UNIVERSITY OF MAURITIUS

FACULTY OF LAW AND MANAGEMENT

SECOND SEMESTER EXAMINATIONS

JULY/AUGUST 2021

BSc (Hons) Accounting (Business Informatics)- Level III

BSc (Hons) Accounting (Minor: Finance) – Level III + Fee-
PROGRAMME Paying, IV (Part-Time)
BSc (Hons) Accounting (Minor: Management) III + Fee-
Paying

MODULE NAME ADVANCED FINANCIAL REPORTING

Monday
DATE 23 August 2021 MODULE CODE DFA3000Y(5)

TIME 13.30 – 15.30 Hours DURATION 2 Hours

NO. OF 5 NO. OF QUESTIONS 3

QUESTIONS SET TO BE ATTEMPTED

INSTRUCTIONS TO CANDIDATES

This paper consists of FIVE (5) questions and TWO (2) Sections (Sections
A and B).
Section A is COMPULSORY and carries 40 marks.
Answer ANY TWO (2) questions from Section B. Each question carries
30 marks.
 Advanced Financial Reporting – DFA3000Y (5)

SECTION A (COMPULSORY)(40 MARKS)

Question 1 (40 marks)

Big Ltd acquired shares in Small Ltd on 1 July 2019 which resulted in an ownership of
80%.

The purchased consideration transferred by Big Ltd in exchange of the shares in Small
Ltd was made up of the following components:
(i) Cash paid of $ 565,000 (inclusive of legal fees)

(ii) Cash to be paid in four years’ time is $ 600,000

(iii) Share exchange of two shares in Big Ltd for every seven shares in Small Ltd.

The market price of one share in Big Ltd at the date of acquisition was $3. Legal fees
associated with the acquisition were $ 65,000. The market price one share in Small Ltd
on 1 July 2019 was $3. The share for share exchange together with the deferred
consideration was not recorded by Big Ltd.

Small Ltd’s retained earnings at the date of acquisition was $135,000. No ordinary
shares had been issued by Small Ltd since acquisition. It is group policy to fair value
non- controlling interest at time of acquisition. Small Ltd holds a patent which has not
been recognized in its financial statements. The directors of Big Ltd are of the opinion
that the patent should be accounted for. The patent had a fair value of $125,000 and a
remaining term of four years as from the date of acquisition. With regards to Small
Ltd’s Property and Plant, it is noted that the asset had a lifetime of five years at the
acquisition date and the carrying value of Property and Plant was greater than the fair
value by $40,000 on the acquisition date.

The cost of capital of Big Ltd is 15% per annum.

During the year ended 30 June 2020, Small Ltd sold goods to Big Ltd at an invoice price
of $150,000. Big Ltd had sold 60% of these goods to third parties by 30 June 2020. Small
Ltd applies a mark up of 20%.

[40 marks]

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 Advanced Financial Reporting – DFA3000Y (5)

Extracts of the statements of financial position for the year ended 30 June 2020 are
given below:

Big Ltd Small Ltd

$ $
Assets
Investment in Small Ltd 565,000
Equity and Liabilities
Share capital (Nominal Value $0.5 per share for each 325,000 175,000
entity)
Share premium 200,000 100,000
Retained earnings 200,000 225,000
Non- current liabilities 100,000 50,000
Current liabilities 50,000 20,000

Required:

a) How many shares did Big Ltd acquire in Small Ltd on 1 July 2019?
[2 marks]

b) Extract two pieces of evidence from the information given in question 1 that
supports the statement “The share for share exchange together with the deferred
consideration was not recorded by Big Ltd.” [4 marks]

c) Calculate the goodwill arising on the acquisition of Small Ltd.

[10 marks]

d) How would the goodwill on the acquisition of Small Ltd change if non-
controlling interest at acquisition date was measured on a proportionate
basis? [2 marks]

e) Compute the revised retained earnings of Small at 30 June 2020 after

incorporating any consolidation adjustments. [4 marks]

f) Calculate the consolidated retained earnings as at 30 June 2020 that would be

included in the equity section of the consolidated statement of financial
position. [4 marks]

g) Show the amounts that would appear in the equity and liabilities section of
the consolidated statement of financial position as at 30 June 2020.
[10 marks]

h) Assume you are given the following additional information: Small Ltd has
bought 60% of the equity shares in Tiny Ltd on 1 January 2020 at a cost of
$100,000. The fair value of 100% of the net assets of Tiny at 1 January 2020
amount to $291,667. Based on the information given, calculate the negative
goodwill that would arise on acquisition and explain how this negative
goodwill should be treated in Big Ltd’s consolidated financial statements.
[4 marks]

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 Advanced Financial Reporting – DFA3000Y (5)

SECTION B (60 MARKS)

Answer ANY TWO (2) questions. Each question carries 30 marks.

