IDIANA CONSULTANCY : NBAA PAST PAPERS (B2 – FINANCIAL ACCOUNTING: ( MAY 2017 ) The National Board of Accountants and Auditors,

MAY 2017
Q & A

©The National Board of Accountants and Auditors, 2017

EXAMINATION : INTERMEDIATE LEVEL

SUBJECT : FINANCIAL ACCOUNTING000000

CODE : B2

EXAMINATION DATE : WEDNESDAY, 3^RD MAY, 2017

TIME ALLOWED : THREE HOURS (2:00 P.M. – 5:00 P.M.)

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GENERAL INSTRUCTIONS

1. There are TWO sections in this paper. Sections A and B which comprise a total

of SIX questions.

2. Answer question ONE in Section A.

3. Answer ANY FOUR questions in Section B.

4. In total answer FIVE questions.

5. Marks are shown at the end of each question.

6. Calculate your answers to the nearest two decimal points where necessary.

7. Show clearly all your workings in respective answers where applicable.

8. This question paper comprises 9 printed pages.

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SECTION A

Compulsory Question

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QUESTION 1

(a) International Financial Reporting Standard [IFRS 10] requires an entity that is a parent to prepare consolidated financial statements.

(i) Define control in the context of IFRS 10. (4 marks)

(ii) State the justification of full consolidation where the parent owns less than 100% of the ordinary shares of a subsidiary. (4 marks)

(b) On 1^st July 2013, Halahala Company acquired 128,000 of Sosomola company’s 160,000 shares. The following Statements of Financial Position have been prepared as at 31^st December 2016.

	Halahala	Sosomola
	TZS ‘000’	TZS ‘000’
Property, plant and equipment	152,000	129,600
Investment in Sosomola	203,000	-
Inventory at cost	112,000	74,400
Receivables	104,000	84,000
Bank balance	41,000	8,000
	612,000	296,000
Ordinary share capital (TZS 1,000 each)	100,000	160,000
Retained earnings	460,000	112,000
Payables	52,000	24,000
	612,000	296,000

The following information is available:

(i) At 1^st July 2013 Sosomola had a debit balance of TZS.11,000,000 on retained earnings.

(ii) Property, plant and equipment of Sosomola included land at a cost of TZS.72,000,000. This land had a fair value of TZS.100,000,000 at the date of acquisition.

(iii) An impairment review at 31^st December 2016 shows that goodwill is impaired by 40%.

(iv) The inventory of Sosomola includes goods purchased from Halahala for TZS.16,000,000. Halahala invoiced those goods at cost plus 25%.

(v) The receivables at 31^st December 2016 in Halahala include a receivable of TZS.7,800,000 from Sosomola, and the payables in Sosomola include an amount of TZS.6,000,000 payable to Halahala. The difference reflects a remittance made at 30^th December 2016, not yet received and recorded in Halahala’s books.

REQUIRED:

Prepare the Consolidated Statement of Financial Position of Halahala as at 31^st December 2016. (12 marks)

(Total: 20 marks)

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SECTION B

There are FIVE questions. Answer ANY FOUR questions

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QUESTION 2

The Statements of Profit or Loss and either Comprehensive Income and Statements of Financial Position of two manufacturing companies in the same sector are set out below:

Statement of Profit or Loss for the year ended 31^st December 2016

	Filo	Mona
	TZS ‘000’	TZS ‘000’
Revenue	150,000	700,000
Cost of sales	(60,000)	(210,000)
Gross profit	90,000	490,000
Interest payable	(500)	(12,000)
Distribution costs	(13,000)	(72,000)
Administrative expenses	(15,000)	(35,000)
Profit before tax	61,500	371,000
Income tax expense	(16,605)	(100,170)
Profit for the period	44,895	270,830

Statement of Financial Position for the year ended 31^st December 2016

	Filo	Mona
	TZS ‘000’	TZS ‘000’
Assets
Non-current assets
Property		500,000
Plant and equipment	190,000	280,000
	190,000	780,000
Current Assets
Inventories	12,000	26,250
Trade receivables	37,500	105,000
Cash at bank	500	22,000
	50,000	153,250
Total Assets	240,000	933,250
Equity and liabilities
Ordinary share capital	156,000	174,750
Retained earnings	51,395	390,830
	207,395	565,580
Non-current liabilities
Long-term debt	10,000	250,000
Current liabilities
Trade payables	22,605	117,670
Total equity and liabilities	240,000	933,250

REQUIRED:

(a) Compare the performance of the two companies in terms of profitability, liquidity and efficiency, supporting your arguments with at least two ratios in each case.

