CL 2 Financial Reporting

PRACTICE & REVISION KIT
CA SRI LANKA CURRICULUM 2020

First edition 2020
ISBN 9781 5097 3136 7
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professional advice and every effort has been made to
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ii
Contents
Page
Question Index iv
Introduction vi
How to use this Practice & Revision Kit vii
Learning outcomes ix
Format of the exam xx
Exam techniques xxi
Action verbs checklist xxiii
Objective test questions 2
Objective test answers 28
Long questions 45
Long answers 97
Mock exam questions 169
Mock exam answers 181
Contents iii
Question index
Time Page
Marks
Title allocated
allocated Question Answer
(Minutes)
Part A:
1 Standards development 10 18 45 97
2 Relevance 10 18 45 98
3 Qualitative characteristics 10 18 46 99
4 SGCC 20 36 47 101
Part B:
5 Plethora Co 10 18 48 104
6 Dearing 10 18 49 105
7 Apex 10 18 49 106
8 Turquoise 10 18 50 107
9 Partway 10 18 51 108
10 Borough 10 18 52 109
11 Hideaway 10 18 53 110
12 Wardle 10 18 52 111
13 Evans Co 10 18 55 112
14 Bowtock 10 18 55 113
15 Barstead Co 10 18 56 115
16 Waxwork 10 18 57 116
17 Tangerine 10 18 58 117
18 Dexterity 20 36 59 118
19 Wilderness 20 36 60 120
20 Tourmalet 20 36 62 122
21 Triangle 20 36 64 124
22 Lucky 20 36 65 126
iv CL 2 Financial Reporting & Governance

Time Page
Marks
Title allocated
allocated Question Answer
(Minutes)
23 Whitebirk 20 36 67 128
24 Pingway 20 36 68 130
25 OceanTelecoms 20 36 69 132
Part C:
26 Consolidation requirements 10 18 71 135
27 Penguin 10 18 71 136
28 Prodigal 10 18 72 137
29 Laurel 10 18 73 139
30 Tyson 10 18 75 142
31 Pricewell 10 18 76 143
32 Candel 20 36 78 145
33 Pedantic 20 36 79 148
34 Pyramid 20 36 81 152
35 Pandar 20 36 83 154
36 Plateau 20 36 85 156
Part D:
37 Performance Appraisal 10 18 87 159
38 Sinharaja Timber 10 18 88 160
39 Victular 20 36 89 162
40 Hardy 20 36 93 163
Part E:
41 Chilaw plc 10 18 95 165
42 Emerald Software PLC 10 18 96 166
Question index v
Introduction
Welcome to this Practice & Revision Kit for the Institute of Chartered Accountants of
Sri Lanka professional examinations for curriculum 2020.
One of the key criteria for achieving exam success is question practice. There is
generally a direct correlation between candidates who revise all topics and practise
exam questions and those who are successful in their real exams. This Practice &
Revision Kit gives you ample opportunity for such practice in the run up to your
exams.
The Practice & Revision Kit is structured to follow the modules of the Study Text, and
comprises banks of non-complex mini scenario and functional scenario questions as
appropriate. Suggested solutions to all questions are supplied.
We welcome your feedback. If you have any comments about this Practice &
Revision Kit, or would like to suggest areas for improvement, please email
learningdevelopment@casrilanka.org.
Good luck in your exams!
BPP LEARNING MEDIA
vi CL 2 Financial Reporting & Governance

How to use this Practice & Revision Kit
This Practice & Revision Kit comprises banks of practice questions, mostly in the style
that you will encounter in your exam. It is the ideal tool to use during the revision
phase of your studies.
Questions in your exam may test any part of the syllabus so you must revise the
whole syllabus. Selective revision will limit the number of questions you can answer
and hence reduce your chances of passing. It is better to go into the exam knowing a
reasonable amount about most of the syllabus rather than concentrating on a few
topics to the exclusion of the rest. You should at all costs avoid falling into the trap of
question spotting, that is trying to predict what are likely to be popular areas for
questions, and restricting your revision and question practice to those.
Practising as many exam-style questions as possible will be the key to passing this
exam. You must do exam-style questions under timed conditions and ensure you
write full answers to the discussion parts as well as doing the calculations.
Planning your revision
When you begin your course, you should make a plan of how you will manage your
studies, taking into account the volume of work that you need to do and your other
commitments, both work and domestic.
In this time, you should go through your notes to ensure that you are happy with all
areas of the syllabus and practise as many questions as you can. You can do this in
different ways, for example:
 Revise the subject matter a module at a time and then attempt the questions
relating to that module; or
 Revise all the modules and then build an exam out of the questions in this
Practice & Revision Kit.
Using the practice questions
The best approach is to select a question and then allocate to it the appropriate time,
based on the real exam. All the questions in this Practice & Revision Kit have mark
allocations, so you can calculate the amount of time that you should spend on the
question.
Using the suggested solutions
Avoid looking at the answer until you have finished a question. It can be very
tempting to do so, but unless you give the question a proper attempt under exam
conditions you will not know how you would have coped with it in the real exam
scenario.
How to use this Practice & Revision Kit vii

When you do look at the answer, compare it with your own and give some thought to
why your answer was different, if it was.
If you did not reach the correct answer make sure that you work through the
explanation or workings provided, to see where you went wrong. If you think that
you do not understand the principle involved, go back to your own notes or your
study materials and work through and revise the point again, to ensure that you will
understand it if it occurs in the exam.
Our suggested solutions are comprehensive, but in some discursive questions it may
be that you have made points that are not included in the suggested solution that are
equally valid. In the real exams you should be given credit for such points.
viii CL 2 Financial Reporting & Governance

Learning outcomes
Syllabus Area Knowledge Learning Outcomes Specific Knowledge Section A – Section B –

Component MCQs Long question
A. Regulatory 1.1 Regulatory 1.1.1 Demonstrate the awareness of: Companies Act (sections 3 2, 3, 4
Framework framework and 56, 69, 148 to 171 and
• Provisions in Corporate
for Financial the need of 192) and SEC regulations
governance, Companies Act and
Reporting regulating the and rulings that affects
and SEC regulations and rulings
process of Financial reporting
that affects for Financial
financial Structure of the
reporting
reporting accountancy profession
• Structure of the accountancy
profession
• Regulations applicable to the
accounting profession and
financial service industry
1.1.2 Demonstrate the awareness of Regulations applicable to 3
regulations applicable to financial the accounting profession
reporting process and financial service
industry
Learning outcomes ix
1.2 The process 1.2.1 Demonstrate the Relationship International Accounting 1
of setting between the International Accounting Standard setting process
standards Standards Board (IASB) and the local Sri Lanka Accounting
governing body responsible for Standard setting process
establishing national standards, with
respect to the standard-setting process
1.2.2 Demonstrate the awareness of Link between IASB, FASB, 1
process of setting standards under Sri ICASL, IAS, IFRS, LKAS,
Lanka Accounting Standards (SLFRS SLFRS, IFRIC, IRC and
and LKAS) and International Financial standard setting process
Reporting Standards (IFRS and IAS)
x CL 2 Financial Reporting & Governance

B. Sri Lanka 2.1 Accounting 2.1.1 Advise on the application of Sri 2, 8, 9, 10, 6, 8, 10, 12, 13,
Accounting Standards Lanka Accounting Standards in solving 11, 12, 13, 17, 19, 21, 25,
Standards setting process, complicated matter 16, 17, 18, 32
international 2.1.2 Recommend the appropriate 19, 24, 25, 6, 8, 10, 12, 13,
practices, FASB accounting treatment to be used in 27, 29, 39, 17, 19, 21, 25,
and IFA complicated circumstances in 40, 52, 53, 32
Announcements, conformity with Sri Lanka Accounting 54, 55, 56
GAAPs, LEVEL A: Standards
Thorough
2.1.3 Evaluate the impact of application 6, 8, 10, 12, 13,
knowledge and
of different accounting treatments 17, 19, 21, 25,
comprehension of
32
the standard to
identify significant 2.1.4 Propose appropriate accounting 6, 8, 10, 12, 13,
complicated policies to be selected in different 17, 19, 21, 25,
issues and any circumstances 32
potential 2.1.5 Evaluate the impact of the use of 6, 8, 10, 12, 13,
implications to the different expert inputs to financial 17, 19, 21, 25,
financial reporting 32
statements, and to 2.1.6 Advise on the appropriate 6, 8, 10, 12, 13,
exercise application and selection of 17, 19, 21, 25,
professional accounting/reporting options given 32
judgement in the under standards
Learning outcomes xi
evaluation and 2.1.7 Recommend appropriate 6, 8, 10, 12, 13,
application of disclosures to be made in the financial 17, 19, 21, 25,
standards in statements in unstructured and 32
resolving a multifaceted situations
complicated
matter related to
financial reporting
2.2 LEVEL B : 2.2.1 Apply Sri Lanka Accounting 14, 15, 21, 5, 7, 9, 11, 12,
Good knowledge Standards in solving moderately 22, 23, 26, 14, 15, 16, 18,
and complicated matters 28, 30, 32, 20, 21, 22, 23,
comprehension of 41, 43, 44, 25
the standard to 2.2.2 Demonstrate a thorough 45, 48, 49, 5, 7, 9, 11, 12,
identify knowledge of Sri Lanka Accounting 50, 51 14, 15, 16, 18,
moderately standards in the selection and 20, 21, 22, 23,
complicated application of accounting policies 25
issues and any
2.2.3 Apply professional judgement in 5, 7, 9, 11, 12,
potential
recommending the appropriate 14, 15, 16, 18,
implications to the
accounting treatment to be used in 20, 21, 22, 23,
financial
complicated circumstances in 25
statements, and to
accordance with Sri Lanka Accounting
exercise
Standards
xii CL 2 Financial Reporting & Governance

professional 2.2.4 Demonstrate appropriate 5, 7, 9, 11, 12,
judgement in the application and selection of 14, 15, 16, 18,
analysis and accounting/reporting options given 20, 21, 22, 23,
application of under standards 25
standards in
2.2.5 Recommend the disclosures to be 55, 7, 9, 11, 12,
resolving a
made in the financial statements 14, 15, 16, 18,
moderately
20, 21, 22, 23,
complicated
25
matter related to
financial reporting
Learning outcomes xiii

2.3 LEVEL C: 2.3.1 Explain the concepts/principals 31, 34, 35, 22, 24, 25
Conceptual 2.3.2 Apply the concepts/principals of 36, 27, 38, 22, 24, 25
knowledge and the standards to resolve a 42 , 55
understanding of simple/straightforward matter
the standard to
2.3.3 Identify the disclosures to be 22, 24, 25
identify simple
made in the financial statements
issues, to exercise
reasonable 2.3.4 Demonstrate thorough 22, 24, 25
professional understanding of the concepts and
judgement in the standards related to preparation of
application of limited liability company accounts
standards in
resolving a simple
(straightforward)
matter related to
financial reporting
xiv CL 2 Financial Reporting & Governance

C. Preparation 3.1 Financial 3.1.1 Prepare financial statements of a Financial statements of a 31, 32, 34
of Financial Reporting of a limited liability company limited liability company
Statements limited liability
company 3.1.2 Apply relevant accounting 6, 9, 10, 13, 31
standards when preparing financial 21, 22, 23,
statements 26, 29, 30,
32, 33, 34,
36, 39, 40,
43, 53, 54,
56
3.1.3 Recommend the disclosures to be Apply relevant accounting 31
made in the financial statements of standards when preparing
limited liability company financial statements
Recommend the
disclosures to be made in
the financial statements of
limited liability company
Learning outcomes xv
3.2 Consolidated 3.2.1 Demonstrate the understanding 45, 46, 47, 26, 33, 35, 36
financial of the concepts and standards related 48, 51, 52,
statements to consolidation, associates and joint 53
(Consolidated venture
Statement of 3.2.2 Prepare consolidated financial Consolidated financial 27, 28, 29, 30,
Financial statements involving one or two statements involving one 33, 35, 36
Position and subsidiaries or two subsidiaries,
Consolidated associates and joint
Statement of venture
Comprehensive
3.2.3 Prepare consolidated financial Consolidated financial 29, 30, 35, 36
Income
statements involving Associates statements involving
Statement)
Associates
3.2.4 Apply relevant accounting Relevant accounting 27, 28, 33, 35,
standards when preparing standards when preparing 36
consolidated financial statements consolidated financial
statements
3.2.5 Recommend the disclosures to be Disclosures to be made in 27, 28, 29, 30,
made in the consolidated financial the consolidated financial 35, 36
statements statements
xvi CL 2 Financial Reporting & Governance

3.2.6 Apply professional judgement in Professional judgement in
complicated circumstances related to complicated
consolidation and recommend the circumstances related to
appropriate accounting treatment consolidation and
recommend the
appropriate accounting
treatment
D. Financial 4.1 Financial 4.1.1 Demonstrate a thorough Different techniques 39, 30
Statement statement understanding of the different available to analyse
Analysis and analysis techniques available to analyse financial statements
Non-financial financial statements
reporting 4.1.2 Demonstrate a thorough Limitations of financial 37
knowledge of the limitations of statement analysis
financial statement analysis techniques techniques
4.1.3 Interpret relevant financial ratios, Relevant financial ratios, 6, 57, 58, 38, 39, 40
including profitability ratios, liquidity including profitability 59, 60
ratios, efficiency ratios, and gearing , ratios, liquidity ratios,
solvency ratios and other relevant efficiency ratios, and
rations gearing , solvency ratios
and other relevant rations
Learning outcomes xvii

4.1.4 Advise on the interpretation of an Interpretation of an 37, 39
entity's financial statements for entity's financial
different stakeholders statements for different
stakeholders
4.1.5 Apply reasoning, critical analysis, Reasoning, critical 39
and innovative thinking to solve analysis, and innovative
business problems thinking to solve business
problems
E. Financial 5.1 Basic 5.1.1 Demonstrate the understanding Professional 7
Reporting understanding of of professional responsibilities of an responsibilities of an
Ethics & FR Ethics and accountant including corporate accountant including
Governance Governance governance corporate governance
5.1.2 Explain the importance of ethics Importance of ethics and 41

and professional judgement professional judgement
5.1.3 Ascertain various compliance and Various compliance and
regulatory regimes regulatory regimes
5.1.4 Demonstrate the understanding Nature, role and 5
of the nature, role and importance of importance of corporate
corporate social responsibility, social responsibility,
including climate change including climate change
xviii CL 2 Financial Reporting & Governance

5.1.5 Demonstrate the basic Commitment of 41
understanding of professional professional accountant to
accountant commitment to public public interest
interest
5.1.6 Demonstrate awareness of good Sustainability reporting 5
understanding of sustainability
reporting
5.1.7 Demonstrate awareness of good Integrated reporting 4, 5 42
understanding of Integrated reporting
Learning outcomes xix

Format of the exam
Mode: Paper based examination

Open books: CL 2 Financial Reporting & Governance, CL 4 Corporate Law
Time: 3 hours
Pass Mark: 50%
The exam comprises of three sections, as follows:

Section 1
Total 20 marks; Ten (10) multiple choice, fill in the blanks, Matching questions, etc. of
two marks each (including scenario based questions)
Section 2
Total 40 marks: Four (4) questions of ten (10) marks each based on mini scenario
leading to non-complex applications and analysis.
Section 3
Total 40 marks: Two (2) questions of twenty (20) marks, each questions on complex
scenario based analysis and applications.
xx CL 2 Financial Reporting & Governance

Exam techniques
Using the right techniques in the real exam can make all the difference between
success and failure.
Here are a few pointers:
1. During the 20-minute reading time at the start, read through the questions and
decide in what order you are going to attempt the exam. You have to write
your answers in the order set out in the question and answer booklet, but you
can attempt the questions in any order that you like.
Some candidates like to attempt the easiest questions first, on the basis that will
enable them to gain the easiest available marks quickly, and build up their
confidence.
If you select a question on a topic area about which you feel confident, and do
that first, you will build up your confidence right at the start, which will help to
calm you if you are nervous and set the tone for the rest of the exam. You should
decide what approach is best for you.
2. Having established the order that you are going to do the exam, allocate the
time available to the questions and work out at what time you will need to
stop working on one question and move on to the next. When you reach the end
of the allocated time for the question that you are working on, STOP. It is much
easier to gain the straightforward marks for the next question than to spend a
long time working on the previous question in the hope of gaining one or two
final marks.
3. Read the question. Read it carefully once, and then read it again to ensure that
you have picked everything up. Make sure that you understand what the
question wants you to do, rather than what you might like the question to be
asking you.
4. Answer all parts of the question. Even if you cannot do all of the calculation
elements, you will still be able to gain marks in the discussion parts.
5. Don’t worry if you think that you have made a mistake in a computational part
of a question. You will not earn the mark for that particular part, but you will
still be able to gain credit for correct application in the later parts of the
question, even if you are using the wrong figure.
6. When starting to read a question, especially a long case study, read the
requirement first. You will then find yourself considering the requirement as
Exam techniques xxi

you read the data in the scenario, helping you to focus on exactly what you have
to do.
7. Plan your answer before you start to write your response, especially for longer
case studies. This will help you to focus on the requirements of the question and
to avoid irrelevance.
8. Try to make sure that your answer relates to the specifics of the question
itself. If you are asked to consider the impact of the scenario on someone named
in the question, make sure that you do that, so your answer is as relevant as
possible.
9. If you finish the exam with time to spare, use the rest of the time to review your
answers and to make sure that you answered every requirement of every
question.
xxii CL 2 Financial Reporting & Governance

Action verbs checklist
Knowledge Process Verb List Verb Definitions
Tier - 1 Remember Define Describe exactly the nature, scope or meaning

Recall important
information Draw Produce (a picture or diagram)
Identify Recognise, establish or select after consideration
List Write the connected items one below

the other
Relate To establish logical or causal connections
State Express something definitely or clearly
Tier - 2 Calculate/Compute Make a mathematical computation

Comprehension
Explain important Discuss Examine in detail by argument showing
information different aspects, for the purpose of arriving at a
conclusion
Explain Make a clear description in detail
revealing relevant facts
Interpret Present in understandable terms or to translate
Recognise To show validity or otherwise, using knowledge

or contextual experience
Record Enter relevant entries in detail
Summarise Give a brief statement of the main points

(in facts or figures)
Classify Allocate into categories

Describe Communicate the key features
Provide Give illustrations to support or illuminate

a point or assertion
Tier - 3 Application Apply Put to practical use

Use knowledge in a
Assess Determine the value, nature, ability
setting other than the or quality
one in which it was
learned/solve close- Demonstrate Prove, especially with examples
ended problems
Graph Represent by means of a graph
Prepare Make ready for a particular purpose
Prioritise Arrange or do in order of importance
Reconcile Make consistent with another

Solve To find a solution through calculations and/
or explanations
Action verbs checklist xxiii

Conduct Organize and carry out a task

Communicate Transmit thoughts or knowledge
Display Make evident or noticeable
Perform Do or execute, usually in the sense of

a complex procedure
Reconcile Make or prove consistent or compatible

or show differences
Set Fix or establish
Select Choose from a range of options

or possibilities
Support Assist to make decisions by providing
appropriate information about
respective concepts
Use Apply in a practical way
Undertake Commit to do or perform
Tier - 4 Analysis Analyse Examine in detail in order to determine
the solution or outcome
Draw relations among
Compare Examine for the purpose of
ideas and to compare
discovering similarities
and
Contrast Examine in order to show
contrast/solve open- unlikeness or differences
ended problems
Construct Build or make a diagram, model
or formula
Differentiate Constitute a difference that

distinguishes something
Outline Make a summary of significant features
Write Provide word descriptions to express an opinion

or idea
Tier - 5 Evaluate Advise Offer suggestions about the best course of
Formation of action in a manner suited to the recipient
judgments and Convince To persuade others to believe something
decisions about the using evidence and/or argument
value of methods, ideas, Criticise Form and express a judgment
people or products
Comment Provide written remarks expressing an opinion
in both positive and negative perspectives
Evaluate To determine the significance by careful appraisal
Conclude Form a judgment about, or determine or resolve

the outcome of, an issue through a process
involving reasoning
Determine Ascertain or conclude after analysis and
consideration; judge
xxiv CL 2 Financial Reporting & Governance

Justify Give valid reasons or evidence for
Review Study critically with a view

to correction or improvement
Recommend A suggestion or proposal as to the
best course of action
Resolve Settle or find a solution to a
problem or contentious matter
Validate Check or prove the accuracy
Tier - 6 Synthesis Compile Produce by assembling information

Solve unfamiliar problems by collected from various sources
combining different aspects Design Devise the form or structure according to
to form a unique or novel a plan
solution Develop To disclose, discover, perfect or unfold a
plan or idea
Propose To form or declare a plan or intention

for consideration or adoption
Anticipate Foresee, or experience or realise

beforehand
Draft Write original material for the scrutiny

of others
Formulate Devise and put into words
Plan Devise the plan for an assurance

engagement
Report Give the formal final conclusion for an

assurance engagement
Submit Send a completed document to a

particular party
Suggest Put forward an idea or give reasons
Synthesize Make or propose a new concepts or ideas

by combining existing knowledge in
different aspects
Action verbs checklist xxv

xxvi CL 2 Financial Reporting & Governance
CL 2 | Financial Reporting & Governance
Objective test questions

1 The process for developing an International Financial Reporting Standard
involves a number of stages. Following receipt and review of comments on a
Discussion Paper, what will be the next step undertaken by the IASB?
A Publication of an Exposure Draft
B Establishment of an Advisory Committee
C Consultation with the Advisory Committee
D Issue of a final IFRS (2 marks)
2 Which of the following would be classified as a liability?

A Dexter's business manufactures a product under licence. In 12 months'
time the licence expires and Dexter will have to pay Rs. 500,000 for it
to be renewed.
B Reckless purchased an investment nine months ago for Rs. 1,120,000.
The market for these investments has now fallen and Reckless's
investment is valued at Rs. 900,000.
C Carter has estimated the tax charge on its profits for the year just
ended as Rs. 165,000.
D Expansion is planning to invest in new machinery and has been quoted
a price of Rs. 570,000. (2 marks)
3 The Conceptual Framework identifies four enhancing qualitative

characteristics of financial information. Which ONE of the following is NOT
an enhancing qualitative characteristic?
A Verifiability
B Timeliness
C Consistency
D Understandability (2 marks)
4 Which of these most closely explains an integrated report?

A A report on social and environmental issues to enable stakeholders to
establish the impact an entity has on society and the environment.
B A communication that provides information to the stakeholders about
how an entity uses capitals to create value.
C Provision of information to the stakeholders which informs them on
how management made decisions about strategy during the year.
D A disclosure about the directors including salaries, bonuses, pensions
and share holdings to enable them to determine what they are earning
from the company.
2 CA Sri Lanka
Questions
5 Which TWO statements are correct?
A Sustainability reporting is mandatory for listed companies in Sri Lanka.

B GRI Standards have been issued and should be applied when preparing
an Integrated Report.
C GRI Standards are classified as general, financial, social, environmental
and governance standards.
D An integrated report should include a description of an entity’s
business model.
E Capitals are inputs to business processes and may include financial,
human, intellectual or natural capitals.
F A sustainability report bridges the gap between content in the annual
report and the value of a business.
6 RK is expanding and requires additional long term capital. The Board has
approved the issue of redeemable preference shares. In discussions with the
Finance Director, a CA Sri Lanka member, the Chief Executive made it clear
that he did not want the gearing ratio of RK to be adversely affected and that
the preference shares should be classified as equity in the financial
statements.
Which of the following statements about the redeemable preference
shares is true?
A As share certificates will be issued, there is no ethical issue in
classifying the shares as equity.
B The Chief Executive has the ultimate responsibility for the financial
statements and so the ethical burden would fall on him if there is any
issue with the classification of the shares.
C It is the responsibility of the directors to prepare the financial
statements in an ethical manner and hence the shares should be
classified as liabilities.
D Preference shareholders are entitled to their dividend before ordinary
shareholders and so the classification of the shares is irrelevant.
CA Sri Lanka 3
7 Match the tokens to the descriptions of fundamental ethical principles
Objectivity To be straightforward and honest in all

professional and business relationships
Integrity To comply with relevant laws and regulations and
avoid any action that discredits the profession
Professional Behaviour To maintain professional knowledge and skill at the
level required to ensure that a client or employer
receives competent professional service based on
current developments in practice
Professional Not to allow bias, conflict of interest or undue
competence and due influence of others to override professional or
care business judgments
8 Which of the following would be a change of accounting policy in accordance

with LKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors?
A A change in valuation of inventory from a weighted average to a
FIFO basis
B A change of depreciation method from straight line to reducing
balance
C Adoption of the revaluation model for non-current assets
previously held at cost
D Capitalisation of borrowing costs which have arisen for the first time
(2 marks)
9 How are the following classified in the financial statements of a company

whose sole trade is buying and selling industrial sewing machines?
An increase in the Profit Other A liability

revaluation surplus comprehensive
income
A sewing machine Inventory Property, plant Investment
and equipment property
A trade receivable due Non-current Current asset Expense
in 13 months’ time asset
Dividend paid Expense Other Equity
comprehensive movement
income
4 CA Sri Lanka
Questions
10 Wetherby Co purchased a machine on 1 July 20X7 for Rs. 500 million. It is

being depreciated on a straight-line basis over its useful life of ten years.
Residual value is estimated at Rs. 20 million. On 1 January 20X8, following a
change in legislation, Wetherby Co fitted a safety guard to the machine. The
safety guard cost Rs. 25 million and has a useful life of five years with no
residual value.
What amount will be charged to profit or loss for the year ended 31 March
20X8 in respect of depreciation on this machine?
A Rs. 36 million
B Rs. 37.25 million
C Rs. 39.75 million
D Rs. 48 million
11 Negombo Exports acquired an office on 1 January 20X7 at a cost of

Rs. 200 million and applied the revaluation model to measure it. The fair
value of the property was Rs. 220.5 million at 31 December 20X7 and
Rs. 210 million at 31 December 20X7. The property has a total useful life of
50 years. What is the carrying amount of the revaluation surplus in the
statement of financial position at 1 January 20X8 assuming that Negombo
Experts has not made permitted reserves transfers in respect of
depreciation?
Rs.
12 Which costs incurred in preparing a self-constructed owner-occupied

property for use are recognised as part of the asset in the statement of
financial position?
Site selection costs Yes No

Legal costs of acquiring the land Yes No
Costs of relocating to the new property Yes No
Interest costs arising on the loan to fund the
Yes No
construction
Wages of employed construction workers Yes No
CA Sri Lanka 5
13 Carter Tea Co vacated its head office building and let it out to a third party,
under an operating lease, on 30 June 20X8. The building had an original cost
of Rs. 900 million on 1 January 20X0 and was being depreciated over
50 years. It was judged to have a fair value on 30 June 20X8 of
Rs. 950 million. At the year-end date of 31 December 20X8 the fair value of
the building was estimated at Rs. 1,200 million.
Carter Tea Co uses the fair value model for investment property.
What amount will be shown in revaluation surplus at 31 December 20X8 in
respect of this building?
Rs. (2 marks)
The following scenario relates to questions 14-15

Artem Co prepares financial statements to 30 June each year.
Artem Co began a research project in October 20X3 with the aim of developing a
new type of machine. If successful, Artem Co will manufacture the machines and
sell them to customers as well as using them in their own production processes.
During the year ended 30 June 20X4, costs of Rs. 25 million were incurred on
conducting feasibility studies and some market research. During the year ended
30 June 20X5, a further Rs. 800 million was incurred on constructing and testing a
prototype of the machine.
14 In accordance with LKAS 38 Intangible Assets, what is the correct treatment
of the Rs. 25 million costs incurred on the research project by Artem Co
during the year ended 30 June 20X4?
A They should be recognised as an intangible non-current asset as future

economic benefits are expected from the use and sale of the machinery.
B They should be written off to profit or loss as an expense as they are
research costs at this date.
C They should be included in tangible non-current assets as machinery
which will be put into use once completed.
D They should be set against a provision made for the estimated total
cost of the project which was set up at the start of the research.
6 CA Sri Lanka
Questions
15 In accordance with LKAS 38, which of the following is true when Artem Co
moves to the production and testing stage of the prototype during the year
ended 30 June 20X5?
A The project has moved to the development stage. If the LKAS 38
development expenditure criteria are met, Artem Co can choose
whether or not to recognise the Rs. 800 million costs as an intangible
non-current asset.
B The project is still in its research stage and the Rs. 800 million costs
incurred by Artem Co cannot be recognised as an intangible
non-current asset until a product is ready for sale.
C The project has moved to the development stage. If the LKAS 38
development expenditure criteria are met, Artem Co must recognise
the Rs. 800 million costs as an intangible non-current asset.
D The project is still in its research stage and so Artem Co must expense
the Rs. 800 million costs to profit or loss.
16 Complete the statement using the options provided

The RECOVERABLE AMOUNT of an asset is the higher of
and under LKAS 36.
Fair value
Fair value less costs of
Market value
Value in use
(2 marks)
CA Sri Lanka 7
17 The net assets of Fyngle Co, a cash-generating unit (CGU), are:

Rs m
Property, plant and equipment 200
Allocated goodwill 50
Product patent 20
Net current assets (at net
realisable value) 30
300
As a result of adverse publicity, Fyngle Co has a recoverable amount of only
Rs. 200 million (which includes net current assets).
What is the carrying amount of Fyngle Co's property, plant and equipment
after the allocation of any impairment loss?
A Rs. 154.5 million
B Rs. 170 million
C Rs. 160 million
D Rs. 133.3 million
Information relevant to questions 18-20

In March 20X7, SL Fabrications Ltd (SLF) made a decision to increase its operating
capacity. On the recommendation of the finance director, SLF adopted a new
policy of leasing rather than buying plant outright. It entered into an agreement to
lease plant with a useful life of 5 years.
The lease commenced on 1 April 20X7; on this date an initial payment of
Rs. 100 million was made to the lessor. The lease required further payments of
Rs. 100 million per annum, payable in advance at the start of each year. At 1 April
20X7, after the first payment, the present value of the future lease payments was
Rs. 173.5 million. The rate of interest implicit in the lease is 10%. The lease does
not transfer ownership of the plant to SLF during the three year lease term and
there is no purchase option available.
18 SLF incurred initial direct costs of Rs. 20 million to set up the lease and
received lease incentives from the manufacturer totalling Rs. 7 million
What is the initial measurement of the right-of-use asset on 1 April 20X7?
A Rs. 293.5 million
B Rs. 186.5 million
C Rs. 313 million
D Rs. 286.5 million
8 CA Sri Lanka
Questions
19 Complete the sentence by choosing the correct token:

SLF should depreciate the right -of-use asset over
The 3 year lease term
The 5 year useful life of the plant
The same useful life as plant

owned by SLF
20 What is the total lease liability at 31 March 20X8 in respect of this plant?
Rs.
21 Identify whether the following statements about LKAS 2 Inventories are

correct or incorrect.
Fixed production overheads should be Correct Incorrect

included in cost on the basis of a company's
actual level of activity in the period.
In arriving at the net realisable value of Correct Incorrect
inventories, settlement discounts must be
deducted from the expected selling price.
In arriving at the cost of inventories, FIFO, Correct Incorrect
LIFO and weighted average cost formulas are
acceptable.
It is permitted to value finished goods Correct Incorrect
inventories at materials plus labour cost only,
without adding production overheads.
CA Sri Lanka 9
22 Derringdo Co is a broadband provider which receives government assistance

to provide broadband to remote areas. Derringdo Co invested in a new
server at a cost of Rs. 800,000 million on 1 October 20X2. The server has an
estimated useful life of ten years with a residual value equal to 15% of its
cost. Derringdo Co uses straight-line depreciation on a time apportioned
basis.
The company received a government grant of 30% of its cost price of the
server at the time of purchase. The terms of the grant are that if the company
retains the asset for four years or more, then no repayment liability will be
incurred. Derringdo Co has no intention of disposing of the server within the
first four years. Derringdo Co's accounting policy for capital-based
government grants is to treat them as deferred income and release them to
income over the life of the asset to which they relate.
The net amount charged to operating expenses in respect of the server for
the year ended 31 March 20X3 is Rs.
The amount to be presented as a non-current liability at 31 March 20X3 in
respect of the grant is Rs.
23 Hill Agriculture acquired 3,000 dairy cattle on 1 August 20X8 at a cost of

Rs. 54,000 each. The cattle are expected to produce milk for an average of
5 years. The fair value of the cattle at 31 December 20X8 was Rs. 56,500.
Livestock auction commission rates are 3% throughout 20X8.
At what amount are the cattle recognised in Hill Agriculture’s statement of
financial position at 31 December 20X8?
A Rs. 148.5 million
B Rs. 162 million
C Rs. 164.415 million
D Rs. 169.5 million
10 CA Sri Lanka
Questions
24 Mulroon Co, a publishing company, is being sued for Rs. 200 million in a libel
action in respect of a book published in January 20X0.
At 31 October 20X0, the end of the reporting period, the directors believed
that the claim had a 10% chance of success. At 30 November 20X0, the date
the accounts were approved, the directors believed that the claim had a 30%
chance of success.
In the financial statements to 31 October 20X0 the amount that should
be provided is:
A Rs. nil
B Rs. 20m
C Rs. 60m
D Rs. 200m
25 Which ONE of the following is valid grounds for a provision?

