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No of pages: 14

Corporate Level
Financial Reporting & Governance
(Pilot Paper)

Instructions to candidates

C
1) Time allowed : 3 hours

2) Section 1: 10 questions- All questions are compulsory

Section 2: 4 questions- All questions are compulsory

L
Section 3: 2 questions- Both questions are compulsory

3) Answers to question papers should be in the answer booklet provided. Begin each

answer on a separate page.

4) All answers should be in English

2
Begin each answer on a separate page in the answer booklet. Submit all workings.
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 2020

- Open Book Referential - Student Version (Sri Lanka Statement of Recommended
practice, IFRICs and SICs)
- Code of Best Practice on Corporate Governance 2017
- A Guide to Corporate Governance in Small and Medium Enterprises 2019
- Code of Ethics 2016
- Sri Lanka Accounting Standard for SMEs 2015
- Sri Lanka Accounting Standard for Smaller Entities - 2015

5) Students are allowed to bring permitted publications that are highlighted, sidelined,
or underlined. Short notes written on the permitted publications will also be
allowed. Page tags may be used to refer to the pages. Short notes pasted on the
permitted publications are not allowed.

6) Notes, textbooks (other than permitted publications), or any other material will not
be allowed. Photocopies/extracts of the above publications will not be allowed.

7) Answers that are written on the answer booklets, graph papers, and any other
stationery distributed at the examination hall, only, are considered when marking of
the answer scripts. Any other attached documents are not taken into account at the
time of marking the answer scripts. Page 1 of 14
 Section 1

All ten questions are compulsory

Total marks for this section - 1: 20 marks
Recommended time for section 1 is 36 minutes

Question 01
Select the best answer for question No. 1.1 to 1.7. Write the number of the selected
answer in your answer booklet along with the number assigned to the question.
1.1 Which of the following statements are correct with regard to the code of best practice
on corporate governance
A. The chairman and CEO of the company cannot be the same person
B. For companies listed in the DIRISAVI board, the board should have at least three
non-executive directors
C. A director is independent if he holds not less than 5% of voting shares of the
company
D. A director is independent if he carries a transaction or transactions equivalent or
less than 5% of the total turnover of that company.

1.2 On 31st March 2019, it was discovered that damage to the machine was worse than
what was expected. The machine is now considered to be worthless and the
recoverable amount of the factory as a cash-generating unit is estimated to be Rs
900,000.
At 31st March 2019, the cash-generating unit comprises the following assets:
Rs’000
Building 500
Plant and equipment (including the damaged machine at a carrying amount of
Rs 45,000) 345
Goodwill 55
Net current assets (at recoverable amount) 200
––––––
1,100
––––––
Under LKAS 36, what will be the carrying amount of ABC’s plant and equipment when the
impairment loss has been allocated to the cash-generating unit?

A Rs262,500
B Rs 200,000
C Rs270,000
D Rs300,000

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1.3 Which of the following will be treated as a subsidiary of Parent Plc as of 31st March
2018?
(1) The acquisition of 60% of the Albion equity share capital on 1 March 2018.
Albion activities are significantly different from the rest of the Parent Plc group
of companies

(2) The offer to acquire 70% of Saman Plc’s equity share capital on 1 November
2017. The negotiations were finally signed off during June 2018

(3) The acquisition of 45% of Janath Plc’s equity share capital on 31 December 2017.
Parent PLC is able to appoint three of the ten members to Janath Plc board

A. 1 only
B. 2 and 3
C. 3 only
D. 1 and 2

1.4 The following two issues relate to Abekoon Plc mining activities:

Issue 1: Abekoon Plc began operating a new mine in January 2019 under a five-year
government license that required Abekoon Plc to landscape the area after mining ceased at
an estimated cost of Rs 500,000.

