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No. of pages: 13

Corporate Level
Financial Reporting & Governance
Instructions to candidates

(1) Time allowed: Reading and planning – 15 minutes

Writing – 3 hours
(2) Total: 100 marks

C
(3) All questions are compulsory.
(4) This paper consists of three sections.
Section 1: 10 multiple choice questions (MCQs)
Section 2: 4 questions
Section 3: 2 questions
(5) Answers to all the questions should be in the answer booklet/s given to you.

L
Answers to Question 1 (the most appropriate answer (A, B, C or D)) should be
entered in the answer booklet against the relevant question number.
(6) Begin each answer in Section 2 and Section 3 on a separate page in the answer
booklet.
(7) The examination will be conducted as an open book examination and only the

2
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 FEBRUARY
(8) Candidates are allowed to bring or use the above permitted publications subject
to the following:
2021
 Highlighting, sidelining and underlining relevant sections in the publications
are allowed. Short notes in the permitted publications are allowed, only if
they are handwritten and are relevant to a particular paragraph or section in
the publication which explains that paragraph or section. Any other notes
written on the publications are not allowed.
 Attaching, pasting or inserting any other documents to the permitted
publications are not allowed.
 Page tabs to refer the pages are allowed.
(9) Notes, textbooks (other than permitted publications) or any other materials will
not be allowed. Photocopies/extracts of the above publications will not be
allowed.
(10) All answers should be in the English language in the answer booklet/s given to
you.
(11) Answers written on the answer booklets, graph papers and any other stationery
distributed at the examination hall, only, are considered in marking of the
answer scripts. Any other attached documents are not taken into account at the
time of marking the answer scripts.

(6) All answers should be in the English language in the answer

 SECTION 1

All questions are compulsory.

Total marks for Section 1 is 20 marks.
Recommended time for the section is 36 minutes.

Question 01

1.1 A Board of Directors of a company listed on the Colombo Stock Exchange is in

the process of appointing members to the audit committee. The following are the
details of the directors.

Ramesh: Chairman (Executive)

Gayan: Independent non-executive director (Fellow chartered marketer)
Piyal: Executive director (Fellow chartered accountant)
Praveen: Independent non-executive director (Fellow chartered accountant)
Kamal: Independent non-executive director (Engineer)
Kaveen: Executive director (Lawyer)

Who are the directors that should be appointed to the audit committee?

A. Gayan, Piyal and Praveen

B. Ramesh, Praveen and Kamal
C. Gayan, Praveen and Kamal
D. Praveen, Kaveen and Kamal
(2 marks)

1.2 You have been given the following information about a few companies.

(i) A company listed on the Colombo Stock Exchange which has a turnover of
Rs. 100 million
(ii) A leasing company which has 100 employees
(iii) A privately owned company which at the end of the previous financial
year, had gross assets of Rs. 400 million
(iv) Public corporations engaged in the sale of goods or the provision of
services
(v) A privately owned company which at the end of the previous financial
year, had liabilities to banks and other financial institutions of
Rs. 50 million

Which of the above companies are required to prepare financial statements in

compliance with Sri Lanka Accounting Standards per Sri Lanka Accounting and
Auditing Standards Act No. 15 of 1995?

A. (i), (ii) and (iv) only.

B. (ii), (iii) and (iv) only.
C. (i), (ii), (iii) and (iv) only.
D. (i), (ii), (iii) and (v) only.

(2 marks)
CL2 – February 2021 Page 2 of 13
 1.3 Tiyon (Pvt) Ltd purchased machinery at a cost of Rs. 30 million on
1 January 2019. The useful life of the machinery is 10 years and has no residual
value. Capital allowance is available at the rate of 25% on cost. Tiyon (Pvt) Ltd
also has Rs. 20 million of development cost capitalised on 1 January 2018 which
is amortised over 10 years. These costs have already been deducted in full for
tax purpose in the same year. Tiyon (Pvt) Ltd pays income tax at the rate of 28%.

What is the deferred tax asset/liability as at 31 December 2019?

