(a) Multex Industries Ltd (MIL) operates in several sectors in the country, including manufacturing, retailing, oil, wholesale and construction to mention but a few. On 1 January, 2018 MIL disposed of all its shares in Amco Ltd for Shs 1.5 billion in order to buy shares in another company which appeared to be more strategic and profitable. MIL had acquired 100% shares in Amco Ltd over 10 years ago when it was incorporated. By 1 January, 2018 Amco was the only subsidiary of MIL. However, on 1 July, 2018 MIL acquired 75% of shares in Bomex Ltd by paying cash Shs 2 billion and issuing shares for Shs 1 billion to the members of Bomex Ltd. The draft consolidated financial statements of the MIL group for the year ended 31 December, 2018 are as follows:

Statement of profit or loss and other comprehensive income Shs '000'

Revenue

Cost of sales

Gross profit

Other income Distribution costs Administrative expenses Other expenses

Finance costs

Profit before tax Income tax

Profit for the year

2,235,385 (1,386,510) 848,875 20,961 (170,950) (114,586) (40,100) (70,925) 473,275 (240,082) 233,193

Statement of financial position as at 31 December: 2017

Assets:

Non-currents:

Property, plant & equipment Other intangible assets Goodwill

Investment property

Current assets: Inventories

Trade & other receivables Cash & cash equivalents

Total assets

Equity & liabilities:

Equity:

Ordinary share capital Retained earnings

Revaluation reserve Non-controlling interests (NCI)

Non-current liabilities: 9% loan stock

7% loan stock Obligations under leases

Current liabilities: Obligations under leases Trade & other payables Taxation

Total equity & liabilities

Shs '000'

21,190,000 575,700

2,033,400 23,799,100

221,670 21,432 455,445 698,547 24,497,647

12,300,000 1,645,607

-

13,945,607

8,606,932 332,393 800,000

9,739,325

99,000 292,865 420,850 812,715

24,497,647

2018 Shs '000'

25,556,000 401,200 2,216,250 1,633,400 29,806,850

164,914 78,382 382,005 625,301 30,432,151

14,001,000 1,878,800 90,000 190,000 16,159,800

10,094,331 425,340 2,100,000 12,619,671

219,620 783,060 650,000

1,652,680 30,432,151

Additional Information:

1

The following information relates to the acquisition of Bomex Ltd and the disposal of Amco Ltd:

Bomex Ltd Shs '000' Cash 50,000

Amco Ltd Shs '000' 145,000

156,000

800,000 1,000,000 15,000 500,000 900,000 3,516,000 400,000 355,000 150,000 712,000 374,000 25,000 2,016,000

Inventories

Land

Investment property Trade receivables Buildings

Machinery

Long-term obligations under leases Bank overdraft

Trade payables

9% loan stock

Income taxation

Short-term obligations under leases

120,000 350,000 800,000 150,000 450,000 950,000

2,870,000 250,000 105,000 170,000 493,000 604,000 203,000

1,825,000

Staff emoluments accounted for 80% of the administrative costs. On 31 December, 2018 there was an outstanding amount Shs 5 million due to staff who were suspended for indiscipline and is included in the trade and other payables balance.

One of the transporters of the company's goods delayed to submit their invoices Shs 40 million for the services they had rendered during the year. This cost is debited to distribution costs. The amount remained outstanding and is also included in the trade and other payables balance.

The company included Shs 2.5 million in respect of other income in the receivables balance at the end of the year.

There were no acquisitions or disposals of other intangible assets during the year. The amortisation expense was charged to cost of sales.

The breakdown of property, plant and equipment is shown below:

Land Buildings Machinery

2017 Shs '000'

2,500,000 9,500,000 9,190,000

2018 Shs '000'

3,200,000

9,250,000 13,106,000 21,190,000 25,556,000

Additional notes:

1. (a)During the year, MIL acquired and installed a piece of sophisticated
2. machinery at cost Shs 1.6 billion under a lease arrangement for 10
3. years.
4. (b)Depreciation expense relating to machinery Shs 50 million was
5. charged to cost of sales. The depreciation charge on buildings Shs 70 million was also charged to cost of sales in the statement of profit or loss.
6. (c)The group hired ABC Surveyors Ltd to value its assets and liabilities at the end of the year. Their findings were as follows:
7. (i)The market value of machinery had increased and hence provided for revaluation surplus of Shs 90 million.
8. (ii)The market value of buildings had depreciated and made a provision for a revaluation loss Shs 130 million which the group charged to cost of sales.
9. (iii)The market of land had stagnated for some time and hence there was no significant change on company's value of land.
10. (iv)There was a fall in value of investment property by Shs 200 million. Management charged it to cost of sales in the statement of profit or loss.