Question 2 (30 marks)

Topwood Ltd is a 40 year old company producing furniture. 22 years ago it acquired a
100% interest in Fleetwood Ltd. In 2018, it acquired a 40% interest in Landscapes Ltd
and on 1 April 2020, it acquired a 75% interest in Garden Furniture Ltd. The draft
consolidated accounts for the Topwood Group are as follows:

Income statement for the year ended 31 March 2021

Rs’000

Sales 10,000

Cost of sales (3,000)

Gross profit 7,000

Other income (income from long term 600

investments)

Selling and distribution expenses (1,000)

Administration expenses (1,545)

Finance cost (450)

Share of profits from associates net of tax 1,050

Profit before tax 5,655

Income tax expense (1,620)

Profit for year 4,035

Attributable to Minority interest 300

Attributable to owners of the parent 3,735

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 Advanced Financial Reporting – DFA3000Y (5)

Consolidated statement of financial position as at 31 March 2021

31 March 2021 31 March 2020

ASSETS Rs’000 Rs’000 Rs’000 Rs’000

Non-current assets

Property, plant and 11,625 7,500

equipment

Goodwill 300 -

Investment in associates 3,300 3,000

Other investments 1,230 1,230

16,455 11,730

Current assets

Inventories 5,925 3,000

Trade receivables 5,550 3,825

Cash at bank and in hand 13,545 5,460

25,020 12,285

Total assets 41,475 24,015

EQUITY AND LIABILITIES

Equity attributable to
owners of the Parent
Issued share capital (Rs25) 11,820 6,000

Share premium 8,649 6,285

Retained profit 10,335 7,500

30,804 19,785

Non controlling interest 345 -

Total equity 31,149 19,785

Non-current liabilities

Loans 4,380 1,500

Finance lease obligations 2,130 510

6,510 2,010

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 Advanced Financial Reporting – DFA3000Y (5)

Current liabilities

Trade payables 1,500 840

Finance lease obligations 720 600

Taxation payable 1,476 690

Accrued interest and finance

charges
120 90

3,816 2,220

41,475 24,015

Notes to the accounts:

1. The consideration relating to the 75% interest acquired in Garden Furniture Ltd
was settled by an issue of 10,560 shares in Topwood deemed to be worth
Rs825,000 with the balance paid in cash.

Fair value of net assets acquired Rs'000

PPE (Machinery) 495

Stocks 96

Trade debtors 84

Cash in hand 336

Trade creditors (204)

Income tax payable (51)

756

Minority Interest (189)

567

Goodwill 300

Cost of investment 867

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 Advanced Financial Reporting – DFA3000Y (5)

2. Note to Property, plant and equipment

Buildings Machinery Total

Rs'000 Rs'000 Rs'000

Cost

At 1 April 2020 18,750 4,200 22,950

Additions - 6,300* 6,300

Disposals - (1,500) (1,500)

At 31 March 2021 18,750 9,000 27,750

Accumulated
Depreciation

At 1 April 2020 12,150 3,300 15,450

Charge for year 375 600 975

Disposals - (300) (300)

12,525 3,600 16,125

Carrying amount

At 1 April 2020 6,600 900 7,500

At 31 March 2021 6,225 5,400 11,625

*Inclusive of Rs2,550,000 acquired under finance leases.

3. An item of machinery was sold during the year ended 31 March 2021 for
Rs1,500,000.

Required:

Prepare the consolidated statement of cash flows for the year ended 31 March 2021.

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 Advanced Financial Reporting – DFA3000Y (5)

Question 3 (30 marks)

Needy Ltd contracted with its bank to raise a loan on 1 January 2020 on the following
terms:

Nominal amount of Loan:Rs1,100,000

Issue costs payable upfront: Rs100,000
One time repayment of Rs1,331,000 on 31 December 2022.
The nominal rate of interest is 6.5% per annum.