A. Deferred tax liability of Rs. 5.74 million

B. Deferred tax liability of Rs. 3.22 million
C. Deferred tax asset of Rs. 5.74 million
D. Deferred tax asset of Rs. 3.22 million
(2 marks)

1.4 Maam Ltd commenced construction of a building on 1 March 2018. On this date,
Maam Ltd received funds borrowed specifically for this construction of
Rs. 25 million at 11% interest p.a. This loan is repayable on 1 March 2020. On
1 July 2019 Maam Ltd used Rs. 10 million from generally borrowed funds.
General borrowings include two bank loans of Rs. 20 million obtained at 12%
interest p.a. and Rs. 15 million at 13% interest p.a. Construction of the building
was completed on 30 October 2019.

What is the borrowing cost to be capitalised per LKAS 23, Borrowing Costs?

A. Rs. 5.914 million

B. Rs. 4.998 million
C. Rs. 5.826 million
D. Rs. 6.743 million
(2 marks)

1.5 K (Pvt) Ltd, on 1 January 2019, granted 100 share options to each of its
20 managers. Each grant is conditional on the manager working for the company
during 3 years of the vesting period until 31 December 2021. Fair value of each
share option at the grant date is Rs. 12. The company expects 10% of the
managers to leave during the three-year period. Two managers left the company
during 2019.

What is the remuneration expense that should be recognised in respect of the

share-based transaction, for the year ended 31 December 2019?

A. Rs. 5,760
B. Rs. 6,480
C. Rs. 7,200
D. Rs. 10,800

(2 marks)

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1.6 The conceptual framework for financial reporting is concerned with general
purpose financial statements.

Which of the following parties are not directly aimed at under the objective of
general purpose financial statements?

A. Existing and potential investors

B. Creditors
C. Lenders
D. General public
(2 marks)

1.7 The following is an extraction from notes to the financial statements of a

company.

“Fair value of the properties was determined using the market comparable
method. The valuations have been performed by the valuer and are based on
proprietary databases benchmarking property prices of transactions of a similar
nature, location and condition. Major adjustments to proprietary databases were
made using significant unobservable inputs in determining the fair value”

Which level of fair value measurement has been applied in the valuation of
above properties?

A. Level 1
B. Level 2
C. Level 3
D. Combination of all levels
(2 marks)

1.8 The following details are related to a machine purchased by a company. Due to
existence of the impairment indications, the management has decided to carry
out an impairment test for the machine.

 The machine has been purchased at Rs. 17.5 million, 3 years ago. At the
inception, both useful life and residual value were assumed to be 8 years
and Rs. 1.5 million, respectively.
 The machine can be sold for Rs. 8 million. However, a sales commission of
5% has to be incurred on the selling price.
 The value in use of the machine is estimated at Rs. 7.5 million.
 The above figures are as at 31 March 2019 unless specifically mentioned.

The impairment provision for the machine as at 31 March 2019 is:

A. Rs. 3.9 million

B. Rs. 4.0 million
C. Rs. 8.4 million
D. Rs. 8.5 million
(2 marks)

CL2 – February 2021 Page 4 of 13

1.9 Luminex PLC has decided to apply modified retrospective approach for its lease
agreements existing as at 1 April 2019. Details pertaining to one of the lease
agreements are given below.

 Rent advance and the rent payable balance as at 31 March 2019 was
Rs. 750,000 and Rs. 500,000 respectively. The rent payable balance was
solely due to outstanding rentals and the company settled the entire
outstanding balance during the 1st week of April 2019.
 Present value of the remaining lease payments as at 1 April 2019 was
Rs. 5,625,000 excluding payments made for the outstanding rent balance
as at 31 March 2019.

Lease liability and right-of-use asset balance of the lease as at 1 April 2019
respectively was:
A. Rs. 5,625,000 and Rs. 6,375,000
B. Rs. 6,125,000 and Rs. 5,875,000
C. Rs. 5,625,000 and Rs. 5,625,000
D. Rs. 6,125,000 and Rs. 6,375,000
(2 marks)

1.10 Which of the following best reflects the main relationship between CA Sri Lanka
and International Accounting Standards Board (IASB), with respect to the
accounting standards setting process?