7 It is the group's policy to value the non-controlling interest at its proportionate share of the fair value of the subsidiary's identifiable net assets.

Required:

Prepare MIL Group's consolidated statement of cash flows for the year ended 31 December, 2018 using the direct method in accordance with IAS 7: Statement of Cash Flows.

Please note that you are not required to adjust the consolidated financial statements above.

(32 marks)

(b) Multex Industries Ltd (MIL) has hired you as a consultant to advise management on the following transactions:

1

MIL was contracted by Abaka Hospital to construct a specialised facility. One of MIL's suppliers, paid to supply a rare material for the construction, failed to deliver on time and consequently, the hospital cancelled the contract with MIL and advised the procurement regulatory authority to blacklist MIL. MIL has now sued the supplier for breach of contract and is confident that it will win the case based on the ruling in a similar case filed 5 years ago by one of the players in the industry. The court, at that time, awarded Shs 500 million to

2

the company which had sued. Considering the time value of money and inflation, management has made a provision in its financial statements Shs 700 million.

Multex Industries Ltd (MIL) entered into a contract with Yonda Railways Ltd (YRL) on 1 January, 2018 to transport the company's goods to Mombasa for export for 15 years with an option to extend it for further 5 years. YRL allocated 20 wagons specifically to transport the goods. MIL, under the contract, has the exclusive use of the wagons and can use them to transport any goods including those of its clients. YRL is responsible for maintenance of the wagons and can also replace a wagon which needs replacement. MIL paid Shs 175 million to Moishe Associated Lawyers to negotiate and draft the contract. The contract requires MIL to pay YRL Shs 560 million per annum during the initial term and Shs 700 million during the optional period, all payable at the end of the year. The interest rate implicit in the lease is 6% per year. The cumulative present values of Shs 1 per year receivable or payable at the end of each year for 15 and 20 years are 9.712 and 11.470 respectively. Management has decided not to extend the contract after the initial period.

Required:

In accordance with relevant accounting standards, explain the accounting treatment of the above transactions in the company financial statements for the year ended 31 December, 2018. (Support your explanations with suitable computations based on applicable international financial reporting standards).

(18 marks) (Total 50 marks)

SECTION B

Attempt two of the four questions in this section

Question 2

Katosi Enterprises Ltd (KEL) is a listed company with a chain of six business operations across the country, some of which trade among themselves. The board members of KEL are concerned about the rigorous reporting requirements and regulations that the company is required to comply with.

The following information was made available for the preparation of consolidated financial statements for the year ended 31 December 2018:

1. 1On 1 January, 2018 the company carried out a 2 for 4 share consolidation
2. transaction. The total company par value of shares was Shs 100 million of
3. Shs 1,000 per share prior to the consolidation transaction.
4. 2The extracts from the financial statements of the company relating to each of the business operations for the year ended 31 December, 2018 are as

follows:

Statement of financial position

Textiles Assets: Shs Non-currents: 'million'

Mining Shs 'million'

650,000 30,000

145,000 825,000

55,000

67,000

23,600 145,600 970,600

Furniture Shs 'million'

240,000 379,000

770,000 1,389,000

540,000 25,000

598,000 1,163,000 2,552,000

Farming Shs

'million'

700,000 500,000

400,000 1,600,000

70,990

232,100

245,410

548,500 2,148,500

Rest.* Shs

'million'

550,000 20,000

125,000 695,000

65,000

57,000

42,600 164,600 859,600

Bev.** Shs

'million'

340,000 279,000

270,000 889,000

40,000

65,000

88,000 193,000 1,082,000

Property, plant & equipment Intangible assets Investment property

790,000 700,000

400,000 1,890,000

Current assets:

Inventories 670,990 Trade & other

receivables 432,100 Cash & cash

equivalents 445,410

1,548,500 Total assets 3,438,500

Rest.* = Restaurants Bev.** = Beverages

Statement of profit or loss Textiles

Shs Revenue: 'million'

Mining Shs

'million' 102,000 - 102,000

1,020 65,000 25,000

5,400

2,500 (98,920) 3,080

Furniture Shs 'million' 54,000 148,000 202,000

4,020 141,400 17,000 17,000 17,900 (197,320) 4,680

Farming Shs 'million' 6,700 219,000 225,700

2,257 157,990 17,800 23,000 15,000 (216,047) 9,653

Rest.* Shs

'million' 107,000 2,000 109,000

1,090 74,300 7,800 7,890 16,000 (107,080) 1,920

Bev.** Shs

'million' 94,000 8,000 102,000

4,000 70,400 18,000

5,600 17,855 (115,855) (13,855)

External sales Inter-business sales

Costs:

Administrative expenses

Production costs

Other expenses

Finance costs

Taxes 25,000

(351,467) Profit/ (loss) for the year 56,233

Rest.* = Restaurants Bev.** = Beverages

300,700 107,000 407,700

4,077 285,390 27,000 10,000

3 The company's net profit for the year ended 31 December, 2017 was Shs 42 billion.

Required:

From the information provided above:

(a) (b)

(c)

discuss, to the board members of KEL, the financial reporting regulatory framework in Uganda.