A A company has decided to close down a division and has estimated the
restructuring costs.
B A law comes into force which means that by the end of the following
year a company will have to install safety guards on its machinery and
the cost involved has been reliably estimated.
C A company has discontinued the use of some laptops as it has acquired
new tablet computers. The laptops have three years left to run on a
non-cancellable lease that has been accounted for using the recognition
exemption in SLFRS 16.
D An ex-employee is suing the company for wrongful dismissal. It is
almost certain that damages will have to be paid but the amount cannot
be estimated reliably.
26 Which TWO of the following events which occur after the reporting date of
a company but before the financial statements are authorised for issue are
classified as ADJUSTING events in accordance with LKAS 10 Events After
the Reporting Period?
A change in tax rate announced after the reporting date, but affecting
the current tax liability
The discovery of a fraud which had occurred during the year
The determination of the sale proceeds of an item of plant sold before
the year end
The destruction of a factory by fire (2 marks)
CA Sri Lanka 11
27 Repro Co, a company which sells photocopying equipment, has prepared its
draft financial statements for the year ended 30 September 20X4. It has
included the following transactions in revenue at the stated amounts below.
Which of these has been correctly included in revenue according to SLFRS 15
Revenue from Contracts with Customers?
A Agency sales of Rs. 2,500,000 on which Repro Co is entitled to a
commission.
B Sale proceeds of Rs. 200,000 for motor vehicles which were no longer
required by Repro Co.
C Sales of Rs. 1,500,000 on 30 September 20X4. The amount invoiced to
and received from the customer was Rs. 1,800,000, which included
Rs. 1,500,000 for the provision of a photocopier and Rs. 300,000 for
ongoing servicing work to be done by Repro Co over the next two years.
D Sales of Rs. 200,000 on 1 October 20X3 to an established customer
which, (with the agreement of Repro Co), will be paid in full on
30 September 20X5. Repro Co has a cost of capital of 10%. (2 marks)
28 Consignment inventory is an arrangement whereby inventory is held by one

party but owned by another party. It is common in the motor trade.
Which TWO of the following indicate that the inventory in question is
consignment inventory?
Manufacturer can require dealer to return the inventory
Dealer has no right of return of the inventory
Manufacturer bears obsolescence risk
Dealer bears slow movement risk (2 marks)
12 CA Sri Lanka
Questions
29 Silva Ltd’s revenue as shown in its draft statement of profit or loss for the
year ended 31 December 20X9 is Rs. 27 million. This includes Rs. 8 million
for a consignment of goods sold on 31 December 20X9 on which Silva Ltd
will provide ongoing service and support for two years after the sale.
The supply of the goods and the provision of service and support are
separate performance obligations under the terms of SLFRS 15 Revenue from
Contracts with Customers.
Silva Ltd sells both the goods and the service package separately, charging
customers Rs. 6 million and Rs. 4 million respectively.
At what amount should revenue be recognised in the statement of profit or
loss of Silva Ltd for the year ended 31 December 20X9? (Ignore the time
value of money.)
Rs.
30 Ullington Co's trial balance shows a debit balance of Rs. 2.1 million brought
forward on current tax and a credit balance of Rs. 5.4 million on deferred tax.
The tax charge for the current year is estimated at Rs. 16.2 million and the
carrying amounts of net assets are Rs. 13 million in excess of their tax base.
The income tax rate is 30%
What amount will be shown as income tax in the statement of profit or loss
of Ullington Co for the year?
A Rs. 15.6 million
B Rs. 12.6 million
C Rs. 16.8 million
D Rs. 18.3 million (2 marks)
CA Sri Lanka 13
31 An 8% Rs. 30 million convertible loan note was issued on 1 April 20X5 at

par. Interest is payable in arrears on 31 March each year. The loan note is
redeemable at par on 31 March 20X8 or convertible into equity shares at the
option of the loan note holders on the basis of 30 shares for each Rs. 100 of
loan. A similar instrument without the conversion option would have an
interest rate of 10% per annum.
The present values of Rs. 1 receivable at the end of each year based on
discount rates of 8% and 10% are:
8% 10%
End of year 1 0.93 0.91
2 0.86 0.83
3 0.79 0.75
Cumulative 2.58 2.49
What amount will be credited to equity on 1 April 20X5 in respect of this
financial instrument?
Rs.
32 Included within the financial assets of Zinet Co at 31 March 20X9 are the
following two recently purchased investments in publicly traded equity
shares:
Investment 1 – 10% of the issued share capital of Haruka Co. This
shareholding was acquired as a long-term investment as Zinet Co wishes to
participate as an active shareholder of Haruka Co.
Investment 2 – 10% of the issued share capital of Lukas Co. This
shareholding was acquired for speculative purposes and Zinet Co expects to
sell these shares in the near future.
Neither of these shareholdings gives Zinet Co significant influence over the
investee companies.
Wherever possible, the directors of Zinet Co wish to avoid taking any fair
value movements to profit or loss, so as to minimise volatility in reported
earnings.
How should the fair value movements in these investments be reported in
Zinet Co's financial statements for the year ended 31 March 20X9?
A In profit or loss for both investments
B In other comprehensive income for both investments
C In profit or loss for investment 1 and in other comprehensive income
for investment 2
D In other comprehensive income for investment 1 and in profit or loss
for investment 2
14 CA Sri Lanka
Questions
33 EM acquired a debt instrument on 1 January 20X3 at its nominal value of

Rs. 20,000,000. The instrument carries a fixed coupon interest rate of 7%,
which is receivable annually in arrears. Transaction costs associated with
the acquisition were Rs. 200,000. EM intends to hold the instrument within a
model to collect cash flows and sell investments.
The journal entry that initially records the instrument is:
A DR Investment Rs. 19,800,000

CR Bank Rs. 19,800,000
B DR Investment Rs. 20,000,000
CR Profit or loss Rs. 20,000,000
C DR Investment Rs. 20,200,000
CR Bank Rs. 20,200,000
D DR Investment Rs. 19,800,000
DR Profit or loss Rs. 200,000
CR Bank Rs. 20,000,000
34 Q has a defined benefit pension plan and prepares financial statements to

31 August. The following additional information is relevant for the year
ended 31 August 20X3.
Net interest income on plan assets/liabilities was Rs. 30 million.
The current service cost was Rs. 45 million.
The entity granted additional benefits to existing pensioners that vested
immediately and that have a present value of Rs. 10 million. These were not
allowed for in the original actuarial assumptions.
The entity paid pension contributions of Rs. 40 million.
The net pension liability are as follows:
31.8.20X3 31.8.20X2
Rs. 40m Rs. 35m
What is the net amount that will be recognised in profit or loss in the year
ended 31 August 20X3?
Choose one:
A Rs. 25 million
B Rs. 40 million
C Rs. 60 million
D Rs. 85 million
CA Sri Lanka 15
35. Match each item to the accounting treatment to indicate how it recognised in
the financial statements.
Items Accounting treatment

Defined contribution pension scheme Asset in the statement of
contributions financial position
Unused holiday allowance carried forward Other comprehensive income
Actuarial gain on defined benefit obligation Accrual in the statement of
financial position
Net defined benefit surplus Expense in profit or loss
36 On 1 May 20X5, More Shares Plc granted 25 share appreciation rights to

each of its 3,500 employees, on the condition that each employee remained
in service until 30 April 20X8. 55% of the rights were expected to vest on
30 April 20X8. The fair value of each right on 30 April 20X6 was Rs. 180, and
their intrinsic value on that date was Rs. 12.
What is the accounting entry in the financial statements for the year
ended 30 April 20X6?
A Dr Current Assets Rs. 8,662,500, Cr Liability Rs. 8,662,500
B Dr Expense Rs. 2,887,500, Cr Liability 2,887,500
C Dr Expense Rs. 2,887,500, Cr Equity Rs. 2,887,500
D Dr Expense Rs. 4,331,250, Cr Cash Rs. 4,331,250
37 Allocate the items below to the correct category in relation to a share option
reward scheme for employees:
Categories
Item Reflected in Reflected in
fair value of estimation of
share options number of
at grant date options expected
to vest
Non-vesting condition
Market-based performance vesting
condition
Service vesting condition
Non-market based vesting condition
16 CA Sri Lanka
Questions
38 ABC plc granted 500 share options to each of its eight directors on 1 April
20X5, which will vest on 31 March 20X7. The fair value of each option at the
grant date is Rs. 1,200, and all are anticipated to vest on 31 March 20X7.
What is the journal entry in the financial statements for the year ended
31 March 20X6?
A Dr Expense Rs. 2.4m, Cr Equity Rs. 2.4m
B Dr Expense Rs. 4.8m, Cr Liability Rs. 4.8m
C Dr Current Assets Rs. 2.4m, Cr Liability Rs. 2.4m
D Dr Equity Rs. 4.8m, Cr Expense Rs. 4.8m
39 Which TWO of the following assets owned by Mullaney Ltd at 31 December

20X8 are classified as held for sale?
A A property which is no longer used by the company. The management
has contacted a number of potential purchasers and the property is
priced at its current fair value. To date no buyers have come forward,
however, Mullaney is confident that a sale will be completed within
12 months.
B A truck that has been damaged after a collision. Mullaney expects to
dispose of the truck within the first quarter of 20X9 for no proceeds.
C A factory which has been actively marketed for sale since August at a
price in line with other similar properties. Mullaney has a backlog of
uncompleted orders which must be eliminated before the factory is
transferred to a buyer.
D A large machine that management expects to sell in 20X9, provided
that a replacement machine is identified and purchased. Management
is actively searching for a replacement machine.
E A brand name that Mullaney has recognised as an intangible asset. The
brand is being marketed at a price that management determined to be
fair value and a sale is expected within 12 months.
CA Sri Lanka 17
40 As at 30 September 20X3 Dune Co's property in its statement of financial

position was:
Property at cost (useful life 15 years) Rs. 45 million
Accumulated depreciation Rs. 6 million
On 1 April 20X4 Dune Co decided to sell the property. The property is being
marketed by a property agent at a price of Rs. 42 million, which was
considered a reasonably achievable price at that date. The expected costs to
sell have been agreed at Rs. 1 million. Recent market transactions suggest
that actual selling prices achieved for this type of property in the current
market conditions are 10% less than the price at which they are marketed.
At 30 September 20X4 the property has not been sold.
At what amount should the property be reported in Dune Co's statement of
financial position as at 30 September 20X4?
A Rs. 36 million
B Rs. 37.5 million
C Rs. 36.8 million
D Rs. 42 million (2 marks)
41 PL is a public listed entity and is a subsidiary within a larger group of

companies; their direct parent company is TJ. The directors of PL would like
to know the possible related parties of their company according to LKAS 24.
Which TWO of the following would normally be deemed a related party
of PL?
 Jed, who is the finance director of PL

 RY, PL's main supplier
 HB Bank, who has recently provided a substantial loan to PL
 UV, a charity which is not part of the group which PL is in which Jed
(PL's finance director) sits as a board member
 QP, the parent of TJ and the ultimate parent of the group in which PL is
included
18 CA Sri Lanka
Questions
42 Which of the following statement(s) is correct in relation to the definition of

an operating segment in SLFRS 8?
(i) It engages in business activities that earns revenues and incurs
expenses
(ii) Its operating results must be reviewed by the Board of directors
(iii) Its operating results must be reviewed by the entity’s chief operating
decision maker
(iv) Discrete financial information is available
A (ii) and (iii)
B (i) and (iii)
C (i) (iii) and (iv)
D All of the above
43 Basic and Diluted Earnings Per Share (EPS) are required to be disclosed at
the foot of the statement of profit or loss and other comprehensive income
for most public listed entities. LKAS 33 Earnings per Share standardises
these ratios to allow consistency in their calculation so enabling
comparisons to be made between entities.
Which TWO of the following instruments that an entity has recently
issued should be included in diluted EPS but not in basic EPS?
 Convertible bonds
 Share options granted to executives
 Preference shares with no conversion rights
 Ordinary shares
 Redeemable bonds
44 ER group has 1.6 million ordinary shares in issue on 1 January 20X0. On

1 September 20X0, ER made a 1 for 4 rights issue at Rs. 150 per share.
The fair value of each share before the rights issue was Rs. 225. ER group's
profit before tax for the year ended 31 December 20X0 was Rs. 300 million
and its income tax expense was Rs. 90 million. Profit attributable to non-
controlling interests was Rs. 35 million
Calculate basic earnings per share for the year ended 31 December
20X0.
(Give your answer to one decimal place).
CA Sri Lanka 19
45 On 1 July, Mole plc acquired 80,000 of Ratty Ltd's 100,000 ordinary shares
for Rs. 450 million. At that date Ratty Ltd's shares were trading at Rs. 3,750.
At the acquisition date Ratty Ltd had net assets of Rs. 265 million and the
carrying values of these were approximately equal to fair value, with the
exception of one building, which had a fair value of Rs. 80 million in excess
of its carrying amount.
It is the policy of the Mole Group to measure the non-controlling interest at
full (fair) value, for which the share price at acquisition is the best estimate.
What is the goodwill arising on acquisition?
Rs.
46 PL acquired 80% of the 1,000,000 ordinary shares in HW several years ago

for Rs. 28 million when the equity of HW stood at Rs. 31 million. It is group
policy to measure non-controlling interest at fair value at acquisition.
Goodwill arising on acquisition was Rs. 4 million and the fair value of the
non- controlling interests (NCI) at acquisition was Rs. 7 million.
On 1 December 20X3, PL disposed of its entire holding in HW for
Rs. 50 million. On this date the equity balance of HW was Rs. 56 million.
There has been no impairment in goodwill since acquisition.
What is the profit or loss on disposal of HW that should be shown in
PL's consolidated statement of profit or loss for the year end
31 December 20X3?
A Rs. 22,000,000 profit

B Rs. 2,000,000 profit
C Rs. 10,000,000 loss
D Rs. 3,000,000 loss
20 CA Sri Lanka
Questions
47 AB owns 80% of the ordinary share capital of CD, its only subsidiary.
In the year ended 31 December 20X3 CD has total comprehensive income of
Rs. 23,800,000. A fair value adjustment at acquisition results in additional
depreciation of Rs. 800,000 in the year ending 31 December 20X3. Goodwill
on the acquisition of CD was impaired by Rs. 1,000,000 in the year to
31 December 20X3 and Rs. 1,200,000 in the previous year.
The group policy is to measure the non-controlling interest at fair value at
the acquisition date.
The share of total comprehensive income attributable to the
non-controlling interest for the year ended 31 December 20X3 is:
A Rs. 4,160,000
B Rs. 4,320,000
C Rs. 4,400,000
D Rs. 4,760,000
48 The accounting treatment of associates in the consolidated financial

statements is addressed by LKAS 28 Investments in Associates and Joint
Ventures; LKAS 27 Separate Financial Statements applies to the financial
statements of the investor.
Which TWO of the following statements are CORRECT in relation to
associates?
 The choice of treatments for an associate in the parent's individual
financial statements is the same as for an investment in a subsidiary or
joint venture.
 Significant influence can only be achieved by investing in at least 20%
of the ordinary shares.
 When the parent sells goods to the associate, the group share of
intragroup revenue and cost of sales must be eliminated.
 In the consolidated statement of profit or loss, the group share of the
associate's profit before tax must be shown in a separate line.
 The group share of the associate's post-acquisition reserves must be
included in the carrying amount of the investment in associate and
consolidated reserves.
CA Sri Lanka 21
49 The objective of SLFRS 12 Disclosure of Interests in Other Entities is to

provide information that allows users to do which one of the following?
A Evaluate the nature of, and risks associated with, interest in other
entities and the effect of those on financial position, performance and
cash flows
B Understand the effect of the elimination of intragroup transactions in
the consolidated financial statements
C Evaluate the performance of all investments made by the entity,
including those accounted for in accordance with SLFRS 9
D Understand the mechanics of the consolidation and equity accounting
processes.
50 Which FOUR of the following are required by SLFRS 12 Disclosure of Interests

in Other Entities to be disclosed in the consolidated financial statements?
 The fair value of each class of financial assets and financial liabilities
 The significant judgements and assumptions made in determining
whether the entity has control, joint control or significant influence of
the other entities, and in determining the type of joint arrangement
 Information to understand the composition of the group and the
interest that non-controlling interests have in the group's activities and
cash flows
 Entries made to remove the effects of any intragroup transactions
 The nature, extent and financial effects of interests in joint
arrangements and associates, including the nature and effects of the
entity's contractual relationship with other investors
 The nature and extent of interests in unconsolidated structured entities
51 Cloud Co obtained a 60% holding in the 100,000 shares of Mist Co on

1 January 20X8. Cloud Co paid Rs. 25,000,000 cash immediately with an
additional Rs. 40,000,000 payable on 1 January 20X9 and one share in Cloud
Co for each two shares acquired. Cloud Co has a cost of capital of 8% and the
market value of its shares on 1 January 20X8 was Rs. 230.
What was the total consideration paid for Cloud Co's share of Mist Co?
A Rs. 68,937,037
B Rs. 71,900,000
C Rs. 75,803,700
D Rs. 78,800,000 (2 marks)
22 CA Sri Lanka
Questions
52 On 1 June 20X1 Premier Co acquired 80% of the equity share capital of

Sandford Co. At the date of acquisition the fair values of Sandford Co's net
assets were equal to their carrying amounts with the exception of its
property. This had a fair value of Rs. 12 million BELOW its carrying amount.
The property had a remaining useful life of eight years.
What effect will any adjustment required in respect of the property have on
group retained earnings at 30 September 20X1?
Rs. Increase / decrease (2 marks)
53 The carrying amount of property, plant and equipment was Rs. 410 million
at 31 March 20X1 and Rs. 680 million at 31 March 20X2. During the year,
property with a carrying amount of Rs. 210 million was revalued to
Rs. 290 million. The depreciation charge for the year was Rs. 115 million.
There were no disposals.
What amount will appear in the statement of cash flows for the year ended
31 March 20X2 in respect of purchases of property, plant and equipment?
Rs. (2 marks)
54 Extracts from Deltoid Co's statements of financial position are as follows:

STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH
20X1 20X0
Rs'000 Rs'000
Non-current assets
Property, plant and equipment
Right-of-use asset 6,500 2,500
Non-current liabilities
Lease obligations 4,800 2,000
Current liabilities
Lease obligations 1,700 800
During the year to 31 March 20X1 depreciation charged on right-of-use
assets was Rs. 1,800,000.
What amount will be shown in the statement of cash flows of Deltoid Co for
the year ended 31 March 20X1 in respect of lease payments made?
Rs. (2 marks)
CA Sri Lanka 23
55 Which of the following statements is/are correct?

1 Rights issues of shares do not feature in a statement of cash flows.
2 A statement of cash flow prepared using the indirect method produces
a different figure for cash flows from operating activities from that
produced using the direct method.
3 A remeasurement of a defined benefit pension scheme will not appear
as an item in a statement of cash flow.
4 A loss on sale of a non-current asset will appear as an item under cash
flows from investing activities in a statement of cash flows.
A 1 and 4
B 2 and 3
C 3 only
D 2 and 4
56 Which of the following statement(s) is correct in relation to accounting

treatment required by SLFRS for SMEs ?
(i) Goodwill must be tested annually for impairment.
(ii) Research costs and development costs must be expensed.
(iii) Equity settled share-based payments can be measured based on
directors estimates if fair value cannot be determined.
(iv) SLFRS 5 rules apply to non-current assets held for sale.
A (ii) and (iii)
B (i) and (iii)
C (i) (iii) and (iv)
D All of the above
57 The gross profit margin of LL has decreased from 25% to 10% in the year to
31 March 20X2.
Which TWO of the following would be realistic reasons for this
decrease?
 LL announcing at the start of the year a price promise to undercut any
of its competitor's prices
 LL signing a major contract to supply a single customer in the year,
which was obtained after a very competitive tendering process
 LL increasing the credit period offered to its customers from one
month to three months
 LL achieving economies of scale in the year
 LL not controlling its indirect costs
24 CA Sri Lanka
Questions
58 The following information is available for two potential acquisition targets.

The entities have similar capital structures and both are toy manufacturers.
SH RV
Current ratio 4.3 7.5
Quick ratio 1.6 2.9
Inventory days 184 days 340 days
Receivable days 35 days 70 days
Payable days 56 days 27 days
Which of the following statements is a realistic conclusion that can be
drawn from the above information?
A Both entities are suffering from liquidity problems – neither can pay its
current liabilities as they fall due using their current assets.
B RV's inventory days are considerably higher than SH's implying a
significant obsolescence risk to RV of changes in the popularity of toys
compared to SH.
C SH's receivable days are lower than RV's implying that RV has a better
credit control function.
D RV pays its suppliers more quickly than SH suggesting that RV has
more favourable credit terms due to a shorter credit history.
59 The gearing ratio (calculated as debt/debt + equity) of YY has increased from

43% to 90% in the year to 31 December 20X0.
Which TWO of the following are likely to be reasons for this increase?
 YY acquiring a large amount of plant and equipment by entering into a
lease in the year
 YY making a substantial profit for the year, thereby increasing retained
earnings at the year end
 YY having more taxable temporary differences in 20X0 which has
increased the deferred tax liability substantially
 YY raising more finance in the year by issuing new ordinary shares to
the market
 YY using the remainder of its overdraft facility and reaching its limit in
20X0, YY uses this facility as another source of long term finance
CA Sri Lanka 25
60 A company has adopted a policy of revaluing its owner occupied property in

the year ended 31 December 20X9 and has recognised a surplus on
revaluation. The property has a remaining useful life of 29 years and
depreciation is reported as an administrative expense. What is the effect of
this policy on the following ratios?
Increase Decrease No effect

Operating profit margin
Return on capital employed
Gearing
Gross profit margin
Current ratio
26 CA Sri Lanka
Objective test answers
1 A Publication of an Exposure Draft

An Exposure Draft will be published following the review of Discussion
Paper comments.
2 C A: The licence payment could be avoided by ceasing manufacture

therefore there is no present obligation.
B: The fall in value of the investment is a loss however there is no
liability as there is no present obligation to transfer economic resource.
C: Planned expenditure does not create an obligation.
3 C Consistency
Consistency is an important part of the qualitative characteristic of
comparability, but it is not the same thing. Comparability of financial
statements is aided by the consistency of policies and methods used,
either between companies within the same industry or within the same
company, between different years.
4 B An integrated report provides information about many areas. A just

focuses on social and environmental issues which is too narrow as is
option C. Option D disclosures are part of the financial statements.
5 D and E
A is incorrect because no form of ESG reporting is mandatory in Sri
Lanka.
B is incorrect because GRI standards apply to sustainability reporting.
C is incorrect: GRI standards are classified as universal, economic,
social and environmental.
F is incorrect because it describes an integrated rather than
sustainability report.
6 C It is the responsibility of the directors to prepare the financial

statements in an ethical manner and hence the shares should be
classified as liabilities.
The directors as a whole are responsible for the financial statements
and should all act ethically, the burden does not fall on just one
director.
28 CA Sri Lanka
Answers
7
Integrity To be straightforward and honest in all
professional and business relationships
Professional Behaviour To comply with relevant laws and regulations
and avoid any action that discredits the
profession
Professional competence To maintain professional knowledge and skill at
and due care the level required to ensure that a client or
employer receives competent professional
service based on current developments in
practice
Objectivity Not to allow bias, conflict of interest or undue
influence of others to override professional or
business judgments
8 A A change in valuation of inventory from a weighted average to a FIFO

basis
A change of depreciation method is treated as a change of accounting
estimate. Adoption of the revaluation method is a change in policy
however it is outside the scope of LKAS 8 and is instead dealt with by
LKAS 16. Application of a new accounting policy (such as capitalisation
of borrowing costs) for transactions that did not previously occur is not
a change in accounting policy.
9
An increase in the Other
revaluation surplus comprehensive
income
A sewing machine Inventory
A trade receivable due Current asset
in 13 months' time
Dividend paid Equity
movement
10 B
Rs million
Machine ((500 – 20)/10  9/12) 36
Safety guard ((25/5  3 / 12) 1.25
37.25
CA Sri Lanka 29
11 Rs. 18.5m
Property Revaluation surplus
Rs m
Cost 1 January 20X7 200
Depreciation (200/50) (4.0)
Carrying amount 196
Revaluation surplus 24.5 24.5
Fair value 220.5
Depreciation (220.5/49) (4.5)
Carrying amount 216
Revaluation decrease (6.0) (6)
Fair value 210 ______
18.5
12
Site selection costs No
Legal costs of acquiring the land Yes
Costs of relocating to the new property No
Interest costs arising on the loan to fund the construction Yes
Wages of employed construction workers Yes
13 Rs. 203 million

Prior to 30 June 20X8, the building was property, plant and equipment and
was accounted for using LKAS 16. When the building was leased, it was
transferred to an investment property, and so is accounted for under IAS 40.
IAS 40 requires that assets must be transferred across at the fair value of the
date of transfer (Rs. 950 million in the question). The credit will go to the
revaluation surplus.
Rs million
Cost 1.1.X0 900
Depreciation to 30.6.X8 (900  8.5 / 50) (153)
Carrying amount 30.6.X8 747
Revaluation surplus 203
Fair value 30.6.X8 950
The increase of (Rs. 1,200 – Rs. 950) = Rs. 250 million arising between
30.6.X8 and 31.12.X8 is credited to profit or loss in accordance with LKAS 40.
14 B They should be written off to profit or loss as an expense as they are
research costs at this date.
30 CA Sri Lanka
Answers
15 C The project has moved to the development stage. If the LKAS 38

development expenditure criteria are met, Artem Co must recognise
the Rs. 800 million costs as an intangible non-current asset.
LKAS 38 does not allow a choice regarding whether or not to capitalise
development costs.
16 The RECOVERABLE AMOUNT of an asset is the higher of
Fair value less costs of disposal and Value in use under LKAS 36.
17 The correct answer is A Rs. 154.5 million

Net assets prior to Impaired net
impairment Impairment assets
Rs m Rs m Rs m
Property, plant and
equipment 200 (45.5) 154.5
Goodwill 50 (50) –
Product patent 20 (4.5) 15.5
Net current assets 30 – 30
300 (100) 200
Goodwill is written off in full and the balance of the loss is pro-rated between
PPE and the patent in line with carrying amounts.
18 D Rs. 286.5 million

Rs million
Lease liability 173.5
Payment made at the commencement of the lease 100
Initial direct costs 20
Less: Lease incentives (7)
Right of Use Asset initial measurement 286.5
19 SLF should depreciate the right-of-use asset over the lease term.
The depreciation period is the shorter of the lease term and the useful life of
the plant
20 Rs. 173.5m + interest of (173.5m  10%) = Rs. 190.85 million.
CA Sri Lanka 31
21
Fixed production overheads should be included in cost on the Incorrect
basis of a company's actual level of activity in the period.
In arriving at the net realisable value of inventories, Incorrect
settlement discounts must be deducted from the expected
selling price.
In arriving at the cost of inventories, FIFO, LIFO and weighted Incorrect
average cost formulas are acceptable.
It is permitted to value finished goods inventories at Incorrect
materials plus labour cost only, without adding production
overheads.
Fixed production overheads are allocated on the basis of a company's

normal level of activity. Settlement discounts are not deducted to arrive at
NRV. The LIFO formula is not allowed by LKAS 2 Inventories. Valuation of
finished goods should include production overheads.
22 The net amount charged to operating expenses in respect of the server for
the year ended 31 March 20X3 is Rs. 22 million
Operating expenses Rs'000
Depreciation charge (800,000  85%  10%  6/12) 34,000
Release of grant (240,000  10%  6/12) (12,000)
22,000
The amount to be presented as a non-current liability at 31 March 20X3 in
respect of the grant is Rs. 204 million
Deferred income Rs'000
Grant received (800,000  30%) 240,000
Release for this year (240,000  10%  6/12) (12,000)
Total balance at year end 228,000
Presentation
Current liability (240,000  10%) 24,000
Non-current liability (balance) 204,000
228,000
23 C The correct answer is Rs. 164.415 million, being the fair value of the cattle
at the year end net of the costs to sell ie, 97%  3,000  Rs. 56,500.
32 CA Sri Lanka
Answers
24 The correct answer is: Rs. nil.

LKAS 37 requires that a provision should only be recognised when it
is probable that an outflow embodying economic benefits will be required
to settle the obligation. An outflow is only regarded as probable if the event
is more likely than not to occur ie more than a 50% chance of occurring.
Here, as the percentage is less than 50%, the outflow is not probable so no
provision should be made.
25 The correct answer is C.
This is an onerous contract as the costs of meeting the obligations under the
lease exceed the economic benefits expected to be received under it.
A provision is not made in respect of:
A – The company is not obliged to incur the restructuring costs because it
has not yet communicated the closure decision to those affected by it.
B – No provision should be made for the cost of installing the safety guards
because no obligating event has yet occurred ie the installation of safety
guards. Furthermore, the company could avoid installing the safety guards
by selling the machinery.
D – No provision can be made for the damages as the amount cannot be
estimated reliably.
26 The discovery of a fraud which occurred during the year.
The determination of the sale proceeds of an item of plant sold before the
year end.
These both provide evidence of conditions that existed at the end of the
reporting period. The other options refer to conditions which arose after the
reporting period and are therefore non-adjusting events according to
LKAS 10 Events After the Reporting Period.
27 C Rs. 1,500,000 relates to the performance obligation that has been

satisfied (the provision of the photocopier) and this is recognised as
revenue. The Rs. 300,000 relating to servicing is only recognised as
revenue when the promise to deliver servicing has been satisfied.
In A revenue is equal to commission rather than the gross sales
amount.
In B the amount generated is not revenue; a profit on disposal is
recognised in operating profit.
In D there is a significant financing component and revenue should
reflect the amount of cash consideration that the sale would generate
on 1 October 20X3.
CA Sri Lanka 33
28 Manufacturer can require dealer to return the inventory.

Manufacturer bears obsolescence risk.
These both indicate that the manufacturer retains ownership of the
inventory. The other options would indicate that the risks and rewards have
been transferred to the dealer.
29 Rs. 23.8 million

Rs'000
Revenue per draft profit or loss 27,000
Service and support costs (8m  4/10) (3,200)
23,800
30 C Rs. 16.8 million

Rs'000
Charge for year 16,200
Underprovision 2,100
Adjust deferred tax (W) (1,500)
Profit or loss charge 16,800
Working
Provision needed (13m  30%) 3,900
Provision b/f (5,400)
Reduce provision (1,500)
31 Rs. 1,524,000
RS'000
Interest years 1–3 (30m  8%  2.49) 5,976
Repayment year 3 (30m  0.75) 22,500
Debt component 28,476
Equity option (β) 1,524
30,000
32 D In other comprehensive income for investment 1 and in profit or loss

for investment 2
Note. Investment 2 is held for trading and therefore measurement at
FVTOCI is not allowed.
34 CA Sri Lanka
Answers
33 The correct answer is C

DR Investment Rs. 20,200,000
CR Bank Rs. 20,200,000
The instrument is classified as measured at FVTOCI. It is therefore
recognised initially at its fair value (transaction price) and transaction costs
are added to this amount..
34 The correct answer is: A

Current service costs and the net interest cost/income is always charged to
P/L. The additional benefits payable to existing pensioners (past service
costs) must be charged immediately to P/L whether they are fully vested or
not.
The contributions are not charged to P/L – these are debited to the pension
liability and credited to the pension assets. Contributions only affect the
figures in the statement of financial position, not the SPLOCI.
Rs m
Net interest income (30)
Current service cost 45
Past service costs 10
Net charge to P/L 25
35
Items Accounting treatment

Defined contribution pension scheme Expense in profit or loss
contributions
Unused holiday allowance carried forward Accrual in the statement of
financial position
Actuarial gain on defined benefit obligation Other comprehensive income
Net defined benefit surplus Asset in the statement of
financial position
CA Sri Lanka 35
36 B The correct answer is: Dr Expense Rs. 2,887,500, Cr Liability

Rs. 2,887,500
This is calculated as (25  3,500  55%  180)/3 years
The total expense is updated at each period end to fair value and is
spread over the vesting period.
As this is a cash-settled share-based payment it should be recorded as
a liability rather than equity. The debit side of the double entry should
reflect the service received in exchange for the SARs ie, employee
service.
37
Categories
Reflected in fair value of share Reflected in estimation of number
options at grant date of options expected to vest
Non-vesting condition
Market-based performance vesting
condition
Service vesting condition
Non-market based vesting condition
38 A This is an equity-settled share-based payment. The total expense is

measured based on the fair value of a share option at the grant date at
Rs. 4.8 million (500  8  Rs. 1,200). This is spread over the two year
vesting period so giving an expense in the year ended 31 March 20X6
of Rs. 2.4 million.
39 A and E
B is not an asset held for sale as it is to be abandoned.
C is not available for immediate sale and so can't be classified as held for
sale.
D is not available for sale until a replacement is located.
36 CA Sri Lanka
Answers
40 A An asset held for sale is measured at the lower of carrying amount and
fair value less costs to sell.
Carrying amount is Rs. 45m – Rs. 6m – Rs. (45/15  6/12) = 36m
Fair value is Rs. 42m  90% = Rs. 37.8m
Fair value less costs to sell is Rs. 37.8m – Rs. 1m = Rs. 36.8m
Therefore the property is measured at carrying amount; it is not
depreciated after classification.
41 The correct answers are:

 Jed, who is the finance director of PL.
 QP, the parent of TJ and the ultimate parent of the group in which PL is
included.
Jed is a related party because he is a member of the key management
personnel of PL. QP is related because it is a member of the same group as
PL.
LKAS 24 Related Party Disclosures gives specific examples of those parties
that are not necessarily related to the reporting entity:
 Two entities simply because they have a director in common, therefore
UV is not a related party.
 Providers of finance – therefore HB Bank is not related to PL.
 Customers and suppliers – therefore RY is not a related party of PL.
42 C The board of directors are nor required to review the results of an

operating segment according to SLFRS 8.

 Convertible bonds
 Share options granted to executives
Both of these instruments can potentially convert into ordinary shares in the
future and therefore the number of potential dilutive shares issued should
be included in diluted EPS but not in basic EPS.
Preference shares issued are not included in the weighted average number
of shares because LKAS 33 dictates that only ordinary shares should be
included. As they are not convertible, they should be excluded from the
diluted EPS number of shares.
Redeemable bonds are not be included in the weighted average number of
shares because they are debt not equity. As they are not convertible, they are
not included in the diluted EPS number of shares.
CA Sri Lanka 37
44 The correct answer is: Rs. 96.7

Profit available to ordinary shareholders
Basic EPS =
Weighted average number of ordinary shares
Basic EPS =
300 m –90 m –35 m 
1,809,524  W1
Basic EPS = Rs. 96.7

Profit (earnings) available to ordinary shareholders is profit for the year less
any preference dividends and profit attributable to non-controlling interests.
WORKINGS
1 Weighted average number of ordinary shares
Date Number of Time Bonus Average
shares fraction fraction
(W2)
1.1.20X0 Ordinary shares 1,600,000  8/12  225/210 1,142,857
at start of year
1.9.20X0 1 for 4 rights issue 400,000
31.12.20X0 Total 2,000,000  4/12 666,667
Weighted average 1,809,524
2 Bonus fraction
Bonus fraction = Fair value prior to issue (cum rights price)/
225
Theoretical ex rights price (TERP) =
210
Fair value of all outstanding shares + total received from exercise of rights
No shares outstanding prior to exercise + no shares issued in exercise
(Rs. 225  1,600,000) + (Rs. 150  400,000)

1,600,000 + 400,000
45 The correct answer is: Rs. 180,000.

Rs’000 Rs’000
Consideration transferred 450,000
Fair value of non-controlling interest
(3,750  20,000) 75,000
Fair value of net assets:
Carrying amount 265,000
Fair value adjustment 80,000
(345,000)
Goodwill 180,000
38 CA Sri Lanka
Answers
46 B The correct answer is: Rs. 200,000 profit. Calculated as follows:

Rs'000 Rs'000
Fair value of consideration received 50,000
Less: Share of consolidated carrying

amount at 1 December 20X3
Net assets 56,000
Goodwill 4,000
NCI (w) (12,000)
(48,000)
Profit / (loss) on disposal 2,000
Working
Rs'000
NCI at acquisition 7,000
NCI share of post-acquisition reserves 5,000
(56,000 – 31,000)  20%
NCI at disposal 12,000
47 The correct answer is: C Rs. 4,400,000.

Rs
TCI 23,800,000
FV depreciation (800,000)
Goodwill impairment (1,000,000)
22,000,000
NCI share (20%) 4,400,000

 The choice of treatments for an associate in the parent's individual
financial statements is the same as for an investment in a subsidiary or
joint venture.
 The group share of the associate's post-acquisition reserves must be
included in the carrying amount of the investment in associate and
consolidated reserves.
In the parent's separate financial statements, LKAS 27 Separate Financial
Statements, requires that an investment in a subsidiary, associate or joint
venture is held at cost, at fair value or using the equity method.
As an associate does not sit within a group, revenue an costs arising on
transactions between the associate and members of a group are not
eliminated in the consolidated financial statements.
In the consolidates statement of profit or loss the group share of the
associate's profit for the year (ie after tax) is recognised in one line. The
group share of the associate's other comprehensive income is recognised
as a separate line entry within group other comprehensive income.
CA Sri Lanka 39
49 The correct answer is A

The other options are incorrect for the following reasons:
Investments which are accounted for in line with SLFRS 9 in the group
accounts are outside the scope of SLFRS 12. The consolidation of
subsidiaries and elimination of intragroup transactions are requirements of
SLFRS 10 not SLFRS 12 and they are not disclosed. SLFRS 12 does not
require explanation fo the consolidation or equity accounting procedures.

 The significant judgements and assumptions made in determining
whether the entity has control, joint control or significant influence of
the other entities, and in determining the type of joint arrangement.
 Information to understand the composition of the group and the
interest that non controlling interests have in the group's activities and
cash flows.
 The nature, extent and financial effects of interests in joint
arrangements and associates, including the nature and effects of the
entity's contractual relationship with other investors.
 The nature and extent of interests in unconsolidated structured
entities.
The disclosure of entries to remove intragroup transactions is not required
in the group financial statements by any of the international financial
reporting standards. SLFRS 10 Consolidated Financial Statements does
require disclosure of this elimination. LKAS 24 Related Party Disclosures does
consider a parent and its subsidiaries to be related parties, however,
intragroup transactions are exempt from disclosure in the group financial
statements as they are eliminated on consolidation.
The requirement to disclose the fair value of each class of financial assets
and financial liabilities comes from SLFRS 7 Financial Instruments:
Disclosures not SLFRS 12. Interests in another entity accounted for in
accordance with SLFRS 9 Financial Instruments are outside the Scope of
SLFRS 12.
40 CA Sri Lanka
Answers
51 A
Consideration transferred: Rs
Cash 25,000,000
Deferred consideration (40,000,000/1.08) 37,037,037
Shares (30,000  230) 6,900,000
68,937,037
52 Increase Rs. 400,000

(12 million / 8  4/12)  80% = 400,000
The adjustment will reduce depreciation over the next eight years, so it will
increase retained earnings.
53
Rs. 305 million Rs m
B/f 410
Depreciation (115)
Revaluation 80
Purchases (β) 305
C/f 680
54
Rs'000
B/f (2,000 + 800) 2,800
Additions (6,500 – 2,500 + 1,800) 5,800
Payments made (β) (2,100)
C/f (4,800 + 1,700) 6,500
55 C A rights issue involves the receipt of cash and so does feature in a

statement of cash flows.
Cash flows from operating activities is the same amount regardless of
method used.
A loss on sale is not a cash flow and is not reported as such in the
statement of cash flows.
56 A In the SLFRS for SMEs goodwill only has be tested for impairment if
there is an indicator. There is no held-for-sale classification for assets.
CA Sri Lanka 41

 LL announcing at the start of the year a price promise to undercut any
of its competitor's prices.
 LL signing a major contract to supply a large proportion of its output to
a single customer in the year, which was obtained after a very
competitive tendering process.
By undercutting its competitors' prices, LL would be reducing their selling
prices in the year which would lead to a reduction in the gross margin if
there were no corresponding decrease in cost of sales.
Also, with LL securing a contract after a very competitive tender, it would have
forced LL to reduce prices to win the contract and therefore it would have
reduced its margin in the year – again assuming no decrease in cost of sales.
By increasing credit terms, LL is likely to have an increase in volume of sales
and is likely to increase sales volume but have no effect on the gross margin
(unless there is an associated change in prices).
If LL achieves economies of scale it is likely to improve margins rather than
deteriorate them.
If LL is not controlling its indirect costs, this would be reflected in a
deteriorating operating profit margin, not the gross profit margin which only
includes direct costs in cost of sales.
58 The correct answer is B.

