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No. of pages: 11

Business Level
Business Financial Reporting
Instructions to candidates

(1) Time allowed: Reading and planning – 15 minutes

K
Writing – 3 hours
(2) Total: 100 marks

(3) Answer all questions.

(4) This paper consists of two sections.

Section 1: 5 questions

B
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

1
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 – 2015/2016
 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
– 2011/2015
DECEMBER
 Sri Lanka Accounting Standards- SLFRS 9, SLFRS 15, SLFRS 16 2016
(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) Travel Asia (Pvt) Ltd (TAL) is a leading tour operator in Sri Lanka. The company’s
main business activity is the promoting of travel packages among European tourists.
Currently the company promotes all-inclusive packages and the client needs to pay
the total package price when the booking is confirmed.

The company financial year ends on 31 March. By the end of January 2016 there
were confirmed and fully paid bookings amounting to USD 22,000. These travelers
arrived to Sri Lanka on 1 March 2016 and departed on 15 April 2016.

Required:

Advise TAL on recognition of revenue, using your knowledge on recognision

criteria given in the conceptual framework for financial reporting and LKAS-18,
Revenue.

(5 marks)

(b) Alco (Pvt) Ltd acquired a machine by paying Rs. 10 million on 1 January 2014, which
has a useful life of 10 years. On 31 December 2015, the management estimated that
this machine can be sold in the market only for Rs. 7.5 million, incurring a selling
cost of Rs. 100,000. However, if it is used in operations to generate future cash
flows, it would give a present value of Rs. 8.5 million over its remaining life.

Required:

Explain the four measurement bases referred to in the Conceptual Framework

for Financial Reporting using the above information, as at 31 December 2015.

(5 marks)

(Total: 10 marks)

KB1 – December 2016 Page 2 of 11

Question 02

(a) The following information has been extracted from the draft financial statements of
Strong Wills PLC (SWP), engaged in manufacturing, for the year ended 31 March
2016.
31 March 2016 31 March 2015
Property, plant and equipment Rs. Rs.
Cost 1,300,000 910,000
Accumulated depreciation (560,000) (440,000)
Carrying amount 740,000 470,000
Revaluation reserve 100,000 85,000

The following additional information, which has been adjusted accurately in the draft
financial statements, is also provided to you.
(i) Machinery, with an original cost of Rs. 120,000 and a carrying amount of
Rs. 95,000 was disposed during the year for Rs. 80,000. The revaluation surplus
relevant to this machinery was Rs. 30,000. There was no other disposal of
property, plant and equipment during the year.
(ii) Rs. 150,000 was transferred from building work-in-progress to building
completed.
(iii) Machinery acquired during the year on a finance lease was Rs. 200,000.
(iv) Cash proceeds from the issue of shares were Rs. 1 million.
(v) During the year, SWP acquired shares in Creators (Pvt) Ltd for Rs. 750,000 for
cash, with the intention of holding it in the long-term.

Required:

Prepare an extract of the statement of cash flows showing ‘cash flows from
investing activities’ for the year ended 31 March 2016, using the above
information.
(5 marks)

(b) Power (Pvt) Ltd has a hydro power plant and a decommissioning liability. The plant
started operations on 1 January 2011, with an estimated useful life of 25 years. The
initial cost of the plant was Rs. 175 million. This included a decommissioning cost of
Rs. 1.2 million, which represented estimated future cash flows of Rs. 13 million
discounted for 25 years, using a risk-adjusted discount rate of 10%.
On 31 December 2015, the discount rate changed to 12% as a result of new
information available on risk. Due to this, the net present value of the
decommissioning liability decreased by Rs. 0.7 million.
Required:

Assess the impact on the financial statements for the year ending 31 December
2016 due to the change in the decommissioning liability.
(5 marks)
(Total: 10 marks)
KB1 – December 2016 Page 3 of 11

(Total: 10 marks)
Question 03

(a) Broad (Pvt) Ltd (BPL) invested Rs. 100,000 (at par) in 6% debentures with a 3 year
maturity period, issued by Costa (Pvt) Ltd (CPL) on 1 January 2015. The par value
approximates the fair value at the date of the investment. The maturity value is
Rs. 125,200. BPL classified this investment as loans and receivables and the effective
interest rate is 12%. BPL received interest at 6% on par on 31 December 2015. On
this date, a significant financial fraud was revealed in CPL and this resulted in huge
financial losses that had a major impact on the going concern ability of CPL. A few
days later, they informed BPL that they are not in a position to pay interest on the
debentures in the future and only 50% of the maturity value will be paid on the
maturity date.