(14 marks)

(b) State any FOUR additional pieces of information that would have made your analysis above more useful, clearly indicating the possible added value of such information. (6 marks)

(Total: 20 marks)

QUESTION 3

(a) Briefly discuss how do investors commonly use (analyse) free cash flow to value a firm and how best should cash flow statements be disclosed to enable the analysis.

(5 marks)

(b) The comparative Statements of Financial Position for Clay Company show the following information:

	31-12-2016		31-12-2015
	TZS ‘000’	TZS ‘000’	TZS ‘000’	TZS ‘000’
Non-Current assets
Building	0		29,750
Accumulated depreciation on building	0	0	6,000	23,750
Equipment	45,000		20,000
Accumulated depreciation on equipment	2,000	43,000	4,500	15,500
Patent		5,000		6,250
Total non-current assets		48,000		45,500
Current Assets
Cash		33,500		13,000
Accounts receivable	12,250		10,000
Allowance for doubtful accounts	3,000	9,250	4,500	5,500
Inventory		12,000		9,000
Investments		0		3,000
Total current assets		54,750		30,500
Total Assets		102,750		76,000
Non-current liabilities
Long-term notes payable		31,000		25,000
Total non-current liabilities		31,000		25,000
Current liabilities
Accounts payable		5,000		3,000
Dividends payable		0		5,000
Notes payable, short-term (nontrade)		3,000		4,000
Total current liabilities		8,000		12,000
Total Liabilities		39,000		37,000
Equity
Common stock		43,000		33,000
Retained earnings		20,750		6,000
Total Equity		63,750		39,000
Total Equity & liabilities		102,750		76,000

Additional data related to 2016 are as follows:

(i) Equipment that had cost TZS.11,000,000 and was 40% depreciated at time of disposal was sold for TZS.2,500,000.

(ii) TZS.10,000,000 of the long-term note payable was paid by issuing common stock.

(iii) Cash dividends paid were TZS.5,000,000.

(iv) On January 1^st 2016, the building was completely destroyed by floods. Insurance proceeds on the building were TZS.30,000,000 (net of TZS.2,000,000 taxes).

(v) Investments (available-for-sale) were sold at TZS.1,700,000 above their cost. The company has made similar sales and investments in the past.

(vi) A long-term note for TZS.16,000,000 was issued for the acquisition of equipment, and the remaining balance was acquired in cash.

(vii) Interest of TZS.2,000,000 and income taxes of TZS.6,500,000 were paid in cash.

REQUIRED:

Prepare a Statement of Cash Flows using indirect method. Flood damage is unusual and infrequent in that part of the country. (15 marks)

(Total: 20 marks)

QUESTION 4

(a) IAS 2: Inventories require that inventories are valued at the lower of cost or net realizable value.

REQUIRED:

State the rationale for such a requirement. (2 marks)

(b) Malyimu retailers had the following figures of reported profit before tax:

Year	Profit (TZS)
2014	27,200,000
2015	28,400,000
2016	24,000,000

Analysis of inventories shows that certain errors were made with the following results:

Date	Incorrect inventory figure (TZS)	Correct inventory figure (TZS)
December 31, 2014	4,800,000	5,680,000
December 31, 2015	5,600,000	4,680,000

REQUIRED:

Calculate the corrected profit before tax figures (where applicable) for the years 2014, 2015 and 2016. (6 marks)

(c) Wakali Limited (WL) is engaged in the manufacturing and sale of textile machinery. The following draft extracts of the Statement of Financial Position and the Statement of Profit or Loss for the year ended 31^st December 2016 have been provided:

Statement of Financial Position

	2016	2015
	TZS ‘000’	TZS ‘000’
Property, Plant and Equipment	189,000	130,000
Retained earnings	166,000	108,000

Statement of Profit or Loss

	2016	2015
	TZS ‘000’	TZS ‘000’
Profit before taxation	90,000	120,000
Taxation	27,000	36,000
Profit after taxation	63,000	84,000

The following additional information has not been taken into account in the preparation of the above financial statements:

· Cost of repairs amounting to TZS.20 million was erroneously debited to the machinery account on 1^st April 2015. The estimated useful life of the machine is 10 years.

