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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

K
(3) Answer all questions.

(4) This paper consists of two sections.

Section 1: 5 questions
Section 2: 2 questions

B
(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

1
the following publications of CA Sri Lanka will be permitted to be used at the
examination hall:
 Sri Lanka Accounting Standards 2017
 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)
 CA Sri Lanka approved IFRIC 22 - Foreign Currency Transactions and
Advance Consideration.
 Sri Lanka Accounting Standard for Small and Medium-sized Entities
2015
 Sri Lanka Accounting Standards - SLFRS 9, SLFRS 15 and SLFRS 16
DECEMBER
 Sri Lanka Accounting Standard for Smaller Entities 2015 2017
(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.
 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

(a) Dress (Pvt) Ltd (“DPL”) is engaged in designing dresses for ladies. You have been
provided with the following information relating to the financial year ended
31 March 2017.

(i) DPL has an employee who is extraordinarily creative in designing dresses.

The company pays a very high salary and other benefits to retain him. The
annual cost incurred by DPL for this employee is Rs. 20 million.

(ii) DPL sued a supplier claiming the damages caused by the low quality
materials provided by this supplier. DPL expects to receive Rs. 10 million
for the damages. The company’s lawyer has advised that it is virtually
certain that DPL will receive the damages claimed.

Required:

Per the Conceptual Framework for Financial Reporting assess whether each
of the above should be recognised as an asset in the financial statements of
DPL.
(6 marks)

(b) Ben (Pvt) Ltd is preparing for the initial listing of its shares on the Colombo Stock
Exchange. The board of directors is considering the composition of the following
committees to be established.

 Audit committee
 Remuneration committee

Required:

Explain the composition of the above two committees per the Code of Best
Practice on Corporate Governance.
(4 marks)

(Total: 10 marks)

KB1 – December 2017 Page 2 of 10

Question 02

Zeena (Pvt) Ltd (“Zeena”) prepares its financial statements in accordance with the
Sri Lanka Accounting Standard for Small and Medium - sized Entities (SLFRS for SMEs).
Zeena has chosen the provision of the relevant sections in the SLFRS for SMEs in full as
its accounting policy for all of its financial instruments.

The following transactions took place during the financial year ended 31 March 2017.

(i) On 1 December 2016, an interest free loan of Rs. 5 million was granted to its
related company, which is payable in one year. The market rate of interest of a
similar loan is 10%.

(ii) On 1 January 2017, Zeena purchased non-convertible preference shares of

Meena PLC for Rs. 2 million. These shares are not publicly traded.

Required:

(a) Advise the management of Zeena on the accounting treatment for (i) and (ii)
above in their books of accounts:

(i) at initial recognition, and

(ii) subsequently as at the reporting period ended 31 March 2017.
(6 marks)

(b) Zeena is a subsidiary of Gold (Pvt) Ltd (“Gold”) and has transactions with Gold
and other subsidiaries (of Gold). Zeena has an investment in an associate and
has a receivable balance from this associate which is partly impaired.

State four (04) disclosures Zeena should make in its financial statements with
respect to related parties.
(4 marks)

(Total: 10 marks)

KB1 – December 2017 Page 3 of 10

Question 03

(a) The concept of temporary differences is central to the calculation of deferred

taxes under LKAS 12 Income Taxes.

Required:

Explain the concept of “temporary differences” stated in LKAS 12.

(2 marks)

(b) Mast (Pvt) Ltd (“Mast”) capitalised the cost of a new building on 1 April 2013 at
Rs. 35 million. This building was revalued on 31 March 2017 at Rs. 50 million.
The building is depreciated over 50 years on a straight line basis from the date of
acquisition and there was no change to its remaining useful life. Capital
allowances were provided on the building at 6.67% at cost per year.

Mast recognises a provision of Rs. 2 million for product warranties as at 31

March 2017. For tax purposes warranty costs are deductible only when the
claims are paid.

The applicable income tax rate is 28%.

Required:

Calculate the deferred tax on following:

(i) Temporary difference on the building as at 31 March 2017 before the

revaluation.

(ii) Temporary difference on the building as at 31 March 2017 after the

revaluation assuming that the revaluation gain does not form part of
the taxable income.

(iii) Temporary difference on the warranty provision as at 31 March

2017.