RV's inventory days are considerably higher than SH's implying a significant
obsolescence risk to RV of changes in the popularity of toys compared to SH.
It is not unusual that toy manufacturers would have high inventory days as
toys are not perishable. However, RV's inventory days are almost double that
of SH's which means that RV is exposed to significant obsolescence risk from
changes in popularity of certain toys compared to SH.
Option A is incorrect as both entities have current and quick ratios in excess
of 1 – therefore they both have more than enough current assets to pay off
current liabilities as they fall due.
Option C is incorrect as SH has the lower receivables days and therefore we
can presume that it would have better credit control than RV, not the other
way around.
Option D is incorrect because although RV does pay its suppliers more
quickly than SH, it is likely to be because they get less favourable (ie shorter)
credit terms than SH, which means they have to pay their suppliers quicker.
Also, to obtain favourable credit terms, a long rather than a short credit
history is usually required.
42 CA Sri Lanka
Answers

 YY acquiring a large amount of plant and equipment by entering into a
lease in the year.
 YY using the remainder of its overdraft facility and reaching its limit in
20X0, YY uses this facility as another source of long term finance.
Both the lease and overdraft would increase long term debt, the numerator
in the gearing ratio, and therefore would increase gearing in the year.
60
Increase Decrease No effect

– Operating profit Gross profit margin
Return on capital employed Current ratio
Gearing
Option 2 is incorrect as this would decrease gearing in the year by increasing

equity, the denominator in the gearing ratio.
Option 3 is incorrect because although deferred tax appears in the statement
of financial position as part of non-current liabilities, it is not a part of long
term debt because it is not a source of funding for an entity.
Option 4 is incorrect as again this will have the effect of increasing equity,
therefore reducing gearing.
CA Sri Lanka 43
44 CA Sri Lanka
Questions
PART A: REGULATORY FRAMEWORK FOR FINANCIAL REPORTING

Questions 1 to 4 cover the Regulatory Framework, the subject of Chapters 1 to 2 of
the Study Text.
1 Standards development
(1) Historically financial reporting throughout the world has differed widely.
The IFRS Foundation is committed to developing, in the public interest, a
single set of high quality, understandable and enforceable global accounting
standards that require transparent and comparable information in general
purpose financial statements. These are adopted by CA Sri Lanka as SLFRS.
Required
Outline the IFRS Foundation's standard setting process including how
standards are produced and occasionally supplemented, how CA Sri Lanka
has input into the process, and how IFRS Standards are adopted as SLFRS
Standards. (7 marks)
(2) The methods by which Accounting Standards are developed differ
considerably throughout the world. It is often argued that there are two
main systems of regulation that determine the nature of Accounting
Standards: a rules-based system and a principles-based system.
Required
Explain the difference between the two systems and state which system you
believe is most descriptive of Sri Lanka Financial Reporting Standards
(SLFRS). (3 marks)
(LO 1.2.1) (Total = 10 marks)
CA Sri Lanka 45
2 Relevance
Your assistant has been reading the Institute of Chartered Accountants of

Sri Lanka's Conceptual Framework for Financial Reporting and, as part of the
qualitative characteristics of financial statements under the heading of 'relevance',
he notes that the predictive value of information is considered important. He is
aware that financial statements are prepared historically (ie after transactions
have occurred) and offers the view that the predictive value of financial
statements would be enhanced if forward-looking information (eg forecasts) were
published rather than backward-looking historical statements.
Required
Explain to your assistant how SLFRS presentation and disclosure requirements
can assist the predictive role of historically prepared financial statements. You
should give specific examples to support your explanation.
(LO 1.1.1) (10 marks)
3 Qualitative characteristics
(1) The qualitative characteristics of relevance, faithful representation and
comparability identified in the Institute of Chartered Accountants of Sri
Lanka's Conceptual Framework for Financial Reporting are some of the
attributes that make financial information useful to the various users of
financial statements.
Required
Explain what is meant by relevance, faithful representation and
comparability and how they make financial information useful. (6 marks)
(2) During the year ended 31 March 20X6, Porto Co experienced the following
transactions or events:
(i) Entered into a lease to rent an asset for a number of years
(ii) The company's statement of profit or loss prepared using historical
costs showed a loss from operating its hotels, but the company is aware
that the increase in the value of its properties during the period far
outweighed the operating loss.
Required
Explain how you would treat the items above in Porto's financial
statements, and indicate on which of the Conceptual Framework's
qualitative characteristics your treatment is based. (4 marks)
(LO 1.1.1, 1.1.2) (Total = 10 marks)
46 CA Sri Lanka
Questions
4 SGCC
You are the audit manager of Tela & Co, a medium sized firm of accountants. Your
firm has just been asked for assistance from Jumper & Co, a firm of accountants in
an adjacent country. This country has just implemented internationally recognised
codes on corporate governance, like the Sri Lankan Code of Corporate Governance,
and Jumper & Co has a number of clients at which the codes are not being
followed. One example of this, relating to SGCC, a listed company, is shown below.
As Sri Lanka already has appropriate corporate governance codes in place, Jumper
& Co has asked for your advice regarding the changes that should be made at SGCC
to achieve appropriate compliance with corporate governance codes.
Extract from financial statements regarding corporate governance
Mr Sheppard is the Chief Executive Officer and board chairman of SGCC. He
appoints and maintains a board of five executive and two non-executive directors.
While the board sets performance targets for the senior managers in the company,
no formal targets or review of board policies is carried out. Board salaries are
therefore set and paid by Mr Sheppard based on his assessment of all the board
members, including himself, and not based on their actual performance.
Internal controls in the company are monitored by the senior accountant,
although detailed review is assumed to be carried out by the external auditors;
SGCC does not have an internal audit department.
Required
Explain to Jumper:
• Why SGCC does not currently meet international codes of corporate
governance and why this may be a problem.
• What changes are necessary to implement those codes in SGCC.
(LO 1.1.1) (20 marks)
CA Sri Lanka 47
PART B: SRI LANKA ACCOUNTING STANDARDS

Questions 8 to 35 cover Sri Lanka Accounting Standards, the subject of Chapters 5
to 20 of the Study Text.
5 Plethora Co
The draft financial statements of Plethora Co for the year to 31 December 20X9
are being prepared and the accountant has requested your advice on dealing with
the following issues:
(1) Plethora has an administration building which it no longer needs following a
reorganisation. On 1 July 20X9 Plethora entered into an agreement to let the
building out to another company. The building cost Rs. 600 million on
1 January 20X0 and is being depreciated over 50 years. Plethora applies the
fair value model under LKAS 40 and the fair value of the building was
determined to be Rs. 800 million on 1 July 20X9. This valuation had not
changed at 31 December 20X9. Another building has been let out for a
number of years. It had a fair value of Rs. 550 million at 31 December 20X8
and Rs. 740 million at 31 December 20X9.
Required
Demonstrate how these two buildings should be accounted for in the
financial statements of Plethora for the year to 31 December 20X9, and
calculate the amounts involved. (6 marks)
(2) Plethora owns a retail business which has suffered badly during the
recession. Plethora treats this business as a separate cash generating unit.
On 31 December 20X9 the carrying amounts of the assets comprising the
retail business are:
Rs'm
Building 900
Plant and equipment 300
Inventory 70
Other current assets 130
Goodwill 40
An impairment review has been carried out as at 31 December 20X9 and the
recoverable amount of the cash generating unit, calculated to include all
assets listed above, is estimated at Rs. 1,300 million.
Required
Calculate the carrying amounts of the assets of the retail business after
accounting for the result of the impairment review. (4 marks)
(LO 2.2) (Total = 10 marks)
48 CA Sri Lanka
Questions
6 Dearing
On 1 October 20X5 Dearing acquired a large manufacturing machine under the

following terms:
Rs'000
Manufacturer's base price 1,050,000
Trade discount (applying to base price only) 20%
Early settlement discount taken (on the payable amount 5%
of the base cost only)
Freight charges 30,000
Electrical installation cost 28,000
Staff training in use of machine 40,000
Pre-production testing 22,000
Purchase of a three-year maintenance contract 60,000
Estimated residual value 20,000
Hours
Estimated life in machine hours 6,000
Hours used – year ended 30 September 20X6 1,200
– year ended 30 September 20X7 1,800
– year ended 30 September 20X8 (see below) 850
On 1 October 20X7 Dearing decided to upgrade the machine by adding new
components at a cost of Rs. 200,000. This upgrade led to a reduction in the
production time per unit of the goods being manufactured using the machine.
The upgrade also increased the estimated remaining life of the machine at
1 October 20X7 to 4,500 machine hours and its estimated residual value was
revised to Rs. 40,000.
Required
Compile extracts from the statement of profit or loss and statement of financial
position for the above machine for each of the three years to 30 September 20X8.
(LO 2.1) (10 marks)
7 Apex
(1) Apex is a publicly listed supermarket chain. During the current year it
started the construction of a new store. The directors are aware that in
accordance with LKAS 23 Borrowing Costs certain borrowing costs have to
be capitalised.
Required
Explain the circumstances when, and the amount at which, borrowing costs
should be capitalised in accordance with LKAS 23. (5 marks)
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(2) Details relating to construction of Apex's new store:

Apex issued a Rs. 10 million unsecured loan with a coupon (nominal)
interest rate of 6% on 1 April 20X8. The loan is redeemable at a premium
which means the loan has an effective finance cost of 7.5% per annum. The
loan was specifically issued to finance the building of the new store which
meets the definition of a qualifying asset in LKAS 23. Construction of the
store commenced on 1 May 20X8 and it was completed and ready for use on
28 February 20X9, but did not open for trading until 1 April 20X9. During the
year trading at Apex's other stores was below expectations so Apex
suspended the construction of the new store for a two-month period during
July and August 20X8. The proceeds of the loan were temporarily invested
for the month of April 20X8 and earned interest of Rs. 40,000.
Required
Prepare a schedule showing the net borrowing cost that should be
capitalised as part of the cost of the new store and the finance cost that
should be reported in profit or loss for the year ended 31 March 20X9.
(5 marks)
8 Turquoise
The directors of Turquoise are disappointed by the draft profit for the year ended
30 September 20X3. The company's assistant accountant has suggested two areas
where she believes the reported profit may be improved:
(1) A major item of plant that cost Rs. 20 million to purchase and install on 1
October 20X0 is being depreciated on a straight-line basis over a five-year
period (assuming no residual value). The plant is wearing well and at the
beginning of the current year (1 October 20X2) the production manager
believed that the plant was likely to last eight years in total (ie from the date
of its purchase). The assistant accountant has calculated that, based on an
eight-year life (and no residual value) the accumulated depreciation of the
plant at 30 September 20X3 would be Rs. 7.5 million (Rs. 20 million/8 years
 3). In the financial statements for the year ended 30 September 20X2, the
accumulated depreciation was Rs. 8 million (Rs. 20 million/5 years  2).
Therefore, by adopting an eight-year life, Turquoise can avoid a depreciation
charge in the current year and instead credit Rs. 0.5 million (Rs. 8 million –
Rs. 7.5 million) to profit or loss in the current year to improve the reported
profit. (5 marks)
50 CA Sri Lanka
Questions
(2) Most of Turquoise's competitors value their inventory using the average cost
(AVCO) basis, whereas Turquoise uses the first in first out (FIFO) basis. The
value of Turquoise's inventory at 30 September 20X3 (on the FIFO basis) is
Rs. 20 million, however on the AVCO basis it would be valued at
Rs. 18 million. By adopting the same method (AVCO) as its competitors, the
assistant accountant says the company would improve its profit for the year
ended 30 September 20X3 by Rs. 2 million. Turquoise's inventory at
30 September 20X2 was reported as Rs. 15 million, however on the AVCO
basis it would have been reported as Rs. 13.4 million. (5 marks)
Required
Evaluate the acceptability of the assistant accountant's suggestions and quantify
how they would affect the financial statements if they were implemented under
SLFRS. Ignore taxation.
9 Partway
Partway is in the process of preparing its financial statements for the year ended
31 October 20X6. The company's main activity is in the travel industry mainly
selling package holidays (flights and accommodation) to the general public
through the Internet and retail travel agencies. During the current year the
number of holidays sold by travel agencies declined dramatically and the directors
decided at a board meeting on 15 October 20X6 to cease marketing holidays
through its chain of travel agents and sell off the related high-street premises.
Immediately after the meeting the travel agencies' staff and suppliers were
notified of the situation and an announcement was made in the press. The
directors wish to show the travel agencies' results as a discontinued operation in
the financial statements to 31 October 20X6. Due to the declining business of the
travel agents, on 1 August 20X6 (three months before the year end) Partway
expanded its Internet operations to offer car hire facilities to purchasers of its
Internet holidays.
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The following are Partway's summarised profit or loss results – years ended:
31/10/X6 31/10/X5
Travel
Internet agencies Car hire Total Total
Rs'000 Rs'000 Rs'000 Rs'000 Rs'000
Revenue 230,000 140,000 20,000 390,000 400,000
Cost of sales (180,000) (165,000) (15,000) (360,000) (320,000)
Gross profit 50,000 (25,000) 5,000 30,000 80,000
Operating (10,000) (15,000) (1,000) (26,000) (20,000)
expenses
Profit before tax 40,000 (40,000) 4,000 4,000 60,000
The results for the travel agencies for the year ended 31 October 20X5 were:
revenue Rs. 180 million, cost of sales Rs. 150 million and operating expenses of
Rs. 15 million.
Required
(1) Discuss whether the directors' wish to show the travel agencies' results as a
discontinued operation is justifiable. (4 marks)
(2) Prepare the (summarised) statement of profit or loss of Partway for the
year ended 31 October 20X6 together with its comparatives, assuming that
the closure of the travel agencies is a discontinued operation, and that
Partway discloses the analysis of its discontinued operations on the face of
its statement of profit or loss. (6 marks)
10 Borough
The following items have arisen during the preparation of Borough's draft
financial statements for the year ended 30 September 20X1:
(1) On 1 October 20X0, Borough commenced the extraction of crude oil from a
new well on the seabed. The cost of a 10-year licence to extract the oil was
Rs. 500 million. At the end of the extraction, although not legally bound to do
so, Borough intends to make good the damage the extraction has caused to
the seabed environment. This intention has been communicated to parties
external to Borough. The cost of this will be in two parts: a fixed amount of
Rs. 200 million and a variable amount of Rs. 0.2 per barrel extracted. Both of
these amounts are based on their present values as at 1 October 20X0
(discounted at 8%) of the estimated costs in 10 years' time. In the year to
30 September 20X1 Borough extracted 150 million barrels of oil.
52 CA Sri Lanka
Questions
Required
Recommend, and quantify where possible, how this item should be treated
in Borough's statement of financial position as at 30 September 20X1.
(5 marks)
(2) Borough owns the whole of the equity share capital of its subsidiary Hamlet.
Hamlet's statement of financial position includes a loan of Rs. 250 million
that is repayable in five years' time. Rs. 150 million of this loan is secured on
Hamlet's property and the remaining Rs. 100 million is guaranteed by
Borough in the event of a default by Hamlet. The economy in which Hamlet
operates is currently experiencing a deep recession, the effects of which are
that the current value of its property is estimated at Rs. 120 million and
there are concerns over whether Hamlet can survive the recession and
therefore repay the loan.
Required
Recommend, and quantify where possible, how this matter should be
treated in Borough's statement of financial position as at 30 September
20X1. Your answer should distinguish between Borough's entity and
consolidated financial statements. Your answer should only refer to the
treatment of the loan and should not consider any impairment of Hamlet's
property or Borough's investment in Hamlet. (5 marks)
11 Hideaway
Related party relationships are a common feature of commercial life. The objective
of LKAS 24 Related Party Disclosures is to ensure that financial statements contain
the necessary disclosures to make users aware of the possibility that financial
statements may have been affected by the existence of related parties.
Required
(1) Explain why the disclosure of related party relationships and transactions
may be important. (3 marks)
(2) Hideaway is a public listed company that owns two subsidiary company
investments. It owns 100% of the equity shares of Benedict and 55% of the
equity shares of Depret. During the year ended 31 March 20X8 Depret made
several sales of goods to Benedict. These sales totaled Rs. 150 million and
had cost Depret Rs. 140 million to manufacture. Depret made these sales on
the instruction of the Board of Hideaway. It is known that one of the
directors of Depret, who is not a director of Hideaway, is unhappy with the
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parent company's instruction as he believes the goods could have been sold
to other companies outside the group at the far higher price of Rs. 200
million. All directors within the group benefit from a profit-sharing scheme.
Required
Evaluate the financial effect that Hideaway's instruction may have on the
financial statements of the companies within the group and explain how the
transaction should be treated in the consolidated financial statements of the
Hideaway Group. (7 marks)
12 Wardle
Wardle's activities include the production of maturing products which take a long
time before they are ready to sell.
Details of one such product are that on 1 April 20X0 it had a cost of Rs. 50 million
and a fair value of Rs. 70 million. The product will not be ready for retail sale until
31 March 20X3.
On 1 April 20X0 Wardle entered into an agreement to sell the product to
Easyfinance for Rs. 60 million. The agreement gives Wardle the right to
repurchase the product at any time up to 31 March 20X3 at a fixed price of
Rs. 79,860,000, at which date Wardle expects the product to retail for Rs. 100
million.
The compound interest Wardle would have to pay on a three-year loan of
Rs. 60 million would be:
Rs.
Year 1 6,000,000
Year 2 6,600,000
Year 3 7,260,000
This interest is equivalent to the return required by Easyfinance.
Required
(1) Prepare extracts from the statement of profit or loss of Wardle for each of
the three years to 31 March 20X3 in respect of the above transaction:
(i) Reflecting the legal form of the transaction (2 marks)
(ii) Reflecting the substance of the transaction (2 marks)
(2) Explain how the requirements of SLFRS 15 apply to the transaction
(2 marks)
54 CA Sri Lanka
Questions
(3) Analyse the effect the two treatments have on the statements of profit or
loss and the statements of financial position and how this may affect an
assessment of Wardle's performance. (4 marks)
(LO 2.1, 2.2) (Total = 10 marks)
13 Evans Co
On 1 July 20X3 Evans Agricultural Pvt Ltd (EA) obtained the use of a tractor for a
period of 5 years, which is approximately 25% of the tractor's total useful life. The
agreement with the legal owner of the tractor allows EA to use the tractor as it
wants, however specifies that it must only be used within Uva Province. EA is
required to pay Rs. 500,000 per annum in arrears to the owner starting on 30 June
20X4, and also paid a non-refundable deposit of Rs. 300,000 on 12 June 20X3
when the agreement with the owner was made. EA also paid Rs. 100,000 to a
specialist haulier to have the tractor delivered to its premises on 1 July 20X3.
EA's incremental borrowing rate is 5% and the present value of future lease
payments at 1 October 20X3 was Rs. 2,165,000.
On 1 November 20X3 EA entered into another non-cancellable agreement to lease
a printer for its office for a period of 3 years at a rental of Rs. 60,000 half-yearly to
be paid in advance, commencing on 1 November 20X3. Evans consider the printer
to be of low value and has elected to apply the SLFRS 16 recognition exemption in
accounting for the agreement.
Required
1. Explain why the agreement to obtain use of the tractor is a lease agreement
within the scope of SLFRS 16. (3 marks)
2. Advise how these transactions should be reflected in the financial
statements for the year ended 30 June 20X4, and calculate the amounts that
would be included.
(LO 2.1) (7 marks)
14 Bowtock
(1) LKAS 12 Income Taxes details the requirements relating to the accounting
treatment of deferred taxes.
Required
Explain why it is considered necessary to provide for deferred tax and
briefly outline the principles of accounting for deferred tax contained in
LKAS 12 Income Taxes. (4 marks)
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(2) Bowtock purchased an item of plant for Rs. 2,000,000 on 1 October 20X0. It
had an estimated life of eight years and an estimated residual value of
Rs. 400,000. The plant is depreciated on a straight-line basis. The tax
authorities do not allow depreciation as a deductible expense. Instead a tax
expense of 40% of the cost of this type of asset can be claimed against income
tax in the year of purchase and 20% per annum (on a reducing balance basis)
of its tax base thereafter. The rate of income tax can be taken as 25%.
Required
Prepare a schedule showing the deferred tax charge/credit in Bowtock's
statement of profit or loss for the year to 30 September 20X3 and the deferred
tax balance in the statement of financial position at that date. (Note. Work to
the nearest Rs'000.) (6 marks)
15 Barstead Co
(1) The following figures have been calculated from the financial statements
(including comparatives) of Barstead for the year ended 30 September 20X1:
Increase in profit after taxation 80%
Increase in (basic) earnings per share 5%
Increase in diluted earnings per share 2%
Required
Explain why the three measures of earnings (profit) growth for the same
company over the same period can give apparently differing impressions.
(4 marks)
(2) The profit after tax for Barstead for the year ended 30 September 20X1 was
Rs. 150 million. At 1 October 20X0 the company had in issue 36 million
equity shares and a convertible loan note with a liability element of
Rs. 100 million and an effective interest rate of 8%. The loan note will
mature in 20X2 and will be redeemed at par or converted into 2.5 million
new equity shares at the loan-note holders' option. On 1 January 20X1
Barstead made a fully subscribed rights issue of one new share for every four
shares held at a price of Rs. 280 each. The market price of the equity shares
of Barstead immediately before the issue was Rs. 380. The earnings per
share (EPS) reported for the year ended 30 September 20X0 was Rs. 3.50.
Barstead's income tax rate is 25%.
56 CA Sri Lanka
Questions
Required
Prepare a schedule showing the (basic) EPS figure for Barstead (including
comparatives) and the diluted EPS (comparatives not required) that would
be disclosed for the year ended 30 September 20X1. (6 marks)
16 Waxwork
Waxwork's current year end is 31 March 20X9. Its financial statements were
authorised for issue by its directors on 6 May 20X9 and the AGM (annual general
meeting) will be held on 3 June 20X9. The following matters have been brought to
your attention:
(1) On 12 April 20X9 a fire completely destroyed the company's largest
warehouse and the inventory it contained. The carrying amounts of the
warehouse and the inventory were Rs. 10 million and Rs. 6 million
respectively. It appears that the company has not updated the value of its
insurance cover and only expects to be able to recover a maximum of
Rs. 9 million from its insurers. Waxwork's trading operations have been
severely disrupted since the fire and it expects large trading losses for some
time to come. (4 marks)
(2) A single class of inventory held at another warehouse was valued at its cost
of Rs. 460,000 at 31 March 20X9. In April 20X9 70% of this inventory was
sold for Rs. 280,000 on which Waxwork's sales staff earned a commission of
15% of the selling price. (3 marks)
(3) On 18 May 20X9 the government announced tax changes which have the
effect of increasing Waxwork's deferred tax liability by Rs. 650,000 as at
31 March 20X9. (3 marks)
Required
Advise Waxwork as to the required treatment of the items (1) to (3) in its
financial statements for the year ended 31 March 20X9. (Note. assume all items
are material and are independent of each other.)
CA Sri Lanka 57
17 Tangerine
Tangerine is a public listed company. Its summarised financial statements for the
years ended 31 March 20X2 and the comparative figures are shown below.
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR
THE YEAR ENDED 31 MARCH
20X2 20X1
Rs mn Rs mn
Revenue 2,700 1,820
Cost of sales (1,890) (1,092)
Gross profit 810 728
Distribution costs (230) (130)
Administrative expenses (345) (200)
Finance costs (40) (5)
Profit before tax 195 393
Income tax expense (60) (113)
Profit for the year 135 280
Other comprehensive income 80 –
Total comprehensive income 215 280
STATEMENTS OF FINANCIAL POSITION AS AT 31 MARCH
20X2 20X1
Rs mn Rs mn
Assets
Non-current assets
Property, plant and equipment 680 410
Intangible asset: manufacturing licence 300 200
Investment at cost: shares in Raremetal 230 –
1,210 610
Current assets
Inventory 200 110
Trade receivables 195 75
Bank – 120
Total assets 1,605 915
Equity and liabilities
Equity
Equity shares 350 250
Revaluation surplus 80 –
Retained earnings 375 295
805 545
5% loan notes 100 100
10% secured loan notes 300 –
58 CA Sri Lanka
Questions
20X2 20X1
Current liabilities
Bank overdraft 110 –
Trade payables 210 160
Current tax payable 80 110
Total equity and liabilities 1,605 915
The following information is relevant:

(1) Depreciation/amortisation charges for the year ended 31 March 20X2 were:
Rs mn
Property, plant and equipment 115
Intangible asset: manufacturing licence 25
(2) There were no sales of non-current assets during the year, although
property has been revalued.
Required
Prepare the statement of cash flows for the year ended 31 March 20X2 for
Tangerine using the indirect method in accordance with LKAS 7 Statement of Cash
Flows.
(LO 2.1) (10 marks)
18 Dexterity
Dexterity is a public listed company. It has been considering the accounting
treatment of its intangible assets and has asked for your opinion on how the
matters below should be treated in its financial statements for the year to 31
March 20X4.
(i) On 1 October 20X3 Dexterity acquired Temerity, a small company that
specialises in pharmaceutical drug research and development. The purchase
consideration was by way of a share exchange and valued at Rs. 350 million.
The fair value of Temerity's net assets was Rs. 150 million (excluding any
items referred to below). Temerity owns a patent for an established
successful drug that has a remaining life of eight years. A firm of specialist
advisors, Leadbrand, has estimated the current value of this patent to be
Rs. 100 million, however the company is awaiting the outcome of clinical
trials where the drug has been tested to treat a different illness. If the trials
are successful, the value of the drug is then estimated to be Rs. 150 million.
Temerity has incurred direct costs of Rs. 20 million for medical research that
it is conducting on behalf of a client. The research is ongoing its outcome is
uncertain at 1 October 20X3. The contract with the client is for a total price
of Rs. 50 million and stipulates that all costs are recoverable from the client;
CA Sri Lanka 59
Temerity is currently holding the Rs. 20 million paid in costs in a suspense

account as it is unsure how to account for them. The suspense account is not
included in the fair value of net assets of Rs. 150 million.
(8 marks)
(ii) Dexterity's manufacturing facilities have recently received a favourable
inspection by government medical scientists. As a result of this the
Government Health Department has granted Dexterity an exclusive five-year
licence to manufacture and distribute a new vaccine. Although the licence
had no direct cost to Dexterity, its directors feel its granting is a reflection of
the company's standing and have asked Leadbrand to value the licence.
Accordingly they have placed a fair value of Rs. 10 million on it. (4 marks)
(iv) In the current accounting period, Dexterity has spent Rs. 3 million sending
its staff on specialist training courses. Whilst these courses have been
expensive, they have led to a marked improvement in production quality and
staff now need less supervision. This in turn has led to an increase in
revenue and cost reductions. The directors of Dexterity believe these
benefits will continue for at least three years and wish to treat the training
costs as an asset. (4 marks)
(v) In December 20X3, Dexterity paid Rs. 5 million for a television advertising
campaign for its products that will run for 6 months from 1 January 20X4 to
30 June 20X4. The directors believe that increased sales as a result of the
publicity will continue for two years from the start of the advertisements.
(4 marks)
Required
Advise the directors of Dexterity how they should treat the above items in
the financial statements for the year to 31 March 20X4. (Note. The values
given by Leadbrand can be taken as being reliable measurements. You are
not required to consider amortisation aspects.)
19 Wilderness
The assistant financial controller of the Wilderness group has identified the
matters below which she believes may indicate an impairment to one or more
assets:
(i) Wilderness owns and operates an item of plant that cost Rs. 6,400,000 and
had accumulated depreciation of Rs. 4,000,000 at 1 October 20X4. It is being
depreciated at 12½% on cost. On 1 April 20X5 (exactly half way through the
year) the plant was damaged when a factory vehicle collided into it. Due to
60 CA Sri Lanka
Questions
the unavailability of replacement parts, it is not possible to repair the plant,

but it still operates, albeit at a reduced capacity. Also it is expected that as a
result of the damage the remaining life of the plant from the date of the
damage will be only two years. Based on its reduced capacity, the estimated
present value of the plant in use is Rs. 1,500,000. The plant has a current
disposal value of Rs. 200,000 (which will be nil in two years' time), but
Wilderness has been offered a trade–in value of Rs. 1,800,000 against a
replacement machine which has a cost of Rs. 10 million (there would be no
disposal costs for the replaced plant). Wilderness is reluctant to replace the
plant as it is worried about the long–term demand for the items produced by
the plant. The trade–in value is only available if the plant is replaced.
Required
Prepare extracts from the statement of financial position and statement of
profit or loss of Wilderness in respect of the plant for the year ended
30 September 20X5. Your answer should explain how you arrived at your
figures. (10 marks)
(ii) On 1 April 20X4 Wilderness acquired 100% of the share capital of Mossel,
whose only activity is the extraction and sale of spa water. Mossel had been
profitable since its acquisition, but bad publicity resulting from several
consumers becoming ill due to a contamination of the spa water supply in
April 20X5 has led to unexpected losses in the last six months. The carrying
amounts of Mossel's assets at 30 September 20X5 are:
Rs'000
Brand (Quencher – see below) 70,000
Land containing spa 120,000
Purifying and bottling plant 80,000
Inventories 50,000
320,000
The source of the contamination was found and it has now ceased.
The company originally sold the bottled water under the brand name of
'Quencher', but because of the contamination it has rebranded its bottled
water as 'Phoenix'. After a large advertising campaign, sales are now starting
to recover and are approaching previous levels. The value of the brand in the
statement of financial position is the amortised amount of the original brand
name of 'Quencher'.
The directors have acknowledged that Rs. 15 million will have to be spent in
the first three months of the next accounting period to upgrade the purifying
and bottling plant.
Inventories include some old 'Quencher' bottled water measured at their
cost of Rs. 20 million; the remaining inventories are labeled with the new
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brand 'Phoenix'. Samples of all the bottled water have been tested by the
health authority and have been passed as fit to sell. The old bottled water
will have to be relabelled at a cost of Rs. 2,500,000, but is then expected to be
sold at the normal selling price of (normal) cost plus 50%.
Based on the estimated future cash flows, the directors have estimated that
the value in use of Mossel at 30 September 20X5, calculated according to the
guidance in LKAS 36 (including inventories) is Rs. 200 million. There is no
reliable estimate of the fair value less costs to sell of Mossel.
Required
Calculate the amounts at which the assets of Mossel should appear in the
consolidated statement of financial position of Wilderness at 30 September
20X5. Your answer should explain how you arrive at your figures.
(10 marks)
20 Tourmalet
The following extracted balances relate to Tourmalet at 30 September 20X4:

Rs'000 Rs'000
Ordinary shares 50,000
Retained earnings at 1 October 20X3 47,800
Revaluation surplus at 1 October 20X3 18,500
6% Redeemable preference shares 20X6 30,000
Trade accounts payable 35,300
Tax 2,100
Land and buildings – at valuation (note (iii)) 150,000
Plant and equipment – cost (note (v)) 98,600
Investment property – valuation at 1 October 20X3 10,000
(note (iv))
Depreciation 1 October 20X3 – land and buildings 9,000
Depreciation 1 October 20X3 – plant and equipment 24,600
Trade accounts receivable 31,200
Inventory – 1 October 20X3 26,550
Bank 3,700
Sales revenue (note (i)) 313,000
Investment income (from properties) 1,200
Purchases 158,450
Distribution expenses 26,400
Administration expenses 23,200
Interim preference dividend 900
Ordinary dividend paid 2,500
531,500 531,500
62 CA Sri Lanka
Questions
The following notes are relevant:

(i) Sales revenue includes Rs. 8 million for goods sold in September 20X4 for
cash to Funders, a bank. The cost of these goods was Rs. 6 million. Funders
has the option to require Tourmalet to repurchase these goods within one
month of the year-end at their original selling price plus a facilitating fee of
Rs. 250,000. The repurchase price is expected to exceed the market value of
the goods at the repurchase date.
(ii) The inventory at 30 September 20X4 was valued at cost of Rs. 28.5 million.
This includes Rs. 4.5 million of slow moving goods. Tourmalet is trying to sell
these to another retailer but has not been successful in obtaining a
reasonable offer. The best price it has been offered is Rs. 2 million.
(iii) On 1 October 20X0 Tourmalet had its land and buildings revalued by a firm
of surveyors at Rs. 150 million, with Rs. 30 million of this attributed to the
land. At that date the remaining life of the building was estimated to be
40 years. These figures were incorporated into the company's books. There
has been no significant change in property values since the revaluation.
Rs. 500,000 of the revaluation reserve will be realised in the current year as
a result of the depreciation of the buildings and should be transferred to
retained earnings.
(iv) Details of the investment property are:
Value – 1 October 20X3 Rs. 10 million
Value – 30 September 20X4 Rs. 9.8 million
The company adopts the fair value method in LKAS 40 Investment property
of valuing its investment property.
(v) Plant and equipment (other than that referred to in note (i) above) is
depreciated at 20% per annum on the reducing balance basis. All
depreciation is to be charged to cost of sales.
(vi) The above balances contain the results of Tourmalet's car retailing
operations which ceased on 31 December 20X3 due to mounting losses. The
results of the car retailing operation, which is to be treated as a discontinued
operation, for the year to 30 September 20X4 are:
Sales
Cost of sales
Operating expenses (4,000 less 800 tax repayment due)
The operating expenses are included in administration expenses in the trial
balance. Tourmalet is still paying rentals for the lease of several low value
items of office equipment. Tourmalet has applied the SLFRS 16 recognition
exemption to these leases and the rentals are included in operating
CA Sri Lanka 63
expenses. Tourmalet is hoping to use the equipment in an expansion of its

administration offices. This is dependent on obtaining planning permission
from the local authority for the change of use, however this is very difficult
to obtain. Failing this, the best option would be early termination of the
leases which will cost Rs. 1.5 million in penalties. This amount has not been
provided for.
(vii) The balance on the taxation account in the trial balance is the result of the
settlement of the previous year's tax charge. The directors have estimated the
provision for income tax for the year to 30 September 20X4 at Rs. 9.2 million.
(viii) The preference shares will be redeemed at par. The finance cost is
equivalent to the annual dividend.
Required
(1) Prepare the statement of profit or loss for the year ended 30 September
20X4. (18 marks)
(2) Prepare the statement of changes in equity for Tourmalet for the year ended
30 September 20X4. (2 marks)
21 Triangle
Triangle, a public listed company, is in the process of preparing its draft financial
statements for the year to 31 March 20X5. The following matters have been
brought to your attention:
(i) On 1 April 20X4 the company brought into use a new processing plant that
had cost Rs. 150 million to construct and had an estimated life of ten years.
The plant uses hazardous chemicals which are put in containers and shipped
abroad for safe disposal after processing. The chemicals have also
contaminated the plant itself which occurred as soon as the plant was used.
It is a legal requirement that the plant is decontaminated at the end of its life.
The estimated present value of this decontamination, using a discount rate of
8% per annum, is Rs. 50 million. The financial statements have been charged
with Rs. 15 million (Rs. 150 million/10 years) for plant depreciation and a
provision of Rs. 5 million (Rs. 50 million/10 years) has been made towards
the cost of the decontamination. (9 marks)
64 CA Sri Lanka
Questions
(ii) On 15 May 20X5 the company's auditors discovered a fraud in the material
requisitions department. A senior member of staff who took up employment
with Triangle in August 20X4 had been authorising payments for goods that
had never been received. The payments were made to a fictitious company
that cannot be traced. The member of staff was immediately dismissed.
Calculations show that the total amount of the fraud to the date of its
discovery was Rs. 24 Mn of which Rs. 21 Mn related to the year to 31 March
20X5. (Assume the fraud is material). (6 marks)
(iii) On 1 October 20X4, Triangle launched its new share option scheme for senior
management with the aim that a financial interest in the capital growth of the
company would motivate them to perform better. On this date it awarded all
100 senior managers 1,500 share options each. The options vest on
30 September 20X7 assuming that the managers remain employed at that
date and providing that the share price of the company has increased by 25%.
At 1 October 20X4 each option had a fair value of Rs. 1,200; at
31 March 20X5 each option had a fair value of Rs. 1,350 and the share price
had increased by 4%. Triangle's HR department has advised that the company
should expect to lose 2% of senior managers before the vesting date.
(5 marks)
Required
Advise the directors of Triangle as to how the items in (i) to (iii) above should be
treated in Triangle's financial statements for the year to 31 March 20X5 in
accordance with Sri Lankan Financial Reporting Standards. Your answer should
quantify the amounts where possible.
(LO 2.1, 2.2) (Total = 20 marks)
22 Lucky
Lucky, a public listed company, produces milk for supply to various customers.
The company owns 150 farms and has a stock of 70,000 cows and 35,000 heifers
(young female cows) which are being raised to produce milk in the future. The
farms produce 2.5 million kilograms of milk per annum and normally hold an
inventory of 50,000 kilograms of milk (Extracts from the draft accounts to 31 May
20X2).
The herds comprise at 31 May 20X2:
70,000 – 3 year old cows (all purchased on or before 1 June 20X1)
25,000 – heifers (average age 1½ years old – purchased 1 December 20X1)
10,000 – heifers (average age 2 years – purchased 1 June 20X1)
CA Sri Lanka 65
There were no animals born or sold in the year. The per unit values less estimated
point of sale costs were as follows.
Rs.
2 year old animal at 1 June 20X1 5,000
1 year old animal at 1 June 20X1 and 1 December 20X1 4,000
3 year old animal at 31 May 20X2 6,000
1½ year old animal at 31 May 20X2 4,600
The cows had contracted a disease at the beginning of the financial year which had
been passed on in the food chain to a small number of consumers. The publicity
surrounding this event had caused a drop in the consumption of milk and as a
result the dairy was holding 500,000 kilograms of milk in storage.
The company's activities take place in three geographical locations, Dale, Shire
and Ham. The only region affected by the disease was Dale and the directors have
decided to restrict the milk production of that region significantly. Lucky
estimates that the discounted future cash income from the present herds of cattle
in the region amounts to Rs. 120 million, taking into account the fall in milk
production. Lucky was not sure that the fair value of the cows in the region could
be measured reliably at the date of purchase because of the problems with the
diseased cattle. The cows in this region amounted to 20,000 in number and the
heifers 10,000 in number. All of the animals were purchased on 1 June 20X1.
Lucky has had an offer of Rs. 100 million for all of the animals in the Dale region
(net of point of sale costs) and Rs. 20 million for the sale of the farms in the
region.
On 1 April 20X2 the government had stated that it was prepared to compensate
farmers for the drop in the price and consumption of milk. An official government
letter was received on 6 June 20X2, stating that Rs. 150 million will be paid to
Lucky on 1 August 20X2.
On 1 June 20X1 Lucky held equity investments that were valued at Rs. 180 million.
The equity investments had a fair value of Rs. 174 million on 30 September 20X1.
There were no purchases or disposals of any of these investments during the year.
Lucky has not made the election in accordance with SLFRS 9 Financial
Instruments.
The directors of Lucky have approached your firm for professional advice on the
above matters.
66 CA Sri Lanka
Questions
Required
Advise the directors on how the biological assets and produce of Lucky, the
government grant and the equity investments should be accounted for under
SLFRS. Your answer should include:
(i) A table which shows the changes in value of the cattle stock for the year to
31 May 20X2 due to price change and physical change excluding the Dale
region;
(ii) A calculation of the value of the herd of the Dale region as at 31 May 20X2.
(LO 2.2, 2.3) (Total = 20 marks)
23 Whitebirk
(1) The main argument for separate SME accounting standards is the undue cost
burden of reporting, which is proportionately heavier for smaller firms.
Required
Discuss the main differences and modifications to SLFRS which the IASB and
CASL made to reduce the burden of reporting for SMEs, giving specific
examples where possible. (7 marks)
(2) Whitebirk has met the definition of a SME in its jurisdiction and wishes to
comply with the SLFRS for Small and Medium-Sized Entities. The entity
wishes to seek advice on how it will deal with the following accounting
issues in its financial statements for the year ended 30 November 20X2. The
entity already prepares its financial statements under full SLFRS.
(i) Whitebirk purchased 90% of Close, a SME, on 1 December 20X1. The
purchase consideration was Rs. 57 million and the value of Close's
identifiable assets was Rs. 60 million. The value of the non-controlling
interest at 1 December 20X1 was measured at Rs. 7 million. Whitebirk
has used the full goodwill method (measuring non-controlling interest
at fair value) to account for business combinations and the life of
goodwill cannot be estimated with any accuracy. Whitebirk wishes to
know how to account for goodwill under the SLFRS for SMEs.
(ii) Whitebirk has incurred Rs. 10 million of research expenditure to
develop a new product in the year to 30 November 20X2. Additionally,
it incurred Rs. 5 million of development expenditure to bring another
product to a stage where it is ready to be marketed and sold.
(iii) Whitebirk purchased some properties for Rs 170 Mn on 1 December
20X1 and designated them as investment properties under the cost
CA Sri Lanka 67
model. No depreciation was charged as a real estate agent valued the