· On 1^st January 2016, WL reviewed the estimated useful life of its plant and revised it from 5 years to 7 years. The plant was purchased on 1^st January 2014 at a cost of TZS.70 million.

Depreciation is provided under the straight line method. Applicable tax rate is 30%.

REQUIRED:

Prepare relevant extracts (including 2015 comparatives) for the year ended 31^st December 2016 related to the following:

(i) Statement of Financial Position. (6 marks)

(ii) Statement of Profit or Loss. (6 marks)

(Total: 20 marks)

QUESTION 5

(a) Damari Limited is a company involved in building wind farms in Singida. The financial controller has asked you, a newly qualified CPA for some help in correctly accounting for Property, Plant and Equipment (PPE) within the company for the financial year ended 31^st December 2016.

The following costs have occurred on a wind farm site:

	TZS ‘000’
Preparation of site	80,000
Annual maintenance once operational	30,000
VAT on materials (recoverable)	120,000
Staff training on correctly operating the wind farm once operational	25,000
Import duty on materials purchased	28,000
Initial surveying of site	40,000
Project manager’s salary to build and manage the wind farm	140,000
Wages of employees to build the wind farm	300,000
Annual wages of employees once the wind farm is operating	100,000
Testing costs	60,000
Materials purchased for wind farm net of VAT	250,000
Discount received on materials purchased	33,000

REQUIRED:

(i) Calculate the amount that should be capitalized as Property, Plant and Equipment for the above wind farm. (3 marks)

(ii) In accordance with IAS 16 – Property, Plant & Equipment explain the accounting treatment allowed for the measurement of PPE:

a. At recognition; (1.5 marks)

b. After recognition. (1.5 marks)

(iii) In the context of IAS 16 – Property, Plant & Equipment:

a. Discuss what is meant by the term ‘fair value’. (1.5 marks)

b. How can the fair value of a building be determined? (1.5 marks)

(b) Damari Limited’s head office building is the only building it owns. Using professional valuers, it revalued this building on 1^st January 2016, at TZS.2,100,000,000. Damari Limited has adopted a revaluation policy for building from this valuation date and has decided that the original useful life of buildings has not changed as a result of the revaluation. The building was acquired on 1^st January 2006. The cost of the building on acquisition was TZS.2,500,000,000 and the accumulated depreciation to 31^st December 2015 amounted to TZS. 500,000,000. The depreciation up to 1^st January 2016 was depreciated evenly since acquisition. The professional valuer believes that the residual value on the building would be TZS.600,000,000 at the end of its useful life.

REQUIRED:

In accordance with IAS 16 – Property, Plant & Equipment:

(i) State how should the depreciable amount of an asset be allocated.

(1 mark)

(ii) State how often should the residual value and the useful life of an

asset be reviewed. (2 marks)

(iii) Calculate the depreciation amount of the building for the year ended 31^st December 2016 based on the information provided in the above scenario.

(8 marks)

(Total: 20 marks)

QUESTION 6

(a) Consider the following list of events that occurred between 31^st December 2016 (reporting date) and 31^st March 2017 (date of authorization of financial statement for issue) and decide which one you would classify as adjusting events and which are non-adjusting events. You should also state clearly the treatment that you are proposing in each case.

(i) The receipt of net proceeds of sales TZS.12,600,000 for inventory items whose net realizable value was estimated (31^st December 2016) at TZS.12,000,000 and cost was TZS.12,500,000.

(ii) Proposed dividend made by the director’s board meeting on 31^st January 2017, for a total of TZS.160,000,000.

(iii) Enactment in February 2017 of a new customer protection law that requires the company to enhance disclosures in labels on its products (including translating them to Kiswahili language). This, apart from increasing labelling costs, makes labels costing the company TZS.14,000,000 useless.

(iv) The declaration of bankruptcy for a debtor. An allowance of TZS.15,000,000 was set against his doubtful debt at 31^st December 2016. The total amount receivable before the allowance was TZS 42,000,000 and as a result of the bankruptcy declaration directors estimate that only TZS.12,000,000 can be recovered.

(v) The chairman of the board of directors got appointed on 1^st January 2017 as a member of parliament (by the president). The appointment automatically requires him to relinquish her position as board member and chair. Processes to fill her position in the board are estimated to cost TZS.15,000,000.

Your answer should be in the following format:

Item	Classification	Treatment
(i)
(ii)
(iii)
(iv)
(v)

(10 marks)

(b) Gambini Company is preparing its Financial Statements for the year ended 31^st December 2016.

