Open University of Mauritius

MSc FINANCE AND INVESTMENT [OUpm001]

MBA WITH SPECIALISATION IN FINANCIAL SERVICES [OUpm006]

EXAMINATION FOR: June/July 2019

MODULE: Financial Reporting and Analysis

[OUpm001111/OUpm0062107]

DATE: Saturday 29 June 2019

DURATION: 3 Hours

READING TIME: 15 Minutes

INSTRUCTIONS TO CANDIDATES

1. This paper consists of Section A and Section B.

2. Section A is COMPULSORY.
3. Answer ANY TWO (2) questions from Section B.
4. Always start a new question on a fresh page.
5. Total marks: 100

This question paper contains 4 questions and 7 pages.

Page 1 of 7
 SECTION A - COMPULSORY

QUESTION 1 (40 MARKS)

Rexim, a listed entity, has just published its financial statements for the year ended 31
December 2018. Rexim operates a chain of 42 supermarkets in the country. During
2018, there has been speculation in the financial press that the entity was likely to be
a takeover target from one of the larger national chains of supermarkets. A recent
newspaper report has suggested that Rexim’s directors are unlikely to resist a
takeover. The board members are all nearing retirement, and all own significant
minority shareholdings in the business.

You have been approached by a private shareholder in Rexim. He is concerned that

the directors have a conflict of interests and that the financial statements for 2018 may
have been manipulated.

The income statement and summarised statement of changes in equity of Rexim, with
comparatives, for the year ended 31 December 2018, and a balance sheet, with
comparatives, at that date are as follows:

Income statement for the year ended 31 December 2018

2018 2017
RsM RsM
Revenue, net of sales tax 1,255 1,220
Cost of sales (1,177) (1,145)
Gross profit 78 75
Operating expenses (21) (29)
Profit from operations 57 46
Finance cost (10) (10)
Profit before tax 47 36
Income tax expense (14) (13)
Profit for the period 33 23

Statement of changes in equity for the year ended 31 December 2018

2018 2017
RsM RsM
Opening balance 276 261
Profit for the period 33 23
Dividends (8) (8)
Closing balance 301 276

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 Balance sheet at 31 December 2018

2018 2017
RsM RsM RsM RsM
Non-current assets:
Property, plant and equipment 580 575
Goodwill 100 680 100 675
Current assets:
Inventories 47 46
Trade receivables 12 13
Cash 46 105 12 71
785 746
Equity:
Share capital 150 150
Accumulated profits 151 301 126 276
Non-current liabilities:
Interest-bearing borrowings 142 140
Deferred tax 25 167 21 161
Current liabilities:
Trade and other payables 297 273
Short-term borrowings 20 317 36 309
785 746

Notes:

1. Rexim’s directors have undertaken a reassessment of the useful lives of non-

current tangible assets during the year. In most cases, they estimate that the
useful lives have increased and the depreciation charges in 2018 have been
adjusted accordingly.

2. Six new stores have been opened during 2018, bringing the total to 42.

3. Four key ratios for the supermarket sector (based on the latest available
financial statements of twelve listed entities in the sector) are as follows:

(i) Annual sales per store: Rs27·6m

(ii) Gross profit margin: 5·9%
(iii) Net profit margin: 3·9%
(iv) Non-current asset turnover (including both tangible and intangible non-
current assets): 1·93

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Required:
(a) Prepare a report, addressed to the investor, analysing the performance and
position of Rexim based on the financial statements and supplementary
information provided above. The report should also include comparisons to the
key sector ratios, and it should address the investor’s concerns about the
possible manipulation of the 2018 financial statements.

(30 marks)

(b) Explain the limitations of the use of sector comparatives in financial analysis.

(5 marks)
(c) Briefly discuss the framework available for financial analysis.
(5 marks)

SECTION B
ANSWER ANY TWO (2) QUESTIONS

QUESTION 2 (30 MARKS)

(a) The Balance Sheets of three entities, P S and A are produced below.

Balance sheets as at 31 December 2018

P S A
Rs’000 Rs’000 Rs’000
Non-current assets
PPE 50 40 45
Investment in S at cost 75 0 0
Current assets 45 60 20
170 100 65

Ordinary share capital (Rs1) 100 40 25

Accumulated profits 60 30 20
Current liabilities 10 30 20
170 100 65

P acquired 80% of the shares in S on 31 December 2017 at a cost of Rs60,000 and

25% of the share capital of company A on the same date at a cost of Rs15,000. P
controls S and exercises significant influence over A. At the time of acquisition, S’s
profits stood at Rs10,000 and an item of PPE in the books of S was undervalued by
Rs10,000. This item of PPE had a remaining useful life of 5 years at date of acquisition.