properties at Rs. 190 Mn at the year end.
(iv) Whitebirk has an intangible asset valued at Rs. 1 Mn on 1 December 20X1.
The asset has an indefinite useful life, and in previous years had been
reviewed for impairment. As at 30 November 20X2, there are no
indications that the asset is impaired.
Required
Discuss how the above transactions should be dealt with in the financial
statements of Whitebirk, with reference to the SLFRS for Small and Medium-
sized Entities. (13 marks)
24 Pingway
Pingway issued a Rs. 100 million 3% convertible loan note at par on 1 April 20X7
with interest payable annually in arrears. Three years later, on 31 March 20Y0,
the loan note is convertible into equity shares on the basis of Rs. 1,000 of loan
note for 25 equity shares or it may be redeemed at par in cash at the option of
the loan note holder. One of the company's financial assistants observed that the
use of a convertible loan note was preferable to a non-convertible loan note as
the latter would have required an interest rate of 8% in order to make it
attractive to investors. The assistant has also commented that the use of a
convertible loan note will improve the profit as a result of lower interest costs
and, as it is likely that the loan note holders will choose the equity option, the
loan note can be classified as equity which will improve the company's high
gearing position.
The present value of Rs. 1 receivable at the end of the year, based on discount
rates of 3% and 8% can be taken as:
3% 8%
Rs. Rs.
End of year 1 0.97 0.93
End of year 2 0.94 0.86
End of year 3 0.92 0.79
Required
(1) Evaluate the financial assistant's observations and show how the
convertible loan note should be accounted for in Pingway's statement of
profit or loss for the year ended 31 March 20X8 and statement of financial
position as at that date. (9 marks)
68 CA Sri Lanka
Questions
(2) During the year ended 31 March 20X8, Pingway acquired two further
financial instruments:
(i) Pingway acquired 500,000 shares in Host, a listed entity, for Rs. 350 per
share on 28 February 20X8. The costs associated with the purchase were
Rs. 1,500,000 and were included in the cost of the investment. The
directors plan to realise this investment before the end of 20X8. There
has been no further adjustment made to the investment since the date of
purchase. The shares were trading at Rs. 365 each on 31 March 20X8.
(ii) Pingway purchased a bond with a par value of Rs. 500 million on
1 April 20X7. The bond carries a 5% coupon, payable annually in
arrears and is redeemable on 31 March 20Y2 at Rs. 580 million.
Pingway fully intends to hold the bond until the redemption date in
order to collect the related cash flows. The bond was purchased at a
10% discount. The effective interest rate on the bond is 10.26%. The
interest due for the year was received and credited to investment
income in the statement of profit or loss.
Required
Explain how financial instruments (i) and (ii) should be classified, initially
measured and subsequently measured, in accordance with SLFRS 9 Financial
Instruments Prepare any journal entries required to correct the accounting
treatment for the year to 31 March 20X8. (11 marks)
25 Ocean Telecoms
Ocean Telecoms is a telecommunications company based in Sri Lanka and

operating throughout South East Asia.
In the year ended 30 September 20X3, Ocean Telecoms acquired a 35%
shareholding in AsiaTel, giving it significant influence over that company. The
cost of the investment was HK$ 40 million (Hong Kong Dollars). On the acquisition
date the exchange rate was Rs. 28: HK$1; at the year end the exchange rate is
Rs. 31 : HK$1.
Required
Explain how the investment is initially recognised in Ocean Telecoms' separate
financial statements and how it is subsequently measured at 30 September 20X3
in the separate financial statements. (5 marks)
CA Sri Lanka 69
(1) Ocean Telecoms sells mobile telephone and network service packages
directly to customers. The customer pays a monthly fixed amount for a
24 month period and in return is given a handset at the start of their contract
and receives unlimited calls, text messages and data throughout the contract
period. Ocean Telecoms also sells handsets and network service packages
separately.
Required
Explain how Ocean Telecoms should recognise revenue associated with
these packages over the contract period, referencing the SLFRS 15 five step
process. (5 marks)
(2) Ocean Telecoms operates a defined benefit pension scheme for all its eligible
employees. The current service cost of operating the scheme was
Rs. 7.8 million for the year ended 30 September 20X3. At 30 September
20X2, the fair value of the pension scheme assets was Rs. 73 million and the
present value of the pension scheme obligations was Rs. 80 million.
Ocean Telecoms made contributions to the scheme in the year of
Rs. 8.8 million. The yield on high quality corporate bonds at 1 October 20X2
was 10%. The pension scheme paid out Rs. 4 million in benefits in the year
to 30 September 20X3.
As at 30 September 20X3, the fair value of pension scheme assets was
Rs. 84 million and the present value of pension scheme obligations was
Rs. 95 million.
Required
(i) Calculate the amounts, in respect of the pension scheme, that Ocean
Telecoms will include in its statement of profit or loss and other
comprehensive income for the year ended 30 September 20X3.
(6 marks)
(ii) Calculate the net pension asset or liability that will appear in the
statement of financial position of Bodyline as at 30 September 20X3.
(1 mark)
(iii) Explain how the accounting treatment of Bodyline's pension plan
would differ if it had been a defined contribution rather than a defined
benefit plan. (3 marks)
(LO 2.1, 2.2, 2.3) (Total = 20 marks)
70 CA Sri Lanka
Questions
PART C: PREPARATION OF FINANCIAL STATEMENTS

Questions 26 to 36 cover Preparation of Financial Statements, the subject of
Chapters 5 and 22 to 27 of the Study Text.
26 Consolidation requirements
Required
(a) State the exemptions from the requirement to present consolidated financial
statements which are available to a parent company. (3 marks)
(b) Explain why intra-group transactions and balances are eliminated on
consolidation. (3 marks)
(c) Under the provisions of LKAS 24, group companies are related parties.
Demonstrate how the relationship between group companies could be
exploited. (4 marks)
(LO 3.2.1) (Total = 10 marks)
27 Penguin
At 1 January 20X9 Penguin Co paid Rs. 1,200 Mn for an 80% share in Platypus Co.
Platypus's net assets at the date of acquisition were as follows:
Rs'm
Share capital 500
Retained earnings 850
It is group policy to measure non-controlling interests at acquisition at fair value.
The fair value of the non-controlling interest at the date of acquisition was
Rs. 400 million.
Statements of profit or loss for both companies for the year ended 31 December
20X9 were:
Penguin Platypus
Rs'm Rs'm
Revenue 12,500 2,600
Cost of sales (7,400) (1,090)
Gross profit 5,100 1,510
Distribution costs (700) (220)
Administrative expenses (1,300) (550)
Finance costs (40) –
Profit before tax 3,060 740
Profit for the year 2,160 510
CA Sri Lanka 71
Required
Calculate the goodwill on acquisition. (4 marks)
Prepare the consolidated statement of profit or loss of the Penguin Group for the
year ended 31 December 20X9. (6 marks)
(LO 3.2.2, 3.2.4, 3.2.5) (Total = 10 marks)
28 Prodigal
On 1 October 20X0 Prodigal purchased 75% of the equity shares in Sentinel. The
acquisition was through a share exchange of two shares in Prodigal for every three
shares in Sentinel. The stock market price of Prodigal's shares at 1 October 20X0
was Rs. 400 per share.
The summarised statements of profit or loss and other comprehensive income for
the two companies for the year ended 31 March 20X1 are:
Prodigal Sentinel
Rs'000 Rs'000
Revenue 450,000 240,000
Cost of sales (260,000) (110,000)
Gross profit 190,000 130,000
Distribution costs (23,600) (12,000)
Administrative expenses (27,000) (23,000)
Finance costs (1,500) (1,200)
Profit before tax 137,900 93,800
Income tax expense (48,000) (27,800)
Profit for the year _ 89,900 _ 66,000
Other comprehensive income
Gain on revaluation of land (note (i)) 2,500 1,000
Loss on fair value of financial asset at FVTOCI (700) (400)
_ 1,800 __ 600
Total comprehensive income for the year 91,700 66,600
(i) Prodigal's policy is to revalue the group's land to fair value at the end of each
accounting period. Prior to its acquisition Sentinel's land had been valued at
historical cost. During the post-acquisition period Sentinel's land had
increased in value over its fair value at the date of acquisition by
Rs. 100 million. Sentinel has recognised the revaluation within its own
financial statements.
(ii) Immediately after the acquisition of Sentinel on 1 October 20X0, Prodigal
transferred an item of plant with a carrying amount of Rs. 4 million to
Sentinel at an agreed value of Rs. 5 million. At this date the plant had a
remaining life of two and half years. Prodigal had included the profit on this
72 CA Sri Lanka
Questions
transfer as a reduction in its depreciation costs. All depreciation is charged

to cost of sales.
(iii) After the acquisition Sentinel sold goods to Prodigal for Rs. 40 million. These
goods had cost Sentinel Rs. 30 million. Rs. 12 million of the goods sold
remained in Prodigal's closing inventory.
(iv) Prodigal's policy is to measure the non-controlling interest of Sentinel at the
date of acquisition at its fair value which the directors determined to be
Rs. 100 million.
(v) The goodwill arising on the acquisition of Sentinel has not suffered any
impairment.
(vi) All items in the above statements of profit or loss and other comprehensive
income are deemed to accrue evenly over the year unless otherwise
indicated.
Required
Prepare the consolidated statement of profit or loss and other comprehensive
income of Prodigal for the year ended 31 March 20X1.
(LO 3.2.2, 3.2.4, 3.2.5) (10 marks)
29 Laurel
Laurel acquired 80% of the ordinary share capital of Hardy for Rs. 160 Mn and
40% of the ordinary share capital of Comic for Rs. 70 Mn on 1 January 20X7 when
the retained earnings balances were Rs. 64 Mn in Hardy and Rs. 24 Mn in Comic.
Laurel, Comic and Hardy are public limited companies.
The statements of financial position of the three companies at 31 December 20X9
are set out below:
Laurel Hardy Comic
Rs mn Rs mn Rs mn
Non-current assets
Property, plant and equipment 220 160 78
Investments 230 – –
450 160 78
Current assets
Inventories 384 234 122
Trade receivables 275 166 67
Cash at bank 42 10 34
701 410 223
1,151 570 301
CA Sri Lanka 73
Equity
Share capital 416 99 80
Retained earnings 278 128 97
694 227 177
Current liabilities
Trade payables 457 343 124
1,151 570 301
You are also given the following information:
1 On 30 November 20X9 Laurel sold some goods to Hardy for cash for
Rs. 32 Mn. These goods had originally cost Rs. 22 Mn and none had been sold
by Hardy by the year-end. On the same date Laurel also sold goods to Comic
for cash for Rs. 22 Mn. These goods originally cost Rs. 10 Mn and Comic had
sold half by the year end.
2 On 1 January 20X7 Hardy owned some items of equipment with a carrying
amount of Rs. 45 Mn that had a fair value of Rs. 57 Mn. These assets were
originally purchased by Hardy on 1 January 20X5 and are being depreciated
over six years.
3 Group policy is to measure non-controlling interests at acquisition at fair
value. The fair value of the non-controlling interests in Hardy on 1 January
20X7 was determined to be Rs. 39 Mn.
4 Cumulative impairment losses on recognised goodwill amounted to
Rs. 15 Mn at 31 December 20X9. No impairment losses have been necessary
to date relating to the investment in the associate.
Required
Prepare a consolidated statement of financial position for Laurel and its
subsidiary as at 31 December 20X9, incorporating its associate in accordance with
LKAS 28.
(LO 3.2.2, 3.2.3, 3.2.5) (10 marks)
74 CA Sri Lanka
Questions
30 Tyson
Below are the statements of profit or loss and other comprehensive income of
Tyson, its subsidiary Douglas and associate Frank at 31 December 20X8. Tyson,
Douglas and Frank are public limited companies.
Tyson Douglas Frank
Rs mn Rs mn Rs mn
Revenue 500 150 70
Cost of sales (270) (80) (30)
Gross profit 230 70 40
Other expenses (150) (20) (15)
Finance income 15 10 –
Finance costs (20) – (10)
Profit before tax 75 60 15
Income tax expense (25) (15) (5)
PROFIT FOR THE YEAR 50 45 10
Other comprehensive income:
Gains on property revaluation, net of tax 20 10 5
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 70 55 15
You are also given the following information:
1 Tyson acquired 80 Mn shares in Douglas for Rs. 188 Mn three years ago
when Douglas had a credit balance on its reserves of Rs. 40 Mn. Douglas has
100 Mn Rs 1 ordinary shares.
2 Tyson acquired 40 Mn shares in Frank for Rs. 60 Mn two years ago when
that company had a credit balance on its reserves of Rs. 20 Mn. Frank also
has 100 Mn Rs 1 ordinary shares.
3 During the year Douglas sold some goods to Tyson for Rs. 66. Mn (cost
Rs. 48 Mn). None of the goods had been sold by Tyson by the year end.
4 Group policy is to measure non-controlling interests at acquisition at fair
value. The fair value of the non-controlling interests in Douglas at acquisition
was Rs. 40 Mn. An impairment test carried out at the year end resulted in
Rs. 15 Mn of the recognised goodwill relating to Douglas being written off
and recognition of impairment losses of Rs. 2.4 Mn relating to the investment
in Frank.
Required
Prepare the consolidated statement of profit or loss and other comprehensive
income for the year ended 31 December 20X8 for Tyson, incorporating its
associate.
(LO 3.2.2, 3.2.3, 3.2.5) (10 marks)
CA Sri Lanka 75
31 Pricewell
The following trial balance relates to Pricewell at 31 March 20X9:

Rs'000 Rs'000
Building – at valuation 31.3.X8 (note (i)) 25,200
Plant and equipment (owned) – at cost (note (i)) 46,800
Right-of-use asset at initial cost (note (ii) 20,000
Accumulated depreciation at 31.3.X8
Owned plant and equipment 12,800
Right-of-use asset 5,000
Lease payment (paid on 31.3.X9) (note (i)) 6,000
Lease liability at 1.4.X8 (note (i)) 15,600
Contract with customer (note (ii)) 14,300
Inventory at 31 March 20X9 28,200
Trade receivables 33,100
Bank 5,500
Trade payables 33,400
Revenue (note (iii)) 310,000
Cost of sales (note (iii)) 234,500
Distribution costs 19,500
Administrative expenses 27,500
Preference dividend paid (note (iv)) 2,400
Equity dividend paid 8,000
Equity shares (80m shares) 40,000
6% redeemable preference shares at 31.3.X8 (note (iv)) 41,600
Retained earnings at 31 March 20X8 4,900
Current tax (note (v)) 700
Deferred tax (note (v)) 8,400
471,700 471,700
(i) Non-current assets:
The building was acquired on 1 April 20X7 at cost
Rs. 30 million and had a remaining useful life of 15 years at that date. The
company policy is to revalue the building at market value at each year end.
The valuation in the trial balance of Rs. 25.2 million as at
31 March 20X8 led to an impairment charge of Rs. 2.8 million which was
reported in profit or loss in the previous year (ie year ended 31 March
20X8). At 31 March 20X9 the building was valued at Rs. 24.9 million.
Owned plant is depreciated at 25% per annum using the reducing balance
method.
The right-of-use asset is plant that was acquired on 1 April 20X7. The lease
payments are Rs. 6 million per annum for four years payable in arrears on
31 March each year. The interest rate implicit in the lease is 8% per annum.
76 CA Sri Lanka
Questions
Ownership of the plant does not transfer to Pricewell and at the end of the
lease term it will be returned to the lessor who will lease it to another
customer.
No depreciation has yet been charged on any non-current assets for the year
ended 31 March 20X9. All depreciation is charged to cost of sales.
(ii) On 1 October 20X8 Pricewell entered into a contract to construct a bridge
over a river. The agreed price of the bridge is Rs. 50 million and
construction was expected to be completed on 30 September 20Y0. The
Rs. 14.3 million in the trial balance is:
Rs'000
Materials, labour and overheads 12,000
Specialist plant acquired 1 October 20X8 8,000
Payment from customer (5,700)
14,300
The sales value of the work done at 31 March 20X9 has been agreed at
Rs. 22 million and Pricewell determines the degree of completion of
contracts such as this using an output method.. The specialist plant will have
no residual value at the end of the contract and should be depreciated on a
monthly basis.
(iii) Pricewell's revenue includes Rs. 8 million for goods it sold acting as an agent
for Trilby. Pricewell earned a commission of 20% on these sales and
remitted the difference of Rs. 6.4 million (included in cost of sales) to Trilby.
(iv) The 6% preference shares were issued on 1 April 20X7 at par for
Rs. 40 million. They have an effective finance cost of 10% per annum due to a
premium payable on their redemption. Redemption is mandatory.
(v) The directors have estimated the provision for income tax for the year ended
31 March 20X9 at Rs. 4.5 million. The required deferred tax provision at
31 March 20X9 is Rs. 5.6 million; all adjustments to deferred tax should be
taken to profit or loss. The balance of current tax in the trial balance
represents the under/over provision of the income tax liability for the year
ended 31 March 20X8.
Required
Prepare the statement of profit or loss for the year ended 31 March 20X9.
(LO 3.1.1, 3.1.2, 3.1.3) (10 marks)
CA Sri Lanka 77
32 Candel
The following trial balance relates to Candel at 30 September 20X8:
Rs'000 Rs'000
Property – at valuation 1.10.X7 (note (i)) 50,000
Plant and equipment – at cost (note (i)) 76,600
Plant and equipment – accum. deprec. at 1.10.X7 24,600
Capitalised dev. expenditure – at 1.10.X7 (note (ii)) 20,000
Development exp. – accum. amortisation at 1.10.X7 6,000
Closing inventory at 30 September 20X8 20,000
Bank 1,300
Trade payables and provisions (note (iii)) 23,800
Revenue (note (i)) 300,000
Cost of sales 204,000
Distribution costs 14,500
Administrative expenses (note (iii)) 22,200
Preference dividend paid 800
Interest on bank borrowings 200
Equity dividend paid 6,000
Research and development costs (note (ii)) 8,600
Equity shares (200m shares) 50,000
8% redeemable pref. shares (20m shares) (note (iv)) 20,000
Retained earnings at 1 October 20X7 24,500
Deferred tax (note (v)) 5,800
Leasehold property revaluation reserve 10,000
466,000 466,000

(i) Non-current assets – tangible:
The property (a building) had a remaining life of 20 years at 1 October 20X7.
The company's policy is to revalue its property at each year end and at 30
September 20X8 it was valued at Rs. 43 million. Ignore deferred tax on the
revaluation.
On 1 October 20X7 an item of plant was disposed of for Rs. 2.5 million cash.
The proceeds have been treated as sales revenue by Candel. The plant
is still included in the above trial balance figures at its cost of
Rs. 8 million and accumulated depreciation of Rs. 4 million (to the date of
disposal).
All plant is depreciated at 20% per annum using the reducing balance
method.
Depreciation and amortisation of all non-current assets is charged to cost of
sales.
78 CA Sri Lanka
Questions
(ii) Non-current assets – intangible:

In addition to the capitalised development expenditure (of Rs. 20 million),
further research and development costs were incurred on a new project
which commenced on 1 October 20X7. The research stage of the new project
lasted until 31 December 20X7 and incurred Rs. 1.4 million of costs. From
that date the project incurred development costs of Rs. 800,000 per month.
On 1 April 20X8 the directors became confident that the project would be
successful and yield a profit well in excess of its costs. The project is still in
development at 30 September 20X8.
Capitalised development expenditure is amortised at 20% per annum using
the straight-line method. All expensed research and development is charged
to cost of sales.
(iii) Candel is being sued by a customer for Rs. 2 million for breach of contract
over a cancelled order. Candel has obtained legal opinion that there is a 20%
chance that Candel will lose the case. Accordingly Candel has provided
Rs. 400,000 (Rs. 2 million  20%) included in administrative expenses in
respect of the claim. The unrecoverable legal costs of defending the action
are estimated at Rs. 100,000. These have not been provided for as the legal
action will not go to court until next year.
(iv) The preference shares were issued on 1 April 20X8 at par. They are
redeemable at a large premium which gives them an effective finance cost of
12% per annum.
(v) The directors have estimated the provision for income tax for the year ended
30 September 20X8 at Rs. 11.4 million. The required deferred tax provision
at 30 September 20X8 is Rs. 6 million.
Required
Prepare the statement of profit or loss and other comprehensive income for the
year ended 30 September 20X8. (10 marks)
Prepare the statement of financial position as at 30 September 20X8.
(10 marks)
(LO 2.1, 3.1.1) (Total = 20 marks)
33 Pedantic
On 1 April 20X8, Pedantic acquired 60% of the equity share capital of Sophistic in
a share exchange of two shares in Pedantic for three shares in Sophistic. The issue
of shares has not yet been recorded by Pedantic. At the date of acquisition shares
in Pedantic had a market value of Rs. 6 each. Below are the summarised draft
financial statements of both companies.
CA Sri Lanka 79
STATEMENTS OF PROFIT OR LOSS FOR THE YEAR ENDED 30 SEPTEMBER 20X8

Pedantic Sophistic
Rs'000 Rs'000
Revenue 85,000 42,000
Cost of sales (63,000) (32,000)
Profit for the year 9,000 3,000
STATEMENTS OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20X8
Pedantic Sophistic
Assets Rs'000 Rs'000
Non-current assets
Property, plant and equipment 40,600 12,600
Current assets 16,000 6,600
Total assets 56,600 19,200
Equity shares (issued at Rs. 1 each) 10,000 4,000
Retained earnings 35,400 6,500
45,400 10,500
10% loan notes 3,000 4,000
Current liabilities 8,200 4,700
Total equity and liabilities 56,600 19,200
(i) At the date of acquisition, the fair values of Sophistic's assets were equal to
their carrying amounts with the exception of an item of plant, which had a
fair value of Rs. 2 million in excess of its carrying amount. It had a remaining
life of five years at that date [straight-line depreciation is used]. Sophistic has
not adjusted the carrying amount of its plant as a result of the fair value
exercise.
(ii) Sales from Sophistic to Pedantic in the post-acquisition period were
Rs. 8 million. Sophistic made a mark up on cost of 40% on these sales.
Pedantic had sold Rs. 5.2 million (at cost to Pedantic) of these goods by
30 September 20X8.
(iii) Other than where indicated, profit or loss items are deemed to accrue evenly
on a time basis.
80 CA Sri Lanka
Questions
(iv) Sophistic's trade receivables at 30 September 20X8 include Rs. 600,000 due
from Pedantic which did not agree with Pedantic's corresponding trade
payable. This was due to cash in transit of Rs. 200,000 from Pedantic to
Sophistic. Both companies have positive bank balances.
(v) Pedantic has a policy of accounting for any non-controlling interest at full
fair value. The fair value of the non-controlling interest in Sophistic at the
date of acquisition was estimated to be Rs. 5.9 Mn. Consolidated goodwill
was not impaired at 30 September 20X8.
Required
Explain how the fair value of the plant should be determined for the purpose of
calculating goodwill. (5 marks)
Prepare the consolidated statement of financial position for Pedantic as at
30 September 20X8. (15 marks)
(LO 3.2.1, 3.2.2, 3.2.4, ) (Total = 20marks)
34 Pyramid
On 1 April 20X1, Pyramid acquired 80% of Square's equity shares by means of an

immediate share exchange and a cash payment of 88 cents per acquired share,
deferred until 1 April 20X2. Pyramid has recorded the share exchange, but not the
cash consideration. Pyramid's cost of capital is 10% per annum.
The summarised statements of financial position of the two companies as at
31 March 20X2 are:
Pyramid Square
Rs'000 Rs'000
Assets
Non-current assets
Investments – Square 24,000
– Cube at cost (note (iv)) 6,000
– Loan notes (note (ii)) 2,500
– Other equity 2,000
72,600 28,500
Current assets
Inventory (note (iii)) 13,900 10,400
Trade receivables (note (iii)) 11,400 5,500
Bank (note (iii)) 900 600
26,200 16,500
CA Sri Lanka 81
Pyramid Square
Rs'000 Rs'000
Equity
Equity shares (P:25m, S:10m shares) 42,600 10,000
Retained earnings – at 1 April 20X1 16,200 18,000
– for year ended 31 March 20X2 14,000 8,000
72,800 36,000
11% loan notes (note (ii)) 12,000 4,000
Deferred tax 4,500
Current liabilities (note (iii)) 9,500 5,000
(i) At the date of acquisition, Pyramid conducted a fair value exercise on
Square's net assets which were equal to their carrying amounts with the
following exception:
• Square had an unrecorded deferred tax liability of Rs. 1 million, which
was unchanged as at 31 March 20X2.
Pyramid's policy is to measure the non-controlling interest at fair value at
the date of acquisition. For this purpose a share price for Square of Rs. 3.50
each is representative of the fair value of the shares held by the
non-controlling interest.
(ii) Immediately after the acquisition, Square issued Rs. 4 million of 11% loan
notes, Rs. 2.5 million of which were bought by Pyramid. All interest due on
the loan notes as at 31 March 20X2 has been paid and received.
(iii) Pyramid sells goods to Square at cost plus 50%. Below is a summary of the
recorded activities for the year ended 31 March 20X2 and balances as at
31 March 20X2:
Pyramid Square
Rs'000 Rs'000
Sales to Square 16,000
Purchases from Pyramid 14,500
Included in Pyramid's receivables 4,400
Included in Square's payables 1,700
On 26 March 20X2, Pyramid sold and despatched goods to Square, which
Square did not record until they were received on 2 April 20X2. Square's
inventory was counted on 31 March 20X2 and does not include any goods
purchased from Pyramid.
82 CA Sri Lanka
Questions
On 27 March 20X2, Square remitted to Pyramid a cash payment which was

not received by Pyramid until 4 April 20X2. This payment accounted for the
remaining difference on the current accounts.
(iv) Pyramid bought 1.5 million shares in Cube on 1 October 20X1; this
represents a holding of 30% of Cube's equity. At 31 March 20X2, Cube's
retained profits had increased by Rs. 2 million over their value at
1 October 20X1. Pyramid uses equity accounting in its consolidated financial
statements for its investment in Cube.
(v) There were no impairment losses within the group during the year ended
31 March 20X2.
Required
Prepare the consolidated statement of financial position for Pyramid as at
31 March 20X2.
(LO 3.1.1) (20 marks)
35 Pandar
On 1 April 20X9 Pandar purchased 80% of the equity shares in Salva. The
non-controlling interest was measured at fair value and goodwill was recognised
at Rs. 113.9 million.
The summarised statements of profit or loss for the three companies for the year
ended 30 September 20X9 are:
Pandar Salva Ambra
Rs'000 Rs'000 Rs'000
Revenue 210,000 150,000 50,000
Cost of sales (126,000) (100,000) (40,000)
Gross profit 84,000 50,000 10,000
Distribution costs (11,200) (7,000) (5,000)
Administrative expenses (18,300) (9,000) (11,000)
Investment income (int. & dividends) 9,500
Finance costs (1,800) (3,000) nil
Profit (loss) before tax 62,200 31,000 (6,000)
Income tax (expense) relief (15,000) (10,000) 1,000
Profit (loss) for the year 47,200 21,000 (5,000)
The following information for the equity of the companies at 30 September 20X9
is available:
Pandar Salva Ambra
Rs'000 Rs'000 Rs'000
Equity shares (P: 200m, S: 120m, A: 40m) 500,000 120,000 40,000
Retained earnings 1.10.X8 40,000 152,000 15,000
Profit (loss) for the year ended 30.9.X9 47,200 21,000 (5,000)
Dividends paid (26 September 20X9) nil 8,000 nil
CA Sri Lanka 83

(i) The fair values of the net assets of Salva at the date of acquisition were equal
to their carrying amounts with the exception of an item of plant which had a
carrying amount of Rs. 12 million and a fair value of Rs. 17 million. This plant
had a remaining life of five years (straight-line depreciation) at the date of
acquisition of Salva. All depreciation is charged to cost of sales.
In addition, Salva owns the registration of a popular internet domain name.
The registration, which had a negligible cost, has a five year remaining life
(at the date of acquisition); however, it is renewable indefinitely at a nominal
cost. At the date of acquisition the domain name was valued by a specialist
company at Rs. 20 million.
The fair values of the plant and the domain name have not been reflected in
Salva's financial statements.
No fair value adjustments were required on the acquisition of the investment
in Ambra.
(ii) Immediately after its acquisition of Salva, Pandar invested Rs. 50 million in
an 8% loan note from Salva. All interest accruing to 30 September 20X9 had
been accounted for by both companies. Salva also has other loans in issue at
30 September 20X9.
(iii) Pandar has credited the whole of the dividend it received from Salva to
investment income.
(iv) After the acquisition, Pandar sold goods to Salva for Rs. 15 million on which
Pandar made a gross profit of 20%. Salva had one third of these goods still in
its inventory at 30 September 20X9. There are no intra-group current
account balances at 30 September 20X9.
(v) The goodwill of Salva is determined to be impaired by 5% at 30 September
20X9. Due to its losses, the value of Pandar's investment in Ambra has been
impaired by Rs. 3 million at 30 September 20X9.
(vii) All items in the above statements of profit or loss are deemed to accrue
evenly over the year unless otherwise indicated.
Required
Calculate the carrying amount of the investment in Ambra to be included within
the consolidated statement of financial position as at 30 September 20X9.
(3 marks)
Prepare the consolidated statement of profit or loss for the Pandar Group for the
year ended 30 September 20X9. (17 marks)
(LO 3.2.1 – 3.2.5) (Total = 20 marks)
84 CA Sri Lanka
Questions
36 Plateau
On 1 October 20X6 Plateau acquired the following non-current investments:
• 3 million equity shares in Savannah by an exchange of one share in Plateau
for every two shares in Savannah plus Rs. 1.25 per acquired Savannah share
in cash. The market price of each Plateau share at the date of acquisition was
Rs. 6 and the market price of each Savannah share at the date of acquisition
was Rs. 3.25.
• 30% of the equity shares of Axle at a cost of Rs. 7.50 per share in cash.
Only the cash consideration of the above investments has been recorded by
Plateau. In addition Rs. 500,000 of professional costs relating to the acquisition of
Savannah are also included in the cost of the investment.
The summarised draft statements of financial position of the three companies at
30 September 20X7 are as follows:
Plateau Savannah Axle
Rs'000 Rs'000 Rs'000
Non-current assets
Property, plant and equipment 18,400 10,400 18,000
Investments in Savannah and Axle 13,250 nil nil
Investments in equity instruments 6,500 nil nil
38,150 10,400 18,000
Current assets
Inventory 6,900 6,200 3,600
Trade receivables 3,200 1,500 2,400
Total assets 48,250 18,100 24,000
Equity shares of Rs. 1 each 10,000 4,000 4,000
Retained earnings
– at 30 September 20X6 16,000 6,000 11,000
– for year ended 30 September 20X7 9,250 2,900 5,000
35,250 12,900 20,000
7% Loan notes 5,000 1,000 1,000
Current liabilities 8,000 4,200 3,000
Total equity and liabilities 48,250 18,100 24,000
(i) At the date of acquisition Savannah had five years remaining of an
agreement to supply goods to one of its major customers. Savannah believes
it is highly likely that the agreement will be renewed when it expires. The
directors of Plateau estimate that the value of this customer based contract
has a fair value of Rs. 1 million and an indefinite life and has not suffered any
impairment.
CA Sri Lanka 85
(ii) On 1 October 20X6, Plateau sold an item of plant to Savannah at its agreed
fair value of Rs. 2.5 million. Its carrying amount prior to the sale was
Rs. 2 million. The estimated remaining life of the plant at the date of sale was
five years (straight-line depreciation).
(iii) Impairment tests on 30 September 20X7 concluded that neither
consolidated goodwill nor the value of the investment in Axle were impaired.
(iv) The investments in equity instruments are included in Plateau's statement of
financial position (above) at their fair value on 1 October 20X6, but they
have a fair value of Rs. 9 million at 30 September 20X7.
(v) No dividends were paid during the year by any of the companies.
(vi) It is the group policy to measure non-controlling interest at acquisition at
full (or fair) value. For this purpose the share price of Savannah at this date
should be used.
Required
Prepare the consolidated statement of financial position for Plateau as at
30 September 20X7.
(LO 3.2.1 – 3.2.5) (20 marks)
86 CA Sri Lanka
Questions
PART D: FINANCIAL STATEMENT ANALYSIS AND NON-FINANCIAL

REPORTING
Questions 37 to 40 cover Financial Statement Analysis and Non-financial
Reporting, the subject of Chapter 28 of the Study Text.
37 Performance appraisal
You are an analyst with Megaloans, an investment bank.