The following matters are all outstanding at the year end.

(i) Gambini is facing litigation for damages from a customer for the supply of faulty goods on 1^st December 2016. The claim which is for TZS. 500,000,000, was received on 15^th January 2017. Gambini’s legal advisors consider that Gambini is liable and it is likely that this claim will succeed. On 25^th January 2017, Gambini sent a counter-claim to its suppliers for TZS.400,000,000. Gambini’s legal advisors are unsure whether or not this claim will succeed.

(ii) Gambini’s sales director, who was dismissed on 15^th December 2016, has lodged a claim for TZS.100,000,000 for unfair dismissal. Gambini’s legal advisors believe that there is no case to answer and therefore think it is unlikely that this claim will succeed.

(iii) Although Gambini has no legal obligation to do so, it has habitually operated a policy of allowing customers to return goods within 28 days, even where those goods are not faulty. Gambini estimates that such returns usually amount to 1% of sales. Sales in December 2016 were TZS.400,000,000. By the end of January 2017, prior to the drafting of the financial statements, goods sold in December for TZS.3,500,000 had been returned.

(iv) On 15^th December 2016 Gambini announced in the press that it is to close one of its divisions in April 2017. A detailed closure plan is in place and the costs of closure are reliably estimated at TZS.300,000,000, including TZS.50,000,000 for staff relocation.

REQUIRED:

State, with reasons, how the above matters should be treated in Gambini’s financial statements for the year ended 31^st December 2016. (10 marks)

(Total: 20 marks)

___________p___________

SUGGESTED SOLUTIONS

B2 - FINANCIAL ACCOUNTING

MAY 2017

ANSWER 1

(a) Control and Consolidation.

(i) Control

An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

In other words, the investor has control over the investee when it has all of the following:

§ Power over the investee

§ Exposure, or rights, to variable returns from its involvement with the

investee; and

§ The ability to use its power over the investee to affect the amount of the investor’s returns.

(ii) Consolidated

The full consolidation is justified by the control that the parent entity has over the assets of the subsidiary. The definition of assets speaks of control rather than ownership, thus even if an entity literally owns less than 100% of another entity, as long as it has control over such entity, it should report the assets of such entity as assets of the group.

(b) Halahala

Halahala Group

Consolidated Statement of Financial Position as at 31 December 2016

	TZS ‘000’
Assets
Non-current assets
Property, plant and equipment
(152,000 + 129,600 + 28,000 (W1))	309,600
Goodwill (W2)	36,840
Current assets
Bank (41,000 + 8,000 +1,800)	50,800
Receivables (104,000 + 84,000 – 7,800)	180,200
Inventory (112,000 + 74,400 – 3,200 (W6))	183,200
	760,640

Equity and liabilities
Capital and reserves
Share capital	100,00
Retained earnings (W4)	530,640
	630,640
Non-controlling interest (W3)	60,000
Current liabilities (52,000 + 24,000 – 6,000)	70,000
	760,640

WORKINGS

1. Net assets of Sosomola
	Reporting date TZS ‘000’	Acquisition date TZS ‘000’	Post acquisition TZS ‘000’
Share capital	160,000	160,000
FV adj. on Land	28,000	28,000
Retained earnings	112,000	(11,000)	123,000
	300,000	177,000

2. Goodwill
			TZS ‘000’
Cost of shares			203,000
Less Net assets acquired (80% x 177,000 (W1))			(141,600)
			61,400
Less: Impairment [40%]			24,560
Goodwill at 31/12/2016			36,840

3. Non-controlling interest
			TZS ‘000’
Share of net assets (20% x 300,000 (W1))			60,000

4. Retained earnings
			TZS ‘000’
Halahala			460,000
Prov for Unrealized Profit (W5)			(3,200)
Sosomola’s post acq. RE (80% x 123,000 (W1))			98,400
Goodwill impairment			(24,560)
			530,640

5. Unrealised Profits
Selling price %		TZS ‘000’
Cost 125		16,000
GP (100)		(12,800)
25		3,200

ANSWER 2

(a) Comparative performance of Filo and Mona

Profitability:

Mona’s figures shows overall higher profitability ratios than Filo both in relation to sales and in relation to assets or investments. This is further confirmed by its ability to efficiently use assets [see the stock turn rate and the return on assets]

This could suggest Mona’s ability to both

Attract premium paying customers
Manage operating costs

Liquidity:

Filo’s ratios portrays greater liquidity compared to Mona. While this may be a good indicator of a stronger liquidity position in favour of Filo, it could also suggest efficient use of resources by Mona, by avoiding to keep excessive idle liquid assets, since it still has an adequate liquidity to meet maturing obligation [ a quick ratio just above 1]. The efficiency is further confirmed by the efficiency ratios

Efficiency:

Mona’s ratios, again, portrays better efficiency than Filo’s. Despite giving longer credit period to its customers, Filo still proves less efficient in ‘turning over’ the stocks.