The market interest rate of a similar bond on 31 December 2015 was 9%.

Required:
Demonstrate how BPL should reflect the above investment in their financial
statements for the year ended 31 December 2015.
(5 marks)

(b) The following information relates to HK (Pvt) Ltd (HKPL) and its group companies.

1. The managing director of HKPL has given a loan to one (Total:

of its 10 marks)
subsidiary
companies.
2. HKPL has purchased an insurance policy from HK Insurance (Pvt) Ltd, a
subsidiary, in normal business dealings.
3. HKPL has provided a bank guarantee to its main customer in order to ensure
continuous trading.
4. Short-term employee benefits were paid to the directors of HK group.
5. HKPL paid consultancy fees to the managing director’s wife.

Required:

Discuss whether the above transactions should be disclosed as related party

transactions as per LKAS 24, Related Party Disclosures.

(5 marks)

(Total: 10 marks)

KB1 – December 2016 Page 4 of 11

Question 04

PBS (Pvt) Ltd entered into a lease agreement with RBS (Pvt) Ltd to acquire the use of a
machine for four years beginning from 1 April 2015. The lease requires four annual
payments of Rs. 31,547 starting on 31 March 2016. The implicit interest rate of the lease is
10% per annum. The useful life of the machine is four years, and its salvage value is zero.
PBS accounts for the lease as a finance lease. The fair value of the machine is Rs. 100,000
and the company uses straight-line basis of depreciation. The carrying amount of the
machine in RBS's books is Rs. 90,000.

You are given the following additional information regarding discount rates:

Discount Present value of Rs. 1 payable at Cumulative present value of Rs. 1

Rate the end of Year 4 payable at the end of Years 1- 4
10% Rs. 0.68 Rs. 3.17
25% Rs. 0.41 Rs. 2.36

Required:

(a) Assess the appropriateness of PBS treating the lease agreement as a finance
lease.
(2 marks)

(b) Prepare financial statement extracts for PBS and RBS on the above transactions
reflecting the impact on the income statement, the statement of cash flows and
the statement of financial position for the year ended/as at 31 March 2016.
(6 marks)

(c) Assess the effects on PBS's profitability and cash flows for the years ended
31 March 2016 and 2017 if PBS had accounted for the above lease as an
operating lease.
(2 marks)

(Total: 10 marks)

KB1 – December 2016 Page 5 of 11

Question 05

Ashaa Medical PLC is one of the leading health care service providers in Sri Lanka. The
table below presents some key ratios of the company with industry averages for the year
ended 31 March 2016.

Formula Company Industry

Liquidity ratios
Current ratio Current assets / Current liabilities 0.7 0.9
(cash + marketable securities + trade
Quick ratio accounts receivable) / current liabilities 0.6 0.8
Sales / (Current assets - current
Sales to working capital liabilities) (40.0) (253.1)
Activity ratios
Sales to assets Sales / Total assets 6.6 8.5
Sales / (Property and equipment -
Sales to net fixed assets Accumulated depreciation) 19.6 25.1
Net fixed assets to (Property and equipment - Accumulated
equity depreciation) / Total equity 4.3 3.9
Profitability ratios
Earnings before taxes / Total assets *
Rate of return on assets 100 3.7 11.1
Earnings before taxes / Total equity *
Rate of return on equity 100 47.8 48.2
Coverage ratios
Debt to equity Total liabilities / Total equity 11.8 10.4
Cash flow to current
Maturities of long-term (Net income + Depreciation expense) /
debt Current portion of long term debt 1.3 1.4
Earnings before interest and taxes /
Times interest earned interest expense 1.6 4.6

Required:

(a) Interpret the above ratios of Ashaa Medical PLC with industry averages for the
year ended 31 March 2016.
(6 marks)
(b) Recommend two (02) measures that Ashaa Medical PLC can use to improve each
ratio category.
(4 marks)

(Total: 10 marks)

KB1 – December 2016 Page 6 of 11

 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 draft statement of financial position of Adams PLC, Bela (Pvt) Ltd and Cone (Pvt) Ltd as
at 31 March 2016 are as follows.
(All values given below, including the values given in additional information are in Rs. ‘000)