A. CA Sri Lanka considering International Financial Reporting Standards and

International Accounting Standards issued by IASB when issuing
Sri Lanka Accounting Standards.
B. IASB inviting other professional bodies including CA Sri Lanka to provide
inputs to the standards setting process.
C. CA Sri Lanka being able to issue additional guidance on interpretation of
Accounting Standards which are based on International Accounting
Standards issued by IASB.
D. CA Sri Lanka being able to seek clarifications from IASB on matters
relating to interpretation of International Financial Reporting Standards
and International Accounting Standards.
(2 marks)

(Total: 20 marks)

CL2 – February 2021 Page 5 of 13

 SECTION 2

All questions are compulsory.

Total marks for Section 2 is 40 marks.
Recommended time for the section is 72 minutes.

Question 02

Rotex (Pvt) Ltd is a manufacturing company that meets the SME definition of the SLFRS
for SMEs. Rotex is currently applying the full SLFRSs and the management has decided
to apply SLFRS for SMEs from the financial year ended 31 March 2020 together with the
restated comparative figures of the previous year. The date of transition to the SLFRS
for SMEs is therefore the beginning of the comparative period (i.e. 1 April 2018). The
accountant is not sure as to how the following matters should be reflected in the
financial statements for the year ended 31 March 2020.

(i) Land and buildings classified as property, plant and equipment (PPE) had been
measured under full SLFRSs using the revaluation model. Last revaluation had
been done as at 31 March 2018 and the revalued amounts on that date were as
follows.
 Land: Rs. 120 million (Cost – Rs. 50 million)
 Buildings: Rs. 82 million (Cost – Rs. 75 million)
As at 31 March 2018, the building has a remaining useful life of 10 years. The
management expects to use the cost model for PPE under SLFRS for SMEs.
Depreciation is calculated using the straight-line method.

(ii) Goodwill amounting to Rs. 10 million recognised in the consolidated financial

statements, resulted from an acquisition of a subsidiary on 1 April 2016. This
had been annually tested for impairment as part of the assets of the cash
generating unit, to which goodwill was allocated. So far, there had been no
impairment.

Required:

Apply the requirements of SLFRS for SMEs to the matters in (i) and (ii) above, in
order to determine how the said matters need to be reflected in the financial
statements, for the year ended 31 March 2020. Ignore taxation.

(Total: 10 marks)

CL2 – February 2021 Page 6 of 13

Question 03

Nickie (Pvt) Ltd realised Rs. 1,000,000 in cash from the sale of land on
31 December 2018. Until a suitable investment opportunity is found, Nickie (Pvt) Ltd
decided to invest the cash in medium term bonds. On 1 January 2019, it purchased
corporate bonds with a contractual term of 3 years at its par value of Rs. 1,000,000.
Annual coupon rate of these bonds is 9% payable annually on 31 December. Bonds are
redeemable with 5% premium on 31 December 2021. Effective interest rate is 10.5%.
Immediately after a suitable investment opportunity is found, Nickie (Pvt) Ltd intends
selling these bonds. Therefore, the investment period is most likely to be shorter than
the term of the bonds. However, if a suitable investment opportunity is not found,
Nickie (Pvt) Ltd would hold these bonds to collect interest and the principal amount.
On 31 December 2019, the fair value of these bonds has been reduced to Rs. 950,000.
As at this date, a significant increase in credit risk was not observed and 12 months
expected credit loss of these bonds were estimated as Rs. 30,000. On 1 January 2020,
Nickie (Pvt) Ltd sold these bonds at Rs. 950,000.

Required:
Describe the appropriate accounting treatment for the above bonds as per SLFRS 9,
Financial Instruments, together with the double entries required to be made on
1 January 2019, 31 December 2019 and 1 January 2020.
(Total: 10 marks)

Question 04
You have been given the following scenarios relating to ethical threats.
(i) The accountant of a company is paid bonus based on the results of the financial
statements which are prepared by him.
(ii) The accountant of a company has been asked by the CEO to improve the net
asset position of the company by recognising incorrect fair value gains. He has
also mentioned that the accountant’s year-end performance evaluation has been
received by him and is pending assessment.
(iii) A busy CFO of a company has recruited one of his close family members as the
senior accountant so that he can rely on the senior accountant’s work without
doing a detailed review.
(iv) A CFO of a listed company (listed on the Colombo Stock Exchange) has
instructed the junior accounting team on the amounts to be incorporated in the
financial statements, as values of its properties. It should be noted that the CFO’s
wife is holding a significant number of shares of this company.