Issue 2: During 2018/2019, Abekoon Plc mining activities caused environmental pollution
to an adjoining piece of government land. No legislation requires Abekoon Plc to rectify this
damage. However, Abekoon Plc has a published environmental policy which includes
assurances that it will do so. The estimated cost of the rectification is Rs. 1,000,000

Under LKAS 37 Provisions, Contingent Liabilities and Contingent Assets, which of the
following statements are correct in respect of the financial statements for the year ended
31 March 2019 of Abekoon Plc?

A. A provision is required for the cost of issues 1 and 2

B. Both issues 1 and 2 require disclosure only
C. A provision is required for the cost of issue 1 but issue 2 requires disclosure only
D. Issue 1 requires disclosure only and issue 2 should be ignored

1.5 Which of the following may not be capitalized as part of the cost of Abekoon
Development Plc's new head office?

A. The retirement benefit costs of Abekoon Development Plc's employees who were
involved in building the head office
B. The cost of identifying an appropriate site for the head office
C. Architects' fees
D. Costs of removing the old property on the chosen site

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1.6 On 1st April 2018, Sayuni Plc borrowed Rs 10m for a one-year term, exclusively to
finance the construction of a new piece of production equipment. The interest rate on
the loan is 15% and is payable on the maturity of the loan. The construction
commenced on 1 July 2018 but no construction took place between 1st December 2018
to 31st January 2019 due to employees taking industrial action. The asset was available
for use on 28 February 2019 with a construction cost of Rs.10m. Production equipment
depreciates 12% on cost annually. The opening ceremony for the production equipment
was held on 01st April 2019.

What is the carrying amount of the production equipment in the statement of the
financial position of Sayuni Plc as of 31st March 2019?

A Rs.10,890,000
B Rs. 10,750,000
C Rs.11,000,000
D Rs. 10,642,500

1.7 Lasanthi Water PLC has a 75% investment in Pure Water Ltd, which in turn has a 60%
investment in Dream Water Ltd. Sakuni Perera is the sales director of Lasanthi Water
PLC, and her husband is the chief operating officer of Gaya Homes PLC. To which of the
companies is she related as per LKAS 24 -Related party disclosures?

A Lasanthi Water PLC

B Lasanthi Water PLC and Gaya Homes PLC
C Lasanthi Water PLC, Gaya Homes PLC, and Pure Water Ltd
D Lasanthi Water PLC, Gaya Homes PLC, Dream water Ltd, and Pure Water Ltd

Fill in the blanks using your calculation and select the most suitable word from the
words given within brackets for question No. 1.8 to 1.10. Write the answer for the
blanks and selected word in your answer booklet along with the number assigned to
the question:

1.8 A company acquired shares in a trading partner on 1st September 2018 as part of a
long-term strategy to gain significant influence. The cost of the investment was
Rs.250million and transaction costs amounted to Rs. 10million. The shares had a fair
value of Rs. 265million on 31 March 2019. The amount recognized in the statement for
the year ended 31 March 2019 if the company makes the available selection regarding
the measurement of shares is (a)Rs…………….million in (b)……………… ..(Profit or loss/
OCI).

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1.9 Chandima Ltd operates a defined Retirement Benefit for its employees. On 31st March
2019, the company was advised by actuaries that the fair value of plan assets was Rs.
20.5million. The present value of the defined benefit obligation was Rs. 17.4million and
the present value of future economic benefits in relation to the plan were Rs. 2.5million.
The amount recognized in the statement of the financial position of Chandima Ltd on 31
March 2019 in respect of the defined benefit plan is (a)Rs. …………………
Million(b)…………..(asset/Liability)

1.10 Panaroma Plc acquired 750,000 shares out of 1,000,000 shares of Samowa Plc on 1st
April 2018 immediately making a cash payment of Rs. 250m and deferred
consideration of Rs 100m payable on 31st March 2021. At that date, the carrying
amount of the net assets of Samowa Plc was Rs. 350m and the market value of a share
in Samowa Plc were Rs. 370. The cost of the capital of Panaroma Plc is 10%. What is
the value of goodwill that arises on the acquisition if the NCI is measured at fair value?