Rs. ‘000
Adams Bela Cone
ASSETS
Non-current assets
Property, plant and equipment 1,032,500 402,000 210,000
Investment 840,000 650,000 -
1,872,500 1,052,000 210,000
Current assets
Inventory 510,120 85,620 65,400
Trade receivables 210,890 136,900 25,300
Receivable from Adams PLC - 40,000 -
Cash 684,100 24,000 15,200
1,405,110 286,520 105,900
Total assets 3,277,610 1,338,520 315,900

EQUITY AND LIABILITIES

Equity
Stated capital 1,200,000 100,000 50,000
Retained earnings 1,435,310 631,820 245,500
2,635,310 731,820 295,500
Non-current liabilities
Long term loan 250,000 50,000 -
250,000 50,000 -
Current liabilities
Trade payables 320,800 436,700 18,400
Payable to Bela (Pvt) Ltd 21,500 - -
Overdraft 50,000 120,000 2,000
392,300 556,700 20,400
Total equity and liabilities 3,277,610 1,338,520 315,900

KB1 – December 2016 Page 7 of 11

Additional information:
(i) On 31 December 2015, Adams acquired 75% of the 100,000 ordinary shares of Bela
for a cash consideration of Rs. 750,000 when Bela’s retained earnings were
Rs. 520,300 and the fair value of non-controlling interest was Rs. 65,000. Cash paid
to acquire Bela and the related legal fees incurred of Rs. 5,000 are shown as
‘investment’ in Adams’ draft financial statements.

(ii) Fair values of assets and liabilities of Bela at the date of acquisition were equal to
their carrying values except for the following:
 The building had a fair value of Rs. 150,000 in excess of the carrying value.
On this date the remaining useful life of the building was estimated to be 20
years.

 Inventory’s fair value was Rs. 5,000 in excess of the carrying value.

(iii) Bela has disclosed a contingent liability of Rs. 13,000 in its financial statements at
the date of acquisition.

(iv) As at 31 March 2016, Bela has sold all the inventories held at the acquisition date to
parties outside the group. Further, there has been no change to the share capital of
Bela since acquisition.

(v) On 1 April 2015, Adams purchased 25% of the 50,000 ordinary shares of Cone (Pvt)
Ltd for Rs. 85,000 when Cone’s retained earnings were Rs. 120,500.

(vi) During the year, Adams sold Rs. 36,000 worth of goods to Cone with a 20% mark-up
on cost. As at 31 March 2016, Cone had all these goods in its inventories.

(vii) An impairment test carried out at the end of the year revealed that 50% of goodwill
has been impaired.

(viii) On 1 March 2015 Adams sold a machine to Bela for Rs. 57,000 which had a carrying
amount of Rs. 69,000 at this date. The estimated remaining useful life of the machine
was reassessed on the date of sale to be 5 years.

(ix) During the year Adams purchased goods worth Rs. 40,000 from Bela. Adams has
50% of these goods in its inventories at the year-end. Bela makes all sales at cost
plus a mark-up of 25%. On 31 March 2016, Adams sent a cheque amounting to
Rs. 18,500 relating to the goods purchased. However, Bela received this cheque
on 4 April 2016.

(x) Ignore taxation.

Required:

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

31 March 2016.
(Total: 25 marks)
KB1 – December 2016 Page 8 of 11
Question 07

Xtreme PLC (“Xtreme”) is a conglomerate and the group consists of 3 subsidiaries, and an
associate entity. The following matters were noted in finalising the consolidated financial
statements of Xtreme for the year ended 31 March 2016.

(1) Some of equity investments held by Xtreme PLC are as follows:

 Moon PLC – 2,500,000 equity shares

This represents 5% of the stated capital of Moon PLC. The price per share on
31 March 2016 was Rs. 50. The shares are traded actively in the market. The
management estimated the fair value per share to be Rs. 55 on 31 March
2016.

 Sunrise (Pvt) Ltd – 20% shareholding

At the last reporting date, the shares were valued at Rs. 75 million. The
company has performed well and met the budget in the current year. Xtreme
agreed to sell this investment in order to obtain required finances for a new
project. The agreed selling price was Rs. 75 million, which has been
considered as the fair value of the investment as at 31 March 2016.