Required
Rampala Fashion Retail Ltd (RFR) manufactures ladies' fashion garments and sells
them through its chain of stores as well as on a wholesale basis to other retailers.
It has prepared financial statements for the year ended 30 June 20X8 that include
the following amounts:
20X8 20X7
Rs'm Rs'm
Revenue 670 540
Cost of sales 280 270
Trade receivables 34 30
Trade payables 44 32
Calculate efficiency ratios insofar as the information provided allows and provide
possible explanation for the movements in these from the perspective of a
potential new supplier. (6 marks)
Discuss the limitations of financial statement analysis techniques. (4 marks)
(LO 4.1.2, 4.1.4) (Total = 10 marks)
CA Sri Lanka 87
38 Sinharaja Timber
Sinharaja Timber is a publicly listed company. Its financial statements for the year
ended 31 December 20X4 plus comparatives for the year ended 31 December
20X3 are shown below:
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR
THE YEAR ENDED
31 December 20X4 31 December 20X3
Rs'm Rs'm
Revenue 124,000 100,000
Cost of sales (87,200) (74,400)
Finance costs (Note 1) (1,600) (1,400)
Other comprehensive income 5,400 Nil
Total comprehensive income 13,400 5,200
STATEMENT OF FINANCIAL POSITION AS AT
Assets Rs'm Rs'm
Non-current
Deferred development expenditure 4,000 Nil
Total non-current assets 60,000 42,800
Current
Inventory 13,200 15,200
Trade receivables 11,800 8,800
Bank 200 5,200
Total current assets 25,200 29,200
Equity
Equity shares 32,000 32,000
Revaluation reserve 5,400 Nil
Retained earnings 12,800 7,000
Shareholders' funds 50,200 39,000
8% loan notes 5,600 12,500
Deferred tax 6,000 3,200
Lease liabilities 4,800 3,600
16,400 19,300
88 CA Sri Lanka
Questions

Rs'm Rs'm
Current liabilities
Lease liabilities 3,000 2,400
Trade payables 10,600 8,400
Current tax payable 5,000 2,900
Total current liabilities 18,600 13,700
Additional information:
1 On 1 April 20X4, Sinharaja Timber acquired a major item of plant under a
lease. The present value of future lease payments amounted to
Rs. 6,000 million. No further costs were associated or anticipated as a result
of taking out the lease. On this date, it also revalued its property upwards by
Rs. 8,000 million and transferred Rs. 2,600 million of the resulting
revaluation surplus to deferred tax. Sinharaja Timber did not dispose of any
non-current assets during the period.
2 Depreciation of property, plant and equipment and amortisation of deferred
development expenditure included in cost of sales for the year ended
31 December 20X4 are Rs. 3,600 million and Rs. 800 million respectively.
Required
(a) Calculate the following ratios for Sinharaja Timber for both years:
(i) Return on capital employed
(ii) Operating profit margin
(iii) Trade receivables collection period
(iv) Inventory holding period
(v) Current ratio
(vi) Total capital gearing ratio (6 marks)
(b) Assess the profitability of Sinharaja Timber for the year ended
31 December 20X4 based on the ratios calculated in (a) above. (4 marks)
39 Victular
Victular is a public company that would like to acquire (100% of) a suitable
private company. It has obtained the following draft financial statements for two
companies, Grappa and Merlot. They operate in the same industry and their
managements have indicated that they would be receptive to a takeover.
CA Sri Lanka 89
STATEMENTS OF PROFIT OR LOSS FOR THE YEAR ENDED 30 SEPTEMBER 20X8

Grappa Merlot
Rs'm Rs'm
Revenue 12,000 20,500
Cost of sales (10,500) (18,000)
Operating expenses (240) (500)
Finance costs – loan (210) (300)
– overdraft nil (10)
– lease nil (290)
Profit for the year 900 1,000
Note. Dividends paid during the year 250 700
90 CA Sri Lanka
Questions
STATEMENTS OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20X8

Grappa Merlot
Rs'm Rs'm Rs'm Rs'm
Non-current assets
Freehold factory (note (i)) 4,400 nil
Owned plant (note (ii)) 5,000 2,200
Right-of-use asset (note (ii)) nil 5,300
9,400 7,500
Current assets
Inventory 2,000 3,600
Bank 600 nil
5,000 7,300
Property revaluation reserve 900 nil
Retained earnings 2,600 800
5,500 2,800
Lease liabilities (note (iii)) nil 3,200
7% loan notes 3,000 nil
10% loan notes nil 3,000
Deferred tax 600 100
Government grants 1,200 nil
4,800 6,300
Current liabilities
Bank overdraft nil 1,200
Government grants 400 nil
Lease liabilities (note (iii)) nil 500
Taxation 600 200
4,100 5,700
Notes
(i) Both companies operate from similar premises.
(ii) Additional details of the two companies' plant are:
Grappa Merlot
Rs'000 Rs'000
Owned plant – cost 8,000 10,000
Right-of use asset – initial nil 7,500
measurement
There were no disposals of plant during the year by either company.
CA Sri Lanka 91
(iii) The interest rate implicit within Merlot's leases is 7.5% per annum. For the
purpose of calculating ROCE and gearing, all lease liabilities are treated as
long-term interest bearing borrowings.
(iv) The following ratios have been calculated for Grappa and can be taken to be
correct. Management of Victular has started to calculate the same ratios for
Merlot but has not completed the task:
Grappa Merlot
Return on year end capital employed (ROCE) 14.8%
(capital employed taken as shareholders' funds plus
long-term interest bearing borrowings – see note
(iii) above)
Pre-tax return on equity (ROE) 19.1%
Net asset (total assets less current liabilities) turnover 1.2 times
Gross profit margin 12.5% 12.2%
Operating profit margin 10.5% 9.8%
Current ratio 1.2:1
Closing inventory holding period 70 days 73 days
Trade receivables' collection period 73 days 66 days
Trade payables' payment period (using cost of sales) 108 days 77 days
Gearing (see note (iii) above) 35.3%
Interest cover 6 times 3.3 times
Dividend cover 3.6 times 1.4 times
Required
Calculate for Merlot the missing ratios equivalent to those given for Grappa
above. (5 marks)
Assess the relative performance and financial position of Grappa and Merlot for
the year ended 30 September 20X8 to inform the directors of Victular in their
acquisition decision. (15 marks)
(LO 4.1.1, 4.1.3, 4..1.4, 4.1.5) (Total = 20 marks)
92 CA Sri Lanka
Questions
40 Hardy
Hardy is a public listed manufacturing company. Its summarised financial

statements for the year ended 30 September 20X1 (and 20X0 comparatives) are:
STATEMENTS OF PROFIT OR LOSS FOR THE YEAR ENDED 30 SEPTEMBER
20X1 20X0
Rs'000 Rs'000
Revenue 29,500 36,000
Cost of sales (25,500) (26,000)
Distribution costs (1,050) (800)
Investment income 50 200
Profit (loss) before taxation (2,500) 5,000
Income tax (expense) relief 400 (1,500)
Profit (loss) for the year (2,100) 3,500
STATEMENTS OF FINANCIAL POSITION AS AT 30 SEPTEMBER
20X1 20X0
Rs'000 Rs'000 Rs'000 Rs'000
Assets
Non-current assets
Investments at FVTPL 2,400 4,000
20,000 28,500
Current assets
Inventory and work-in-progress 2,200 1,900
Tax asset 600 nil
Bank 1,200 _ 6,200 100 _ 4,800
Equity
Revaluation reserve nil 4,500
Retained earnings _ 3,600 _ 6,500
17,600 23,000
Bank loan 4,000 5,000
Deferred tax 1,200 700
Current liabilities
Current tax payable nil 3,400 1,800 4,600
CA Sri Lanka 93
The following information has been obtained from the Chairman's Statement and
the notes to the financial statements:
'Market conditions during the year ended 30 September 20X1 proved very
challenging due largely to difficulties in the global economy as a result of a sharp
recession which has led to steep falls in share prices and property values. Hardy
has not been immune from these effects and our properties have suffered
impairment losses of Rs. 6 million in the year. The excess of these losses over
previous surpluses has led to a charge to cost of sales of Rs. 1.5 million in addition
to the normal depreciation charge.'
'Our portfolio of investments at fair value through profit or loss has been 'marked
to market' (fair valued) resulting in a loss of Rs. 1.6 million (included in
administrative expenses).'
There were no additions to or disposals of non-current assets during the year.
'In response to the downturn the company has unfortunately had to make a
number of employees redundant incurring severance costs of Rs. 1.3 million
(included in cost of sales) and undertaken cost savings in advertising and other
administrative expenses.'
'The difficulty in the credit markets has meant that the finance cost of our variable
rate bank loan has increased from 4.5% to 8%. In order to help cash flows, the
company made a rights issue during the year and reduced the dividend per share
by 50%.'
'Despite the above events and associated costs, the Board believes the company's
underlying performance has been quite resilient in these difficult times.'
Required
Evaluate the financial performance and position of Hardy from an investor's
perspective as portrayed by the above financial statements and the additional
information provided. Your analysis should be supported by appropriate ratios
(up to 8 marks available for calculations).
(LO 4.1.1, 4.1.3) (20 marks)
94 CA Sri Lanka
Questions
PART E: FINANCIAL REPORTING ETHICS AND GOVERNANCE
Questions 41 and 42 cover ethics and governance, the subject of Chapters 3 to 4 of

the Study Text.
41 Chilaw plc
Chilaw plc is a listed company with a year-end of 31 December 20X5. All directors
are members of a company share option scheme. The company also significant
bank funding with gearing-related covenants attached.
Shortly before the year end, the CEO sends the following email to the Finance
Director:
Email
From: Ravindu Chakrabati, CEO
To: Amanda da Silva, FD
Subject: Annual report
Hi Amanda
I've been thinking about our annual report and making the numbers work.
One thing in particular comes to mind. I know that we've entered into a major new
lease agreement and when I was chatting with the financial controller yesterday,
he suggested that he's going to record an asset and a corresponding lease liability
in the statement of financial position. I'm a bit worried about the effect on the
gearing ratio, but I know that there's an option to simply record lease payments in
profit or loss so can you tell him to follow that route. Make him aware that his job
security is reliant on the company retaining its bank funding!
Also, I'm hoping to retire within the next year and I'd like to maximise our share
price by any means possible so my retirement will be as comfortable as possible!
If you can think of anything to boost our numbers to help the share price jump, I'd
certainly appreciate it. I'm hoping to buy a beach villa in retirement and you and
your family would be very welcome to use it!
Let me know your thoughts!
Ravi.
Required
Discuss the ethical issues arising from the email to the Finance Director from
the CEO. (10 marks)
CA Sri Lanka 95
42 Emerald Software PLC
Emerald Software PLC a listed company, develops specialist software for use by
accountancy professionals. The specialist software market is particularly dynamic
and fast changing. It is common for competitors to drop out of the market place.
The most successful companies have been particularly focused on enhancing their
offering to customers through creating innovative products and investing heavily
in training and development for their employees.
Emerald Software has been through a turbulent time over the last three years.
During this time there have been significant senior management changes, which
resulted in confusion amongst shareholders and employees as to the strategic
direction of the company. One investor complained that the annual accounts made
it hard to know where the company was headed. The last CEO introduced an
aggressive cost-cutting programme aimed at improving profitability. At the
beginning of the financial year the annual staff training and development budget
was significantly reduced and has not been reviewed since the change in
management.
In response to the confusion surrounding the company's strategic direction, the
Board published a new mission statement, the primary focus of which centres on
making Emerald Software the market leader of specialist accountancy software. In
her previous role Ms Keen oversaw the introduction of an integrated approach to
reporting performance. This is something she is particularly keen to introduce at
Emerald Software.
During the company's last board meeting, Ms Keen was dismayed by the finance
director's reaction when she proposed introducing integrated reporting at
Emerald Software. The finance director made it clear that he was not convinced of
the need for such a change, arguing that 'all this talk of integrated reporting in the
business press is just a fad, requiring a lot more work, simply to report on things
people do not care about. Shareholders are only interested in the bottom line'.
Required
Explain how integrated reporting may help Emerald Software to communicate its
strategy and improve the company's strategic performance? Your answer should
make reference to the concerns raised by the finance director. (10 marks)
96 CA Sri Lanka
Answers
PART A: CONCEPTUAL AND REGULATORY FRAMEWORK FOR FINANCIAL

STATEMENTS
1 Standard development
(1) Setting standards
IFRS Standards are developed by the International Accounting Standards
Board (the Board) through an international consultation process that
involves interested individuals and organisations from around the world.
A due process is followed which includes setting the work plan, conducting
research, setting the standard and maintaining the standard.
At the start of the process the Board identifies projects to add to its work
plan. The work plan is generally reviewed on a five year cycle, but projects
can be added on an ad hoc basis as the need arises to deal with particular
issues. The Board's work plan at any one time includes a number of projects
at varying stages of completion. Some of these deal with developing a
standard on a new topic, some with revising existing standards, some with
making amendments (major and minor) to existing standards and others
with developing Interpretations.
The first stage in most projects is a research stage at which the underlying
issue and possible solutions (eg, a new standard or an amendment) are
explored. As part of the research phase the Board may issue a discussion
paper to set out its ideas and invite public comment. CASL makes issued
discussion papers available for comment, forwarding any feedback to the
Board. When the Board is satisfied that a problem exists, that it requires the
issuance of guidance and that a practical solution can be found, the project
moves on to the standard-setting stage.
At the standard-setting stage the Board reviews the research material, and
responses to the discussion paper and issues an exposure draft of proposed
amendments or a proposed new standard. This exposure draft is available
for public comment for a period and when the period closes the Board
analyses feedback received. Again CASL makes exposure drafts available to
its members and seeks feedback on them which is fed back to the Board. As
part of this process ,chief financial officers (CFOs) are invited to round table
discussions to identify the impact of the proposed standard in Sri Lanka.
Feedback received by the IASB from global constituents may result in
amendments to the proposals, and if these are extensive, a second exposure
draft is issued, again being available for public comment.
CA Sri Lanka 97
Finally a standard is issued. When the Board issues a final IFRS Standard or
IFRS Interpretation, CASL reviews the IFRS Standard and related technical
materials. In a few cases, this review has resulted in modification or deferral
of the standard for use in Sri Lanka. The standard is translated into Sinhala
and Tamil and published in the Extra Ordinary Gazette as required by the
Accounting and Auditing Standards Act No 15 of 1995 in Sri Lanka. Once
gazetted, the standard becomes legally authoritative.
After issue the Board is focused on understanding any implementation
problems that preparers may encounter. These may result in the issue of an
IFRS Interpretation or a narrow-scope amendment to the standard. An
interpretation is issued when divergent or unacceptable accounting
treatments arise. Financial statements must comply with all of these
interpretations if they claim to comply with International Financial
Reporting Standards.
(2) A rules-based system of regulation is very prescriptive and seeks to set out
specific requirements to cover every eventuality. In one sense this makes
things straightforward for preparers of financial statements because they
can easily demonstrate that they have prepared information in accordance
with the rules. However, because it seeks to regulate for specific situations, a
rules-based system will continue to expand as more situations arise. This is
why US GAAP has about 250 accounting standards and new ones continually
being drafted.
A principles-based system tends to be much less prescriptive and
emphasises instead compliance with a set of concepts or principles. SLFRS,
based on IFRS, is a principles-based system.
While individual SLFRSs do contain rules and requirements, they do not seek
to regulate every type of transaction. SLFRS are based on the Conceptual
Framework and SLFRSs are drafted to be in accordance with the concepts set
out in the Conceptual Framework. This does mean that more judgement has
to be used in applying SLFRSs.
2 Relevance
Historically-prepared financial statements of limited companies are used by
analysts and stockbrokers to value the company's shares. The valuation placed on
a company's shares is an indication of how it is expected to perform in the future.
So financial statements are relied upon for their predictive value and this is one
reason why it is so important that they faithfully represent financial information.
98 CA Sri Lanka
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The difference between historical financial statements and forecasts is that

historical financial statements record financial transactions which have already
taken place, so they are highly reliable. Forecasts have a much lower degree of
reliability because they are based on estimates, which are subjective.
SLFRS presentation and disclosure requirements are intended to enhance the
quality of information provided to users. For instance, entities are required to
present separately the results of discontinued operations and to disclose a
breakdown of these results between gains or losses on disposal or reclassification
of assets and trading results. They are also required to show separately the details
of non-current assets held for sale and to disclose details of the discontinued
operation. This gives important predictive information to shareholders because
they know that this operation will not be running during the next accounting
period and that the assets in question are expected to be sold within 12 months.
Another area where financial statements supply predictive information concerns
provisions. A provision might be made in the current year for an event expected
to arise in a later accounting period. Details of the amount of the provision and
why it is being made have to be disclosed so that users are aware of the nature
and extent of the liability. Entities also disclose contingent liabilities, so users are
aware of possible future liabilities of which either the probability or the amount is
not certain.
Diluted EPS provides another piece of predictive information. Although it does not
represent specific future EPS, it does alert shareholders to the degree of dilution
inherent in the entity's financial instruments and users will be able to see from the
notes the relevant dates of exercise of options. The notes will also disclose
proposed dividends, so shareholders can see how much cash will be paid out and
how much they can expect to receive.
3 Qualitative characteristics
(1) Relevance
The relevance of information must be considered in terms of the decision-
making needs of users. Information is relevant when it can influence users'
economic decisions or allow them to reassess past decisions and evaluations.
Economic decisions often have a predictive quality – users may make
financial decisions on the basis of what they expect to happen in the future.
To some degree past performance gives information on expected future
performance and this is enhanced by the provision of comparatives, so that
users can see the direction in which the company is moving. The separate
presentation of discontinued operations also shows how much profit or loss
can be attributed to that part of the operation will be not be there in the
CA Sri Lanka 99
future. This can also affect valuation of assets. One aspect of relevance is
materiality. An item is material if omitting, misstating or obscuring it could
reasonably be expected to influence the economic decisions of primary users
of the financial statements.
Faithful representation
Information can be considered to be a faithful representation when it is
complete, neutral and free from bias. The statement of profit or loss must
faithfully represent the results of the entity for the period in question and the
statement of financial position must faithfully represent its financial position
at the end of the period. Financial statements in which provision has not been
made for known liabilities or in which asset values have not been correctly
stated could not be considered reliable. This also brings in the issue of
substance over form. Transactions should be represented in accordance with
their economic substance, rather than their legal form. This principle applies
to the treatment of leases, sale and leaseback transactions and consignment
sales. If these types of transactions are not accounted for in accordance with
their economic substance, then the financial statements are unreliable.
Comparability
Comparability operates in two ways. Users must be able to compare the
financial statements of the entity with its own past performance and they
must also be able to compare its results with those of other entities. This
means that financial statements must be prepared on the same basis from
one year to the next and that, where a change of accounting policy takes
place, the results for the previous year must also be restated so that
comparability is maintained. Comparability with other entities is made
possible by use of appropriate accounting policies, disclosure of accounting
policies and compliance with International Financial Reporting Standards.
Revisions to standards have to a large degree eliminated choice of
treatments, so this has greatly enhanced comparability.
(2) (i) The 'substance' of a lease is that the lessee has acquired a part of the
right to use an asset using a loan from the lessor. Porto should
capitalise the right of use as an asset and depreciate it over its useful
life. A lease liability is also recognised. The liability will be reduced by
the lease payments, less the notional finance charge on the loan, which
will be charged to profit or loss. This presents the transaction in
accordance with its substance.
(ii) This issue has to do with relevance. It could be said that the use of
historical cost accounting does not adequately reflect the value of assets
in this case. This can be remedied by revaluing the properties. If this
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policy is adopted, all properties in the category will have to be revalued.

This will not, however, have a positive impact on profit or loss because
a revaluation is recognised in other comprehensive income. It will
probably have a negative effect on the statement of profit or loss
because there will be a higher depreciation charge. The excess can be
credited back to retained earnings in the statement of financial position
by way of a reserves transfer (from the revaluation surplus).
4 SGCC
Chief Executive and Chairman Roles
Mr Sheppard is both the Chief Executive Officer and the board chairman of the
company. Corporate governance codes indicate that there should be a clear
division of responsibilities between running the board of directors and running
the company's business, ie no single individual should have unfettered powers of
decision.
In order to address this, the company should appoint a separate chairman who
meets the independence criteria set out in the codes. This would ensure that
Mr Sheppard does not have too much power within the company.
Board Composition
The board consists of five executive and two non-executive directors. To follow
good corporate governance practice, the board should consist of a balance of
executive and non-executive directors such that no one individual or group of
individuals can dominate the board's decision-making. There should be three
independent non-executive directors (or if greater one third of the total number of
directors). In the case of SGCC, there are only two non-executive directors out of
seven and it is not clear how independent they are.
The company should appoint more independent non-executive directors to the
board to achieve a balance of half non-executive directors and half executive
directors.
Board Appointments
Mr Sheppard makes appointments to the board himself. Good corporate
governance suggests that any appointments to the board should be done through
a nomination committee, the majority of the members of which should be
independent non-executive directors and which should be chaired by the
chairman or an independent non-executive director. This ensures transparency of
appointment of board members.
CA Sri Lanka 101

The company should establish a nomination committee consisting of mainly

non-executive directors. Formal job descriptions should also be published to make
the appointment process as transparent as possible.
Monitoring of Targets
At present there are no formal targets or reviews of board policies carried out. The
board should undertake a formal and rigorous review of its own performance, its
committees and of individual directors annually. This should also be stated in the
annual report. The performance evaluation of the chairman should be undertaken
by the non-executive directors.
SGCC should address this by ensuring that performance targets are set for each
director and that their performance is reviewed annually. Non-executive directors
should review the performance of the Chairman.
Remuneration of Board Members
Currently Mr Sheppard decides the level of remuneration for himself and the
board members without considering performance. A significant proportion of
executive directors' remuneration should be structured so that rewards are linked
to performance. For non-executive directors, remuneration should reflect the time
commitment and responsibilities of the role.
A remuneration committee should be set up for determining the level of
remuneration for directors and no director should be involved in deciding his own
remuneration. The remuneration of non-executive directors should be determined
by the board itself (or the shareholders if required by the articles of association of
the company).
Review of Internal Controls
The internal controls of the company are monitored by the senior accountant and
a detailed review assumed to be undertaken by the external auditors. It is not
sufficient to rely on this to test the overall effectiveness of controls within the
company.
The board should have a process of risk management and a system of internal
control. It should conduct a review of the company's internal controls regularly
and report to shareholders that this has been undertaken. This should be
facilitated by establishing an internal audit department.
Audit Committee
It is not clear whether there is an audit committee. Good corporate governance
would require an audit committee, comprising independent non-executive
directors, which can monitor the external auditors.
The board should set up an audit committee to allow it to maintain an appropriate
relationship with the external auditors.
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Internal Audit Department

SGCC does not have an internal audit department. Listed companies, such as SGCC,
should review the need for an internal audit department at least annually. Given
the lack of formal controls at SGCC, an internal audit department should be
established as soon as possible. It should report its findings to the audit
committee.
CA Sri Lanka 103

PART B: SRI LANKA ACCOUNTING STANDARDS
5 Plethora Co
(1) Building transferred to investment property
Rs'm
Original cost 600
Depreciation 1.1.X0 to 1.7.X9 ((600/50)  9.5) (114)
Carrying amount at 1.7.X9 486
Fair value 800
Prior to transfer to investment property, the property is remeasured to fair
value in accordance with LKAS 16. The revaluation surplus of Rs. 314m is
recognised in other comprehensive income and accumulates in the
revaluation surplus in equity. The carrying amount of the building is
increased to Rs. 800m. The building is then transferred to investment
property and LKAS 40 Investment Property applies. Had there been an
increase in fair value after 1.7.X9, this would have been credited to profit or
loss.
Existing investment property
The increase in fair value in this case of Rs. 190m (740m – 550m) is credited
to profit or loss in accordance with LKAS 40.
(2)
Prior to After
review review
Rs'm Rs'm
Building 900 825
Plant and equipment 300 275
Inventory 70 70
Other current assets 130 130
Goodwill 40 –
1,440 1,300
Recoverable amount (1,300)
Impairment loss 140
The impairment loss is allocated first against goodwill and then pro-rata
against the tangible non-current assets. This means writing Rs. 75m off the
carrying amount of the building and Rs. 25m off plant and equipment.
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6 Dearing
30 Sept 30 Sept 30 Sept
Year ended 20X6 20X7 20X8
Statement of profit or loss: Rs'000 Rs'000 Rs'000
Depreciation (W3) 180,000 270,000 119,000
Maintenance (60,000/3) 20,000 20,000 20,000
Discount received (840,000  5%) (42,000) – –
Staff training 40,000 – –
198,000 290,000 139,000
30 Sept 30 Sept 30 Sept

As at: 20X6 20X7 20X8
Statement of financial position Rs'000 Rs'000 Rs'000
Property, plant and equipment:
Cost/valuation (W1), (W2) 920,000 920,000 670,000
Accumulated depreciation (180,000) (450,000) (119,000)
Carrying amount 740,000 470,000 551,000
WORKINGS
1 Cost price
Rs'000
Base price 1,050,000
Trade discount (1,050,000  20%) (210,000)
840,000
Freight charges 30,000
Electrical installation cost 28,000
Pre-production testing 22,000
920,000
2 Valuation after upgrade
Rs'000
Original cost 920,000
Depreciation to 30 September 20X7 (W3) (450,000)
Upgrade 200,000
Valuation 670,000
CA Sri Lanka 105

3 Depreciation
Rs'000
30 September 20X6:
(920,000 – 20,000)  1,200/6,000 180,000
30 September 20X7:
(920,000 – 20,000)  1,800/6,000 270,000
450,000
30 September 20X8:
(670,000 – 40,000)  850/4,500 119,000
7 Apex
(1) 'Qualifying' borrowing costs are borrowing costs incurred in the
construction of qualifying assets. These are assets that necessarily take a
substantial period of time to get ready for intended use or sale. Qualifying
borrowing costs must be capitalised as part of the cost of the underlying
asset to which they relate.
Where funds are borrowed specifically to finance the construction of a
qualifying asset, the amount eligible for capitalisation will be the borrowing
costs incurred at the effective rate of interest, less any investment income
earned on the temporary investment of those borrowings.
Where funds are borrowed generally and the borrowings attributable to a
particular asset cannot be readily identified, the amount eligible for
capitalisation will have to be estimated by applying a weighted capitalisation
rate to the funds used in constructing the asset.
The capitalisation rate is the weighted average of the borrowing costs
applicable to the borrowings of the entity that are outstanding during the
period excluding any specific borrowings unless the related specific asset is
substantially complete.
Capitalisation commences when expenditure and necessary activities begin
on the asset and borrowing costs are incurred. Capitalisation is suspended
during any period in which activities on the asset are suspended and it
ceases when substantially all activities necessary to prepare the asset for its
intended use or sale are complete.
(2) The total finance costs for the year are Rs. 750,000 (Rs. 10 Mn  7.5%).
However, the finance costs can only be capitalised for those periods during
which the activity was taking place, not before the development begins,
while it is suspended or after it has ceased.
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Finance costs to be capitalised are therefore:

Rs'000
May/June 20X8 (Rs. 10 Mn  7.5%  2/ )
12 125
Sept X8 – Feb X9 (Rs. 10 Mn  7.5%  6/12) 375
500
Rs. 500,000 is debited to PPE as part of the cost of the new store.
Rs'000
Finance costs to be expensed (750 – 500) 250
These are recognised as an expense in profit or loss.
The period during which the funds were invested was before the
development activity began, so during a period in which finance costs were
not being capitalised. Therefore the interest received of Rs. 40,000 is not
deducted from the capitalised finance costs, but is credited to profit or loss
as investment income.
8 Turquoise
(1) As the plant is wearing well and the production manager now estimates its
total life to be eight years, it is reasonable to adjust its remaining life.
However, the adjustment proposed by the assistant accountant is incorrect.
This is a change in accounting estimate and is not applied retrospectively. At
1 October 20X2 the remaining life of the plant will be six years – the new
estimated life of eight years less the two years which have elapsed.
The correct adjustment is calculated as follows:
Rs mn
Original cost 1 October 20X0 20
Two years depreciation ((20/5)  2) (8)
Carrying amount at 1 October 20X2 12
Depreciation to 30 September 20X3 (12/6) (2)
Carrying amount at 30 September 20X3 10
A credit to profit or loss for the year is not permitted; depreciation will
continue to be charged, but at a reduced rate.
(2) It looks here as if this change is being proposed simply in order to increase
reported profit, rather than to make the financial information more relevant
and reliable. However, if most of Turquoise's competitors are using AVCO
this suggests that AVCO is the method generally used in the industry, so it
may actually be a more appropriate method.
However the assistant accountant is mistaken to suppose that moving from
closing inventory of Rs. 20 Mn under FIFO to closing inventory of Rs. 18 Mn
CA Sri Lanka 107

under AVCO will increase profits by Rs. 2 Mn. It will actually reduce profits
by increasing cost of sales. In any case, this cannot be done simply as an
adjustment to the current year. This is a change of accounting policy and has
to be applied retrospectively.
The effect of the adjustment will be as follows:
FIFO AVCO Current Retained
year profit earnings
Rs mn Rs mn Rs mn Rs mn
Year to 30 September 20X2 15 13.4 (1.6) (1.6)
B/f 1 October 20X2 1.6 1.6
Year to 30 September 20X3 20 18 ( 2.0) (2.0)
At 30 September 20X3 (0.4) (2.0)
The net effect at 30 September 20X3 of this proposal will be to reduce
current year profits by Rs. 400,000 and to reduce retained earnings by
Rs. 2 Mn.
9 Partway
(1) The travel agencies may be able to be classified as a discontinued operation
provided certain criteria are met. The termination was decided on before the
financial statements were approved and within two weeks of the year end
date. The interested parties were notified at that time and an announcement
was made in the press, making the decision irrevocable. Although the
company will continue to sell holidays over the internet, the travel agency
business represents a separate major line of business. The internet business
will have quite different property and staffing requirements and a different
customer base. The results of the travel agency business are clearly
distinguished.
(2) PARTWAY
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED
31.10.X6 31.10.X5
Rs'000 Rs'000
Continuing operations
Revenue 250,000 220,000
Cost of sales (195,000) (170,000)
Operating expenses (11,000) (5,000)
Profit from continuing operations 44,000 45,000
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31.10.X6 31.10.X5
Rs'000 Rs'000
Discontinued operations
Revenue 140,000 180,000
Cost of sales (165,000) (150,000)
Gross profit/(loss) (25,000) 30,000
Operating expenses (15,000) (15,000)
Profit/(loss) from discontinued operations (40,000) 15,000
10 Borough
(1) Borough has a constructive obligation to deal with these environmental
costs, so a provision must be recognised.
The fixed cost of making good the damage must be added to the cost of the
licence and recognised as a provision. The provision will be increased each
year according to the number of barrels extracted. The provision will also
increase as the discount is unwound.
At 30 September 20X1 the statement of financial position will show:
Rs'm
Non-current assets
Intangible asset – extraction licence 630
((500m + 200m)  9/10)
Environmental provision 248.4
(200m + (150m  0.2))  1.08
(2) Legally, Borough and Hamlet are separate companies and in its individual
financial statements Borough will simply report its investment in Hamlet as
an asset measured at cost, in line with SLFRS 9 or using the equity method,
as required by LKAS 27. The guarantee of Rs. 100 million will be disclosed
as a contingent liability. Borough will not need to reflect the Rs. 150 million
which is secured on Hamlet's property. If at some point it is decided that
Hamlet is not a going concern, then Borough's loan guarantee will need to be
provided for.
In its group financial statements Borough will consolidate the whole of the
Rs. 250 Mn loan.
CA Sri Lanka 109

11 Hideaway
(1) Importance of related party disclosures
Investors invest in a business on the assumption that it aims to maximise its
own profits for the benefit of its own shareholders. This means that all
transactions have been negotiated at arm's length between willing and
informed parties. The existence of related parties may encourage directors
to make decisions for the benefit of another entity at the expense of their
own shareholders. This can be done actively by selling goods and services
cheaply to related parties, or by buying in goods and services at an above
market price. It can also happen when directors chose not to compete with a
related party, or offer guarantees or collateral for the other party's loans.
Disclosure is particularly important when a business is being sold. It may
receive a lot of custom, supplies, services or general help and advice from
family or group companies. When the company is sold these benefits may be
withdrawn.
Related party transactions are not illegal, nor are they necessarily a bad
thing. However shareholders and potential investors need to be informed of
material related party transactions in order to make informed investment
and stewardship decisions.
(2) Hideaway, Benedict and Depret
The directors and shareholders of Hideaway, the parent, will maximise their
wealth by diverting profitable trade into wholly owned subsidiaries. They
have done this by instructing Depret (a 55% subsidiary) to sell goods to
Benedict (a 100% subsidiary) at Rs. 50 Mn below fair value. As a result the
non-controlling shareholders of Depret have been deprived of their 45%
interest in those lost profits, amounting to Rs. 22.5 Mn. The non-group
directors of Depret will also lose out if their pay is linked to Depret's profits.
Because Depret's profits have been reduced, the non-controlling
shareholders might be persuaded to sell their shares to Hideaway for less
than their true value. Certainly potential shareholders will not be willing to
pay as much for Depret's shares as they would have if Depret's profits had
been maximised.
The opposite possibility is that the Directors of Hideaway are boosting
Benedict's reported performance with the intention of selling it off for an
inflated price.
LKAS 24 Related Party Disclosures states that entities are related parties if
they are members of the same group. Hideaway, Benedict and Depret are all
110 CA Sri Lanka

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related parties of one another and therefore the relationship and details of
the transaction, including the amount payable and any outstanding balances,
must be disclosed in the consolidated financial statements of the Hideaway
Group, as well as in the separate financial statements of Benedict and Depret.
12 Wardle
(1) (i)
Legal form 31.3.X1 31.3.X2 31.3.X3 Total
Rs'000 Rs'000 Rs'000 Rs'000
Revenue 60,000 – 100,000 160,000
Cost of sales (50,000) – (79,860) (129,860)
Gross profit 10,000 – 20,140 30,140
Finance costs – – – –
Net profit 10,000 – 20,140 30,140
(ii)
Substance 31.3.X1 31.3.X2 31.3.X3 Total
Rs'000 Rs'000 Rs'000 Rs'000
Revenue – – 100,000 100,000
Cost of sales – – (50,000) (50,000)
Gross profit – – 50,000 50,000
Finance costs (6,000) (6,600) (7,260) (19,860)
Net profit (6,000) (6,600) 42,740 30,140
(2) Wardle has a right to repurchase the products (a call option). In this case the
purchaser does not obtain control of the products; because the repurchase
price is greater than the original selling price, Wardle should account for the
contract as a financing arrangement. It should continue to recognise the
product as an asset and should recognise the proceeds of sale as a loan, so
reflecting the substance of the arrangement.
(3) While net profit at the end of the three-year period is the same under both
treatments, we can see that under the legal form revenue is much greater,
because of the assumption that Wardle has 'sold' the asset twice. This leads
to profit being split between two of the three years rather than shown
wholly in year 3, so there is some 'smoothing' effect.
Reporting under the legal form of the transaction removes the finance cost,
which will have a favourable effect on interest cover, and will also have
removed the loan from the statement of financial position, thus making
gearing appear lower.
CA Sri Lanka 111

Similarly, under the legal form, the asset will not appear in the statement of
financial position, which will make ROCE appear higher than it would
otherwise have been.
13 Evans Co
(1) A lease is a contract that conveys the right to control the use of an identified
asset for a period of time in exchange for consideration.
In order to obtain the right to control an asset, a customer must obtain
substantially all economic benefits from its use and be able to direct the use
of the asset. EA has the ability to obtain all of the economic benefits of the
tractor for the five years that it uses it; EA can also direct the use of the
tractor within the parameters of the contract ie, it can use the tractor as it
wishes within Uva province.
The tractor is an identified asset and consideration is payable for the 5 years
of the lease. Therefore the contract is a lease and SLFRS 16 is applied in
accounting for it.
(2) The SLFRS 16 lessee accounting model should be applied to the tractor; a
lease liability should be recognised at Rs. 2,165,000, being the present value
of future lease payments at the commencement of the lease. This
subsequently accrues interest at 5% and is reduced by the capital amount of
lease payments. A right-of-use asset is also recognised in the statement of
financial position. This is measured at Rs. 2,565,000 (2,165 + 300 + 100)
and is depreciated over the lease term (as it is less than useful life).
The printer is a low value asset and EQ management has elected to apply the
recognition exemption and so apply simplified accounting. Therefore no
asset or liability is recognised and rental payments are recognised as an
expense on a straight line basis over the lease term.
STATEMENT OF PROFIT OR LOSS (extract)
Rs.
Depreciation (Rs. 2,565/5) 513,000
Lease expense (120,000  8/12m) 80,000
Finance costs (W) 108,250
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STATEMENT OF FINANCIAL POSITION (extract)

Non-current assets Rs.
Property, plant and equipment (Rs. 2,565,000 – 513,000) 2,052,000
Current assets
Prepayment (120,000 – 80,000) 40,000
Lease liability (W) 1,361,913
Current liabilities
Lease liability (1,773,250 – 1,361,913 (W)) 411,337
WORKING
Lease liability
Rs.
At commencement of lease 1 July 20X3 2,165,000
Interest (5%  2,165) 108,250
Instalment 30 June 20X4 (500,000)
1,773,250
Interest (5%  1,773.250) 88,663
Instalment 30 June 20X5 (500,000)
1,361,913
14 Bowtock
(1) Principles of deferred tax
Temporary differences arise when the carrying amount of an item is different
from its tax base. This often arises because income or expenditure is
recognised in the financial statements in one year, but is charged or allowed
for tax in another. Deferred tax needs to be provided for on these items.
For example a provision for legal damages might be made in one year, so
reducing accounting profits, however the tax authorities don't give tax relief
on the amount until the legal damages are actually paid.
Therefore operating profit in the statement of profit or loss reflects the legal
expense, as required by LKAS 37, but the tax charge in profit or loss doesn't
reflect the associated tax relief.
This imbalance is misleading for users of financial statements and
particularly for investors who value companies on the basis of their post-tax
profits (by using EPS for example).
Deferred tax adjusts the reported tax expense for these differences. – in this
case it decreases the tax charge. As a result the reported tax expense (the
current tax for the period plus the deferred tax) is calculated on the same
items as operating profits.
CA Sri Lanka 113