Generally, therefore, staying within the information given, between the two companies, Mona has a better performance than Filo.

Supporting computations:

Relevant ratios	Formula	Filo	Mona
*Profitability*
Gross margin	Gross profit/ Sales	60%	70%
Profit margin	Profit before interest and Tax/ Sales	41.33%	54.71%
Return on Assets	Profit before interest and Tax/ Total Assets	25.83%	41.04%

*Liquidity*
Current ratio		2.2119	1.302371	times
Quick ratio		1.68	1.08	times

*Efficiency*
Rate of stock turnover	Cost of sales/ average stock	5	8	times
Debtors collection period	(Debtors *365 days)/sales	91.25	54.75	days
Assets Turnover	Sales/ total assets	0.625	0.750067	times

(b) Additional information needed in the analysis, and the indicative possible added value

They number of years each of the companies have been in operation – could tell whether Mona is enjoying learning curve as compared to Filo. It could also be that Filo is in the entry phase, thus having to adopt market penetration strategies

The nature of customers served - Much as they are both manufacturers, one could be concentrating on corporate customers and another small scale customers. These will affect the margins and efficiencies

The trend of performance for the past years - This information could indicate whether the current year performance is typical of the performance in the past few years, or reflects improving/ worsening performance

§ Industry averages - This information could assist in gauging the performance against peers in the industry.

ANSWER 3

(a) For many investors, the core concept in estimating free cash flow is the excess of a company’s operating cash flows over its capital expenditure. Applying free cash flow in intrinsic valuation methods, such as a discounted cash flow model (DCF), is often considered to more appropriate than simply using the disclosed operating cash flow. This is because it considers the cash flows available to owners after funding the investment (or reinvestment) needs of the business. To enable this analysis to be as precise as possible, companies are encouraged to disclose separately cash flows that increase operating capacity and those required to maintain it (some investors refer to this as ‘maintenance capex’ vs ‘growth capex’). As well, these measures of a company’s cash flow can be used as an indicator of financial strength, which may be useful to investors analyzing a company’s ability to repay debt.

CLAY CORPORATION

Statement of Cash Flows

For the Year Ended December 31, 2016

Cash flows from operating activities	TZS.‘000’	TZS.‘000’
Net income (a)		14,750
Adjustments to reconcile net income to net cash provided by operating activities
Loss on sale of equipment (b)	4,100
Gain from flood damage [(TZS30,000 + 2,000) – 29,750 - 6,000)]	-8,250
Depreciation expense (c)	1,900
Patent amortization	1,250
Gain on sale of investments	-1,700
Increase in Accts Rec (net) [(TZS12,250 – TZS3,000) – (TZS10,000 – TZS4,500)]	-3,750
Increase in inventory	-3,000
Increase in accounts payable	2,000	-7,450
Net cash provided by operating activities		TZS7,300

Cash flows from investing activities
Sale of investments	TZS4,700
Sale of equipment	2,500
Purchase of equipment (d)	-20,000
Proceeds from flood damage to building	32,000
Net cash provided by investing activities		TZS 19,200

Cash flow from financing activities
Payment of dividends	(TZS5,000)
Payment of short-term note payable	-1,000
Net cash used by financing activities		(TZS6,000)

Increase in cash		TZS20,500
Cash January 1,2016	13,000
Cash, December 31, 2016	TZS33,500

Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest	TZS2,000
Income taxes	6,500

Noncash investing and financing activities
Retired note payable by issuing common stock	TZS10,000
Purchased equipment by issuing note payable	16,000
	TZS26,000

Supporting Computations:
(a) Ending retained earnings	TZS20,750
Beginning retained earnings	-6,000
Net income	TZS14,750