(5 marks)

compute the earnings per share (EPS) that would be disclosed in the financial statements for the year ended 31 December 2018 as a result of the share consolidation.

(5 marks)

advise management, with reasons, on which of the operations above would qualify as a reportable segment in accordance with the relevant international financial reporting standards.

Question 3

KKT Ltd manufactures different types of high precision equipment and sources its key materials from oversees. In addition, the company owns other businesses outside its principal business of manufacturing high precision equipment. The Director, Finance has asked you to prepare nd submit a report to him, discussing the accounting treatment of the following transactions in the company's financial statements:

1. 1One of the suppliers of a key material used in the manufacture of the precision equipment went into liquidation on 21 July, 2018. The supplier has been providing 40% of the company's requirements for the last 20 years. KKT Ltd, on average, purchases in excess of Shs 100 billion worth of materials from all its suppliers. Since there is high competition for this material, KKT Ltd is unlikely to get an alternative supplier to fill the gap. In this regard, the Director, Finance is contemplating making a provision for loss Shs 4 billion in the financial statements for the year ended 30 June, 2018.
2. (4 marks)
3. 2KKT Ltd operates a television station, Enyota TV, which it started running 3 years ago. The company applied for and obtained a license from the Government Licensing Authority Shs 30 billion for a period of 30 years. The company is required, by the Authority, to store safely all contents of what it airs out for at least 10 years. The contents can be accessed and reviewed in case there is suspected breach of conditions of the license. The company pays Shs 30 million annually for storage to a private company. In addition, it pays Shs 10 million annually to the licensing authority for spot checks. During a viewers' survey carried out by one of the leading research firms, the TV station was ranked number one. Because of this, management believes that if they were to sell the station, they would earn over Shs 4 billion in excess of its existing net assets. The company has made a provision Shs 4 billion for goodwill.
4. (5 marks)
5. 3The company owns a production facility in the central part of the country. In May 2017, the facility was struck by lightning which affected its efficiency resulting in reduced output. The company had earlier on carried out impairment tests on the facility on 30 June, 2015 and discovered that the recoverable amount was lower than its carrying amount by Shs 21 billion. The auditors, BmC & Co., guided the company to account for the transaction in accordance with the relevant international financial reporting standards. The carrying amount of the asset was Shs 162 billion on 30 June, 2015. Although the company has spent a substantial amount to

rectify the facility, it has not improved its efficiency to the expected standard. The company has received an offer from one of its new rivals to buy the facility for Shs 150 billion. It would require KKT Ltd to dismantle and install the machine at the buyer's premises which is estimated to cost Shs 2 billion. Management estimates that the facility would generate cash flows during the next 5 years as follows:

Inflows Outflows Year Shs 'billion' Shs 'billion'

1 50 5 2 52 7 3 47 9 4 45 10 5 59 12

The risk free rate of interest is 11% per annum.

The company's policy is to depreciate the facility at 10% on a reducing balance basis.

(7 marks)

1. 4On 1 July, 2017 the company issued a 5 year 10% loan stock specifically for the construction of a new factory in the northern part of the country in order to meet demand from the neighbouring countries. The company contracted Africa Contractors Ltd on the same day for Shs 25 billion. However, due to the delay in approving the plan by the authorities, the construction started in October 2017. The company paid Africa Constructors Ltd Shs 10 billion in the first phase of the construction on 1 November, 2017 and Shs 15 billion for the second phase of the construction on 1 April, 2018 as final payment. Work on the construction was suspended from January 2018 for a period of 2 months due to technical disagreements between the company and contractor. Balances on the bank accounts of the company earn interest at 5% per annum. The Director, Finance wants to know the cost of the construction. The loan financing facilities as at 1 July, 2017 were as follows:
2. Shs 'billion'
3. 15 year 10% loan stock 14
4. 210 year 9% loan stock 10
5. 318% overdraft facility 4
6. (5 marks)
7. 5On the 1 June, 2018 the company decided to dispose of a group of assets belonging to one of its production facilities in the eastern part of the country. They believed that the assets would be disposed of within the

next 6 months given that they hired the most reliable agent in the country. Management estimated the fair value of the assets was Shs 17 billion and would incur Shs 900 million to sell, including the agent's fees. The carrying amount of the assets consisted of goodwill Shs 6 billion; property, plant and equipment Shs 11 billion; inventory Shs 2 billion and financial assets Shs 4 billion. Property, plant and equipment were revalued 3 years ago, resulting into a credit balance Shs 3.2 billion on the revaluation reserve account.