Here the corresponding entry in the statement of financial position is an

asset, which reflects the expected decrease in tax payable to the authorities
in the future.
When the legal damages are paid, tax payable on profits is reduced but the
deferred tax asset is released to increase the tax charge in profit or loss. As a
result the higher tax charge in matched to the higher operating profits.
(2) Bowtock
The deferred tax liability in Bowtock's statement of financial position at
30 September 20X3 is equal to the tax rate applied to the difference between
the accounting carrying amount of Rs. 1,400,000 and the tax base of
Rs. 768,000. The difference is Rs. 632,000 and the tax on the difference is
Rs. 158,000.
The charge (or credit) for deferred tax in profit or loss is the increase (or
decrease) in the deferred tax liability during the year. The closing liability of
Rs. 158,000 is less than the opening liability of Rs. 160,000, so there is a
credit for Rs. 2,000 in respect of this year.
Movement in the deferred tax liability for the year-ending 30 September 20X3
Rs.
Opening liability 160,000
Credit released to profit or loss (2,000)
Closing liability 158,000
WORKINGS
Accounting
Carrying
amount Tax base Difference Tax @ 25%
Y/E 09/X1 Rs. Rs. Rs. Rs.
Purchase 2,000,000 2,000,000 – –
Depreciation W1 (200,000) W2 (800,000)
Balance 1,800,000 1,200,000 600,000 150,000
Y/E 09/X2
Depreciation (200,000) W3 (240,000)
Balance 1,600,000 960,000 640,000 160,000
Y/E 09/X3
Depreciation (200,000) W4 (192,000)
Balance 1,400,000 768,000 632,000 158,000
(W1) Rs. 2,000,000 cost – Rs. 400,000 residual value over eight years.
(W2) Rs. 2,000,000  40%
(W3) Rs. 1,200,000  20%
(W3) Rs. 960,000  20%
114 CA Sri Lanka

Answers
15 Barstead Co
(1) An increase in profit after tax of 80% will not translate into a comparable
increase in EPS unless the number of shares in issue has remained constant.
The disparity between the increase in profit and the increase in EPS shows
that Barstead has obtained the resources it needed in order to generate
higher profit through share issue(s). This may have been done as part of an
acquisition drive, obtaining a controlling interest in other entities through
share exchange. In this way, EPS is a more reliable indicator of performance
than pure profit because it matches any additional profit with the resources
used to earn it.
Diluted EPS takes into account the existence of potential ordinary shares,
arising from financial instruments such as options, warrants and convertible
debt. Diluted EPS shows what EPS would be if all of these potential shares
came into existence in the current year. In the case of Barstead, the diluted
EPS has increased by less than the basic EPS. This shows that some of the
profit increase has been financed by the issue of financial instruments
carrying future entitlement to ordinary shares. The disclosure of diluted EPS
is an advance warning signal to investors.
(2) Basic EPS is calculated as follows:
Theoretical ex-rights price will be:
4 shares at Rs. 380 1,520
1 share at Rs. 280 280
1,800 / 5 = Rs. 360
Weighted average calculation:
No. Time Weighted
Date Narrative shares period Bonus fraction average
1.10.20X0 36Mn  3/12  Rs. 380/Rs. 360 9.5 Mn
1.1.20X1 Rights issue 9Mn
45Mn  9/12 33.75 Mn
43.25 Mn
Basic EPS for the year ended 30 September 20X1 is therefore:
Rs. 150 Mn/43.25 Mn = Rs. 3.47
Comparative EPS = 3.50  360/380 = Rs. 3.32
CA Sri Lanka 115

Diluted EPS:
The additional earnings will be Rs. 8,000,000 (Rs. 100 Mn  8%) less 25% tax
= Rs. 6,000,000
The additional shares will be 2.5 Mn
The net effect is therefore Rs. 6,000,000/2.5 Mn = Rs. 2.40. This is below
basic EPS and therefore dilutive.
Earnings = Rs. 156 Mn
Shares = 43.25 + 2.5 = 45.75 Mn
Diluted EPS = Rs. 3.41
16 Waxwork
(1) This is a non-adjusting event as it does not affect the valuation of property or
inventory at the year end. However, it would be treated as adjusting if the
scale of losses were judged to threaten the going concern status of Waxwork.
It will certainly need to be disclosed in the notes to the financial statements,
disclosing separately the Rs. 16 Mn loss and the expected insurance recovery
of Rs. 9 Mn.
(2) The sale in April 20X9 gives further evidence regarding the realisable value
of inventory at the year end and so an adjustment will be required. If 70% of
the inventory was sold for Rs. 280,000 less commission of Rs. 42,000, it had
a net realisable value of Rs. 238,000. On this basis, the total cost of
Rs. 460,000 should be restated at NRV of Rs. 340,000. So inventory at the
end of the reporting period should be written down by Rs. 120,000.
(3) This change has occurred outside the period specified by LKAS 10, so it is not
treated as an event after the reporting period. Had it occurred prior to 6 May
20X9, it would have been treated as a non-adjusting event requiring
disclosure in the notes. The increase in the deferred tax liability will be
accounted for in the 20Y0 financial statements.
116 CA Sri Lanka

Answers
17 Tangerine
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 MARCH 20X2
Rs mn Rs mn
Net cash from operating activities (see below) 85
Cash flows from investing activities
Purchase of property, plant and equipment (W2) (305)
Addition to licence (W3) (125)
Purchase of shares in Raremetal (230)
Net cash used in investing activities (660)
Cash flows from financing activities
Share issue 100
10% loan notes issued 300
Equity dividend paid (W4) ( 55)
Net cash from financing activities 345
Net decrease in cash and cash equivalents ( 230)
Cash and cash equivalents at 1 April 20X1 120
Cash and cash equivalents at 31 March 20X2 (110)
Reconciliation of profit before tax to net cash from operating activities
Rs mn
Profit before tax 195
Depreciation/amortisation 140
Finance costs 40
Increase in inventory (200 – 110) (90)
Increase in receivables (195 – 75) (120)
Increase in payables (210 – 160) 50
Cash generated from operations 215
Interest paid (40)
Tax paid (W1) (90)
Net cash from operating activities 85
WORKINGS
1. Tax paid
INCOME TAX
Rs mn Rs mn
Paid (bal. fig.) 90 B/f 1.4.X1 110
C/f 31.3.X2 80 Charge for the year 60
170 170
CA Sri Lanka 117

2. Purchase of property, plant and equipment

PROPERTY, PLANT AND EQUIPMENT – CARRYING AMOUNT
Rs mn Rs mn
B/f 1.4.X1 410 Depreciation 115
Revaluation 80
Purchases (bal. fig.) 305 C/f 31.3.X2 680
795 795
3. Addition to intangible asset
INTANGIBLE ASSET – CARRYING AMOUNT
Rs mn Rs mn
B/f 1.4.X1 200 Amortisation 25
Addition (bal. fig.) 125 C/f 31.3.X2 300
325 325
4. Dividends paid
RETAINED EARNINGS
Rs mn Rs mn
Dividends paid (bal. fig.) 55 B/f 1.4.X1 295
C/f 31.3.X2 375 Profit for the year 135
430 430
18 Dexterity
(i) Temerity
The following assets will be recognised on acquisition:
Rs mn
Fair value of sundry net assets 150
Patent at fair value 100
Receivable 20
Goodwill (balancing figure) 80
Total consideration 350
The patent is recognised at its fair value at the date of acquisition, even if it
hadn't previously been recognised by Temerity. It will be amortised over the
remaining eight years of its useful life with an assumed nil residual value.
The higher value of Rs. 150 Mn can't be used because it depends on the
successful outcome of the clinical trials. The extra Rs. 50 Mn is a contingent
asset, and contingent assets are not recognised in a business combination.
(Only assets, liabilities and contingent liabilities are recognised.)
118 CA Sri Lanka

Answers
Research costs cannot be recognised as an asset, and therefore the suspense

account should be eliminated and the costs recognised as an expense.
However, SLFRS 15 Revenue from Contracts with Customers also applies. This
states that where a performance obligation within a contract with a
customer is satisfied over time and its outcome is reasonably uncertain,
revenue can be recognised to the extent that costs are recoverable. Since all
of the costs incurred are recoverable, Rs. 20 million should be recognised as
revenue and a corresponding (unbilled) receivable recognised in the
statement of financial position. This increases the fair value of net assets
acquired and decreases goodwill.
The goodwill is capitalised at cost. It is not amortised but it will be tested for
impairment annually.
(ii) Government licence
LKAS 38 states that assets acquired as a result of a government grant may be
recognised as an asset and measured initially at fair value. A corresponding
credit is made to a deferred grant income account.. Therefore Dexterity may
recognise an asset and deferred grant of Rs. 10 Mn which are then
amortised/released over the five year life of the licence. The net effect on
profits and on shareholders' funds will be nil. If Dexterity chooses not to
measure the licence and grant at fair value they should be measured at a
nominal amount.
(iv) Training costs
Although well trained staff adds value to a business LKAS 38 prohibits the
recognition of training costs as an asset. This is because an entity has
'insufficient control over the expected future economic benefits' arising from
staff training; in other words trained staff are free to leave and work for
someone else. Training is part of the general cost of developing a business as
a whole.
(v) Advertising costs
LKAS 38 Para 69 states that advertising and promotional costs should be
recognised as an expense when incurred. This is because the expected future
economic benefits are uncertain and they are beyond the control of the
entity.
However, because the year-end is half way through the campaign there is a
Rs. 2.5 Mn prepayment to be recognised as a current asset.
CA Sri Lanka 119

19 Wilderness
(i) Plant
STATEMENT OF PROFIT OR LOSS (EXTRACT)
Rs.
Depreciation First six months 400,000
Second six months 375,000
Impairment 500,000
1,275,000
STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20X5
(EXTRACT)
Rs.
Cost 6,400,000
Accumulated depreciation and impairment
(Rs. 4,000,000 + Rs. 400,000 + Rs. 500,000 + (5,275,000)
Rs. 375,000)
Carrying amount 1,125,000
At 1 April 20X5 the asset should be measured at the lower of carrying
amount and recoverable amount. Recoverable amount is the higher of
value in use and fair value less costs to sell.
Carrying amount 1 April 20X5 Rs.
Cost 6,400,000
Opening depreciation (4,000,000)
Depreciation for 6 months (Rs. 6,400,000  12 1/2%  6/12) (400,000)
Carrying value 1 April 20X5 2,000,000
Recoverable amount Rs.

Value in use and recoverable amount 1,500,000
[Fair value less costs to sell 200,000]
Wilderness does not intend to replace the machine and so the trade-in
value of Rs. 1,800,000 is irrelevant when determining fair value less
costs to sell.
The asset is impaired and should be written down to the recoverable
amount of Rs. 1,500,000, giving an impairment loss of Rs. 500,000. This
new valuation will then be depreciated over the remaining useful life of
the asset, which is two years from the date of the accident.
Carrying amount 30 September 20X5 Rs.
Impaired value 1 April 20X5 1,500,000
Depreciation for 6 months (Rs. 1,500,000  6/24) (375,000)
Carrying amount 30 September 20X5 1,125,000
120 CA Sri Lanka

Answers
(ii) Mossel
The question raises four issues:
 The value of the Quencher brand name
 The Rs. 15 Mn upgrade costs
 The old bottles in inventories
 The overall impairment of the whole operation
(1) The value of the Quencher brand name
The Rs. 70 Mn Quencher brand name should have been written
off in April 20X5 as it is no longer used. The Phoenix brand name
is internally generated and so it cannot be capitalised. This will
reduce the carrying amount of the net assets at 30 September
20X5 to Rs. 250 Mn (320Mn – 70Mn).
(2) The Rs. 15 Mn upgrade costs
These costs reflect the directors' intentions for the coming year.
There is no obligation to incur these costs and so they cannot be
recognised in the current year. However they may be disclosed in
the notes.
(3) The old bottles in inventories
These should be stated at the lower of normal cost (Rs. 20 Mn)
and net realisable value (Rs. 27.5 Mn), therefore they remain at
their cost of Rs. 20 Mn. The NRV is the normal sales price of
Rs. 30 Mn (normal cost of Rs. 20 Mn plus 50%) less the Rs. 2.5 Mn
re-labelling costs.
(4) The overall impairment of the whole operation at 30 September
20X5
The value in use and recoverable amount of the whole operation
(including inventories) is Rs. 200 Mn. This is less than the
carrying amount of Rs. 250 Mn and so an impairment loss of
Rs. 50 Mn must be recognised in profit or loss. This is
apportioned to the assets of the cash generating unit that are
within the scope of LKAS 36 as follows:
CA Sri Lanka 121

Carrying Impairment Impaired

amount values
Rs'000 Rs'000 Rs'000
Brand (already impaired) – – –
Land 120,000 (30,000) 90,000
Plant 80,000 (20,000) 60,000
200,000 (50,000) 150,000
Inventory of Rs. 50 Mn is not within the scope of LKAS 36 and so
is not allocated any of the impairment loss
20 Tourmalet
(1) TOURMALET
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 30 SEPTEMBER
20X4
Rs'000
Sales revenues (W1) 289,800
Cost of sales (W2) (154,800)
Gross profit 135,000
Other income (W3) 1,200
Distribution costs (W4) (26,400)
Administrative expenses (W5) (20,000)
Other expenses (W6) (200)
Finance costs (W7) (2,050)
Profit before tax 87,550
Income tax expense (W8) (7,100)
Profit for the year from continuing operations 80,450
Discontinued operations
Loss for the year from discontinued operations (W9) (5,500)
Profit for the year 74,950
WORKINGS
Continuing operations
1 Sales revenues
The sale and repurchase transaction with Funders includes a put
option (ie, Funders can enforce the repurchase). SLFRS 15 requires
that a sale and repurchase transaction if accounted for as a financing
arrangement if there is a put option, the repurchase price is greater
than selling price and the repurchase price is greater than expected
market value. Therefore the Rs. 8m is reversed out of revenue and
instead recognised as a loan.
122 CA Sri Lanka

Answers
Rs'000
From TB 313,000
Sale of goods to Funders (8,000)
Discontinued activities (15,200)
289,800
2 Cost of sales
Opening inventory 26,550
Purchases 158,450
Closing inventory: Cost 28,500
Add: cost of inventories 'sold' 6,000
Less NRV allowance (4,500 – 2,000) (2,500) (32,000)
Depreciation
Plant and equipment 14,800
(Rs. 98.6 Mn – Rs. 24.6 Mn)  20%
Buildings (Rs. 120 Mn/40 years) 3,000
154,800
3 Other income
From the TB 1,200
4 Distribution costs
From the TB 26,400
5 Administrative expenses
From the TB 23,200
20,000
6 Other expenses
Fall in value of investment property (10m – 9.8m) 200
7 Finance costs
Interim preference dividend from the TB 900
Accrued final preference dividend (Rs. 30 Mn  6%  6/12) 900
Accrued finance charge to Funders 250
2,050
8 Income tax expense

Over-provision from the trial balance (2,100)
Charge for the year 9,200
7,100
CA Sri Lanka 123

9 Discontinued operations
Revenue 15,200
Operating expenses (20,700)
(16,000 + 3,200 + 1,500 termination penalty)
Loss (5,500)
(2) TOURMALET
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR TO 30 SEPTEMBER
20X4
Share Revaluation Retained Total
capital surplus earnings
Rs'000 Rs'000 Rs'000 Rs'000
Opening 50,000 18,500 47,800 116,300
Transfer of depreciation – (500) 500 –
on revaluation
Dividends – – (2,500) (2,500)
Total comprehensive – – 74,950 74,950
income for the year
Closing 50,000 18,000 120,750 188,750
21 Triangle
(i) Contamination
There are two errors in the current accounting treatment.
Firstly, the obligation to clean up the contamination existed in full from the
day that the plant was brought into use. Therefore the provision should be
recognised in full immediately at present value; it should not be accrued
incrementally over the life of the plant. Over the next ten years the present
value will increase as the discount unwinds. This will be reported by
increasing the provision and charging the increase to profit or loss as a
finance cost.
Secondly, on initial recognition, the cost of the plant should include the
present value of the decontamination.
The plant and the provision should be reported as follows:
Rs'000
Plant (a non-current asset)
1 April 20X4: cost (Rs. 150 Mn + Rs. 50 Mn) 200,000
Depreciation (Rs. 200 Mn /10 years) (20,000)
31 March 20X5: carrying amount 180,000
124 CA Sri Lanka

Answers
Rs'000
Provision (a non-current liability)
1 April 20X4 50,000
Finance cost @ 8% 4,000
31 March 20X5 54,000
(ii) Fraud
The fraud means that the draft financial statements for the year-ended
31 March 20X5 are incorrect. This probably won't affect the net profit for the
year, but it will affect the amounts shown for cost of sales and gross profit.
The discovery of this fraud provides new evidence about conditions existing
at the end of the reporting period, and so it is classified as an adjusting event.
The Rs. 21 Mn fraud that occurred during the year will be charged to profit
or loss as an operating expense and disclosed.
The Rs. 3 Mn fraud occurring after the year-end does not affect conditions
existing at the end of the reporting period and so it will not be adjusted for.
However it will be disclosed if it is considered to be material in its own right.
(iii) Share options
The share options are an equity-settled share-based payment scheme. This
scheme is measured based on the fair value of an option at the grant date
(1 October 20X4) and taking into account the number of options expected to
vest. There are two vesting conditions:
– A requirement for senior managers to provide service to the company
for 3 years, and;
– A requirement for the share price to increase by 25%.
The first is a service condition and is considered when estimating the
number of options expected to vest; the second is a market performance
condition and is not considered.
Therefore at 31 March 20X5 the total transaction price is expected to be
Rs. 176.4 Mn ((100  98%) managers  1,500 options  Rs. 1,200).
At this date 6months of the 36 months of the scheme have passed and
therefore Rs. 29.4 Mn (176.4  6/36m) of the total transaction price is
recognised.
This is recognised as a staff cost, to reflect the fact that it is an alternative
form of renumeration for senior managers; it is also recognised in equity to
reflect the fact that equity instruments (options) will be issued.
CA Sri Lanka 125

22 Lucky
The dairy herd
The dairy herd is a biological asset as defined by LKAS 41 Agriculture. LKAS 41
states that a biological asset should be measured at fair value less costs to sell
unless its fair value cannot be measured reliably. Gains and losses arising from a
change in fair value should be included in profit or loss for the period.
In this case, fair value is market price and point of sale costs are the costs of
transporting the cattle to the market. Cattle stock for the Ham and Shire regions is
valued on this basis.
LKAS 41 encourages companies to analyse the change in fair value between the
movement due to physical changes and the movement due to price changes (see
the table below). It also encourages companies to provide a quantified description
of each group of biological assets. Therefore the value of the cows and the value of
the heifers should be disclosed separately in the statement of financial position.
Valuing the dairy herd for the Dale Region is less straightforward as its fair value
cannot be measured reliably at the date of purchase. In this situation LKAS 41
requires the herd to be valued at cost less any impairment losses. The standard
also requires companies to provide an explanation of why fair value cannot be
measured reliably and the range of estimates within which fair value is likely to
fall.
Valuation of cattle stock, excluding Dale region
Cows Heifers Total
Rs'm Rs'm Rs'm
Fair value of herd at 1 June 20X1 (50,000  5,000) 250 250
Purchase 1 December 20X1 (25,000  4,000) 100 100
Increase in fair value less costs to sell due to price
change:
(50,000  (5,500 – 5,000)/25,000  (4,200 –
4,000)) 25 5 30
Increase in fair value less costs to sell due to
physical change:
(50,000  (6,000 – 5,500)/25,000  (4,600 –
4,200)) 25 10 35
Fair value less costs to sell at
31 May 20X2 (50,000  6,000/25,000 
4,6000) 300 115 415
126 CA Sri Lanka

Answers
Valuation of cattle stock in Dale Region

Rs'm
Cost at 1 June 20X1
Cows (20,000  5,000) 100
Heifers (10,000  4,000) 40
140
Less impairment loss (20)
120
Note. The herd is impaired because its recoverable amount is Rs. 120 million. This
is the higher of fair value less costs to sell of Rs. 100 million (the amount that
Lucky has been offered) and value in use of Rs. 120 million (discounted value of
the milk to be produced).
Rs'm
Estimated fair value at 31 May 20X2 (for disclosure only):
Cows (20,000  6,000) 120
Heifers (10,000  5,500) 55
175
Milk
The milk is agricultural produce as defined by LKAS 41 and should normally be
measured at fair value less costs to sell at the time of milking. In this case the
company is holding ten times the amount of inventory that it would normally hold
and it is probable that much of this milk is unfit for consumption. The company
should estimate the amount of milk that will not be sold and write down the
inventory accordingly. The write down should be disclosed separately in the
statement of profit or loss as required by LKAS 1 Presentation of Financial
Statements.
Government grant
Under LKAS 41, the government grant should be recognised as income when it
becomes receivable. As it was only on 6 June 20X2 that the company received
official confirmation of the amount to be paid, the income should not be
recognised in the current year. The amount may be sufficiently material to
justify disclosure as a non-adjusting event after the end of the reporting period.
Equity investments
SLFRS 9 states that all financial assets should be classified as measured at amortised
cost, fair value through OCI or fair value through profit or loss A financial asset can
only be measured at amortised cost of fair value through OCI if it is results in cash
flows that are solely payments of interest on the principal amount outstanding and
repayment of the principal. Equity instruments do not give rise to such payments.
Therefore they must be measured at fair value. The equity investments should be
CA Sri Lanka 127

recorded at Rs. 174 million in the statement of financial position as at 31 May 20X2.
Lucky should recognise a loss of Rs. 6,000,000 (Rs. 180 million – Rs. 174 million) in
profit or loss for the year ended 31 May 20X2.
23 Whitebirk
(1) Modifications to reduce the burden of reporting for SMEs
The SLFRS for SMEs is much shorter than full SLFRS, and has
simplifications that reflect the needs of users of SMEs' financial statements
and cost-benefit considerations. It is designed to facilitate financial
reporting by small and medium-sized entities in a number of ways:
(i) It provides significantly less guidance than full SLFRS. A great deal of
the guidance in full SLFRS would not be relevant to the needs of
smaller entities.
(ii) Many of the principles for recognising and measuring assets,
liabilities, income and expenses in full SLFRSs are simplified. For
example, goodwill and intangibles are always amortised over their
estimated useful life (or ten years if it cannot be estimated). Research
and development costs must be expensed.
(iii) Where full SLFRSs allow accounting policy choices, the SLFRS for SMEs
allows only the easier option. Examples of alternatives not allowed in
the SLFRS for SMEs include: revaluation model for intangible assets and
choice between cost and fair value models for investment property
(measurement depends on the circumstances).
(iv) Topics not relevant to SMEs are omitted: earnings per share, interim
financial reporting, segment reporting, insurance and assets held for
sale.
(v) Significantly fewer disclosures are required.
(vi) The standard has been written in clear language that can easily be
translated.
The above represents a considerable reduction in reporting
requirements – perhaps as much as 90% – compared with listed
entities. Entities will naturally wish to use the SLFRS for SMEs if they
can, but its use is restricted, generally to non-publicly accountable
entities rather than those of a certain size.
128 CA Sri Lanka

Answers
(2) (i) Business combination

SLFRS 3 Business Combinations allows an entity to measure non-
controlling interest at fair value or share of net assets in its
consolidated financial statements. The SLFRS for SMEs only allows
measurement at share of net assets. This avoids the need for SMEs to
determine the fair value of the non-controlling interests not purchased
when undertaking a business combination.
In addition, SLFRS 3 Business Combinations requires goodwill to be
tested annually for impairment. The IFRS for SMEs requires goodwill
to be amortised instead. This is a much simpler approach and the
IFRS for SMEs specifies that if an entity is unable to make a reliable
estimate of the useful life, it is presumed to be ten years, simplifying
things even further.
Goodwill on Whitebirk's acquisition of Close will be calculated as:
Rs'm
Consideration transferred 57
Non-controlling interest: 10%  Rs. 60 Mn 6
63
Less fair value of identifiable net assets acquired (60)
Goodwill 3
This goodwill of Rs. 0.3 Mn will be amortised over ten years, that is
Rs. 30,000 per annum.
(ii) Research and development expenditure
The SLFRS for SMEs requires all internally generated research and
development expenditure to be expensed through profit or loss. This
is simpler than full SLFRS – LKAS 38 Intangible Assets requires
internally generated assets to be capitalised if certain criteria (proving
future economic benefits) are met, and it is often difficult to determine
whether or not they have been met.
Whitebirk's total expenditure on research (Rs. 5 Mn) and development
(Rs. 10 Mn) must be written off to profit or loss for the year, giving a
charge of Rs. 15 Mn.
(iii) Investment property
Investment properties must be held at fair value through profit or loss
under the SLFRS for SMEs where their fair value can be measured
without undue cost or effort, which appears to be the case here, given
that an estate agent valuation is available. Consequently a gain of
CA Sri Lanka 129

Rs. 20 Mn (Rs. 190 Mn – Rs. 170 Mn) will be reported in Whitebirk's

profit or loss for the year.
(iv) Intangible asset
LKAS 36 Impairment of Assets requires annual impairment tests for
indefinite life intangibles, intangibles not yet available for use and
goodwill. This is a complex, time-consuming and expensive test.
The SLFRS for SMEs only requires impairment tests where there are
indicators of impairment. In the case of Whitebirk's intangible, there
are no indicators of impairment, and so an impairment test is not
required.
24 Pingway
(1) Convertible loan note
This convertible loan note is a compound financial instrument. It contains
both a liability and an equity component and LKAS 32 Financial Instruments:
Presentation requires these components to be separately recognised.
Interest costs on the liability element will be based on the non-convertible
rate of 8%, so the charge to profit or loss will not be significantly lower than
if a non-convertible instrument were issued. The liability element will also
add to gearing. So the financial assistant's observations are incorrect.
FINANCIAL STATEMENT EXTRACTS
Rs.
STATEMENT OF PROFIT OR LOSS
Finance costs 6,939,200
STATEMENT OF FINANCIAL POSITION

Equity – option to convert (W1) 13,260,000
3% convertible loan note (W2) 90,679,200
WORKINGS
1 Equity and liability elements
Rs.
Proceeds of loan note 100,000,000
3 years interest (10,000  3%  (0.93 + 0.86 + 0.79)) (7,740,000)
Redemption (100,000  0.79) (79,000,000)
Equity element of loan note 13,260,000
Liability element (100,000 – 13,260) 86,740,000
130 CA Sri Lanka

Answers
2 Loan note balance

Rs.
Liability element 86,740,000
Interest at 8% 6,939,200
Less interest paid (3,000,000)
Carrying value at 31 March 20X8 90,679,200
(2) Financial instruments
Investment in Host
The equity investment should be classified as an asset held at fair value
through profit or loss. Pingway cannot elect to measure the investment at
FVTOCI because the shares are held for trading. The investment is initially
measured at fair value, in this case the cost of Rs. 175 million (500,000
shares  Rs. 350). The transaction costs should not be included in the cost of
the investment and should be written off to the statement of profit or loss as
a period cost. The investment is subsequently measured (at 31 March 20X8)
at fair value of Rs. 182.5 million (500,000 shares  Rs. 365) with the gain of
Rs. 7.5 million (Rs. 182.5 Mn – Rs. 175 Mn) being recognised in profit or loss.
The following adjustments are therefore required:
Rs. Rs.
DEBIT Administrative expenses 1,500,000
CREDIT Financial asset investment 1,500,000
Being the correction in respect of transaction costs
Rs. Rs.
DEBIT Financial asset investment 7,500,000
CREDIT Gain on investment (P/L) 7,500,000
Being the gain on the investment being credited to the statement of profit or
loss.
Investment in bond
The bond purchased by Pingway should be classified as measured at
amortised cost because it generates contractual cash flows that are
payments solely of principal and interest and Pingway intends to hold it to
collect those contractual cash flows. It is initially recorded at fair value being
transaction cost of Rs. 450 million and subsequently measured at amortised
cost using the effective interest rate (10.26%). Only the interest received of
Rs. 25 million (5%  face value of Rs. 500 million) has been recognise in the
statement of profit or loss. The following adjustment is therefore required to
bring the finance income up to the effective interest rate and to correct the
carrying amount of the asset:
CA Sri Lanka 131

Rs. Rs.
DEBIT Financial asset 21,170,000
CREDIT Finance income 21,170,000
Being the additional finance income to be recognised in profit or loss
WORKING
Rs'000
1 April 20X7 Purchased (Rs. 5 Mn  90%) 450,000
Finance income (Rs. 450 Mn  10.26%) 46,170
Interest received (Rs. 500 Mn  5%) (25,000)
31 March 20X8 Balance c/d 471,170
The financial asset will be held at Rs. 471,170,000 and a further
Rs. 21,170,000 (Rs. 46,170,000 – Rs. 25,000,000) will be credited to the
statement of profit or loss.
25 Ocean Telecoms
(1) The investment is an associate; in the separate financial statements of Ocean
Telecom it is initially recognised at cost. As cost is denominated in HK$, it is
translated at the spot exchange rate on the acquisition date to give
Rs. 1,120 million (40m  28).
LKAS 27 Separate Financial Statements applies and Ocean Telecom can
choose to measure its investment subsequently at cost, at fair value in line
with SLFRS 9 or using the LKAS 28 equity method.
An equity investment is a non-monetary asset and therefore if Ocean
Telecom elects to measure the investment at cost, this is not retranslated at
the period end using the closing exchange rate. Instead it remains at initial
measurement of Rs. 1,120 million.
If Ocean Telecom elects to apply SLFRS 9, this requires equity investments to
be measured at fair value at the period end. Where a non-monetary asset is
measured at fair value it should be translated using the prevailing exchange
rate when fair value is determined ie, Rs. 31: HK$1.
(2) The SLFRS 15 five step process to recognise revenue applies as follows:
Step 1 – There is a contract with a customer in place when the customer
acquires a package from Ocean Telecoms.
Step 2 – The performance obligations in the contract should be determined.
In this case there are two: a promise to provide a handset and a
promise to provide network services over a 24 month period.
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Step 3 – The transaction price is the total of the 24 fixed payments over the
contract.
Step 4 – The transaction price is allocated to the two promises in the
contract based on the standalone selling price of the handset and
the network services.
Step 5 – Revenue is recognised as each performance obligation is satisfied;
in the case of the handset revenue is recognised at the start of the
contract; in the case of the network services, it is amount per
month.
(3) (i) Charge to statement of profit or loss
Rs mn
Service cost 7.8
Net interest cost (W1) (8 – 7.3) 0.7
Charge to P/L 8.5
Charge to OCI
Remeasurement loss on plan assets (W1) (1.1)
Remeasurement loss on plan liabilities (W1) (3.2)
(4.3)
(ii) Statement of financial position
Rs mn
PV of defined benefit plan obligations 95.0
Less FV of defined benefit plan assets 84.0
Net pensions liability 11.0
WORKINGS
1 Remeasurement gains/losses in period
Assets Liabilities
Rs mn Rs mn
Balance at 1 October 20X2 73.0 80.0
Current service cost 7.8
Interest on b/d assets/liabilities 7.3 8.0
(10%  73)/(10%  80)
Contributions 8.8
Benefits paid (4.0) (4.0)
Remeasurement loss on plan assets (1.1)
(balance)
Remeasurement loss on plan liabilities 3.2
(balance)
Balance at 30 September 20X3 84.0 95.0
CA Sri Lanka 133

(iii) Defined contribution pension plan

Under a defined contribution pension plan, the entity's legal or
constructive obligation is limited to the amount that it agrees to
contribute to the fund. Therefore, the entity does not take on the risks
and benefits of the pension plan and does not need to bring the pension
plan's assets and liabilities into its statement of financial position.
Instead, the entity's contributions for the year should be recognised as
an expense in profit or loss and the difference between the cash paid
and the contributions expense should be recognised as an accrual or
prepayment in the statement of financial position.
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PART C: PREPARATION OF FINANCIAL STATEMENTS
26 Consolidation requirements
(a) A parent need not present consolidated financial statements if all of the
following conditions apply:
• It is itself a wholly or partly-owned subsidiary of another entity and its
other owners do not object to it not preparing consolidated financial
statements.
• Its shares or debt instruments are not traded on any stock exchange.
• Its financial statements are not being filed with any regulatory
organisation for the purpose of issuing any debt or equity instruments
on any stock exchange.
• Its own or ultimate parent produces publicly-available financial
statements that comply with SLFRS.
(b) SLFRS 10 requires intragroup balances, transactions, income and expenses
to be eliminated in full. The purpose of consolidated financial statements is
to present the financial position of the parent and subsidiaries as that of a
single entity, the group. This means that, in the consolidated statement of
profit or loss, the only profits recognised should be those earned by the
group in trading with entities outside the group. Similarly, inventory should
be valued at cost to the group.
When a company sells goods to another company in the same group it will
recognise revenue and profit in its individual financial statements. However,
from the point of view of the group, no sale has taken place, because the
goods are still held by the group. The sale must therefore be eliminated from
revenue and the unrealised profit must be eliminated from group inventory.
Where one group company owes money to another group company or one
company holds loan stock of another company, the asset and liability
balances will be eliminated on consolidation. As far as the group is
concerned, they do not represent amounts due to or from third parties.
(c) The parent-subsidiary relationship is one between related parties and can be
used to manipulate trading results and balances.
If the purpose is to improve the financial statements of the parent, a number
of options are possible. Transfer prices can be fixed so that the subsidiary
sells cheaply to the parent and/or the parent sells to the subsidiary at an
inflated price. Intercompany loans can be similarly fixed so that the
subsidiary lends to the parent at a low interest rate and borrows from the
CA Sri Lanka 135

parent at a high interest rate. Assets being transferred between the parent
and the subsidiary can be priced in the same way.
The parent company shareholders, including the directors, are paid
dividends on the basis of the parent company's individual financial
statements, so there may be a temptation to boost the parent company's
results at the expense of those of the subsidiary. However, the situation may
also arise where the parent is planning to sell the subsidiary and so wants it
to present favourable results. In this case, the transactions above could be
reversed.
This is an issue that must be kept in mind when analysing group financial
statements – that transactions between group companies may not represent
an 'orderly transaction between market participants'.
27 Penguin
Goodwill on acquisition
Rs'm Rs'm
Fair value of non-controlling interest 400
Net assets at acquisition:
Share capital 500
(1,800)
Negative goodwill * (200)
* Note. Negative goodwill is known as 'gain on a bargain purchase' (SLFRS 3
Business Combinations).
CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED
31 DECEMBER 20X9
Rs'm
Revenue (12,500 + 2,600) 15,100
Cost of sales (7,400 + 1,090) (8,490)
Gross profit 6,610
Distribution costs (700 + 220) (920)
Administrative expenses (1,300 + 550 – 200*) (1,650)
Finance costs (40)
Income tax expense (900 + 230) (1,130)
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Profit attributable to:

Owners of Penguin (balancing figure) 2,768
Non-controlling interest (510  20%) 102
2,870
* Note. Penguin should double-check the valuation of Platypus's assets and
liabilities and reassess the valuation of the consideration paid. If it is satisfied that
it has indeed secured a 'bargain purchase' then Rs. 200 million should be credited
to profit or loss. Note that SLFRS 3 requires this gain to be attributed to the
acquirer; none of it is attributed to the non-controlling interest.
28 Prodigal
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 MARCH 20X1
Rs'000
Revenue (450,000 + (240,000  12) – (W4) 40,000)
6/ 530,000
Cost of sales (260,000 + (110,000  6/12) + (W3) 800 – (W4)
40,000 + 3,000) (278,800)
Distribution costs (23,600 + (12,000  6/12)) (29,600)
Administrative expenses (27,000 + (23,000  6/12)) (38,500)
Finance costs (1,500 + (1,200  6/12)) (2,100)
Income tax expense (48,000 + (27,800  6/12)) (61,900)
Gain on land revaluation (2,500 + 1,000) * 3,500
Financial assets at FVTOCI (700 + (400  6/12)) (900)
Other comprehensive income, net of tax 2,600
Total comprehensive income for the year 121,700
Owners of the parent (bal) 111,600
Non-controlling interests (W2) 7,500
119,100
Total comprehensive income attributable to:
Owners of the parent (bal) 114,000
121,700
* all post-acquisition
CA Sri Lanka 137

WORKINGS
1 Group structure
Prodigal
75% subsidiary
for 6/12 of the year
Sentinel
2 Non-controlling interests
Total
Profit for comprehensive
year income
Rs'000 Rs'000
Per question (66,000  6/12) ((66,000 –
400)  6/12 + 1,000)) 33,000 33,800
PUP (W4) (3,000) (3,000)
30,000 30,800
x 25% 25%
7,500 7,700
3 Transfer of plant
Rs'000
1.10.20X0 Profit on transfer (5,000 – 4,000) 1,000
Proportion depreciated (½ / 2½) (200)
Unrealised profit 800
Required adjustment:
Dr Cost of sales (and retained earnings) 800
Cr Plant 800
4 Intragroup trading
Cancel intragroup sales/purchases:
Rs'000 Rs'000
Dr Group revenue 40,000
Cr Group cost of sales 40,000
Eliminate unrealised profit:

((40,000 – 30,000)  12,000/40,000) = 3,000
Dr Cost of sales (Sentinel) (NCI) 3,000
Cr Group inventories 3,000
138 CA Sri Lanka