Page 4 of 7
At the time of acquisition, A’s profits stood at Rs15,000 and the net assets of A at that
date were deemed to reflect fair values. Goodwill in S is deemed to have been
impaired by 20% since the date of acquisition. The fair value of non-controlling interest
at 31 December 2017 was Rs15,000. There was no impairment in the investment in
the associate.

During the year ended 2018, S sold goods to P for Rs10,000 and P still has 40% of
the goods in stock at balance sheet date. S applies a margin of 25% on all sales.

Required:

Prepare a Consolidated Statement of financial position at 31 December 2018.

(20 marks)

(b) Discuss the disclosures required for business combinations, as per IAS 27
Separate Financial Statements.
(10 marks)

QUESTION 3 (30 MARKS)

(a) The objective of IAS 37 is to ensure that appropriate recognition criteria and
measurement bases are applied to provisions and contingent liabilities and that
sufficient information is disclosed in the notes to the financial statements to
enable users to understand their nature, timing and amount.

In relation to IAS 37, briefly explain your understanding of the following:

(i) Measurement of a Provision (5 marks)

(ii) Contingent liabilities and their accounting treatment (5 marks)

(b) Rex Contracting Ltd has a fixed price contract to build a tower block. The initial
amount of revenue agreed is Rs220m. At the start of the contract on 1 January
2017 the initial estimate of the contract costs is Rs200m. At the end of 2017 the
estimate of the total costs has risen to Rs202m.

During 2018 the customer agrees to a variation which increases expected

revenue from the contract by Rs5m and causes additional costs of Rs3m. At
the end of 2018, there are materials stored on the site for use during the
following period which cost Rs2.5m.

Page 5 of 7
 Rex Contracting Ltd have decided to determine the stage of completion of the
contract by calculating the proportion that contract costs incurred for work to
date bear to the latest estimated total contract costs. The contract costs
incurred at the end of each year were as follows: 2017, Rs52.52m; 2018,
Rs154.2m (including materials in store); 2019, Rs205m.

Required:

Compute the stage of completion for each year of the contract and show how
revenues, costs and profits will be recognised in each year, according to the
requirements of IAS 11 Construction Contracts.
(20 marks)

QUESTION 4 (30 MARKS)

(a) Rex Ltd prepares its accounts to 31 March each year and the trial balance
extracted on 31 March 2019 showed the following balances before final
adjustments
Dr Cr
Rs’000 Rs’000

Building at cost on 1 April 2018 40,000

Accumulated depreciation on Building at 1 April 2018 6,000

Additional information not yet incorporated in the above trial balance:

The property at cost figure of Rs 40m in the above list of balances consists of:

Property I
An administrative building with the following details at 31 March 2018:

Cost Rs20,000,000
Accumulated depreciation Rs 6,000,000

The building has been depreciated straight line at 2% per annum. On 30

September 2018, the building is revalued to Rs20,700,000 with no change in
the building’s remaining useful life.

These adjustments have not yet been incorporated in the books.

Property 2
Another wing to the administrative building (costing Rs20,000,000) was built
and completed on 31 March 2019. Although the new wing was available for use
on 1 April 2019, it was not actually used until early May 2019. The building has
a useful economic life of 50 years. The cost of the building includes
Rs4,800,000 for the air conditioning system and Rs5,200,000 for the lifts. The

Page 6 of 7
 air conditioning system and the lifts have a respective useful life of 9 years and
10 years respectively. However, the air conditioning system will be subject to a
major inspection every 3 years to ensure its continued use. The inspection is
expected to cost Rs300,000 in 3 years’ time.

Required:

Compute the carrying amount of property, plant and equipment for Rex Ltd at
31 March 2019.
(15 marks)

(b) On 1 January 2018, Rexon entered into two leasing contracts, effective from
that date, details of which are as follows:

Contract 1
An operating lease for mobile lifting equipment for use in the finished goods
warehouse at an annual rental of Rs45,000 payable in advance on the 1st
January of each year for a period of six years.

Contract 2
A finance lease for plant at an annual rental of Rs200,000 payable in arrears
for a period of five years. The initial fair value of the plant was Rs721,000.
Finance charges are at the rate of 12% pa. Depreciation is provided at the
rate of 20% per annum on a straight-line basis assuming no residual value.

Rexon has a calendar year end.

Required:

(i) Prepare journal entries in the books of Rexon to record the relevant
leasing transactions for the years ended 31 December 2018.

(ii) Prepare the relevant extracts of the statement of financial position of

Rexon in respect of the above leasing contracts at 31 December 2018.
Show all workings.
(15 marks)

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