Institute of Certified Management Accountants of Sri Lanka. Managerial Level May 2014 Examination. Corporate Reporting and Analysis (CRA / ML 2 302)

Transcription

1 Copyright Reserved Serial No Managerial Level May 2014 Examination Examination Date : 10 th May 2014 Number of Pages : 05 Examination Time: 9.30 a:m p:m. Number of Questions: 05 Instructions to Candidates 1. Time allowed is three (3) hours. 2. Total: 100 Marks. 3. Answer all questions in Part I and three (3) questions from Part II. 4. The answers should be in English Language. Subject Subject Code Corporate Reporting and Analysis (CRA / ML 2 302) PART I Answer all questions Question No. 01 (40 Marks) (a) (c) Explain the meaning of consideration given by a parent company for the shares in a subsidiary. Cross Ltd. is a wholly-owned subsidiary of Ace Plc. Cross Ltd. holds 5% of the shares issued by Ace. How should these shares be presented in Cross s separate financial statements? Holmes Plc acquired 16% of issued ordinary shares of Colonel Plc on 01/01/2009 for Rs. 13 million and carried at cost. Holmes made a further acquisition of 36% of ordinary shares of Colonel Plc on 01/01/2014 for Rs. 120 million. Consider additional information given below: 01/01/ /01/2014 Fair value of net assets of Colonel Fair value of Non-Controlling Interest Fair value of 16% investment (i) Calculate the goodwill arising on the acquisition of Colonel Plc. Give the impact to the income statement of Holmes based on the acquisition on 01/01/2014. (02 Marks) 1

2 (d) The summarized financial information of public companies, Anon, Bell, and Cell as at 31/03/2014 are given below: Anon Bell Cell Statements of Financial Position Property, Plant & Equipment Investment in Bell Investments in Cell Inventories Receivables Cash and Bank ,000 1, Ordinary shares issued at Rs. 100 each 1, Retained earnings 1, Bank balances Creditors ,000 1, Income Statements Revenue 5,000 2,000 1,000 Cost of Sales 3, Expenditure 1, Income Tax Profit Additional information: 1. Anon acquired 6 mn ordinary shares in Bell on 01/04/2010 when Bell s retained earnings were Rs.250 million. The fair value of Bell s Property, which had a remaining useful life of 10 years, exceeded the book value by Rs.50 million on the date of acquisition. The fair value of the non-controlling interest at acquisition was estimated at Rs.234 mn. 2. Anon sold one quarter of Bell s shares owned for Rs million on 31/03/2014. This has not been accounted by Anon, as the payment is due on 31/03/ Anon also acquired 1.2 mn ordinary shares in Cell on 01/04/2012 when Cell s retained earnings were Rs.150 million. The fair value of Cell s Property, which had a remaining useful life of 5 years, exceeded the book value by Rs.20 million on the date of acquisition. 4. Goodwill to be calculated gross and has not been impaired since acquisition. 5. The impairment review reveals the recoverable amount of Cell as at 31/03/2014 to be Rs.1,030 mn. 6. Anon s trade receivables as at 31/03/2014 include Rs.120 mn due from Bell and Rs.60 mn due from Cell. 7. Anon sells goods to Bell and Cell at a margin of 10% on cost. The Revenue of Anon includes sales of Rs. 200 million to Bell and Rs. 120 million to Cell. You are required to prepare the followings for Anon group. (i) The consolidated income statement for the year ended 31 st March (09 Marks) The consolidated statement of financial position as at 31 st March (20 Marks) (Total 40 Marks) End of Part I 2

3 Part II Answer any three (3) questions Question No. 02 (20 Marks) (a) (i) Revenue recognition criteria emphasize on transfer of significant risks and rewards of ownership of the goods to the buyer. Explain the meaning of significant with examples. Colombo Engineers & Co. shipped swimming pool equipment and machinery to Maldives, to a destination specified by a hotel company in that country. As the goods have been dispatched from Colombo port on 20 th March 2014, the accountant has recognized the invoice value of Rs. 30 million in the financial year 2013/2014. The transaction involves installation of the equipment and machinery that has not yet been fulfilled. The customer has not yet paid the invoice and the accountant is of the view that the settlement is irrelevant for recognition of revenue. Give your opinion. (iii) UNACO supermarket has implemented a new customer policy; if a customer has made purchases more than Rs. 3 million for the year ended 31/12/2014, the customer is entitled for a rebate of 5% retrospectively (i.e. rebate on all purchases for the year). UNACO has observed that there are 10 customers who have made average purchases of Rs.300,000/- per month for the 1 st quarter of the year Advice UNACO on revenue recognition for the year ended 31/03/2014. (04 Marks) (i) Explain the followings in accordance with related reporting standards. 1. Operating segments 2. Reportable segments (04 Marks) Sihin Air Plc operates a domestic airline from Colombo to Mattala in addition to its international operations. The domestic airline operations are based on contracts awarded by the government in a competitive tender and fees for services are paid by the government. The local air ticket fees are determined by and paid to the government. The company reports these two operations as two segments. Evaluate and give your explanation. 3