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29 Laurel
LAUREL GROUP – STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER
20X9
Rs mn
Non-current assets
Property, plant and equipment (220 + 160 + (W7) 3) 383
Goodwill (W2) 9
Investment in associate (W3) 96.8
488.8
Current assets
Inventories (384 + 234 – (W6) 10) 608
Trade receivables (275 + 166) 441
Cash (42 + 10) 52
1,101
1,589.8
Equity attributable to owners of the parent
Share capital 416
Retained earnings (W4) 326.8
742.8
Non-controlling interests (W5) 47
789.8
Current liabilities
Trade payables (457 + 343) 800.0
1,589.8
WORKINGS
1 Group structure
Laurel
80% 40%
1.1.X7 1.1.X7
Hardy Comic (associate)

Rs. 64 Mn Rs. 24 Mn Pre acq'n ret'd earnings
CA Sri Lanka 139

2 Goodwill
Rs mn Rs mn
Consideration transferred 160
Non-controlling interests (at fair value) 39
Fair value of net assets at acq'n:
Share capital 99
Fair value adjustment (W7) 12
(175)
24
Impairment losses (15)
9
3 Investment in associate
Rs mn
Cost of associate 70
Share of post-acquisition retained reserves (W4) 29.2
Unrealised profit (W6) (2.4)
Impairment losses (0)
96.8
4 Consolidated retained earnings
Laurel Hardy Comic
Rs mn Rs mn Rs mn
Per question 278 128 97
Less PUP re Hardy (W6) (10)
PUP re Comic (W6) (2.4)
Fair value adjustment movement (W7) (9)
Less pre-acquisition retained earnings (64) (24)
55 73
Group share of post-acq retained earnings:
Hardy (55  80%) 44
Comic (73  40%) 29.2
Less group share of impairment losses (12.0)
(15  80%)
326.8
Rs mn
Non-controlling interests at acquisition (W2) 39
NCI share of post-acquisition retained earnings:
Hardy (55  20%) 11
Less NCI share of impairment losses (15  20%) (3)
47
140 CA Sri Lanka

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6 Unrealised profit
Laurel's sales to Hardy: Rs. 32 Mn – Rs. 22 Mn = Rs. 10 Mn
DR Retained earnings (Laurel) Rs. 10 Mn
CR Group inventories Rs. 10 Mn
Laurel's sales to Comic (associate) (Rs. 22 Mn – Rs. 10 Mn)  ½  40% share
= Rs. 2.4 Mn.
DR Retained earnings (Laurel) Rs. 2.4 Mn
CR Investment in associate Rs. 2.4 Mn
7 Fair value adjustments
At
acquisition At year
date Movement end
Rs mn Rs mn Rs mn
PPE (57 – 45) +12 (9)* +3
*Extra depreciation Rs. 12 Mn  ¾

Goodwill Ret'd PPE
earnings
CA Sri Lanka 141

30 Tyson
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR
THE YEAR ENDED 31 DECEMBER 20X8
Rs mn
Revenue (500 + 150 – 66) 584
Cost of sales (270 + 80 – 66 + (W3) 18) (302)
Gross profit 282
Other expenses (150 + 20 + 15) (185)
Finance income (15 + 10) 25
Finance costs (20)
Share of profit of associate [(10  40%) – 2.4*] 1.6
Profit before tax 103.6
Income tax expense (25 + 15) (40)
PROFIT FOR THE YEAR 63.6
Gains on property revaluation, net of tax (20 + 10) 30
Share of other comprehensive income of associate (5  40%) 2
Other comprehensive income for the year, net of tax 32.0
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 95.6
Owners of the parent (63.6 – 2.4) 61.2
Non-controlling interests (W2) 2.4
63.6
Total comprehensive income attributable to:
Owners of the parent (95.6 – 4.4) 91.2
Non-controlling interests (W2) 4.4
95.6
* Impairment losses could either be included in expenses or deducted from
the share of profit of associates figure. LKAS 28 is not prescriptive.
WORKINGS
1 Group structure
Tyson
80% 40%
3 yrs ago 2 yrs ago
Douglas Frank (associate)

Rs. 40 Mn Rs. 20 Mn Pre acq'n reserves
142 CA Sri Lanka

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PFY TCI
Rs mn Rs mn
PFY/TCI per question 45 55
Unrealised profit (W3) (18) (18)
Impairment loss (15) (15)
12 22
 NCI share (20%) 2.4 4.4
3 Unrealised profit
Rs mn
Selling price 66
Cost (48)
PUP 18
31 Pricewell
PRICEWELL: STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 MARCH
20X9
Rs'000
Revenue (310,000 + 22,000 (W4) – 6,400 (W5)) 325,600
Gross profit 69,700
Distribution costs (19,500)
Administrative expenses (27,500)
Finance costs (1,248 (W3) + 4,160 (W6)) (5,408)
WORKINGS
1 Expenses
Cost of Distribution Administrative
sales costs expenses
Rs'000 Rs'000 Rs'000
Per question 234,500 19,500 27,500
Depreciation (W2) 17,300
Reversal impairment (W2) (1,500)
Contract costs 12,000
Agency sales (W5) (6,400)
255,900
CA Sri Lanka 143

2 Property, plant and equipment

Owned Right-of- Specialist
Building plant use asset Plant Total
Rs'000 Rs'000 Rs'000 Rs'000 Rs'000
Cost per question 25,200 46,800 20,000 8,000 100,000
Depreciation to
31.3.X8 – (12,800) (5,000) – (17,800)
25,200 34,000 15,000 8,000 82,200
Depreciation
(25,200/14
years) (1,800)
Depreciation
(34,000  25%) (8,500)
Depreciation
(20,000  25%) (5,000)
Depreciation
(8,000/2  6/12) (2,000) (17,300)
Reversal of
impairment
loss (β) 1,500 – – – 1,500
24,900 25,500 10,000 6,000 66,400
3 Lease liability
Rs'000
Balance 1.4.X8 per question 15,600
Interest to 31.3.X9 at 8% 1,248
4 Contract with a customer
The transaction price is Rs. 50 million.
The promise to construct the bridge is a performance obligation delivered
over time and therefore revenue is recognised according to the degree of
completion.
Using an output method (the value of work performed), revenue of
Rs. 22 million is recognised.
Costs incurred to fulfil the contract are recognised as an expense unless they
qualify to be recognised as an asset. The specialist plant is recognised as an
asset in accordance with LKAS 16 (W2), however the remaining material,
labour and overheads expenses do not. Therefore these form part of cost of
sales (W1).
144 CA Sri Lanka

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5 Sales on commission
DR CR
Rs'000 Rs'000
Revenue 6,400
Cost of sales 6,400
This leaves commission of Rs. 1.6 Mn in revenue.
6 Preference shares
Rs'000
Balance at 31.3.X8 41,600
Finance cost 10% 4,160
7 Income tax
Rs'000
Prior year underprovision 700
Current provision 4,500
Movement on deferred tax (8.4 – 5.6) (2,800)
Charge for current year 2,400
32 Candel
CANDEL
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 30 SEPTEMBER 20X8
Rs'000
Revenue (300,000 – 2,500 (plant disposal)) 297,500
Gross profit 72,100
Distribution costs (14,500)
Administrative expenses (W1) (21,900)
Finance costs (1,200 (W5) + 200) (1,400)
Loss on property revaluation (W2) (4,500)
Total comprehensive income for the year 18,200
CA Sri Lanka 145

CANDEL
STATEMENT OF FINANCIAL POSITION AT 30 SEPTEMBER 20X8
Rs'000 Rs'000
Assets
Non-current assets
Property, plant and equipment (W2) 81,400
Development expenditure (W3) 14,800
96,200
Current assets
Inventory 20,000
63,100
Total assets 159,300
Equity
Share capital 50,000
Retained earnings 41,200
Revaluation surplus 5,500
96,700
Redeemable preference shares (W5) 20,400
Deferred tax (5,800 + 200 (W6)) 6,000
Current liabilities
Trade payables 23,400
Provision (W4) 100
Tax payable 11,400
Overdraft 1,300
36,200
Total equity and liabilities 159,300
WORKINGS
1 Expenses
Cost of
sales Distribution Admin
Rs'000 Rs'000 Rs'000
Per question 204,000 14,500 22,200
Depreciation: Property (W2) 2,500 – –
Plant and equipment (W2) 9,600 – –
Loss on plant (4,000 – 2,500) 1,500 – –
Research and development (W3) 3,800 – –
Amortisation (W3) 4,000 – –
Legal claim (W4) – – (300)
225,400 14,500 21,900
146 CA Sri Lanka

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2 Property, plant and equipment

Property P&E Total
Rs'000 Rs'000 Rs'000
Cost/valuation b/d 50,000 76,600
Acc depreciation b/d – (24,600)
50,000 52,000 102,000
Depn: Property (50,000/20) (2,500) – (2,500)
P&E ((52,000 – 4,000)  20%) – (9,600) (9,600)
Disposal (8,000 – 4,000) – (4,000) (4,000)
Revaluation (β) (4,500) – (4,500)
43,000 38,400 81,400
3 Development expenditure
Rs'000
Cost b/d 20,000
Accumulated amortisation b/d (6,000)
14,000
Additional expenditure capitalised (800  6) 4,800
Amortisation (20,000  20%) (4,000)
Balance c/d 14,800
Charged to cost of sales:
Research 1,400
Development when criteria not met (800  3) 2,400
Amortisation 4,000
7,800
4 Legal claim
Rs'000
Damages are not probable, therefore not accrued
– Reverse in admin expenses 400
Legal costs should be provided as results from
past event (claim) (100) Provision
300 Credit to
Admin
CA Sri Lanka 147

5 Preference shares – Financial liability at amortised cost

Rs'000
Financial liability b/d 20,000
Effective interest ( 12%  6/12) 1,200
Coupon paid (per TB) ( 8%  6/12) _ (800)
Financial liability c/d 20,400
Adjustment required:
Rs'000
Dr Finance costs 400
Cr Financial liability 400
The Rs. 800k coupon paid in the TB is increased to effective cost of
Rs. 1,200k.
6 Taxes
Rs'000
Current tax:
Dr Income tax expense (profit or loss) 11,400
Cr Current tax payable (SOFP) 11,400
Deferred tax:
Dr Income tax expense (6,000 – 5,800) 200
Cr Deferred tax liability 200
33 Pedantic
SLFRS 3 Business Combinations requires that the identifiable net assets of an
acquire are measured at fair value. SLFRS 3 does not offer guidance on the
measurement of fair value, but defers to the requirements of SLFSR 13 Fair Value
Measurement.
SLFRS 13 defines fair value as an exit value ie, the price that could be achieved on
the sale of an item in an orderly (rather than a forced) transaction).
To determine fair value, the characteristics of the plant (eg, its condition and
location) should be considered, as well as its highest and best use. If the plant can
be used for more than one purpose, fair value is based on the use that is possible,
allowed and feasible and gives the highest and best value. Determination of fair
value should also take into account the principal or most advantageous market for
the plant. The principal market is that in which the most transactions take place; if
there are several markets but none is the principal, then the price in the most
advantageous market is fair value.
The plant should be valued using an appropriate valuation approach, which may
be a market approach, a cost approach or an income approach. Inputs to the
valuation approach should be level 1 where possible (quoted prices in an active
148 CA Sri Lanka

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market for identical assets) or level 2 (observable inputs other than level 1
inputs). Where these are not available, level 3 inputs (unobservable inputs) may
be used.
PEDANTIC
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 30 SEPTEMBER 20X8
Rs'000
Non-current assets
Property, plant and equipment (40,600 + 12,600 + 1,800 (W6)) 55,000
Goodwill (W2) 4,500
59,500
Current assets (W8) 21,400
Total assets 80,900
Share capital (10,000 + 9,600 (W5)) 19,600
Retained earnings (W3) 35,700
55,300
61,400
10% loan notes (3,000 + 4,000) 7,000
Current liabilities (8,200 + 4,700 – 400 (W9)) 12,500
80,900
CA Sri Lanka 149

WORKINGS
1 Group structure
Pedantic
1.4.X8 60% Mid-year acq, 6 months before year end.
Sophistic
2 Goodwill
Rs'000 Rs'000
Consideration transferred (W5) 9,600
Fair value of non-controlling interests 5,900
Less: Fair value of net assets at acquisition:
Share capital 4,000
Retained earnings (6,500 – (3,000  6/12)) 5,000
Fair value adjustment (W6) 2,000
(11,000)
Goodwill 4,500
3 Retained earnings
Pedantic Sophistic
Rs'000 Rs'000
Per question 35,400 6,500
Movement on FV adjustment (W6) (200)
PUP (W7) (800)
Pre-acquisition (W2) (5,000)
500
Group share (500  60%) 300
35,700
Statement of financial position
Rs'000
NCI at acquisition (W2) 5,900
NCI share of post-acquisition retained 200
earnings ((W3) 500  40%)
6,100
5 Share exchange
DR CR
Rs'000 Rs'000
Consideration transferred
(4,000  60%  2/3 = 1,600  Rs. 6) 9,600
Share capital of Pedantic (1,600  Rs. 6) 9,600
150 CA Sri Lanka

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Rs'000 Rs'000 Rs'000
Acq'n Mov't Year end
1.4.X8 6/12 30.9.X8
Plant (*Rs. 2 Mn /5  6/12) 2,000 (200)* 1,800
Eliminate unrealised profit: Dr Cr
Retained earnings
((8,000 – 5,200)  40/140) 800
Inventories (SOFP) 800
8 Current assets
Rs'000
Pedantic 16,000
Sophistic 6,600
Unrealised profit in inventory (W7) (800)
Intercompany receivables (per question) (600)
Cash in transit (W9) 200
21,400
9 Cash in transit
(Rs'000) DR CR
Receivables 600
Payables 400
Group cash 200
CA Sri Lanka 151

34 Pyramid
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X2
ASSETS Rs'000
Non-current assets
Property, plant and equipment (38,100 + 28,500 ) 66,600
Goodwill (W2) 10,400
Investment in associate (W3) 6,600
Investment in equity instruments 2,000
85,600
Current assets
Inventory (13,900 + 10,400 + 1,500 (W6) – 500 (W6)) 25,300
Receivables (11,400 + 5,500 – 1,200 (W6) – 3,200 (W6) 12,500
Cash and cash equivalents (900 + 600 + 1,200 (W6)) 2,700
40,500
Total assets 126,100
EQUITY AND LIABILITIES
Equity attributable to owners of Pyramid
Equity shares 42,600
78,660
87,260
11% loan notes (12,000 + 4,000 – 2,500) 13,500
Deferred tax (4,500 + 1,000) 5,500
19,000
Current liabilities (9,500 + 5,000 + 1,500 (W7) – 3,200 (W6)) 12,800
Deferred consideration (W7) 7,040
19,840
WORKINGS
1 Group structure
Pyramid
80% 30%
1.4.X1 1.10.X1
Square Cube (associate)
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2 Goodwill
Rs'000 Rs'000
Consideration transferred:
Share exchange (per investments SFP) 24,000
Deferred consideration ((8,000  0.88)  1/1.1) 6,400
30,400
Non-controlling interest at fair value (2,000  3.5) 7,000
37,400
Fair value of net assets:
Shares (10,000)
Retained earnings (18,000)
Deferred tax liability 1,000

(27,000)
Goodwill 10,400
3 Investment in associate
Rs'000
Consideration transferred (SFP) 6,000
Share of post-acquisition retained earnings (2,000(W4)  30%) 600
6,600
4 Retained earnings
Pyramid Square Cube
Rs'000 Rs'000 Rs'000
Per question 30,200 8,000 2,000
Unwinding of disc on def. consid. (W8) (640)
PURP (W6) (500)
8,000 2,000
Group share of Square (80%) 6,400
Group share of Cube (30%) 600
36,060
Rs'000
FV of NCI at acquisition (W2) 7,000
Share of post-acquisition retained earnings (8,000  20%) 1,600
8,600
CA Sri Lanka 153

DEBIT CREDIT
Rs'000 Rs'000
Group inventory 1,500
Payables 1,500
Being goods in transit
Receivables 1,200
Cash 1,200
Being cash in transit
Receivables 3,200
Payables 3,200
Being intragroup receivables/payables cancelled
Inventory 500
Being PURP (1,500  50/150)
7 Deferred consideration
Rs'000
Fair value at acquisition (8,000  0.88)  1/
1.1 6,400
Discount unwound 640
Fair value at 31.3.X2 (8,000  0.88) 7,040
35 Pandar
Investment in Ambra
Rs'000
Cost (40m  40%  Rs. 2) 32,000
Share of post-acquisition loss (5,000  40%  6/12) (1,000)
Impairment loss (3,000)
28,000
PANDAR GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 30
SEPTEMBER 20X9
Rs'000
Revenue (210,000 + (150,000  /12) – (W5) 15,000)
6 270,000
Cost of sales (126,000 + (100,000  /12) + (W3) 500 – (W5)15,000
6
+ (W5) 1,000) (162,500)

Administrative expenses (18,300 + (9,000  6/12) + (113,900  5%)) (28,495)
Investment income (9,500 – (W4) 2,000 – (8,000  80%)) 1,100
154 CA Sri Lanka

Answers
Rs'000
Finance costs (1,800 + (3,000  6/ )
12 – ((W4) 2,000  6/ )
12 + (W4)
2,000 – (W4) 2,000) (2,300)
Share of loss of associate ((5,000  40%  6/12) + (3,000)
impairment) (4,000)
Owners of the parent 38,444
Non-controlling interest (W2) 661
39,105
WORKINGS
1 Timeline
Pandar
Salva – subsidiary + NCI  6/12
Ambra – associate  40%  6/12
1.10.20X8 1.4.20X9 30.9.20X9
2 Non-controlling interest
Rs'000
Salva's post acquisition profit 9,500
((21,000  6/12) + ((W4)2,000  6/12) – (W4)2,000)
Depreciation on FVA (W3) (500)
Impairment of goodwill (113,900  5%) (5,695)
3,305
 20% 661
Acquisition Movement Year end
1.4.X9 30.9.X9
Rs'000 Rs'000 Rs'000
Plant (17,000 – 12,000) 5,000 * (500) 4,500
Domain name 20,000 – 20,000
25,000 24,500
* 5,000/5  6/12 = 500
CA Sri Lanka 155

4 Intragroup interest
Interest 50,000  8%  6/12 = 2,000

Dr Finance income/Cr Finance costs
Cancel intragroup sales/purchases:
Dr Revenue 15,000/Cr Cost of sales 15,000
Unrealised profit 15,000  1/3  20%:

Dr Cost of sales 1,000/Cr Inventories (SOFP) 1,000
36 Plateau
PLATEAU – CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30
SEPTEMBER 20X7
Rs'000
Non-current assets
Property, plant and equipment (18,400 + 10,400 – (W7) 400) 28,400
Goodwill (W3) 5,000
Intangible asset – customer contract 1,000
Investment in associate (W4) 10,500
Investment in equity instruments (note v to question) 9,000
53,900
Current assets
Inventories (6,900 + 6,200) 13,100
Trade receivables (3,200 + 1,500) 4,700
17,800
Total assets 71,700
Share capital (10,000 + (W2) 9,000) 19,000
49,525
Non-controlling interest (W6) 3,975
53,500
7% loan notes (5,000 + 1,000) 6,000
Current liabilities (8,000 + 4,200) 12,200
156 CA Sri Lanka

Answers
WORKINGS
1 Group structure
Plateau
1.10.X6 1.10.X6
75% 30%
Savannah Axle
2 Purchase of Savannah
DEBIT Cost of Savannah (3 Mn/2  Rs. 6)
+ (3m  Rs. 1.25) 12.75 Mn
CREDIT Share capital (3 Mn/2  Rs. 6) 9 Mn
CREDIT Cash 3.75 Mn
3 Goodwill– Savannah
Rs'000 Rs'000
Non-controlling interests at acquisition 3,250
(1Mn shares @ Rs. 3.25)
Less net fair value of assets and liabilities at
acquisition:
Share capital 4,000
Retained earnings 6,000
Fair value adjustment (W8) 1,000
(11,000)
5,000
4 Investment in Axle
Rs'000
Cost (4,000  30%  Rs. 7.50) 9,000
Share of post-acquisition retained earnings (W5) 1,500
10,500
5 Group retained earnings
Plateau Savannah Axle
Rs'000 Rs'000 Rs'000
Per statement of financial position 25,250 2,900 5,000
Unrealised profit (W7) (400) _______ –
24,850 2,900 5,000
Group share: 2,900  75% 2,175
5,000  30% 1,500
Gain on investment
(9,000 – 6,500) 2,500
Professional costs of acquisition (500)
Group retained earnings 30,525
CA Sri Lanka 157

6 Non-controlling interests – Savannah

Rs'000
NCI at acquisition (W3) 3,250
NCI share of post-acquisition retained earnings ((W5)
2,900  25%) 725
3,975
Unrealised profit on transfer of plant:
Unrealised profit (Rs. 2.5 Mn – Rs. 2 Mn) 0.5 Mn
Less realised by use (depreciation) 1/5 (0.1 Mn)
0.4 Mn
DEBIT Retained earnings/CREDIT Property, plant and equipment in books of
Plateau
8 Fair value adjustment – customer contract
Acquisition date End of reporting period
1.10.X6 Movement 30.9.X7
1,000 – 1,000
9 Investments in equity instruments
Rs'000
Fair value at 1 October 20X6 6,500
Fair value at 30 September 20X7 9,000
Increase in fair value 2,500
DEBIT Investments in equity instruments/CREDIT Retained earnings
158 CA Sri Lanka

Answers
PART D: FINANCIAL STATEMENT ANALYSIS AND NON-FINANCIAL REPORTING
37 Performance appraisal
(a) Rampala Fashion Retail Ltd
Trade receivables days
20X8 34/670  365 = 18.5 days
20X7 30/540  365 = 20.2 days
Trade receivables days is low, which is to be expected given that a
proportion of sales are made through RFR's own retail stores and so are for
cash. The decrease in days, matched with the increase in revenue may
suggest that RFR has new credit customers that are less powerful than
existing customers and so have been unable to negotiate such long terms.
Alternatively customers may be taking advantage of available prompt
payment discounts, more sales may be for cash or RFR may be taking a more
proactive approach to recovering amounts due from credit customers.
From a supplier's perspective the quicker recovery of cash by RFR means
that it has a cash inflow that it can use to pay suppliers, provided that this is
not tied up in inventory.
Trade payables days
20X8 44/280  365 = 57.4 days
20X7 32/270  365 = 43.2 days
The majority of purchases are likely to be on credit terms and therefore this
ratio is not skewed by cash transactions.
It has increased significantly which may be due to better terms being
secured as a result of the increased volume of purchases. Alternatively
slower payment may be the result of internal administrative procedures.
A potential new supplier should consider whether the terms it is prepared to
offer would be acceptable to RFR in the light of its existing cash cycle.
(b) Limitations of financial statement analysis techniques
While ratio analysis is a useful tool, it has a number of limitations,
particularly when comparing ratios for different companies.
Some ratios can be calculated in different ways. For instance, gearing can be
expressed using debt as a proportion of debt and equity or simply debt as a
CA Sri Lanka 159

proportion of equity. Ratios can be distorted by inflation, especially where

non-current assets are carried at original cost.
Ratios are based upon financial statements which may themselves not be
comparable, due to the adoption of different accounting policies and
different estimation techniques.
For instance, whether non-current assets are carried at original cost or
current value will affect ROCE, as will the use of different depreciation rates.
In addition, financial statements are often prepared with the key ratios in
mind, so may have been subject to creative accounting. The year end values
also may not be representative of values during the year, due to seasonal
trading.
Users would find further information useful in making decisions. They
should look at the composition of the Board of each company and the
expertise that is present.
38 Sinharaja Timber
(a) Ratios
Calculation of ratios (figures in formula substitution all in Rs. million)
20X4 20X3
(i) Return on capital employed (ROCE) =
Operating profit/capital employed:
12,000 + 1,600/63,600  100 = 21.4%
8,200 + 1,400/57,500  100 = 16.7%
(ii) Operating profit margin =
Operating profit/revenue:
12,000 + 1,600/124,000  100 11%
8,200 + 1,400/100,000  100 9.6%
(iii) Receivables days =
Receivables/revenue  365 days:
11,800/124,000  365 35 days
8,800/100,000  365 days 32 days
160 CA Sri Lanka

Answers
(iv) Inventory days =

Inventory/cost of sales  365 days
13,200/87,200  365 days = 55 days
15,200/74,400  365 days = 75 days
(v) Current ratio =
Current assets/current liabilities:
25,200/18,600 = 1.4:1
29,200/13,700 = 2.1:1
(vi) Gearing =
Interest-bearing debt/equity + interest-bearing debt:
(5,600 + 4,800 + 3,000/50,200 + 5,600 + 4,800 + 3,000)  100 21%
(12,500 + 3,600 + 2,400/39,000 + 12,500 + 3,600 + 2,400)  100 32%
(b) Profitability
The primary measure of profitability is the Return on Capital Employed
(ROCE). ST's performance in 20X4 has improved in terms of ROCE, that is by
28% (21.4% – 16.7%/16.7%  100). It suggests that ST made better use of
its assets in generating profit in the current year as compared to previous
year. This improvement would have been higher had ST not revalued its
property, plant and equipment (PPE).
A review of the components of ROCE show that all of them contributed to its
improvement.
Gross profit margin improved by 16% (29.7% – 25.6%/25.6%  100). This
could be due to either an increase in selling prices or a reduction in cost of
sales. The same reasons apply to the improvement in operating margins
which show an improvement of 15% (11% – 9.6%/9.6%  100).
The other component of ROCE is asset turnover. This measures how well a
company uses its assets to generate revenue. ST has had some success in
increasing revenue per Rs. 1 invested by 12.1% (1.95 – 1.74/1.74  100).
With the new investment in PPE and the new leased asset, this suggests an
improved future performance of ST. Also, some improvement could be due
to the development project coming on board in 20X4. Since it is being
amortised, it must be generating revenues that have contributed to
improved asset turnover and hence profitability.
CA Sri Lanka 161

39 Victular
ROCE (2,500 – 500 – 10)/ = 20.9%
(2,800 + 3,200 + 3,000 + 500) %
Pre-tax ROE (1,400/2,800)% = 50%
Net asset turnover 20,500/(14,800 – 5,700) = 2.3 times
Current ratio 7,300/5,700 = 1.3 : 1
Gearing ((3,200 + 500 + 3,000)/9,500)% = 71%
Assessment of relative position and performance of Grappa and Merlot
Profitability
At first sight it appears that Victular would see a much greater return on its
investment if it acquired Merlot rather than Grappa. A closer analysis of the
figures suggests that this may not be the case.
Merlot has an ROCE over 40% higher than Grappa's and an ROE more than double
Grappa's ROE. However, the difference is due more to the lower level of equity in
Merlot than to the superiority of its profit. Merlot's equity (2,800) is only half that
of Grappa (5,500). This reduces the denominator for ROCE and doubles the ROE. A
closer look at the profits of both companies shows that the operating profit margin
of Grappa is 10.5% and that of Merlot is 9.8%.
The net asset turnover of Merlot (2.3 times) suggests that it is running the more
efficient operation. Merlot has certainly achieved a much greater turnover than
Grappa and with a lower level of net assets. The problem is that, on a much higher
level of turnover, its net profit is not much higher than Grappa's.
Further analysis of net assets shows that Grappa owns its factory, while Merlot's
factory must be rented, partly accounting for the higher level of operating
expenses. Grappa's factory is carried at current value, as shown by the property
revaluation reserve, which increases the negative impact on Grappa's ROCE.
Gearing
Merlot has double the gearing of Grappa, due to its lease liabilities. At 7.5% Merlot
is paying less on the lease obligation than on its loan notes, but this still amounts
to a doubling of its interest payments. Its interest cover is 3.3 times compared to 6
times for Grappa, making its level of risk higher. In a bad year Merlot could have
trouble servicing its debts and have nothing left to pay to shareholders. However,
the fact that Merlot has chosen to operate with a higher level of gearing rather
than raise funds from a share issue also increases the potential return to
shareholders.
162 CA Sri Lanka

Answers
Liquidity
Grappa and Merlot have broadly similar current ratios, but showing a slightly
higher level of risk in the case of Merlot. Merlot is also running an overdraft while
Grappa has Rs. 0.6 Mn in the bank. Grappa is pursuing its receivables slightly less
aggressively than Merlot, but taking significantly longer to pay its suppliers. As
this does not appear to be due to shortage of cash, it must be due to Grappa being
able to negotiate more favourable terms than Merlot.
Summary
Merlot has a higher turnover than Grappa and a policy of paying out most of its
earnings to shareholders. This makes it an attractive proposition from a
shareholder viewpoint. However, if its turnover were to fall, there would be little
left to distribute. This is the risk and return of a highly geared company. Merlot is
already running an overdraft and so has no cash to invest in any more plant and
equipment. In the light of this, its dividend policy is not particularly wise. Grappa
has a lower turnover and a much more conservative dividend policy but may be a
better long-term investment. Victular's decision will probably depend upon its
attitude to risk and the relative purchase prices of Grappa and Merlot.
40 Hardy
Hardy's revenue has declined by 18% and its gross profit by 60%. This alone
paints the picture of a very challenging trading environment. The results are
worsened by the Rs. 1.6 Mn charged to administrative expenses for loss on
investments, which contributes to a net loss of Rs. 2.1 Mn, down from a net profit
of Rs. 3.5 Mn in 20X0.
However, it is important to note that cost of sales in 20X1 has had to bear
Rs. 1.5 Mn for impairment losses and Rs. 1.3 Mn for restructuring expenses. These
are exceptional costs and, like the loss on investments, serve to obscure the
picture given by the trading results.
If we were to adjust for these amounts the gross profit for 20X1 would be
Rs. 6.8 Mn (4 + 1.5 + 1.3) and the net profit (ignoring tax) would be Rs. 2.3 Mn
((2.1) + 1.5 + 1.3 + 1.6). These results would be more comparable to the 20X0
results and would therefore reflect profits lost due to the trading downturn.
Profitability
Hardy's gross profit percentage is 13.6%, compared to 27.8% in 20X0. However, if
we were to take the adjusted profit of Rs. 6.8 Mn the gross profit percentage
would be 23%. The same effect can be seen on the net profit percentage. The net
loss of Rs. 2.1 Mn gives a net profit percentage of –7.1%, set against 9.7% for 20X0.
CA Sri Lanka 163

The adjusted net profit gives a net profit of 7.8%. So it is clear that profit is down,
but actual trading profit has not fallen as far as may at first appear. The one-off
losses which have reduced Hardy's net profit have also reduced equity, thereby
favourably affecting the ROE. Although the ROE based on reported figures is
negative, ROE based on the underlying profits is only 2% below the figure for
20X0.
Liquidity
Despite the downturn in trading, Hardy's liquidity position has improved. Both
the current and quick ratios have improved. This is partly due to the tax
repayment situation and partly due to an improvement in cash balances. The
actual cash in the bank has increased by Rs. 1.1 Mn, attributable to the Rs. 2 Mn
proceeds of the rights issue, which has also allowed the company to repay part of
the bank loan. As the interest rate has climbed so steeply, it is important to reduce
the loan as much as possible. The losses on property and investments in 20X1
have not had cash consequences, which is fortunate for Hardy, bearing in mind
that liquidity problems lead to more company failures than lack of profitability.
Looking at the retained earnings we can see that the company paid a dividend of
Rs. 800,000. According to the Chairman's statement this is 50% of the dividend
per share paid the previous year, but since the rights issue Hardy has more shares
on which the dividend has to be paid. The directors may have decided that it was
important to continue to pay the dividend, even at a reduced rate, in order to
maintain shareholder confidence.
Gearing
Gearing has increased in 20X1, but only by 1%. This outcome has been achieved
by paying off Rs. 1 Mn of the loan and by the rights issue. Keeping gearing under
control will make it more possible for Hardy to obtain further loan finance in the
future, although given the movement on interest rates it will probably prefer to
avoid this.
Conclusion
Hardy's results are not as bad as they appear at first glance. A more detailed
analysis generally bears out the Chairman's comments. They have been affected
by the global economic downturn, but they are still trading profitably and liquidity
is being maintained.
164 CA Sri Lanka

Answers
Appendix
20X1
20X1 adjusted 20X0
Gross profit % 4,000/29,500 ; 10,000/36,000 13.6% 27.8%
6,800/29,500 23%
Net profit % (2,100)/29,500 ; 3,500/36,000 (7.1)% 9.7%
2,300/29,500 7.8%
ROE (2,100)/17,600 ; 3,500/23,000 (11.9)% 15.2%
2,300/17,600 13.1%
Asset turnover 29,500 /17,600 ; 36,000/23,000 1.68  1.6 
Current ratio 6,200/3,400 ; 4,800/4,600 1.8:1 1.04:1
Quick ratio 4,000/3,400 ; 2,900/4,600 1.2:1 0.6:1
Gearing ratio 4,000/17,600 ; 5,000/23,000 22.7% 21.7%
41 Chilaw PLC
As directors, the CEO and the Finance Director should be acting in the best
interests of the shareholders by maximising shareholder wealth in the long-term.
However, it appears that the CEO is more concerned with self-interest and
maximising the gains on his share options in the short to medium term by
manipulating the share price to increase his retirement fund.
The suggestion that the lease payments should be expensed again raises concerns
over the intentions of the CEO. The accounting treatment for leases should follow
the relevant accounting standard and should not be influenced by pressure to
meet the bank covenants. Unless the leases are short-term or for assets of low
value SLFRS 16 requires a right-of-use asset and a lease liability to be recognised
by all lessees.
The CEO suggests that the Finance Director should pressurise the financial
controller to present the financial statements in a positive light rather than by
using his professional knowledge to prepare them. He also offers the Finance
Director potential future use of a beach villa if she helps to 'boost the numbers'.
This pressure from the CEO is a threat to the integrity and objectivity of the
Finance Director. The Finance Director is in a difficult position ethically as she
reports directly to the CEO and the CEO has direct influence over her job security
and remuneration.
The Finance Director could speak directly to the CEO and seek clarification of the
intent of his comments, explaining that she is unable to change Chilaw PLC
accounting policies just to maximise Chilaw share price in the short term and that
she should be acting with professional competence. She should also mention that
she is unable to exert pressure over the financial controller. However, if she felt
CA Sri Lanka 165

under too much pressure from the CEO to speak to him directly, she could raise
his concerns with the non-executive directors and/or the audit committee.
The problem here is that the threats to both the CEO's and the Finance Director's
objectivity and integrity are similar so there is a danger that the Finance Director
reacts to the CEO's comments by changing accounting policies to improve results
and so increase the share price and improve the bank covenants rather than acting
in the company's and stakeholders' best long-term interests. This would definitely
constitute unethical behaviour.
Additionally the Financial Controller will be subject to the same threats as he may
amend the accounting treatment of the lease to ensure that the CEO and Finance
Director are satisfied with his work so that his job is secure.
42 Emerald Solutions PLC

As a result of the recent management changes at Emerald Software PLC, the
company has struggled to communicate its 'strategic direction' to key
stakeholders. The company's annual accounts have made it hard for shareholders
to understand Emerald Software's strategy, which in turn has led to confusion.
Uncertainty among shareholders and employees is likely to increase the risk of
investors selling their shares and talented IT developers seeking employment with
competitors.
The introduction of integrated reporting may help Emerald Software to overcome
these issues as it places a strong focus on the organisation's future orientation. An
integrated report should detail the company's mission and values, the nature of its
operations, along with features on how it differentiates itself from its competitors;
including Emerald Software's new mission to become the market leader in the
specialist accountancy software industry would instantly convey what the
organisation stands for.
In line with best practice in integrated reporting, Emerald Software could
supplement its mission with how the board intend to achieve this strategy. Such
detail could focus on resource allocations over the short to medium term. For
example, plans to improve the company's human capital through hiring innovative
software developers working at competing firms would help to support the
company's long term mission. To assist users in appraising the company's
performance, Emerald Software should provide details on how it will measure
value creation in each capital. Human capital could be measured by the net
movement in new joiners to the organization compared to the previous year.
A key feature of integrated reporting focuses on the need for organisations to use
non-financial KPIs to help communicate the entity's strategy. The most successful
166 CA Sri Lanka

Answers
companies in Emerald Software's industry are committed to enhancing their

offering to customers through producing innovative products. Emerald Software
could report through the use of KPIs how it is delivering on this objective,
measures could be set which for example measure the number of new software
programs developed in the last two years or report on the number of customer
complaints concerning newly released software programs over the period.
The introduction of integrated reporting may also help Emerald Software to
enhance its performance. Historically, the company has not given consideration to
how decisions in one area have impacted on other areas. This is clearly indicated
by former CEO's cost cutting programme which served to reduce the staff training
budget. Although, this move may have enhanced the company's short term
profitability, boosting financial capital, it has damaged long term value creation.
The nature of the software industry requires successful organisations to invest in
staff training to ensure that the products they develop remain innovative in order
to attract customers. The decision to reduce the training budget will most likely
impact on future profitability if Emerald Software is unable to produce software
customers' demand.
The finance director's comments indicate a very narrow understanding of how the
company's activities and 'capitals' interact with each other in delivering value. To
dismiss developments in integrated reporting as simply being a 'fad', suggest that
the finance director is unaware of the commitment of authorities in Sri Lanka in
promoting its introduction.
The finance director's assertion regarding shareholders is likely to some degree to
be correct. Investors looking for short term results from an investment might
assess Emerald Software's performance based on improvements in profitability.
However, many shareholders will also be interested in how the board propose to
create value in the future.
Furthermore, unlike traditional annual accounts, integrated reports highlight the
importance of considering a wider range of users. Key stakeholder groups such as
Emerald Software's customers and suppliers are likely to be interested in
assessing how the company has met or not met their needs beyond the 'bottom
line'. Integrated reporting encourages companies to report performance measures
which are closely aligned to the concepts of sustainability and corporate social
responsibility. This is implied by the different capitals used: consideration of
social relationships and natural capitals do not focus on financial performance but
instead are concerned, for example, with the impact an organisation's activities
have on the natural environment.
CA Sri Lanka 167

Ultimately as integrated reporting provides senior management with a greater

quantity of organisational performance data this should help in identifying
previously unrecognised areas which are in need of improvement.
It is debatable as to whether the production of an integrated report necessarily
leads to an improvement in organisational performance or whether it simply leads
to an improvement in the reporting of performance. However, focusing
management's attention on the non-financial aspects of Emerald Software's
performance as well as its purely financial performance, could be expected to lead
to performance improvements in those areas. For example, if innovation is
highlighted as a key factor in sustaining Emerald Software's long term value, a
focus on innovation could help to encourage innovation within the company.
168 CA Sri Lanka

Questions
Section 1 – Objective test questions (Total 20 marks)
Each question is worth 2 marks

1 Which TWO of the statements regarding the Code of Best Practice on
Corporate Governance are correct:
A Board meetings should be held at least twice per financial year.
B Every board should include non-executive directors
C The audit committee should be made up of a mixture of executive and
non-executive directors
D The annual report must contain ESG reporting prepared in line with
the Integrated Reporting Framework
E The Chairman and CEO should not be the same person.
2 Identify whether the following statements are true or false in accordance

with LKAS 40 Investment Property?
Following initial recognition, investment

True False
property can be held at either cost or fair value.
If an investment property is held at fair value,
this must be applied to all of the entity's True False
investment properties.
An investment property is initially measured at
True False
cost, including transaction costs.
A gain or loss arising from a change in the fair
value of an investment property should be True False
recognised in the revaluation surplus.
3 On 1 April 20X7 Ocean Plantations commenced a lease for the use of a tea
harvesting machine. The lease runs for ten months and payments of
Rs. 500,000 per month are payable in arrears. As an incentive to enter into
the lease, the lessor gave Ocean Plantations the first month rent free. Ocean
Plantations applies the SLFRS 16 recognition exemption.
What amount should be recognised in profit or loss in respect of the leased
asset for the year ended 30 September 20X7?
A Rs. 3,000,000
B Rs. 2,250,000
C Rs. 2,500,000
D Rs. 2,700,000
CA Sri Lanka 169

4 DH has the following two legal claims outstanding:
• A legal action against it filed in February 20X7 in which the
counterparty is claiming compensation of Rs. 10,000,000. DH has been
advised that there is a 60% probability that the full compensation will
have to be paid.
• A legal action by DH against another entity, claiming damages of
Rs. 800,000, started in March 20X4. DH has been advised that there is a
75% probability that it will win the case.
How should DH report these legal actions in its financial statements for the
year ended 30 April 20X7?
In each case indicate which one of the three accounting options is correct.
Legal action Make a provision Disclose in the Make a provision

against DH for Rs. 10million notes to the for Rs. 6 million
accounts
Legal action Recognise an Disclose in the Neither
taken by DH asset of notes to the recognise an
Rs. 600,000 account asset nor
disclose
5 Jennifer holds an 80% interest in the share capital of Juniper.