…………………………………………………………

(Total: 20 marks)

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 Section 2

All four questions are compulsory

Total marks for this section 2: 40 marks
Recommended time for section 2 is 72 minutes

Question 02

(a) Tesla Energy (Pvt) Ltd (TE) is a rooftop solar installer and importer of solar-related
products. It prepares its financial statements in accordance with SLFRS for SMEs. The
operating results of the entity have deteriorated for two consecutive years including
the year ended 31 March 2019. Presently the entity is facing a challenging time in
business operations. As a result, going-concern issues are noted. A director has
inquired the accountant of TE whether any issue on going-concern should be
disclosed even though the entity prepares its financial statements in accordance with
SLFRS for SMEs.

Required:
Advise the director regarding the going-concern disclosure in accordance with SLFRS
for SMEs.
(4 marks)

(b) Solid Star PLC (SSP) is in the process of finalizing its financial statements for the year
ended 31 March 2019. The following issue has not been yet resolved. During the year
SSP introduced two Retirement Benefit schemes to its employees, details of which are
given below.

Scheme 1
This is a retirement benefit plan for employees where SSP and its employees have to
contribute 8% and 12% of annual salaries respectively. These contributions will be
invested in plan assets. Under this scheme, employees are entitled to a specific
proportion of such plan assets at retirement. This in turn depends on the performance
of investments.

Scheme 2
This is also a retirement benefit plan where SSP and its employees have to contribute
10% and 15% of annual salaries respectively. These contributions will be invested in
plan assets. The amount of the Retirement Benefit paid to retirees is determined by
referring to their period of service. If the plan does not have sufficient funds to meet
the Retirement Benefit liability, SSP is obliged to fund the shortfall.

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 Required:

Advise the management of SSP on the following:

(I)Classification of the above Retirement Benefit schemes as per LKAS 19 Employee

Benefits.

(II)The accounting treatment to be used for the Retirement Benefit schemes.

(6 marks)

(Total: 10 marks)

Question 03

(a) “Some financial instruments contain elements of both, liability and equity. e.g.,
LKAS-32 Financial Instruments. Presentation requires segregating these two
elements and disclosing them separately.”

Required: Explain the reason for separately identifying liability and equity elements
of compound financial instruments.
(2 marks)

(b) Dream Light PLC issued 200,000 convertible bonds on 31st March 2018. The bonds
have a three-year term and are issued at par with a face value of Rs. 1,000 per bond,
giving total proceeds of Rs. 200,000,000. Interest is payable annually at a nominal
annual rate of 6%. Each bond is convertible up to maturity into 500 ordinary shares
at any time. When the bonds were issued, the prevailing market interest rate for a
similar bond without conversion options was 9%.

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Required

1. Calculate the value of the equity component in the bond.

(3 marks)
2. Advice Dream Light PLC as to how the above bonds should be presented in
financial statements based on the calculations (1) above as at 31st March 2018.
(3 marks)
3. Two years after issuing the bonds, Dream Light PLC found that there is less
likelihood of exercising conversion options. Explain whether the presentation of
the above bonds would be changed in the third year.
(2 marks)
(Total: 10 marks)

Question 04

You have been given the following information on Sun Solar Power (Pvt) Ltd
concerning the current and previous financial years.

31 March 2018 31 March 2017

Current ratio 2.05 1.85

Quick ratio 0.80 1.11
Debtors collection period 35 days 28 days
Creditors payment period 29 days 31 days
Inventory turnover period 106 days 70 days

Required:
(a) Assess the liquidity position and efficiency of Sun Solar Power (Pvt) Ltd using
the above information.
(6 marks)
(b) Discuss the main aspects of an Integrated Report according to the IR
Framework
(4 marks)
(Total: 10 marks)

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Question 05

The following situations are relevant to Sachila Engineering Holdings PLC (SHE) for the
year ended 31 march 2019. You are handling the following situation as reporting
accountant of SHE Plc.

