Sie sind auf Seite 1von 8

Copyright Reserved

No. of pages: 8

Corporate Level
Corporate 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: 2 questions
Section 2: 1 question (Common pre-seen case study provided prior to the
examination is in relation to this question)

(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

(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 2014
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 JUNE 2015

(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.

(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
SECTION 1 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.

Question 01
Freeland Investment (Pvt) Limited (FIL) has invested in a number of different instruments.
You have been newly recruited by the company as the accountant and the CEO has
requested your advice on the following instruments.

Instrument I
Purchased 12%, debentures at par for Rs. 100 million on 1 January 2013 at the initial
public offering. The debentures are redeemable in 3 years and coupon is paid annually.

According to the published stock market details, the yield of the debenture as at
31 December 2013 and 2014 are as follows;

2013 2014
Ask 9% 8%
Bid 10% 9%

(a) Discuss the classification options available for the above instrument.
(4 marks)

(b) Develop financial statements extracts (Statement of comprehensive income,

Statement of other comprehensive income and Statement of financial
position) for each of the two years for the classification options identified in
(a) above.
(6 marks)

(c) The CEO of FIL would like to classify the debentures as an available-for-sale
instrument in the first 2 years but then reclassify the instrument based on
market behaviour. If the market conditions improve, the instrument is to be
classified as fair value through profit or loss (FVTPL) and if the market
conditions continue to deteriorate, the instrument is to be classified as held to
maturity (HTM).

Advise the CEO on the proposed classifications.

(5 marks)

(d) The CEO is of the view that the Sri Lankan debenture market is not an active
market since there are no frequent transactions as in the equity market.

Explain what an active market is in accordance with SLFRS 13 Fair Value

(3 marks)

KC1 June 2015 Page 2 of 8

Instrument II
FIL entered into a 4 year interest rate swap with Gall National Bank on 1 July 2013 for
speculative purposes. The company has agreed to pay interest at a fixed rate of 6% per
annum, and receive interest at an annual variable rate equivalent to SLIBOR+1%, reset at 6
monthly intervals. Interest is determined on a notional amount of Rs. 400 million.

SLIBOR The fair values

of the SWAP
30/6/2013 5%
31/12/2013 Rs. 11.7 million
31/12/2013 5%
31/12/2014 Rs. 10.3 million
30/6/2014 6%
31/12/2014 6.5%


(e) Advise the company on how to account for the above Instrument.
(4 marks)

(f) Develop financial statements extracts for the year ended 31 December 2014
for the Instrument II (your answer should be supported with calculations
and journal entries).
(3 marks)

(Total: 25 marks)

KC1 June 2015 Page 3 of 8

Question 02

Green Ground PLC is a quoted public company. During the year ended 31 March 2014 it
changed its accounting policy on property plant and equipment (PPE) from the cost model
to the fair value model.

Following are the details of land and buildings that were classified under PPE and were
fair valued. The company has not purchased any property since 1 April 2014.

Rs. million
Property Cost Accumulated Fair value Fair value
31/3/2014 Depreciation 31/3/2014 31/3/2015
A 700 200 700 850
B 450 - 350 400
C 800 300 900 1,200
D 550 - 600 600
E 600 - 700 800
F 800 - 900 700

Additional information:

(i) 40% of the cost and the fair value of Property A represents building. The property is
used as the administration office of the company. The remaining useful life of the
building is 10 years.

(ii) Property B is the car park of the administration office.

(iii) Property C is rented to a third party for 10 years, and 50% of the property cost and
fair value represents building. The remaining useful life of the building is 20 years.

(iv) Property D as well was used as a car park for the companys own purposes up until 31
March 2014, and with effect from 1 April 2014 the property was rented out to a third

(v) Property E is a 50 year lease of land out of which 30 years of the lease period has
expired. This land shall be returned to the lessor at the end of the lease period. The
amount included in the PPE is the prepaid lease rentals.

KC1 June 2015 Page 4 of 8

(vi) During year ended 31 March 2015, the company actively sought to sell Property F
(land) and identified an interested party to sell it for Rs. 750 million. The property
was sold to the same party for Rs. 750 million on 5 May 2015.

(vii) Investment property of the company is measured at cost. The company is liable for tax
at a rate of 25%.

(a) The managing director of Green Ground PLC has approached you and seek your
advice with regard to the fair valuation of land and buildings.

Outline the valuation approaches/methods that can be used in fair valuation of

land and buildings.
(2 marks)

(b) Compile extracts of summarised statement of comprehensive income and

statement of other comprehensive income for the years ended 31 March 2014
and 31 March 2015.
(18 marks)
(c) The managing director suggested that a friend of his is a diploma holder of real
estate valuation and all valuations should be obtained from him. You have been
copied to an email sent by him to his friend stating that all property values shall
at least be increased by 30% for year 2016 as it is critical to disclose a high net
assets value as the company intends to declare a large dividend.
(i) Analyse this case in the context of applicable accounting standards.

(ii) Recommend the ethical actions you would take.