 Star (Pvt) Ltd – 15% shareholding

There have been no transactions recently in the shares of Star (Pvt) Ltd. The
management has valued this using the market approach and the fair value
had been estimated to be Rs. 20 million at the year end. This valuation was
based on share prices of three quoted companies of different sizes.

(2) Subsidiary company Alpha (Pvt) Ltd (“Alpha”) was considered a separate cash
generating unit (CGU) and the carrying value of non-current assets of Alpha as at
31 March 2016 were as follows:

Rs. ‘000
Goodwill 100,000
Brand 400,000
Property, plant and equipment (PPE) 350,000

PPE with a carrying value of Rs. 50 million had a recoverable amount of Rs. 20
million. The value-in use of Alpha was calculated to be Rs. 650 million.

(3) The following were noted:

(i) Xtreme uses a particular raw material for production and it is expected to be
used for 14 months after 31 March 2016. This is within the normal operating
cycle of Xtreme.

KB1 – December 2016 Page 9 of 11

 (ii) An equity investment is held in Nobel PLC for strategic purposes. Xtreme can
sell this investment at any time but it currently has no immediate plans to
sell it.

(iii) Rs. 300 million was borrowed during the year ended 31 March 2016.
Rs. 22 million is payable next year and Rs. 22 million every year thereafter
until the loan is repaid in full. In March 2016, a covenant in the borrowing
agreement was breached and therefore the lender could demand immediate
repayment of the loan. In April 2016, this breach was rectified and the lender
agreed not to demand immediate repayment of the loan. The financial
statements for the year ended 31 March 2016 were authorised for
publication on 2 June 2016.

(4) Xtreme is presently putting together its 5 year business plan. During the period
covered by the plan a restructure of the business is due to take place which will
result in discontinuing of certain operations.
 1 January 2016 - the directors formally decided to undertake a
restructuring programme which would be finalised during the
financial year ending 2020.
 10 February 2016 - Xtreme started working together with the
employees’ representative, as an informal agreement was drawn by
the managing director but no identification of affected employees was
made.
 On 5 March 2016 - the business plan was approved by the directors.
 On 15 March 2016- the plan was announced to the workforce.

(5) Xtreme won a long standing legal case during the current financial year. A full
provision of Rs. 20 million was made on 1 April 2012 for the adverse outcome of
this case (which was the possible outcome expected at that time). This amount
represented the present value of the amount required to settle the case and had
been correctly calculated using a 12% discount rate. The discount was “unwound” in
each subsequent accounting up to and including the year to 31 March 2015.

(6) Xtreme purchased the following intangible assets on 1 April 2015:

Intangible asset 1: The cost of purchase was Rs. 400 million and the residual value
was estimated to be zero. The asset’s useful life is 4 years. The pattern in which the
asset’s future economic benefits are to be consumed cannot be reliably determined
and management decided to charge amortisation at a rate of 40% in Year 1, 20%
annually from Year 2 onwards

Intangible asset 2: The asset was ready for use from the date of purchase. However,
this was not used until the Year 2. The cost of the asset was Rs. 300 million. The
asset will not have any use at the end of Year 3 and therefore no residual value. The
pattern in which the economic benefits are to be consumed cannot be determined
reliably.

KB1 – December 2016 Page 10 of 11

Required:

(a) Evaluate the appropriateness of fair values determined as at 31 March 2016 in respect
of the equity investments held by Xtreme, given in point (1) above with reference to
SLFRS 13.

(6 marks)

(b) “When the fair value less cost to sell is derived from a valuation technique the result would
be the same as the Value in use calculation”

(i) Discuss whether you agree with the above statement. (3 marks)

(ii) Advise Xtreme on the accounting entries required to recognise the impairment
provision on Alpha CGU in the consolidated financial statements for the year
ended 31 March 2016.

(5 marks)

(c) Evaluate the appropriate way the management should have classified the items noted
in point (3) above, in the statement of financial position of Xtreme as at 31 March 2016.

(4 marks)

(d) Recommend the correct accounting treatment for the items described in point (4) and
(5) above, for the year ended 31 March 2016. (Support your answers with figures where
necessary).
(4 marks)

(e) Assess the correct amortisation charge for the year ended 31 March 2016 on the
intangible assets described in point (6) above.
(3 marks)

(Total: 25 marks)

KB1 – December 2016 Page 11 of 11