(b) Cost	TZS 11,000
Accumulated depreciation (40% x TZS11,000	-4,400
Book value	6,600
Proceeds from sale	-2,500
Loss on sale	TZS4,100

(c) Accumulated depreciation on equipment sold	TZS 4,400
Decrease in accumulated depreciation	-2,500
Depreciation expense	TZS1,900

(d) Beginning equipment balance	TZS 20,000
Cost of equipment sold	-11,000
Remaining balance	9,000

ANSWER 4

(a) Rationale for the ‘lower of cost or NRV valuation principle

The rationale is to avoid reporting inventory as an asset at a value that is higher than what they can really generate to the reporting entity. This is in line with the basic element of the definition of an asset, i.e. the probable flow of economic benefits to the entity.

(b) Malyim

In this situation, we have:

Year	Opening stock	Closing stock	Net effect profit	Correction required
2013	NIL	880,000 understated	880,000 understated	Add 880,000 to the reported profit
2014	880,000 understated	920,000 overstated	1,800,000 overstated	Deduct 1,800,000 from the reported profit
2015	920,000 overstated	NIL	920,000 understated	Add 920,000 to the reported profit

The corrected profit figures are thus:

Year	Original Profit TZS	Correction required	Corrected profit TZS
2013	27,200,000	Add 880,000 to the reported profit	28,080,000
2014	28,400,000	Deduct 1,800,000 from the reported profit	26,600,000
2015	24,000,000	Add 920,000 to the reported profit	24,920,000

Extracts of statement of financial position as at:

	31-Dec-16 TZS	31-Dec-15 TZS
PPE
Original figure	189,000,000	130,000,000
Wrong capitalized repair cost	(20,000,000)	(20,000,000)
Accumulated depr on wrongly capitalized repair cost	3,500,000	1,500,000
Extra depreciation charged	4,000,000	-
	176,500,000	111,500,000
Retained earnings	157,250,000	95,050,000

Extracts of statement of Profit/loss for the year ended:

	31-Dec-16 TZS	31-Dec-15 TZS
Profit before tax-originally reported	90,000,000	120,000,000
Wrongly capitalized repair cost	-	(20,000,000)
Extra depreciation (TZS4m + 2m)	6,000,000	1,500,000
Corrected profit before tax	96,000,000	101,500,000
Taxation	28,800,000	30,450,000
Profit after tax	67,200,000	71,050,000

Workings 1: Extra depreciation

Plant cost	70,000,000
Original useful life	5 years
Revised useful life	7 years
Depreciation charge before change	14,000,000
Depreciation charge after change	10,000,000
Extra depreciation charged 2016	4,000,000

Workings 2: PAT

Profit after tax figures	63,000,000	84,000,000
Wrongly capitalize repair cost	-	(20,000,000)
Extra depreciation	6,000,000	1,500,000
After Tax implications of the corrections	4,200,000	(12,950,000)
Corrected after tax figure	67,200,000	71,050,000

Workings 3: Retained earnings correction

	TZS	TZS
Originally reported	166,000,000	108,000,000
Effect of PAT adjustment	(8,750,000)	(12,950,000)
Corrected Retained earnings figure	157,250,000	95,050,000

ANSWER 5

(a)

REPORT

To: Financial Controller – Damari Limited

From: Future Financial Accountant

RE: IAS 16 – Property, Plant & Equipment (PPE)

Date: April 2016

(i) The amount that can be capitalized for this wind farm is as follows:	TZS‘000’
Preparation of site 80,000 Yes	80,000
Annual maintenance once operational 30,000 no
Vat on material (recoverable) 120,000 no
Staff training on correctly operating the wind farm once operational 25,000 no
Import duty on materials purchased 28,000 Yes	28,000
Initial surveying of site 40,000 Yes	40,000
Project manager salary to build and manage the wind farm 140,000 Yes	140,000
Wages of employees to build wind farm 300,000 Yes	300,000
Annual wages of employees once the wind farm is operating 100,000 no
Testing costs 60,000 Yes	60,000
Materials purchased for wind farm net of vat 250,000 Yes	250,000
Discount received on materials purchased 33,000 Yes	(33,000)
Amount to be Capitalised	865,000

(ii) a. Per paragraph 15 of IAS 16 at initial recognition, all items of PPE are recognized at cost.

b. Per paragraph 29 of IAS, two methods of valuing PPE after initial recognition are allowed. i.e.

