Aline Limited (Aline) owns 100% ordinary share capital of Byasha Limited (Byasha) and Tinka Limited (Tinka). The group companies operate as flour millers in the northern (Tinka), western (Aline) and eastern (Byasha) regions of Uganda. The eastern region is currently depressed following the continued weather vagaries which have negatively affected the grain yield. Byasha has made losses for the last three years and its liquidity is poor. You are the newly recruited financial controller and the following extracts of the statements of financial position for the group companies as at 31 March, 2018 have been presented to you:

Assets:

Non-current assets:

Property, plant & equipment (cost/ valuation) Investment in Tinka

Investment in Byasha

Current assets: Inventories Trade receivables Cash

Total assets

Equity & liabilities:

Issued share capital Shs 100,000 each Retained earnings

Total equity

Non-current liabilities:

Long-term loans

Current liabilities:

Trade payables

Total liabilities

Total equity & liabilities

Aline Shs

'million'

6,000 1,300 950 8,250

320 950 280

1,550 9,800

1,400 7,500 8,900

50

850

900 9,800

Tinka Shs

'million'

2,040 - - 2,040

160

350 1,260 1,770 3,810

840 2,640 3,480

-

330

330 3,810

Byasha Shs

'million'

540 - - 540

40 200 - 240 780

420 60 480

144

156 300 780

According to the directors, Byasha requires some cash investment. Therefore the directors have secured all the necessary approvals to put forward the following reconstruction plan as at 31 March, 2018:

Tinka is to purchase the whole of Aline's investment in Byasha at a consideration of Shs 960 million payable in cash to Aline; this amount will be loaned on long-term unsecured basis to Byasha.

Tinka will buy land with a carrying amount of Shs 100 million from Byasha for a consideration of Shs 120 million. The land has a mortgage outstanding on it of Shs 40 million. The purchase consideration of Shs 120 million will comprise 500 non-voting shares Shs 100,000 each, issued by Tinka to Byasha and the Shs 40 million mortgage which Tinka will assume. A dividend of Shs 160,000 per share will be paid by Tinka to Aline thereby reducing the accumulated reserves of Tinka.

As a

redundant. According to the detailed plan, the costs of redundancy will be spread over two years with Shs 157.5 million being payable by 31 March, 2019 and Shs 189 million by 31 March, 2020.

You have also established that the market yield of high quality corporate bonds is 5%. The directors have ascertained that the overall restructuring will cost Shs 336 million. However, they are unsure about the impact and implications the above reconstruction plan is likely to have on the individual accounts of the group companies.

Additional information:

1. (i)Aline purchased 100% of the ordinary share capital in Tinka on 1 April, 2013 when the latter's retained earnings balance was Shs 600 million. The fair value of the identifiable net assets of Tinka on 1 April, 2013 was Shs 800 million. Byasha was incorporated by Aline on 1 April, 2014 and has always been a 100% owned subsidiary.
2. (ii)The fair value of the net assets of Byasha as at 31 March, 2018 was 790 million and the fair value of the net assets of Tinka on the same date was Shs 3.85 billion. The fair value of the net current assets of both Byasha and Tinka were approximately the same as their book values. Following the impairment review carried out on 31 March, 2018 it was decided that the goodwill on acquisition of Byasha be fully impaired.
3. (iii)Aline has a 40% share of a joint operation of a fueling station. Assets, liabilities, revenues and costs are apportioned on the basis of shareholding.
4. The following information relates to the joint arrangement activities:

result of the restructuring, some of Byasha's employees will be made

1. The fueling station cost Shs 600 million to construct and was completed on 1 April, 2017 and is to be dismantled at the end of its useful life of 10 years. The present value of this dismantling cost to the joint arrangement at 1 April, 2017 using a discount rate of 5% was Shs 80 million.
2. During the year, fuel with a direct cost of Shs 1.152 billion was sold for Shs 1.44 billion. Additionally, the joint arrangement incurred operating costs of Shs 20 million during the year.
3. Aline has only contributed and accounted for its share of construction cost, paying Shs 240 million. The revenues and costs are receivable and payable by the other joint operator who settles amounts outstanding with Aline after the year end.