(5 marks)

(Total: 25 marks)

KC1 June 2015 Page 5 of 8


Question 03 (based on common pre-seen case study)

In addition to the information given in the common pre-seen case study the following
information is also provided.

Sureka has evaluated the growth opportunities of Lanka Foods (Pvt) Limited (LFPL) and is
seriously considering to invest in Northern Foods (Pvt) Limited (NFPL). Charles Sellamuttu
has agreed to divest 60% of his interest in NFPL. As Sureka had very limited funds, she
approached the managing director of Partha Sarathi PLC (PSP) and was able to convince
him to invest directly in NFPL.

NFPL has an issued ordinary share capital of Rs. 200 million representing 100 million
ordinary shares. Charles has agreed to transfer his interest in shares on the following basis.

Investor No. of shares

Lanka Foods (Pvt) Limited 45 million
Partha Sarathi PLC 15 million

PSP has agreed to purchase a share at Rs. 10. Sureka has agreed to a share swap
arrangement with Charles where 2 shares of LFPL will be issued for 1 share of NFPL at
Rs. 5.25 per share.

The three parties, LFPL, PSP and Charles have further agreed on the following:

The board of directors of NFPL shall consist of at least 5 directors.

Charles shall be the chairman of the board and PSP is entitled for 1 board position.
The balance 3 members are appointed by LFPL.
Any change in the capital structure or payment of dividends in excess of 70% of the
current years profit shall be approved by Charles.
LFPL shall agree to pay a further Rs. 100 million to Charles at the end of 2017 if the
profit of NFPL is doubled by then.

The following additional information is provided:

(i) A due diligence was carried out on NFPL as at 31 December 2014 and the following
were identified:

The fair value of the land and buildings is Rs. 800 million and 60% of the
value represents building. The building can be used for the next 20 years. A
plant with a carrying value of Rs. 50 million is not in a usable condition. The
fair value of the plant and machinery is Rs. 150 million. The remaining plant
and machinery can be used for the next 5 years. The fair value of the

KC1 June 2015 Page 6 of 8

Charlies brand is Rs. 100 million and the brand can be used for the next 10

It is noted that due to a calculation error NFPL has understated its VAT
obligations by Rs. 159 million.
NFPL has unused tax losses of Rs. 100 million carried forward as at
31 December 2014.
Current liabilities that represent trade payables amounts to Rs.195 million as
at 31 December 2014.

(ii) Additional information in relation to LFPL

With the acquisition of NFPL, one of the major plants used by LFPL will be
abandoned. The carrying value of the plant that would not be used for
production is Rs. 75 million. The company has found an interested party to
sell the plant for Rs. 40 million. However, based on a study carried out by the
production manager, the plant can generate net cash flows (in present value
terms) of Rs. 65 million if it was continued to be used.

Long term investments of LFPL include an investment of Rs. 300 million in

Handsome PLC bonds. The investment was made on 1 January 2014 and
these bonds have a 3 year maturity period. The original coupon rate is 12%
and coupon is paid annually. No interest is accrued and recognised in the
financial statements.

The following market rates of the above bond as at 31 December 2014 are
available for you.

Ask 9%
Bid 10%

The trade and other receivables of LFPL include an amount due from a
customer of Rs. 350 million which has been outstanding for the last 2 years
due to a dispute with the customer. No provision was made in relation to
this. The auditors have qualified the audit report to this effect. With much
follow up activities, the customer has agreed to pay Rs. 100 million at end of
year 2015 and Rs. 50 million at the end of year 2016 as the final settlement.

However, LFPL has decided to file a case against the customer to recover the
entire amount due by the end of year 2017.

(iii) Other information:

Both LFPL and NFPL are liable for income tax at a rate of 25%.
LFPL decided to measure non- controlling interest (NCI) at fair value at initial
recognition and the fair value per share is Rs. 10.
Assume the weighted average cost of capital (WACC) of LFPL is 10%.
KC1 June 2015 Page 7 of 8
Assume the investment in NFPL was made on 31 December 2014.


(a) Assess whether LFPL has control over NFPL.

(5 marks)

(b) Compile the statement of financial position of LFPL as at 31 December 2014 after
considering the information provided in the above scenario.
(22 marks)

(c) Sureka plans to list LFPL in the 1st quarter of year 2016. She has read about sustainability
reporting and has reached you for more information.

Advise Sureka on:

- What sustainability is.
- Why sustainability reporting is important.
(10 marks)

(d) Develop a brief report to Sureka evaluating the performance of LFPL compared to its
competitor Healthy Food (Pvt) Limited (HFL). The following ratios are provided for HFL.

Return on capital employed
(ROCE) 18%
Return on equity (ROE) 20%
Net profit margin 16%
Gross profit margin 32%
Accounts receivable collection
period 60 days
Inventory turnover period 45 days
Accounts payable period 90 days
Current ratio 1:2
Gearing ratio 30%
Interest cover 10 times

You may support your answers with appropriate computations using the financial
information provided in the pre-seen case study as well.
(13 marks)

(Total: 50 marks)

KC1 June 2015 Page 8 of 8