Subsidiary fair value adjustments

When completing the consolidated financial statements, the director has suggested that
there should be no positive fair value adjustments for a recently acquired subsidiary and
has stated that the accountant’s current position is dependent upon following these
instructions. The fair value of the subsidiary is Rs 500 million above the carrying amount in
the financial records. The reason given for not fair valuing the subsidiary’s net assets is that
goodwill is an arbitrary calculation that is meaningless in the context of the performance
evaluation of an entity.

Goodwill impairment calculation

When preparing the annual impairment tests of goodwill arising on other subsidiaries, the
director has suggested that the accountant is flexible in the assumptions used in calculating
future expected cash flows, so that no impairment of goodwill arises and that the
accountant should use a discount rate which reflects risks for which future cash flows have
been adjusted. He has indicated that he will support a salary increase for the accountant if
he follows his suggestions.

Required:
Discuss the ethical and accounting implications of the above situations from the
perspective of the reporting accountant.

(Total: 10 marks)

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 Section 3

Both questions are compulsory

Total marks for this section 3: 40 marks
Recommended time for section 2 is 72 minutes

Question 06
Pencil PLC (Pencil) is a large public limited company based in Sri Lanka. It has
shareholdings in two other companies; Sun Green PLC (Sun) and Albion PLC (Albion).
Statements of financial position as at 31 March 2019 are given below for all three
companies.
Pencil Sun Albion
Rs. ʽ000 Rs. ʽ000 Rs. ʽ000
Assets
Non-Current Assets
Property, plant and equipment 200,000 55,000 48,000
Investments 90,000 30,000 -
290,000 85,000 48,000
Current assets
Inventories 44,000 24,000 14,000
Trade and other receivables 38,000 21,000 18,000
Cash and cash equivalents 6,000 5,000 -
88,000 50,000 32,000
Total assets 378,000 135,000 80,000
Equity and liabilities
Equity
Stated capital 180,000 75,000 30,000
Retained earnings 125,000 20,000 15,000
305,000 95,000 45,000
Non-current liabilities
Deferred Tax Liabilities 7,000 4,000 8,000
Interest Bearing borrowings 43,000 20,000 22,000
50,000 24,000 30,000
Current liabilities
Trade and other payables 19,000 16,000 5,000
Bank overdraft 4,000 -
23,000 16,000 5,000
Total equity and liabilities 378,000 135,000 80,000

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The following additional information is to be taken into account insofar as it is relevant:

(i) Pencil bought 80 million out of the 100 million ordinary shares in Sun on 1st April
2018. The consideration consisted of an immediate cash payment of Rs. 60 million
together with a deferred payment of Rs. 40 million due on 1st April 2021. The
immediate cash payment of Rs. 60 million has been recorded under ‘investment’,
but deferred payment has not been accounted for. Pencil’s cost of capital is
estimated to be 10%.

(ii) At the date of acquiring Sun, the fair value of its land & building was considered to
be Rs. 10 million more than the value in Sun’s statement of financial position. Sun
had acquired the property in April 2008 and the building element (comprising 50%
of the total value) is depreciated on cost over 50 years. Further, Sun’s investments
carried at Rs. 30 million had a fair value of Rs.32 million at the acquisition date. The
value of the investments has not changed since the acquisition date. Disposal gain
on the investment is liable for income tax at 10% capital gain tax rate. Disposal gain
of the building is taxed at the rate applicable to the company. Disposal gain on land
is liable for income tax at 10% capital gain tax rate. Consider deferred tax
implications, if any, from the above adjustments.

(iii) Group accounting policy is to value non-controlling interests at fair value as at the
date of acquisition, and goodwill to be calculated accordingly. On 1st April 2018, the
non-controlling interest in Sun was fair-valued at Rs. 15 million. The management
assessed that 20% of the value of goodwill in Sun was impaired as of 31 March
2019.

(iv) Pencil bought 20 million out of the 50 million ordinary shares in Albion on 1 July
2018, paying an amount of Rs. 30 million in cash for these shares. This investment
has been correctly recorded at cost. Pencil exercises joint control over its
investment in its joint venture, Albion.