The draft financial statements for the year 2020 tabled at the Audit Committee
revealed the following:

i. Issue costs of Rs100,000 had been expensed to the profit or loss

ii. Interest costs of Rs71,500 (i.e. 6.5% of Rs1,100,000) had been expensed to
the profit or loss and classified as current liabilities.
iii. The loan of Rs1,100,000 appears as a non-current liability

Required:

a) Briefly explain the role of Audit committees. [4 marks]

b) Explain the factors or pre requisites that should be present for the audit
committee to discharge its role effectively. [4 marks]

c) As an independent director on the Audit committee what comments would you

make on the draft financial statements? [4 marks]

d) Using the provisions of IFRS 9, show the liability section of the statement of
financial position of Needy Ltd as at 31 December 2020 and the amount that
should be expensed to the profit or loss. [8 marks]

PV (1+r)n = FV

e) Needy Ltd had 5 million ordinary shares in issue on 1 January 2020. On 31

January 2020 the company made a rights issue of 1 for 4 at $1.75. The cum rights
price was $2 per share. On 30 June 2020 the company made an issue of 125,000
shares at full market price. Finally, on 30 November 2020 the company made a
1-for-10 bonus issue. Profit for the year ended 31 December 2020 - verified and
validated by the Audit Committee and by the External Auditors - was $2.9
million. The reported EPS for the year ended 31 December 2019 was 46.4 cents.

Required:

Compute the EPS for the year ended 31 December 2020 and the restated EPS
for the year ended 31 December 2019.
[10 marks]

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 Advanced Financial Reporting – DFA3000Y (5)

Question 4 (30 marks)

On 1 January 2020 the University of Mauritius enters into a 5-year lease of a building
owned by SICOM which has a remaining useful life of 10 years. Annual lease
payments amount to $50,000 and are payable on 31 December each year. Initial direct
costs (paid on 1 January 2020) incurred by the University to enter into the lease
contract amount to $20,000. The University has also received on 1 January 2020
incentives from SICOM amounting to $5,000. The fair value of the asset amounts to
$358,150. The unguaranteed residual value at the end of 31 December 2024 is $200,000.
There is uncertainty as to whether the University of Mauritius will renew the lease at
the end of the lease term.

Required:

Using the provisions of IFRS 16,

a) Explain and compute the interest rate implicit in the lease (rounded off to the
nearest integer) using trial rates of 3% and 7%. [10 marks]

HDR - LDR
IRR= LDR + × NPV LDR
NPV LDR - NPV HDR

b) Prepare an extract of the lease amortisation table for calendar years 2020 and
2021. [10 marks]

c) Prepare journal entries in the books of the University of Mauritius for the year
ended 31 December 2020 and an extract of the liability section of the statement of
financial position as at 31 December 2020. [10 marks]

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 Advanced Financial Reporting – DFA3000Y (5)

Question 5 (30 marks)

Part A

The following information is given regarding a non-contributory defined benefit

scheme for a company with a calendar year end:

As at 31 December 2019:
Present value of defined benefit obligation $2,430,000
Fair value of Plan assets $1,855,000
Defined benefit Liability: $575,000

The following figures relate to the year ended 31 December 2020 (extracted from the
report of the Actuary):

Interest cost $170,000

Present value of current service cost for the year $415,000
Interest income $130,000
Return on plan assets (before deducting interest income) $235,000
Employer contribution $450,000
Benefits paid during the year $375,000
Present value of defined benefit obligation at 31 December 2020 $2,760,000
Fair value of plan assets at end of year $2,165,000

Required:

a) Explain the rationale for including the interest cost figure of $170,000. [3 marks]

b) Explain what you understand by the term “ present value of current service
cost”. [3 marks]
c) Prepare the reconciliation between the opening and closing balance of the
“Present Value of the defined benefit obligation” and identify any actuarial
gain/loss for the year. [7 marks]
d) Calculate the defined benefit expense for the year ended 31 December 2020.
[3 marks]
e) Compute the amount of the defined benefit obligation that must be shown in
the statement of financial position as at 31 December 2020. [2 marks]

PART B

In their book entitled “The End of Accounting and the Path Forward for Investors and
Managers”, Baruch Lev and Feng Gu criticise the usefulness of traditional financial
information and emphasise the rising importance of intangibles and the need to report
value creation.
(a) Briefly explain 2 main criticisms of traditional financial information. [4 marks]
(b) Briefly explain how the provision of information on intangibles and value
creation would assist investors and managers. [8 marks]

END OF QUESTION PAPER

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