4 Question No. 03 (20 Marks) (a) Briefly explain the following terms in relation to the insurance contracts. (i) Liability adequacy test Reinsurance contracts (04 Marks) A machine with a carrying value of Rs. 1 million produces an electronic chip. The work done by the machine costs Rs. 12 per unit, for which a supply contract exists for 90,000 units over next 3 months. Machine will be scrapped at the end of 3 month period. Currently, the machine has a net resale value of Rs.975,000/-. Calculate the impairment loss, if any. (c) (i) Ash Plc has issued a convertible bond that gives the holder the choice of payment by cash or in shares. The directors suggest it to be presented as a debt. How do you solve the problem of classification as to debt or equity? What do you mean by a derivative? (04 Marks) (iii) Determine whether each of the followings should be reported as derivatives as at 31/03/2014. Give the reasons. 1. GK Plc entered into a forward contract on 1 st March 2014 to purchase 100,000 shares in BM Plc in one year forward. Currently, the share is traded at Rs.100/- and the one year forward price is Rs.140/-. GK paid Rs. 10 mn on 1 st March GL Plc. sells products in the United States. GL entered into a contract on 01/01/2014 with a local bank to convert Dollars in to LKR at a fixed exchange rate. The contract requires GL to remit US sales in Dollars in exchange for LKR at a fixed exchange rate of Rs.132/-. 3. GM Plc has signed a contract on 01/03/2014; contract requires payment of Rs. 2 mn if JK Plc's share price increases by Rs.50/- or more during the next six month period. GM will receive Rs. 2 mn if the share price decreases by Rs.50/- or more during the same period. There will be no payment if the price swing is less than Rs.50/- up or down. Question No. 04 (20 Marks) (a) (i) Related party relationships are a normal feature of business throughout the world. What is the purpose of disclosure of such relations? (02 Marks) Dr. Heman, an architect, serves in the director board of Just Plc. Just Plc pays a monthly fee of Rs.50,000/- to the government department where Dr. Heman is a permanent employee. It is not known to Just Plc whether Dr. Heman collects the fee from the government department. Explain the disclosure requirements for Just Plc. Explain the difference between the two different accounting treatments for joint ventures in the group accounts, as allowed by the standard for interest in joint ventures. (05 Marks) (c) What are the methods a business could discharge its Corporate Social Responsibility? (05 Marks) (d) Explain the need for good governance in the corporate sector today. (05 Marks) 4

5 Question No. 05 (20 Marks) (a) In case of firm comparisons, ratio analysis would draw false conclusions. Discuss. (04 Marks) Giant Plc acquired Summer Ltd. and Everise Ltd. acquired Jaya Ltd. in The directors of Everise are concerned with differences in post-acquisition financial indicators compared with Giant who acquired a similar company. Giant Pre-acquisition Post-acquisition Number of Shares 10 million 15 million Earnings after tax (Rs.) 100 million 150 million Share price (Rs.) Everise Pre-acquisition Post-acquisition Number of Shares 10 million 12.5 million Earnings after tax (Rs.) 100 million 150 million Share price (Rs.) You are required to state your key observations and give suggestions to Everise. (c) Hill Ltd s directors are evaluating an option of issuing commercial papers in order to finance its expected sales growth based on the new business policy implemented in Company s revenue in 2013 shows a growth of about 50% compared to 2012, and net profit margin has increased by 4% Rs Rs. Sector Information Revenue 43,400 29,000 Cost of sales 30,300 18,400 Average Inventory 5,100 1,250 Trade receivables 5,900 3,100 Cash Overdraft 2, Trade payables 6,800 2,920 Long-term finance 48,250 44,000 Current ratio 1.8 Quick ratio 1.4 Inventory days 28 Trade receivables days 40 working capital turnover 10 You are required to write a report to the directors on its performance, giving your suggestions. (10 Marks) End of Part II End of Question Paper 5