Required:
Explain the ethical threat in each scenario and state one (01) action that can be
taken to mitigate the risk of violating ethical principles.
(Total: 10 marks)
CL2 – February 2021 Page 7 of 13
Question 05

Best Food (Pvt) Ltd (BFL) is engaged in the business of buying and selling dairy
products. The following ratios are available for the company and its industry.
Company Company Industry
Ratio FY 2019 FY 2018 FY 2019
Inventory turnover 80 55 65
Total asset turnover 0.7 0.8 0.6
Accounts receivable collection period 125 110 130
Debt-to-equity 0.90 0.85 0.95
Total assets to equity 1.90 1.85 1.95
Interest cover 1.35 1.85 0.85
Profit margin 12% 11.5% 12.5%

Required:

(a) Calculate the following based on the available ratios and comment on it.

 Return on Capital Employed (ROCE) for BFL for the financial year 2018
and 2019
 ROCE for the industry for the financial year 2019
(5 marks)

(b) Discuss the following areas of BFL based on the available information.

 Asset management efficiency

 Solvency
(5 marks)

(Total: 10 marks)

CL2 – February 2021 Page 8 of 13

 SECTION 3

Both questions are compulsory.

Total marks for section 3 is 40 marks.
Recommended time for the section is 72 minutes.

Question 06
Honex PLC (Hon) is a large public limited company based in Sri Lanka. It has
shareholdings in two other companies, Vonex PLC (Von) and Linex PLC (Lin).
Statements of financial position are shown below for all three companies as at
31 March 2019.

Hon Von Lin

Rs. ‘000 Rs. ‘000 Rs. ‘000
Assets
Non-current assets
Property, plant and equipment 940,000 700,000 352,000
Intangible assets 160,000 75,000 35,000
Investments 980,000 - -
2,080,000 775,000 387,000
Current assets
Inventories 200,000 80,000 135,000
Trade and other receivables 150,000 100,000 90,000
Cash and cash equivalents 25,000 30,000 15,000
375,000 210,000 240,000
Total assets 2,455,000 985,000 627,000

Equity and liabilities

Equity
Stated capital 710,000 275,000 245,000
Revaluation reserve 220,000 162,000 28,000
Retained earnings 760,000 114,000 85,000
1,690,000 551,000 358,000
Non-current liabilities
Retirement benefit liability 168,000 52,000 17,000
Long-term borrowings 162,000 118,000 95,000
Other non-current liabilities 72,000 44,000 55,000
402,000 214,000 167,000
Current liabilities
Trade and other payables 298,000 177,000 79,000
Short-term borrowings 65,000 43,000 23,000
363,000 220,000 102,000
Total equity and liabilities 2,455,000 985,000 627,000

CL2 – February 2021 Page 9 of 13

The following additional information is to be taken into account in so far as it is
relevant:

(i) Hon bought 40 million out of the 50 million ordinary shares in Von on
1 April 2018 for Rs. 11.25 per share. A consultancy fee of Rs. 8 million paid on
this acquisition was also included in the carrying amount of investments in
Hon’s financial statements.

(ii) Hon also bought 20 million out of the 40 million ordinary shares in Lin on
1 July 2018, paying an amount of Rs. 12 per share plus a transaction cost of
Rs. 2 million associated with this share purchase. Total payment made on this
acquisition was included in the carrying amount of investments in Hon’s
financial statements. Hon exercises joint control over its investment in joint
venture - Lin.

(iii) The stated capital of Von and Lin has not changed since their respective dates of
acquisition. The retained earnings of Von and Lin at the dates of acquisition were
Rs. 70 million and Rs. 58 million respectively. Also revaluation reserves of Von
and Lin at the dates of acquisition were Rs. 130 million and Rs. 15 million
respectively.

(iv) Group accounting policy is to value non-controlling interest at fair value at the
dates of acquisition, and goodwill should be calculated accordingly. On
1 April 2018, the non-controlling interest in Von was fair-valued at
Rs. 112.5 million. The management assessed that 25% of the value of goodwill in
Von was impaired as at 31 March 2019.

