PROBLEM SOLVING SESSION

CORPORATE REPORTING C1

FOR NOV 2019 EXAMS

[SET 2]
Prepared By: Godson Leonard: MBA (Finance), Bachelor of Accounting (Hons), CPA (T) &
Mshana Ally A.: MFA- (OG), B.Com Accounting (Hons), CPA (T), ATEC (II) |Phone1: +255 717 / 769 348 616 | Phone1:
+255 714 965 564 | Email: info@covenantfinco.com |Website: www.covenantfinco.com
 COVENANT FINANCIAL CONSULTANTS PROBLEM SOLVING SESSION [SET 2]

QUESTION ONE [1]

a. Related party relationships and transactions are a normal feature of business.
Enterprises often carry on their business activities through subsidiaries, joint ventures
and associates; and it is inevitable that transactions will occur between group
companies.
The objective of IAS 24, Related party disclosures is to ensure that an entity’s financial
statements contain the disclosures necessary to draw attention to the possibility that
its financial position and profit or loss may have been affected by the existence of
related parties and by transactions and outstanding balances, including commitments,
with such parties.
Required:
(i) Briefly explain who is a related party according to IAS 24, related party
disclosures. Your explanation should clearly identify persons and entities that
are related parties to a reporting entity.
(ii) Justify why the disclosure of related party relationships and transactions is an
important issue in corporate reporting.
(iii) Discuss the view that small companies should be exempt from the disclosure
of related party relationships and transactions on the ground of size.

b Discuss whether the following events would require disclosures in the financial
statements of the CFC group, a public limited company under IAS 24 related party
disclosures.
The CFC group, investment bankers, has a number of subsidiaries, joint ventures and
associates in its group structure. During the financial year to 31st October 2019 the
following events occurred:-
i. The company agreed to finance a management buyout of a group company, AB
limited company. In addition to providing loan finance, the company has
retained a 25% equity holding in the company and has a main Board director on
the board of AB. CFC received management fees, interest payments and
dividends from AB.
ii. On 1st July 2019, CFC sold a whole owned subsidiary, X, a limited company, to
Z, a public limited company. During the year CFC supplied X with second hand
office equipment and X leases it’s factory from CFC. The transactions were all
contracted for at market rates.

Prepared By: Godson Leonard: MBA (Finance), Bachelor of Accounting (Hons), CPA (T) &
Mshana Ally A.: MFA- (OG), B.Com Accounting (Hons), CPA (T), ATEC (II) |Phone1: +255 717 / 769 348 616 | Phone1:
+255 714 965 564 | Email: info@covenantfinco.com |Website: www.covenantfinco.com Page | 1
 COVENANT FINANCIAL CONSULTANTS PROBLEM SOLVING SESSION [SET 2]

QUESTION TWO [2]

On 1st April 2017 Bushka Ltd. Owned 75% of the equity share capital of Note ltd. And
80% of the equity share capital of El co. On 1st April 2018 Bushka Ltd purchased the
remaining 25% of the equity shares of Note ltd. In the two years ended 31st March 2019
the following transactions occurred between the three companies:-
a. On 30th June 2017 Bushka Ltd manufactured a machine for use by Note ltd. The cost
of manufacturing was TAS 20,000. The machine was delivered to Note ltd for an
invoice price of TAS 25,000. Note Ltd paid the invoice on 31st August 2017. Note ltd.
depreciated the machine over its anticipated useful life of five years, charging a full
years’ depreciation in the year of purchase.
b. On 30th September 2018 Note Ltd sold some goods to El co. at an invoiced price of
TAS 15,000. El co. paid the invoice on 30th November 201. The goods had cost Note
ltd. TAS 12,000 to manufacture. By 31st March 2019 El co. had sold all the goods
outside the group.
c. For each of the two years ended 31st March 2019, Bushka Ltd provide management
services to Note ltd. and El co. Bushka ltd. Did not charge for these services in the
year ended 31st March 2018 but in the year ended 31st March 2019 decided to impose
a charge of TAS 10,000 per annum to El lt. the amount of TAS 10,000 is due to be
paid by EL on 31st May 2019.

Required:
Summarize the Related Party Disclosures which will be required in respect of transactions
(a) to (c) above for both of the years ended 31st March 2018 and 31st March 2019 in the
financial statements of Bushka Ltd., Note Ltd. and El co.

Note: You may assume that Bushka Ltd. presents consolidated financial statements for
both years dealt with in the question.

QUESTION THREE [3]

a. The CEO of Tuwimba Plc. who is based at the corporate headquarters has decided that
the company will be managed and controlled through three divisions, namely, the
spare parts division, the workshop division, and the sales division. Both the sales
division and the workshop division deal with external customers and handle orders of
both walk-in customers as well as long-term customers who have purchased cars
through earlier sales through this dealership. The entity’s spare parts division,
however, only supplies spare parts to the workshop division and does not cater to the
demands of any outside customers. In other words, if outside customers desire to
Prepared By: Godson Leonard: MBA (Finance), Bachelor of Accounting (Hons), CPA (T) &
Mshana Ally A.: MFA- (OG), B.Com Accounting (Hons), CPA (T), ATEC (II) |Phone1: +255 717 / 769 348 616 | Phone1:
+255 714 965 564 | Email: info@covenantfinco.com |Website: www.covenantfinco.com Page | 2
 COVENANT FINANCIAL CONSULTANTS PROBLEM SOLVING SESSION [SET 2]

purchase spare parts directly from the spare parts division of Tuwimba, they cannot
do so unless their automobiles are serviced by the workshop division of Tuwimba and
the workshop division (of Tuwimba) purchases spare parts from its spare parts
division for the purposes of undertaking repairs of vehicles they have been contracted
to undertake repair work for. The CEO of Tuwimba is responsible for allocating
resources and assessing performance based on the results of the three divisions; for
which Tuwimba’ s financial controller maintains separate and discrete financial
information.
The CEO is seeking your advice on how to determine the number of operating
segments applicable to Tuwimba. She specifically wants clarification on whether the
corporate headquarters and the spare parts division can be identified as operating
segments.
Required: Identify the number of operating segments that are applicable to Tuwimba
based on IFRS 8 Operating Segments.

b. On the other hand the CEO recently attended a seminar and she has prepared a
question for you concerning the issues raised at the seminar

“I was confused regarding a number of references to Fair value and number of

references on the subject. I thought financial statements are prepared on historical cost
basis. Please give me three examples of where fair value might be relevant for us. I was
told the new standard removed an inconsistency in the definition of fair value and
applied three levels of input into measurement of fair values. Please explain how the
new standard defines fair value and what the previous inconsistency was. Please also
explain each level of input and how each level is applied in measuring the fair value
of a particular item in the financial statements.”

Prepared By: Godson Leonard: MBA (Finance), Bachelor of Accounting (Hons), CPA (T) &
Mshana Ally A.: MFA- (OG), B.Com Accounting (Hons), CPA (T), ATEC (II) |Phone1: +255 717 / 769 348 616 | Phone1:
+255 714 965 564 | Email: info@covenantfinco.com |Website: www.covenantfinco.com Page | 3