(4 marks)

Required:

Write report, to the Director, Finance discussing, with appropriate computations, the treatment of the above transactions in KKT Ltd's financial statements for the year ended 30 June, 2018. KKT Ltd's financial statements were approved for issue in September 2018.

(Total 25 marks)

Question 4

The following information relates to Albert Ltd which is a listed company that has been in operation for over 25 years:

1. 1Mr. Max Magino who is the managing director (MD) also doubles as the chairman of the Board of Directors. The other board members who were handpicked by the MD comprise four executive directors and two non- executive directors.
2. 2The evaluation of performance of the board was last carried out 3 years ago under the chairmanship of the MD. The results of the evaluation have never been shared with the other board members.
3. 3During the financial year ended 30 June, 2018 the Board met only once. The review of the of the company's financial statements for the year ended 30 June, 2018 revealed that this was not disclosed.
4. 4About 5 years ago, Magino appointed a committee that handles remuneration of senior management and members of the Board. The committee comprises the MD as its chairman, the Director, Finance and Administration, the Director, Human Resource Management, the Director, Investments and one non-executive director. The committee meets annually and in the last 3 years, the MD has received a 400% salary increment while the rest have received a mere 20% increment during the same period.
5. 5There is an audit committee in place comprising Mr. Oganda, a history professor who has spent his entire career in academia, as its chairman; Mr. Mase, a retired accountant, as the secretary, while the Director, Finance and Administration, the Director, Investments and the Director, Human

Resource Management, are members. The committee sits only to review draft financial statements before they are submitted for external audit. Mr. Oganda has serious personal issues with the head of internal audit and has prevented the committee from meeting him despite several requests by the head of internal audit. The file on the operations of the committee contains only its minutes on the review of the draft financial statements.

6 The shareholders of the company held their annual general meeting on 5 August, 2018 to consider the financial statements for the year ended 30 June, 2018. The financial statements presented to the members consisted of the statement of financial position, statement of performance and statement of cash flows. Members raised very serious concerns about the effectiveness of the Board and the amount of information, which is basically financial, being provided about the company performance. The members made a resolution to appoint an independent consultant to review the effectiveness of the Board and also advise the company on additional information which may be included in or accompany the financial statements to enable them make informed decisions.

Required:

Based on the information provided above, discuss:

(a) the corporate governance issues and how each issue can be addressed.

(15 marks)

(b) issues that are important to the company which should be disclosed in its environmental report.

(10 marks) (Total 25 marks)

Question 5

Boss Ltd has 100% shareholding in Tefe Pensioners Ltd and KKD Ltd. Boss Ltd has computerised almost all its operations and is contemplating introducing integrated reporting in an attempt to satisfy the ever-increasing demand for information about the company. The following information relates to Tefe Pensioners Ltd (TPL) and KKD Ltd:

1. 1TPL provides both defined benefit plans and defined contribution plans to various institutions in Uganda. TPL has organised a training workshop for its recently recruited staff, on reporting.
2. 2KKD Ltd is a fast growing small/ medium entity (SME) which started its operations 10 years ago and has set up offices in every major town in the country. The company has a modern training facility which it constructed 5

years ago at a cost Shs 2 billion. Due to its recent restructuring which led to reduction in staff numbers, KKD Ltd decided, on 1 January, 2018 to rent out three quarters of the facility to a nearby football club for Shs 10 million per month. The fair value of the facility less costs to sell is Shs 7 billion. The facility is depreciated at 5% on a straight-line basis.

KKD Ltd adopted International Financial Reporting Standard for Small and Medium-sized Entities (IFRSs for SMEs) from its inception. During the last Board meeting, the group Director of Finance complained about time wastage by his team in converting the financial statements of KKD Ltd during the preparation of group consolidated financial statements. The Board immediately directed the management of KKD Ltd to adopted full International Financial Reporting Standards (IFRSs).

Required:

1. (a)Contrast the contents of the reports under defined contribution plans and defined benefit plans.
2. (7 marks)
3. (b)Justify the decision by the Board to direct KKD Ltd to adopt full IFRSs.
4. (4 marks)
5. (c)Discuss the implications Boss Ltd will have to contend with in introducing integrated reporting.
6. (7 marks)
7. (d)Discuss, with relevant calculations, the accounting treatment of the training facility under IFRS for SMEs by KKD Ltd in its financial statements for the year ended 31 December, 2018.