(8 marks)
(Total: 10 marks)

KB1 – December 2017 Page 4 of 10

Question 04

(a) Wealth (Pvt) Ltd (“Wealth”) acquired 100,000 quoted equity shares of Complex
PLC for Rs. 2,000,000 on 1 April 2016. The shares were classified as available-
for-sale. Wealth’s year end is 31 March.

 On 25 March 2017, Complex PLC declared a dividend of Rs. 1.50 per

share.
 As at 31 March 2017, the market price of the shares (ex-dividend)
amounted to Rs. 21 per share.
 Wealth received the dividends payment on 10 April 2017.

Required:
Prepare the financial statement extracts on the above information in the
books of Wealth for the year ended 31 March 2017.
(4 marks)

(b) Alloy PLC issued 600,000 convertible bonds on 1 March 2017. These bonds have
a three-year term and were issued at par with a face value of Rs. 100 per bond,
which was the fair value. The convertible bonds are redeemable at par. Interest
is payable annually in arrears at a nominal annual interest rate of 8%. Each
Rs. 100 nominal bond is convertible at any time up to maturity into 25 ordinary
shares. When the bonds were issued, the prevailing market interest rate for
similar debt without the conversion option was 10%.

Required:

Assess the liability and equity components of the above instrument at the
initial recognition.

(6 marks)
(Total: 10 marks)

KB1 – December 2017 Page 5 of 10

Question 05

(a) It has been suggested that ratio analysis is not necessarily the best way of
assessing the performance of a company.

Required:

List two (02) limitations of the use of accounting ratios in the appraisal of
financial performance.
(2 marks)

(b) Below are the financial ratios for the year ended 31 March 2017 for Decimal (Pvt)
Ltd, a company engaged in the buying and shipment of agricultural products. The
ratios for the industry are also provided.

Decimal (Pvt) Industry

Ltd average
Quick ratio 0.52:1 0.84:1
Current ratio 1.20:1 1.80:1
Debtors collection period 46 days 41 days
Inventory holding period 58 days 48 days
Price-earnings ratio 1.4 times 3.4 times
Gross profit margin 18% 28%
Net profit margin 8% 12.8%
Return on capital employed 28% 14%

Required:

Prepare a memo to the shareholders of Decimal (Pvt) Ltd assessing its

performance in comparison with the industry average under profitability,
liquidity and shareholders’ investment.
(8 marks)

(Total: 10 marks)

KB1 – December 2017 Page 6 of 10

 SECTION 2

Both questions are compulsory.

Total marks for Section 2 is 50 marks.
Recommended time for the section is 90 minutes.

Question 06

On 1 April 2016, Pan PLC (“Pan”) acquired 80% of the equity shares of Sage (Pvt) Ltd
(“Sage”) in a share exchange of two shares in Pan for three shares in Sage. This share
issue has not yet been recorded by Pan. At the date of acquisition the shares of Pan had
a market value of Rs. 30 each. The summarised draft financial statements of Pan and
Sage are given below.

Statements of financial position as at 31 March 2017

(Rs.ʽ000)
Pan Sage
Non-current assets
Property, plant and equipment 101,500 31,500
Total non-current assets 101,500 31,500
Current assets
Inventories 15,000 6,250
Trade and other receivables 17,500 7,250
Cash and cash equivalents 7,500 3,000
Total current assets 40,000 16,500
Total assets 141,500 48,000

Equity and liabilities

Equity
Stated capital (issued at Rs. 10 each) 25,000 12,000
Retained earnings 88,500 14,250
Total equity 113,500 26,250
Non-current liabilities
12% loan stock 7,500 10,000
Total non-current liabilities 7,500 10,000
Current liabilities
Trade and other payables 13,250 8,000
Borrowings 7,250 3,750
Total current liabilities 20,500 11,750
Total equity and liabilities 141,500 48,000

KB1 – December 2017 Page 7 of 10

Statements of profit or loss for the year ended 31 March 2017

(Rs.ʽ000)
Pan Sage
Revenue 212,500 105,000
Cost of sales (157,500) (80,000)
Gross profit 55,000 25,000
Administrative expenses (15,000) (8,750)
Distribution costs (5,000) (4,250)
Finance costs (750) (1,000)
Profit before tax 34,250 11,000
Income tax expense (11,750) (3,500)
Profit for the year 22,500 7,500

Additional information

(i) At the date of acquisition, the fair values of Sage's assets were equal to their
carrying amounts with the exception of an item of plant, which had a fair value of
Rs. 1.5 million in excess of its carrying amount. It had a remaining life of five
years at the date of acquisition. The plant is depreciated on a straight line basis.
Sage has not adjusted the carrying amount of its plant as a result of the fair value
exercise.