(iii) a. Cost model i.e. PPE is carried at cost less accumulated depreciation and impairment

losses

b. Revaluation model i.e. PPE is carried at a revalued amount. The revalued amount is equal

to the fair value at date of revaluation less subsequent accumulated depreciation and

impairment losses.

(b)

(i) Per paragraph 6 of IAS 16, it should be allocated over its useful life

(ii) Per paragraph 51 of IAs 16 16, the residual value and the useful life of an asset shall be reviewed at least at each financial year end and if expectations differ from previous estimates, the change(s) shall be accounted for as a change in an accounting estimate in accordance with IAS 8 Accounting Policies, changes in Accounting estimates an errors.

(iii) The depreciation amount is as follows:

Working – Property, Plant & Equipment	Building	Total
Cost	2,500,0000	2,500,000
-Accumulated depreciation	(500,000)	(500,000)
Carrying Value b/d at 1^st January 2015	2,000,000	2,000,000
Revaluation Gain	100,000	100,000
	2,100,000	2,100,000
Depreciation-building-note1	(37,500)	(37,500)
Carrying Value c/d at 31^st December 2015	2,062,500	2,062,500

Note 1

Buildings – original Cost 2,500,000

Buildings – original Accumulated depreciation 500,000

Accumulated depreciation/Cost = 20%

Building has been depreciated by 20% over 10 years (01.01.05 – 31.12.14) so annual rate of depreciation has been 2% i.e. 20% /10 years as asset has been depreciated evenly since acquisition. Therefore, the original useful life is 50 years i.e. 100%/2% and the remaining useful life is 40 years. Therefore, the remaining useful life is 40 years.

To calculate the new depreciation amount, we use the following depreciation formula revalued Cost of Asset – residual value i.e. 2,100,000 – 600,000 expected useful life of Asset 40 years depreciation = 37,500.

If you have any further queries, please do not hesitate to contact me.

Yours sincerely,

Financial Accountant

ANSWER 6

(a) Classification of events and respective treatments

Item	IAS 10 classification	Treatment
(i)	Adjusting	Restate the inventory to cost, i.e. TZS 12,500,000 as it is lower than the NRV
(ii)	Non adjusting	Disclose in the notes
(iii)	Non adjusting	Do nothing, the loss [obsolete labels] will be expenses in 2017.
(iv)	Adjusting	Adjust the allowance for doubtful debt to TZS 30,000,000
(v)	Non-adjusting	Do nothing

(b) Gambini Ltd

(i) Customer Litigation – damage

§ Gambini’s legal advisors have confirmed that there is a legal obligation. This arose from the past event of the sale, on 1 December 2016 (i.e. before the year-en).

§ The legal advisors have confirmed that it is likely that the claim will succeed.

§ A reliable estimate of TZS 500,000,000 has been made.

§ Therefore, a provision of TZS 500,000,000 should be made.

§ About the Counter-claim, IAS37 requires that such a reimbursement should only be recognized where receipt is ‘virtually certain’. Since the legal advisors are unsure whether this claim will succeed no asset should be recognized in respect of this claim.

(ii) Sales director suit – unfair dismissal

In this case, the legal advisers believe that success is unlikely (ie. Possible rather than probable). Therefore, this claim meets the IAS37 definition of a contingent liability. The liability is a possible one, which will be determined by a future court case or tribunal. It did arise from past events (the dismissal had taken place by the year end).

This contingent liability should be disclosed in the financial statements (unless the legal advisors believe that the possibility of success is in fact remote, in which case no disclosure would be necessary.

(iii) Customers’ returns

Although there is no legal obligation, a constructive obligation arises from Gambini’s past actions. Gambini has created an expectation in its customers that such refunds will be given.

As at the year end, based on past experience, an outflow of economic benefits is probable.

A reliable estimate can be made. This could be 1% x 400,000,000 but since the returns are now all in the actual figure of TZS 3,500,000 can be used.

Therefore, a provision of TZS 3,500,000 should be made.

(iv) Closure announcement

§ A present obligation exists because at the year-end there is a detailed plan in place and the closure has been announced in the press.

§ An outflow of economic benefits is probable.

§ A reliable estimate of TZS 300,000,000 has been made.

§ However, IAS37 specifically states in respect of restructuring that any provision should include only direct expenses, not ongoing expenses such as staff relocation or retraining (paragraph 80 and 81). Therefore, a provision of TZS 250,000,000(300,000,000) – 50,000,000) should be made.