(v) On the acquisition date, the fair value of the assets of Von were equivalent to
their carrying amounts with two exceptions. A motor vehicle with a four-year
remaining useful life which was worth Rs. 10 million in excess of its carrying
value. Also, a land with a carrying amount of Rs. 125 million and a fair value of
Rs. 150 million. These fair value adjustments have not been reflected in the
individual financial statements of Von.

(vi) During the financial year ended 31 March 2019, Hon had sold goods to Von
amounting to Rs. 30 million. These goods were sold inclusive of a mark-up of
25% on cost. 40% of these goods remained in the stock of Von at the reporting
date. Since acquiring its holding in Lin, Hon sold goods with a margin of 25% to
Lin which had cost Lin Rs. 6 million. All of these remained in the inventory at the
reporting date.

(vii) Carrying value of investments of Hon includes costs incurred on acquisitions of

shares of both Von and Lin. The balance amount represents the carrying value of
quoted investments made with the expectation of obtaining short term gains by
trading. However, the fair value of these investments at the end of reporting
period was Rs. 278 million.

(viii) Ignore tax effects of above transactions/adjustments unless specifically

mentioned.

CL2 – February 2021 Page 10 of 13

 Required:

Prepare the consolidated statement of financial position of Honex PLC as at

31 March 2019.

(Total: 20 marks)

CL2 – February 2021 Page 11 of 13

Question 07

Winnie PLC is in the process of preparing financial statements for the year ended
31 March 2020. The following accounting issues are yet to be resolved.

(i) Winnie PLC has relocated its operations in Horana to Malabe. Due to this, land and
building used as the head office in Horana was rented out to a third party on
1 August 2019. Winnie PLC measures land and building at fair value irrespective
of the classification as property, plant and equipment or investment properties.
The following details are relevant for the head office property which is currently
shown under property, plant and equipment:

 Fair value as at 31 March 2020 is Rs. 350 million (land – Rs. 230 million,
building – Rs. 120 million)
 Fair value as at 1 August 2019 is Rs. 300 million (land – Rs. 210 million,
building – Rs. 90 million)
 Fair value as at 1 April 2019 is Rs. 270 million (land – Rs. 200 million,
building – Rs. 70 million). As at this date, remaining useful life of the
building is 15 years.
 Cost of the property is Rs. 102 million. (land – Rs. 50 million, building –
Rs. 52 million)

(ii) Winnie PLC has a pension plan for it’s employees. The following details are
relevant to the pension plan.

 Fair value of the plan asset and the present value of the pension liability as
at 1 April 2019 were Rs. 12.1 million and Rs. 12.5 million respectively.
 Current service cost for the year ended 31 March 2020 as estimated by the
actuary is Rs. 1.2 million.
 Past service costs due to the change in the pension plan so as to increase
benefits (vesting is immediate) as estimated by the actuary is Rs. 1 million.
 Expected return on plan asset is 8% whereas discount rate used for pension
liability is 11%.
 During the year, Rs. 5 million was paid as benefits to the members of the
plan. Winnie PLC paid Rs. 4 million as contribution to the pension plan
including the past service cost of Rs. 1 million.
 Fair value of the plan asset and the present value of the pension liability as
at 31 March 2020 were Rs. 13.1 million and Rs. 14.5 million respectively.

(iii) On 1 April 2019, Winnie PLC entered into a four-year lease arrangement to obtain
the use of an asset. Winnie PLC was required to pay Rs. 1.2 million annually in
advance. Winnie PLC’s incremental borrowing rate is 8%. The asset has a useful
life of 10 years. There is no option available to Winnie PLC to purchase the asset at
the end of the lease term. At the commencement of the lease Winnie PLC received
a lease incentive of Rs. 50,000 for this lease and incurred a direct cost of
Rs. 30,000.

CL2 – February 2021 Page 12 of 13

 Required:

(a) Advise on the accounting treatment for the Horana property referred to in (i)
above, for the year ended 31 March 2020.
(5 marks)

(b) Recommend how the pension plan referred to in (ii) above, should be
recognised and presented in the financial statements for the year ended
31 March 2020 with reference to the given information.
(8 marks)

(c) Assess the impact to the financial statements for the year ended
31 March 2020 from the lease arrangement in (iii) above, if Winnie PLC
applies SLFRS 16, Leases.
(7 marks)

(Total: 20 marks)

CL2 – February 2021 Page 13 of 13