contractual arrangements
(ii)
Rights to assets and obligations for liabilities

(5 marks)
(Total: 25 marks)

KB1 June 2016

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Question 07
BAND PLC is a well-established diversified conglomerate. The newly appointed accountant
is confronted with the following accounting issues and he seeks your assistance to resolve
them.
(1)

BAND has moved to a new manufacturing facility in which the total electricity
requirement cannot be fulfilled from the general electricity line. To address this
issue a transformer is established at this premises which cost around Rs. 1 million.
The accountant is considering to charge this amount to profit or loss.

(2)

When relocating the manufacturing facility certain assembling machines were

identified for sale. The carrying value of these machines as at 31 March 2016 stood
at Rs. 400,000 and the fair value was Rs. 300,000. The management expects to incur
a further Rs. 50,000 for minor repairs before selling them. The 2014/15 statement
of financial position contains another item of property, plant and equipment (PPE)
recognised as available-for-sale at Rs. 350,000. Even though the company has taken
reasonable steps to sell this item, they have not yet sold it. The company had not
charged any depreciation on this item even though they continued to use it.

(3)

BANDs employees are entitled to following benefits:

-

(4)

Paid annual holiday leave- unused leave can be carried forward up to 12

months only. As at 31 March 2016, the total carried forward unused holiday
leave was 175 days.
A profit sharing plan for its management staff- accordingly 8% of the net
profit will be shared among the companys management staff who have not
left during the year.

BANDs board members are deliberating on introducing an Employee Stock

Ownership Plan (ESOP) for its managerial grade employees. 1,000 share options will
be given to each member of the management staff. Options can be exercised 5 years
from the grant date.

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Required:
(a)

Discuss the accountants proposed action with regard to point (1).

(b)

Advise the management on the measurement of assets identified for sale in point (2).

(5 marks)

(5 marks)
(c)

Explain to the accountant how the two employee benefits in point (3) should be
accounted for.
(5 marks)

(d)

Prepare a memo to the board explaining the impact on its financial statements of
introducing an ESOP.
(5 marks)

(e)

BAND is also in the business of constructing apartments. The accountant is aware that
SLFRS 15 has replaced LKAS 11.
Explain to the accountant two (02) key changes applicable to BAND due to SLFRS 15
replacing LKAS 11.
(5 marks)
(Total: 25 marks)

(Total: 25 marks)

KB1 June 2016

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