(ii) During the year Sage sold goods at a price of Rs. 12 million to Pan. Sage made a
markup on cost of 40% on these sales. Out of the goods received from Sage,
goods costing Rs. 7.5 million were sold by Pan to its customers by
31 March 2017.

(iii) Sage's trade receivables as at 31 March 2017 included Rs. 1.5 million due from
Pan, which did not agree with Pan's corresponding trade payable. This was due
to cash in transit of Rs. 500,000 from Pan to Sage. Both companies have positive
bank balances.

(iv) Pan has a policy of accounting for any non-controlling interest at full fair value.
The fair value of the non-controlling interest in Sage at the date of acquisition
was estimated to be Rs. 8.5 million. The consolidated goodwill has not suffered
any impairment as at 31 March 2017.

Required:

Prepare the following statements of Pan.

(a) Consolidated statement of profit or loss for the year ended 31 March 2017.

(b) Consolidated statement of financial position as at 31 March 2017.

(Total: 25 marks)

KB1 – December 2017 Page 8 of 10

Question 07

Win PLC (“Win”) is in the process of preparing its financial statements for the year
ended 31 March 2017. The accountant is uncertain about the financial reporting
treatment of the following matters and has therefore asked you to advise on the same.

(i) Per the draft financial statements, Win has a basic earnings per share (EPS) of
Rs. 8.27, based on earnings of Rs. 16,540,000 and 2,000,000 ordinary shares. Win
also has issued the following bonds as at 31 March 2017.

 Rs. 4,000,000 worth of 8% bonds convertible into ordinary shares in two

years’ time at the rate of 1 ordinary share for every Rs. 100 bonds.

 Rs. 2,000,000 worth of 10% bonds convertible into ordinary shares in three
years’ time at the rate of 1 ordinary share for every Rs. 200 bonds.

Win pays income tax at 28%.

(ii) During the year, Win developed a website that will be used for online sales. The
development activities have already been completed. Customers can place
orders online instead of visiting the shops in the particular area.

Management estimates have shown that this website is capable of increasing

revenue through online sales. Costs incurred for the development of the website
are as follows.

 Planning the website: Rs. 10,000

 Obtaining the domain name: Rs. 50,000
 Developing an operating software: Rs. 4,050,000
 Designing the web pages and developing content: Rs. 1,750,000
(This includes a cost of Rs. 150,000 incurred in developing a content page
that is used to advertise the products sold by the company).

(iii) On 28 March 2017, Win invoiced goods amounting to Rs. 660,000 to Narah (Pvt)
Ltd (“Narah”).

Narah has accepted the title of the goods by accepting the amount billed in the
invoice. However, Narah requested Win to delay the delivery by 10 days due to
non-availability of warehouse space. Win accepted the request and packaged the
goods and stored them separately until delivery. No additional payment will be
made for the delay requested.

KB1 – December 2017 Page 9 of 10

(iv) During the year, Win changed the measurement basis for land and buildings
from the cost model to the revaluation model. Win shows land and buildings as
two separate line items in its financial statements. Based on the valuation of land
and buildings carried out at the year-end, the remaining useful life of the
buildings was reassessed as 10 years. This is two years less than the remaining
useful life based on the original assessment.

Other relevant information is given below.

As at 31 March 2017 Land Buildings

Cost 5,000,000 21,600,000
Accumulated depreciation as at 31
March 2017 - (4,050,000)
Written down value as at 31 March
2017 5,000,000 17,550,000
Fair value as at 31 March 2017 7,000,000 15,000,000

Required:

(a) Assess the impact of the convertible bonds referred to in (i) above on
the earnings per share of Win PLC as at 31 March 2017 per LKAS 33
Earnings per Share (Ignore any other adjustments resulting from the
remaining matters given hereto).
(6 marks)

(b) Advise how the costs incurred in developing the website should be
accounted for using the information given in (ii) above.
(7 marks)

(c) Recommend the appropriate accounting treatment to be used for the

goods invoiced to Narah given in (iii) above per LKAS 18 Revenue.

(6 marks)

(d) Explain the financial reporting impact of changing the measurement

basis for land and buildings and the useful life of the buildings based on
the information provided in (iv) above.
(6 marks)

(Total: 25 marks)

KB1 – December 2017 Page 10 of 10