(v) The stated capitals of Sun and Albion have not changed since their respective dates
of acquisition. The retained earnings were as follows on the respective acquisition
dates.

Sun: Rs. 12 million, Albion: Rs. 8 million.

(vi) During the financial year ended 31st March 2019, Sun sold to Pencil goods
amounting to Rs. 8 million. These goods were sold inclusive of a mark-up of 25% on
cost. 40% of these goods remained in the stock of Pencil at the reporting date. Since
acquiring its holding in Albion, Pencil purchased Rs. 5 million of goods from Albion,
which had cost Albion Rs. 4 million. All of these remained in inventory at the
reporting date. Ignore the deferred tax implication if any from the above
adjustments.

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(vii) There was an intra-group balance of Rs. 5 million owed by Pencil to Sun at year-end.
An amount of Rs. 3 million was owed by Pencil to Albion at the reporting date.

(viii) The income tax rate applicable to the group is 40%

Required:
Prepare the consolidated statement of financial position of Pencil as of 31 March 2019.
(Total: 20 marks)

Question 07
Dream Holding PLC (DHP) is a diversified company listed in the Colombo stock exchange
and you are its Finance Manager. The company has business around the world. The
following matters need to be properly addressed to finalize the financial statements for the
year ended 31st March 2019. Required calculations need to be provided where necessary
to support your explanations/recommendations/advice.
(i)Sales contract
DHP has entered into a sales contract for the construction of an asset with a customer
whereby the customer pays an initial deposit. The deposit is refundable only if DHP fails to
complete the construction of the asset. The remainder is payable on delivery of the asset. If
the customer defaults on the contract before completion, DHP has the right to retain the
deposit. The managing director believes that, as completion of the asset is performed over
time, revenue should be recognized accordingly. He has persuaded the accountant to
include the deposit and a percentage of the remaining balance for construction work in
revenue to date

(II) Property, Plant & equipment

DHP changed the measurement basis for land and buildings from the cost model to the
revaluation model from 31st March 2019. DHP shows land and buildings as two separate
line items in its financial statements. Based on the valuation of land and buildings carried
out at year-end, the remaining useful life of the buildings was reassessed as 25 years. This
is five years more than the remaining useful life based on the original assessment.

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The following information is extracted from the financial statements

As of 31 March 2019 Land Buildings

Cost 8,000,000 30,000,000
Accumulated depreciation - (15,000,000)
as at 31 March 2019
Written down value as at 31 8,000,000 15,000,000
March 2019
Fair value as at 31 March 7,000,000 18,000,000
2019

(III) Manufacturing facility and head office

DHP is committed to a plan to sell its head office building, and on 31 March 2019 had
engaged the services of an agent to locate a buyer. DHP Industries is having a new head
office constructed and will use the existing building until the completion of its new
premises. When DHP Industries vacates the property, the existing head office will be
transferred to a buyer.

(IV)Segment Reporting
The results of the regional segments for the year ended 31 March 2019 are as follows.
Rs. Million
Revenue Segment
results
External Internal profit/(loss) Segment Segment
assets Liabilities
Europe 200 10 (15) 500 200
Asia 300 15 30 600 150
Other Regions 380 5 25 450 170

There were no significant intra-group balances in the segment assets and liabilities. The
company sets individual performance indicators for each region.

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Required

1. Under the Sri Lanka Accounting Standards SLFRS 15 Revenue from Contracts with
Customers, discuss whether revenue arising from the sales contract should be
recognized on a stage of completion basis.
(6 Marks)

2. Explain the financial reporting impact of changing the measurement basis for land
and buildings and the useful life of the buildings based on the information provided
in (ii) above.
(4 Marks)

3. Assess whether the manufacturing facility and head office can be classified as 'held
for sale' on 31 March 2019.
(4 Marks)
4. Discuss how the principles in SLFRS 8 Operating Segments for the determination of
a company's reportable operating segments would be applied for DHP, using the
information given above
(6 Marks)
(Total: 20 marks)

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