During the year, Juniper sold goods to Jennifer for Rs. 3,000,000, including a
mark-up of 25%. Half the goods remain in inventory at the year end.
Extracts from the statement of profit or loss are as follows:
Jennifer Juniper
Rs. Rs.
Revenue 25,000,000 18,000,000
What is the amount to be included in the consolidated statement of profit or
loss for revenue?
Rs
170 CA Sri Lanka

Questions
6 TAH Imports buys goods priced at £50,000 from a UK company on

1 November 20X8. The invoice is due for settlement in two equal instalments
on 1 December 20X8 and 1 January 20X9.
The exchange rate moved as follows:
1 November 20X8 – £1:Rs. 220
1 December 20X8 – £1:Rs. 225
31 December 20X8 – £1:Rs. 227
What is the net exchange gain or loss reported in the financial statements of
TAH Imports at 31 December 20X8?
Rs
7 NK owns 80% of SU. NK also owns 30% of CA which it has significant

influence over. NK also shares joint control of TD, a separate company, with
UJ in a joint venture. NK also operates a defined benefit pension plan for all
of its employees.
Which of the following are considered to be related parties of NK in
accordance with LKAS 24 Related Party Disclosures?
A SU, CA, UJ and the pension plan
B SU, TD and UJ
C SU, CA, TD and UJ
D SU, CA, TD and the pension plan
8 Astral Co purchased an item of plant for Rs. 400,000 on 1 September 20X1.

The plant has an estimated useful life of five years and an estimated residual
value of Rs. 50,000. The plant is depreciated on a straight-line basis. Local
tax law does not allow depreciation as an expense, but a tax allowance of
60% of the cost of the asset can be claimed in the year of purchase and 20%
per annum on a reducing balance basis in the following years. The rate of
income tax is 30%
What charge or credit for deferred taxation should be recorded in Astral Co's
statement of profit or loss for the year to 31 August 20X2?
A Rs. 170,000 charge
B Rs. 51,000 charge
C Rs. 51,000 credit
D Rs. 170,000 credit (2 marks)
CA Sri Lanka 171

9 Riley Co acquired a non-current asset on 1 October 20W9 (ten years before
20X9) at a cost of Rs. 10,000,000 which had a useful life of ten years and a nil
residual value. The asset had been correctly depreciated up to 30 September
20X4. At that date the asset was damaged and an impairment review was
performed. On 30 September 20X4, the fair value of the asset less costs of
disposal was Rs. 3 million and the expected future cash flows were
Rs. 850,000 per annum for the next five years. The current cost of capital is
10% and a five-year annuity of Rs. 1 per annum at 10% would have a
present value of Rs. 3.79.
What amount would be charged to profit or loss for the impairment of this
asset for the year ended 30 September 20X4?
A Rs. 1,778,500
B Rs. 2,000,000
C Rs. 3,000,000
D Rs. 3,221,500 (2 marks)
10 The BC group is suffering from liquidity problems. During the year, BC made
a loan to one of its directors. The loan has no specific repayment date but is
repayable on demand. The directors have included this loan in 'cash and
cash equivalents' in the statement of financial position. They feel that there
is no problem with this accounting entry as there is a choice within SLFRSs.
Which ONE of the following statements is correct in relation to the
above?
A The directors' treatment of the loan is correct because it is repayable
on demand.
B It would be unethical just to treat the loan as 'cash and cash
equivalents' purely to improve the perceived liquidity of the company.
C The directors' treatment of the loan complies with the Conceptual
Framework's qualitative characteristics.
D The directors are acting in the best interests of the shareholders
therefore there is no ethical issue.
172 CA Sri Lanka

Questions
Section 2
1 Elite Leisure is a private limited liability company that operates a single
cruise ship. The ship was acquired on 1 October 20W6 (ten years before
20X6). Details of the cost of the ship's components and their estimated useful
lives are:
Component Original cost Depreciation basis
Rs mn
Ship's fabric (hull, decks etc) 300 25 years straight–line
Cabins and entertainment area
fittings 150 12 years straight–line
Engine system 100 Useful life of 40,000 hours
At 30 September 20X4 no further capital expenditure had been incurred on
the ship.
In the year ended 30 September 20X4 the ship had experienced a high level
of engine trouble which had cost the company considerable lost revenue and
compensation costs. The measured expired life of the engine system at
30 September 20X4 was 30,000 hours. Due to the unreliability of the
engines, a decision was taken in early October 20X4 to replace the whole of
the engine system at a cost of Rs. 140 million. The expected life of the new
engine system was 50,000 hours and in the year ended 30 September 20X5
the ship had used its engines for 5,000 hours. The scrap value of the engine
system disposed was zero.
At the same time as the engine system replacement, the company took the
opportunity to do a limited upgrade to the cabin and entertainment facilities
at a cost of Rs. 60 million and repaint the ship's fabric at a cost of
Rs. 20 million. After the upgrade of the cabin and entertainment area fittings
it was estimated that their remaining life was five years (from the date of the
upgrade). For the purpose of calculating depreciation, all the work on the
ship can be assumed to have been completed on 1 October 20X4. All residual
values can be taken as nil.
Required
Calculate the carrying amount of Elite Leisure's cruise ship at 30 September
20X5 and its related expenditure in the statement of profit or loss for the
year ended 30 September 20X5. Your answer should explain the treatment
of each item. (10 marks)
CA Sri Lanka 173

2 Bertrand issued Rs. 100 million convertible loan notes on 1 October 20X0
that carry a nominal interest (coupon) rate of 5% per annum. They are
redeemable on 30 September 20X3 at par for cash or can be exchanged for
equity shares in Bertrand on the basis of 20 shares for each Rs. 1,000 of loan.
A similar loan note, without the conversion option, would have required
Bertrand to pay an interest rate of 8%.
When preparing the draft financial statements for the year ended
30 September 20X1, the directors are proposing to show the loan note
within equity in the statement of financial position, as they believe all the
loan note holders will choose the equity option when the loan note is due for
redemption. They further intend to charge a finance cost of Rs. 5,000,000
(Rs. 100 million  5%) in the statement of profit or loss for each year up to
the date of redemption.
The present value of Rs. 1 receivable at the end of each year, based on
discount rates of 5% and 8%, can be taken as:
5% 8%
End of year 1 0.95 0.93
2 0.91 0.86
3 0.86 0.79
Required
(a) Explain why the nominal interest rate on the convertible loan notes is
5%, but for non-convertible loan notes it would be 8%. (2 marks)
(b) Assess the impact of the directors' proposed treatment of the loan
notes on the financial statements and the acceptability of this
treatment. (3 marks)
(c) Prepare extracts to show how the loan notes and the finance charge
should be treated by Bertrand in its financial statements for the year
ended 30 September 20X1. (5 marks)
(Total = 10 marks)
174 CA Sri Lanka

Questions
3 Julian recognised a deferred tax liability for the year end 31 December 20X3
which related solely to accelerated tax depreciation on property, plant and
equipment at a rate of 30%. The carrying amount of the property, plant and
equipment at that date was Rs. 31 Mn and the tax written down value was
Rs. 23 Mn.
The following data relates to the year ended 31 December 20X4:
(i) At the end of the year the historical cost carrying amount of property,
plant and equipment was Rs. 46 Mn and its tax written down value was
Rs. 27 Mn. At the year-end a property was revalued by Rs. 9 Mn. No
items had previously required revaluation. In the tax jurisdiction in
which Julian operates revaluations of assets do not affect the tax base
of an asset or taxable profit. Gains due to revaluations are taxable on
sale.
(ii) Julian began development of a new product during the year and
capitalised Rs. 6 Mn in accordance with LKAS 38. The expenditure was
deducted for tax purposes as it was incurred. None of the expenditure
had been amortised by the year end.
(iii) Julian's statement of profit or loss showed interest income receivable
of Rs. 55 Mn but only Rs. 45 Mn of this had been received by the year
end. Interest income is taxed on a receipts basis.
(iv) During the year, Julian made a provision of Rs. 8 Mn to cover an
obligation to clean up some damage caused by an environmental
accident. None of the provision had been used by the year end. The
expenditure will be tax deductible when paid.
The corporate income tax rate recently enacted for the following year is 30%
(unchanged from the previous year).
The current tax charge was calculated for the year as Rs. 45 Mn.
Current tax is settled on a net basis with the national tax authority.
Required
(a) Prepare a table showing the carrying amounts, tax bases and
temporary differences for each for the items above at 31 December
20X4. (6 marks)
(b) Prepare the statement of profit or loss and statement of financial
position notes to the financial statements relating to deferred tax for
the year ended 31 December 20X4. (4 marks)
(Total = 10 marks)
CA Sri Lanka 175

4 Asiasun
Asiasun is a publicly traded group involved in the holiday industry. It
acquires hotel rooms and seats on flights and puts them together to form
'package deals'. In setting prices for package deals, Asiasun considers prices
set by hoteliers and airlines together with other costs incurred (such as
ground transportation and the cost of resort customer care staff to deal with
'on holiday' issues) and adds a mark up.
The terms under which Asiasun sells its holidays are as follows:
• a 10% deposit is required on booking
• the balance of the holiday must be paid 6 weeks before the travel date.
In previous years, Asiasun has recognised revenue (and profit) from the sale
of its holidays at the date the holiday is actually taken. From the beginning of
November 20X3, Ntaula has made it a condition of booking that all
customers must have holiday cancellation insurance and as a result it is
unlikely that the outstanding balance of any holidays will be unpaid due to
cancellation. In preparing its financial statements to 31 March 20X4, the
directors are proposing to change to recognising revenue (and related
estimated costs) at the date when a booking is made. The directors also feel
that this change will help to negate the adverse effect of comparison with
last year's results which were better than the current year's.
Required
(a) Comment on whether Ntaula's proposal to change the timing of its
recognition of its revenue is acceptable, referring to the requirements
of IFRS 15. (7 marks)
(b) Discuss whether Asiasun is acting as an agent or principal in
transactions to sell package holidays and explain why this
determination is important. (3 marks)
(10 marks)
176 CA Sri Lanka

Questions
Section 3 (Total 20 marks)
Crimson
5 (a) On 1 October 20X7, Crimson acquired a newly constructed oil platform
at a cost of Rs. 300 million together with the right to extract oil from an
offshore oilfield under a government licence. The terms of the licence
are that Crimson will have to remove the platform (which will then
have no value) and restore the sea bed to an environmentally
satisfactory condition in ten years' time when the oil reserves have
been exhausted. The estimated cost of this in ten years' time will be
Rs. 150 million. The present value of Rs. 1 receivable in ten years at the
appropriate discount rate for Crimson of 8% is Rs. 0.46.
Required
(i) Explain and quantify how the oil platform should be treated in the
financial statements of Crimson for the year ended 30 September
20X8. (7 marks)
(ii) Explain how your answer to (a)(i) would change if the
government licence did not require an environmental cleanup.
(3 marks)
(b) Crimson acquired an investment in a debt instrument on 1 October
20X7 at its par value of Rs. 30 million. Transaction costs relating to the
acquisition were Rs. 2 million. The investment earns a fixed annual
return of 6%, which is received in arrears. The principal amount will be
repaid to Crimson in 4 years' time at a premium of Rs. 4 million. The
investment has been correctly classified as measured at amortised cost.
The investment has an effective interest rate of approximately 7.05%.
Required
(i) Explain how this financial instrument will be initially recorded
AND subsequently measured in the financial statements of
Crimson, in accordance with SLFRS 9 Financial Instruments.
(ii) Calculate the amounts that would be included in Crimson's
financial statements for the year to 30 September 20X8 in respect
of this financial instrument. (6 marks)
CA Sri Lanka 177

(d) On 1 October 20X7 Crimson acquired a computer system by way of a
lease.
The computer system lease was for 3 years, the expected useful life of
the system was 3 years. The Rs. 15,000,000 per year lease rental was
due annually in arrears commencing with 30 September 20X8. The
interest rate implicit in the lease is 12%. Crimson was also required to
pay an initial deposit before commencement of the lease of
Rs. 2 million and by way of incentive, the lessor agreed to pay
Crimson's legal costs associated with the lease, which amounted to
Rs. 500,000
Required
Explain and quantify how the leases should be treated in the financial
statements for the year ended 30 September 20X8. (4 marks)
(Total = 20 marks)
6 On 1 August 20X7 Patronic purchased 18 million of a total of 24 million

equity shares in Sardonic. The acquisition was through a share exchange of
two shares in Patronic for every three shares in Sardonic. Sardonic's shares
had raised Rs. 24 million when originally issued. The market price of
Patronic's shares at 1 August 20X7 was Rs. 5.75 per share. Patronic will also
pay in cash on 31 July 20X9 (two years after acquisition) Rs. 2.42 per
acquired share of Sardonic. Patronic's cost of capital is 10% per annum. The
reserves of Sardonic on 1 April 20X7 were Rs. 69 million.
Patronic has held an investment of 30% of the equity shares in Acerbic for
many years.
The summarised statements of profit or loss for the three companies for the
year ended 31 March 20X8 are:
Patronic Sardonic Acerbic
Rs'000 Rs'000 Rs'000
Revenue 150,000 78,000 80,000
Cost of sales (94,000) (51,000) (60,000)
Gross profit 56,000 27,000 20,000
Distribution costs (7,400) (3,000) (3,500)
Administrative expenses (12,500) (6,000) (6,500)
Finance costs (note (ii)) (2,000) (900) nil
Profit before tax 34,100 17,100 10,000
Income tax expense (10,400) (3,600) (4,000)
Profit for the year 23,700 13,500 6,000
178 CA Sri Lanka

Questions

(i) The fair values of the net assets of Sardonic at the date of acquisition
were equal to their carrying amounts with the exception of property
and plant. Property and plant had fair values of Rs. 4.1 million and
Rs. 2.4 million respectively in excess of their carrying amounts. The
increase in the fair value of the property would create additional
depreciation of Rs. 200,000 in the consolidated financial statements in
the post-acquisition period to 31 March 20X8 and the plant had a
remaining life of four years (straight-line depreciation) at the date of
acquisition of Sardonic. All depreciation is treated as part of cost of
sales.
The fair values have not been reflected in Sardonic's financial
statements. No fair value adjustments were required on the acquisition
of Acerbic.
(ii) The finance costs of Patronic do not include the finance cost on the
deferred consideration.
(iii) Prior to its acquisition, Sardonic had been a good customer of Patronic.
In the year to 31 March 20X8, Patronic sold goods at a selling price of
Rs. 1.25 million per month to Sardonic both before and after its
acquisition. Patronic made a profit of 20% on the cost of these sales. At
31 March 20X8 Sardonic still held inventory of Rs. 3 million (at cost to
Sardonic) of goods purchased in the post-acquisition period from
Patronic.
(iv) An impairment test on the goodwill of Sardonic conducted on
31 March 20X8 concluded that it should be written down by
Rs. 2 million. The value of the investment in Acerbic was not impaired.
(v) All items in the above statements of profit or loss are deemed to accrue
evenly over the year.
(vi) Ignore deferred tax.
(vii) It is the group policy to value the non-controlling interest at full
fair value. At the date of acquisition the directors valued the
non-controlling interest in Sardonic at Rs. 32 Mn.
Required
(a) Calculate the goodwill arising on the acquisition of Sardonic at
1 August 20X7. (5 marks)
(b) Prepare the consolidated statement of profit or loss for the
Patronic Group for the year ended 31 March 20X8. Note. Assume
that the investment in Acerbic has been accounted for using the
equity method since its acquisition. (15 marks)
(Total = 20 marks)
CA Sri Lanka 179

180 CA Sri Lanka
Answers
Section 1 – Objective test solutions

1 B and E
A is incorrect because board meetings should be held at least quarterly.
C is incorrect because the audit committee should be made up exclusively of
non-executive directors, the majority of whom are independent.
D is incorrect because although the annual report should contain
information about ESG, this may be built on a number of guidelines. The
guidelines applied need not be the Integrated Reporting Framework.
2 The gain or loss arising from a change in the fair value of an investment
property should be recognised in profit or loss not the revaluation surplus
Following initial recognition, investment

True
property can be held at either cost or fair value.
If an investment property is held at fair value,
this must be applied to all of the entity's True
investment property.
An investment property is initially measured at
True
cost, including transaction costs.
A gain or loss arising from a change in the fair
value of an investment property should be False
recognised in the revaluation surplus.
3 D (500,000  9)  6/10m = Rs. 2,700,000

4 The correct answer is: B
Legal action Make a provision

against DH for Rs. 10million
Legal action Disclose in the
taken by DH notes to the
account
5 The correct answer is: Rs. 40,000,000.

Rs. m
Jennifer 25
Juniper 18
Intra-group trading (3)
40
CA Sri Lanka 181

6 Rs. 300,000 loss
Date Rate £ Rs. Rs Gain/(loss)
Restated
1/11 220 50,000 11,000,000
1/12 225 (25,000) (5,500,000) 5,625,000 (125,000)
31/12 227 25,000 5,500,000 5,675,000 (175,000)
(300,000)
7 D According to LKAS 24, entities that are typically related parties are
those entities that are part of the same group. This includes parent,
subsidiaries (ie, SU), associates (ie, CA) and joint ventures (ie, TD). A
post employment benefit plan for the benefit of employees of an entity
(ie, the defined benefit plan for NK's employees) is also specifically
mentioned in LKAS 24 as a related party.
Two joint venturers are not necessarily related parties simply because
they share joint control of a joint venture. Therefore UJ is not a related
party of NK.
8 B Rs. 51,000 charge
As the tax base is less than the carrying amount for accounting
purposes (more tax benefit has been taken), then a deferred tax
liability is recognised:
Carrying amount
Rs
Cost of asset 400,000
Depreciation charge
(400,000 – 50,000)/5 years (70,000)
Carrying amount at 31 August 20X2 330,000
Tax base
Cost of asset 400,000
Less Y1 tax depreciation at 60%
400,000  0.6 (240,000)
160,000
Difference Rs. 330,000 – Rs. 160,000 170,000
Tax provision 0.3  Rs. 170,000 51,000
9 A Rs. 1,778,500
Rs
Carrying amount (10,000,000  5/10) 5,000,000
Fair value less costs to sell 3,000,000
Value in use (85,000  3.79) 3,221,500
Recoverable amount is Rs. 3,221,500 and impairment loss = 5,000,000
–3,221,500 = Rs. 1,778,500
182 CA Sri Lanka

Answers
10 B It would be unethical just to treat the loan as 'cash and cash

equivalents' purely to improve the perceived liquidity of the company.
Section 2
1 Elite Leisure
Although there is only one ship, the ship is a complex asset made up from a
number of smaller assets with different costs and useful lives. Each of the
component assets of the ship will be accounted for separately with its own
cost, depreciation and profit or loss on disposal.
At 30 September 20X4 the ship is eight years old and its cost and carrying
amount is as follows:
Cost Depreciation Accumulated Carrying
period depreciation amount
Rs mn Rs mn Rs mn
Ship's fabric 8 years
300 96 204
25 years
Cabins and 8 years
entertainment 150 100 50
12 years
areas
30,000 hours
Engine system 100 75 25
40,000 hours
550 271 279

Changes during Y/e 30 September 20X5
Replacing the engine system Rs. 140 Mn
The old engines will be scrapped giving rise to a Rs. 25 Mn loss on disposal.
The new engines will be capitalised and depreciated over their 50,000 hour
working life. The charge for this year will be:
5,000 hours
Rs. 140 Mn  = Rs. 14 Mn.
50,000 hours
Upgrading cabins and entertainment areas Rs. 60 Mn

These costs can be capitalised because they are improvements and because
they extend the useful life of the assets. The revised carrying amount at
1 October 20X4 is Rs. 110 Mn (Rs. 50 Mn + Rs. 60 Mn).
The depreciation charge for the year is Rs. 22 Mn (Rs. 110 ÷ 5 years).
Repainting the ship's fabric Rs. 20 Mn.
CA Sri Lanka 183

This is a maintenance cost and cannot be capitalised as it does not create
additional economic benefit. It will be charged to profit or loss for the year.
The depreciation for the ship itself will be Rs. 12 Mn, based on its Rs. 300 Mn
cost and 25-year life.
Summary
Ship's Cabins etc. Engine Total
fabric
Rs mn Rs mn Rs mn Rs mn
Opening carrying
amount 204 50 25 279
Disposals – – (25) (25)
Additions – 60 140 200
Depreciation (12) (22) (14) (48)
Closing carrying
amount 192 88 126 406
Rs mn
Depreciation 48
Loss on disposal 25
Repainting 20
Total charge 93
2 (a) The convertible loan notes carry a lower rate of interest because
holders are considered to have forgone 3% interest in order to have
the conversion option. Without the conversion option, Bertrand would
have to offer 8% in order to attract investors.
(b) The directors' proposed treatment will classify an amount that should
be shown as a non-current liability as equity, which will make the
financial statements misleading. A finance cost of 5% on the whole
amount is not correct and will understate the cost of the loan to the
company.
Rs'000
Interest payable (Rs. 100 Mn  5%  2.58*) 12,900
Capital repayable (Rs. 100 Mn  0.79) 79,000
Debt element 91,900
Equity element 8,100
100,000
* (0.93 + 0.86 + 0.79)
184 CA Sri Lanka

Answers
The debt element of Rs. 91,900,000 will appear under non-current

liabilities, the equity element should appear under equity.
(c) At 30 September 20X1 the following entries will be made:
DR CR
Rs'000 Rs'000
Profit or loss 7,352
Loan notes 7,352
Being finance charge (91,900  8%)
Loan notes 5,000
Cash 5,000
Being interest paid (100,000  5%)
So the balance on the loan notes at 30 September 20X1 will be
(91,900 + 7,352 – 5,000) = Rs. 94,252,000.
3 (a)
Carrying Tax Temporary
amount base difference
RS mn Rs mn Rs mn
Property, plant and
equipment 46 27 19
Revaluation surplus 9 - 9
Development –
expenditure 6 6
Interest receivable –
(55 – 45) 10 10
Provision (8) – (8)
36
(b) Notes to the statement of financial position
Deferred tax liability
Rs mn
Accelerated depreciation for tax purposes (19  30%] 5.7
Product development costs deducted from taxable profit
(6 Mn  30%) 1.8
Interest income taxable when received (10  30%) 3.0
Provision for environmental costs deductible when paid
(8  30%) (2.4)
Revaluation surplus (9  30%) 2.7
10.8
CA Sri Lanka 185

Rs mn
At 1 January 20X4 [(31 – 23)  30%] 2.4
Amount charged to profit or loss (balancing figure) 5.7
Amount charged to equity (9  30%) 2.7
At 31 December 20X4 (36  30%) 10.8
Note to the statement of profit or loss
Income tax expense
Rs mn
Current tax 45.0
Deferred tax 5.7
50.7
4 Asiasun
(a) The directors' proposal here is that revenue recognition can be
accelerated based on the imposition of compulsory holiday insurance.
This is based on the presumption that the risk of not receiving the
balance of the payment has now been covered.
SLFRS 15 Revenue from Contracts with Customers should be applied.
This standard requires that performance obligations are identified
within a contract with a customer, the total transaction price in the
contract is allocated to these performance obligations and revenue is
recognised when each performance obligation is satisfied, which may
be at a single point in time or over a period of time.
In the case of a package holiday booking, it appears that there is a
single performance obligation promised by Asiasun, being the delivery
of the holiday to the customer. Therefore all of the transaction price is
allocated to the delivery of the holiday. Revenue is recognised only
when the performance obligation is satisfied ie, when the customer
goes on holiday.
The performance obligation is not satisfied when a booking is made
and therefore the directors' suggestion is incorrect and should not be
adopted as an accounting policy.
Package holidays vary in length, and it would seem appropriate for
Asiasun to consider each performance obligation to be satisfied over
time. Revenue is therefore recognised by reference to the stage of
completion of the obligation. An appropriate way to assess stage of
completion is on a days basis. Therefore, for example if Asiasun's
reporting date were to fall one week into the delivery of a two-week
package holiday to a customer, half of the transaction price would be
recognised as revenue in the reporting period.
186 CA Sri Lanka

Answers
As Asiasun receives all payment for a holiday in advance of satisfying

its performance obligation, it should initially recognise a contract
liability (deferred income). This is only released to profit or loss as
revenue as the performance obligation is satisfied.
(b) Whether Asiasun is acting as an agent or principal affects the amount
of revenue to be recognised; if it is the principal in a transaction it
should recognise gross revenue but where it is an agent it should
recognise only the commission due to it.
An entity is a principal if it controls goods or services before they are
transferred to the customer. Indicators that this is the case include the
entity having primary responsibility for delivering the goods / services,
the entity bearing the risk of non-delivery and the entity having
discretion in setting prices.
In the case of the package holidays Asiasun appears to be the principal.
It purchases services from other companies but also provides
additional services in the form of ground transportation and resort
staff. It prices packages taking all of these costs into account. The fact
that customer care staff work in resorts also indicates that Asiasun
bears the risk of non-delivery of promises as these staff are required to
deal with customer problems whilst on holiday.
CA Sri Lanka 187

Section 3
5 (a) (i) Crimson must provide for dismantling and restoration costs at
30 September 20X8, as the liability came into existence with the
granting of the licence and the cost has been reliably estimated.
The provision at 30 September 20X8 will be for the future cost
discounted over ten years. This will be added to the carrying
amount of the oil platform and depreciated over ten years. The
discount will be 'unwound' each year and charged to finance
costs. The credit entry will increase the provision until at the end
of ten years it will stand at Rs. 150 Mn.
At 30 September 20X8:
Rs'000
Depreciation (see SFP) 36,900
Finance costs (69,000 (see SFP)  8%) 5,520
Rs'000
Non-current assets:
Oil platform 300,000
Dismantling (150m  0.46) 69,000
369,000
Depreciation (369,000 / 10) (36,900)
Non-current liabilities:
Environmental provision at 1 October 20X7 69,000
Discount unwound (69,000  8%) 5,520
74,520
(ii) If the government licence did not require an environmental clean-
up, Crimson would have no legal obligation. It would then be
necessary to determine whether or not Crimson had a
constructive obligation. This would apply if on past performance
it had established a practice of carrying out an environmental
clean-up where required, which would give rise to the
expectation that it would do so in this case. If a constructive
obligation existed, the accounting would be as described above.
If no obligation were established, there would be no liability. No
provision would be made for the clean-up. The platform would be
188 CA Sri Lanka

Answers
recognised at Rs. 300 Mn and depreciated over ten years. There

would be no finance costs.
(b) (i) Crimson has acquired a financial asset and the question states
that it has been correctly classified as measured at amortised
cost.
The requirements in respect of this category of financial asset
under are as follows:
Initial measurement
The asset should be recorded at its fair value, plus transaction
costs.
The initial value of Crimson's investment is Rs. 32,000,000
(Rs. 30 million + Rs. 2 million).
Subsequent measurement
The asset should be measured using the amortised cost method.
Interest should be accrued using the effective interest rate
(allocating the true interest earned over the term of the
investment, including the actual interest received each year and
the premium received on maturity at a constant rate). The
effective interest is added to the carrying amount of the asset in
each accounting period and any cash flows received from the
investment will be deducted from its carrying amount.
(ii) The financial statements for the year ended 30 September 20X8
will include:
• a financial asset of Rs. 32,456,000 (in the statement of
financial position)
• interest income of Rs. 2,256,000 (in profit or loss, in the
statement of profit or loss and other comprehensive
income)
WORKING
Rs.
1 October 20X7 32,000,000
Finance income (Rs. 32,000,000  7.05%) 2,256,000
Interest received (Rs. 30,000,000  6%) (1,800,000)
Balance c/d 30 September 20X8 32,456,000
CA Sri Lanka 189

(d) Computer system lease
At the commencement of the lease at 1 October 200X7, Crimson should
recognise a liability for future lease payments and a right-of-use asset
which represents its right to use the computer system for 3 years.
The lease is initially measured at the present value of future lease
payments discounted at the rate implicit in the lease:
Rs
30 September 20X8 payment 15m/1.12 13,392,857
30 September 20X9 payment 15m/1.122 11,957,908
30 September 20Y0 payment 15m/1.123 10,676,704
32,456,000
The right-of-use asset is initially recognised at Rs. 37,528,000
(36,028,000 + 2,000,000 – 500,000).
The lease liability subsequently accrues interest but is reduced by lease
payments such that the carrying amount at 30 September 20X8 is
Rs. 25,350,765 (36,027,469 + (12%  36,027,469) – 15,000,000).
A finance cost of Rs. 4,323,296 is recognised in profit or loss.
The right-of-use asset is subsequently depreciated over 3 years giving
rise to a depreciation expense of Rs. 12,509,333 in the year ended
30 September 20X8. The carrying amount of the asset at the year- end
is Rs. 25,018,667.
6 (a) Goodwill
Rs'000 Rs'000
Consideration transferred:
Shares (12m  Rs. 5.75) 69,000
Deferred consideration
(18m  Rs. 2.42  1/1.21(10% over 2 years)) 36,000
105,000
Fair value of NCI at acquisition 32,000
Fair value of identifiable net assets acquired:
Share capital 24,000
Reserves b/f 69,000
Current year to date (13,500  4/12) 4,500
Fair value adjustments (W3) 6,500
(104,000)
Goodwill 33,000
190 CA Sri Lanka

Answers
(b) CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR THE YEAR

ENDED 31 MARCH 20X8
Rs'000
Revenue (W4) 192,000
Gross profit 72,900
Administrative expenses (12,500 + (6,000  8/12)) (16,500)
Finance costs (W6) (5,000)
Impairment of goodwill (2,000)
Share of profit of associate (6,000  30%) 1,800
Owners of the parent 27,400
Non-controlling interest (W2) 1,600
29,000
WORKINGS
1 Group structure
Patronic
18m/24m = 75% 30%
Sardonic Acerbic
2 Non-controlling interest
Rs'000
Profit after tax (13,500  8/12) 9,000
Additional depreciation (W3) (600)
8,400
Non-controlling share 25% 2,100
Less goodwill impairment (2,000  25%) (500)
1,600
CA Sri Lanka 191

Acquisition Movement Year end
1.8.X7 8/12 31.3.X8
Rs'000 Rs'000 Rs'000
Property 4,100 (200)* 3,900
Plant 2,400 (400)** 2,000
6,500 (600) 5,900
* given in the question
** 2,400/4  8/12
4 Revenue
Rs'000
Patronic 150,000
Sardonic (78,000  8/12) 52,000
Intra-group (1,250  8) (10,000)
192,000
5 Cost of sales
Patronic 94,000
Sardonic (51,000  8/12) 34,000
Intragroup (W4) (10,000)
URP in inventory (3,000  20/120) 500
Additional depreciation on FVA:
Property 200
Plant (2.4 Mn/4  8/12) 400
119,100
6 Finance costs
Patronic 2,000
Sardonic (900  8/12) 600
Unwinding of discount (36,000  10%  8/12) 2,400
5,000
192 CA Sri Lanka

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PRACTICE & REVISION KIT

CA SRI LANKA CURRICULUM 2020

ISBN 9781 5097 3136 7

British Library Cataloguing-in-Publication Data

BPP Learning Media Ltd

The copyright in this publication is owned by

All rights reserved. No part of this publication may be

The contents of this book are intended as a guide and not

Every effort has been made to contact the copyright holders

We are grateful to CA Sri Lanka for permission to reproduce

iv CL 2 Financial Reporting & Governance

BPP LEARNING MEDIA

vi CL 2 Financial Reporting & Governance

How to use this Practice & Revision Kit vii

viii CL 2 Financial Reporting & Governance

Syllabus Area Knowledge Learning Outcomes Specific Knowledge Section A – Section B –

x CL 2 Financial Reporting & Governance

xii CL 2 Financial Reporting & Governance

Learning outcomes xiii

xiv CL 2 Financial Reporting & Governance

xvi CL 2 Financial Reporting & Governance

Learning outcomes xvii

5.1.2 Explain the importance of ethics Importance of ethics and 41

xviii CL 2 Financial Reporting & Governance

Learning outcomes xix

Mode: Paper based examination

The exam comprises of three sections, as follows:

xx CL 2 Financial Reporting & Governance

Exam techniques xxi

xxii CL 2 Financial Reporting & Governance

Knowledge Process Verb List Verb Definitions

Tier - 1 Remember Define Describe exactly the nature, scope or meaning

Identify Recognise, establish or select after consideration

List Write the connected items one below

State Express something definitely or clearly

Tier - 2 Calculate/Compute Make a mathematical computation

Recognise To show validity or otherwise, using knowledge

Summarise Give a brief statement of the main points

Classify Allocate into categories

Provide Give illustrations to support or illuminate

Tier - 3 Application Apply Put to practical use

Prioritise Arrange or do in order of importance

Reconcile Make consistent with another

Action verbs checklist xxiii

Conduct Organize and carry out a task

Display Make evident or noticeable

Perform Do or execute, usually in the sense of

Reconcile Make or prove consistent or compatible

Set Fix or establish

Select Choose from a range of options

Differentiate Constitute a difference that

Write Provide word descriptions to express an opinion

Conclude Form a judgment about, or determine or resolve

xxiv CL 2 Financial Reporting & Governance

Review Study critically with a view

Tier - 6 Synthesis Compile Produce by assembling information

Propose To form or declare a plan or intention

Anticipate Foresee, or experience or realise

Draft Write original material for the scrutiny

Formulate Devise and put into words

Plan Devise the plan for an assurance

Report Give the formal final conclusion for an

Submit Send a completed document to a

Suggest Put forward an idea or give reasons