(iv) Aline

currently valued at cost. There is market for the grain after stage 1 of processing and before conversion into flour. The cost structure of the grain/flour is as follows:

processes grain from the retail market. The grain inventory is

Stage 1: production process Stage 2 : conversion costs Finished product (flour)

Cost per unit Shs

5,000 2,000 7,000

Selling price per unit Shs

7,000 - 8,500

Selling costs are Shs 500 per unit and Aline had 15,000 units at production stage 1 and 30,000 units of the finished products (flour) at 31 March, 2018.

Shortly before the year end, a competitor released on the market a new brand which caused the brand of Aline to become less attractive to customers. The result was a reduction in the selling price to Shs 8,000 for the finished product and Shs 6,700 for stage 1 products. The sales at the reduced prices have been recorded in sales and accounts receivable but no adjustment has been made to inventory.

(v) Aline acquired a plot of land on 1 April, 2017 in an area where land is expected to rise significantly in value if plans for redevelopment go ahead in the area. The land is currently held at cost of Shs 990 million in property, plant and equipment until the directors decide on what should be done with it. The market value of the land at 31 March, 2018 was Shs 1.32 billion but as at 5 April, 2018 this had reduced to Shs 1.155 billion as there was some uncertainty surrounding the viability of the redevelopment plan. Aline's policy is to maximize the return on capital employed.

(vi) During the preceding financial reporting period, Aline was involved in litigation. The litigation against Aline was in progress in court at the time of issuance of the financial statements for the year ended 31 March, 2017 and a disclosure was included to this effect. However, no liability was recognised since Aline's legal advisors firmly believed in a favourable outcome. As per their expectation, Aline won the case during the current financial reporting period. However, the decision of the initial court was subsequently overturned on appeal and Aline had to pay Shs 50 million to the claimants on 31 March, 2018. No adjustment was made to the financial statements to reflect the above.

Required:

1. (a)Prepare the relevant entries to record the effect of the reconstruction plan on the individual statements of financial position for Aline, Tinka and Byasha as at 31 March, 2018.
2. (20 marks)
3. (b)Prepare the consolidated statement of financial position of Aline as at 31 March, 2018 after the implementation of the reconstruction plan in accordance with the relevant standards. (Include all the workings as far as the information allows.)
4. (20 marks)
5. (c)Discuss the key considerations and implications of the proposed reconstruction plan.
6. (10 marks) (Total 50 marks)

SECTION B

Attempt two of the four questions in this section

Question 2

1. (a)Kabana Ltd (KL) is a Ugandan based company that processes, packages and sells a range of grain products. The company has a year end of 31 March. The company adopted the International Financial Reporting Standards based on the International Accounting Standards Board's conceptual framework for financial reporting.
2. For a long time, KL has attempted to register on the securities exchange. According to the United Securities Exchange (USE), KL falls in the category of small and medium-size entities (SME) and has not matured to raise capital through the stock market. However, a player in the East African region mobilised funds to grow SMEs, KL inclusive.
3. The CEO of KL acknowledged that there is a challenge of securing approval for listing since KL was yet to address some audit risk queries that were raised by the external auditors. The CEO explained that the USE would certainly review the extent of implementation of auditors' recommendations. You have been contracted as the reporting accountant for KL's listing. The board of KL have asked you to explain the purpose and contents of the accountant's report for listing.
4. (8 marks)
5. (b)Following the previous plans to list on the USE , KL granted 1,000 shares to its employees on 1 April, 2017 with a total grant date fair value of Shs 15 million (Shs 15,000 per option). This amount would be expensed over the three year vesting period on a straight-line basis. The intrinsic value of each option as at 31 March, 2018 was Shs 12,000. Assume that KL's corporation tax rate is 30% and that KL would receive a tax deduction equal to the intrinsic value of the share options at the date of exercise. The auditors had recommended to KL to recognise the deferred tax item for the year ended 31 March, 2018 and to make the appropriate adjustments to equity and the statement of profit or loss. The CEO has also asked you to address the above issues and explain the condition for adjusting equity.
6. (8 marks)

(c)The external auditors pointed out that the financial statements of KL did not include a note on the underlying assumption as provided for in the conceptual framework for financial reporting, which requires theoretical coherence of financial reporting standards. You are to discuss the scope

and authority of the conceptual framework to a company like KL and advise KL's management on the relevance of the going concern assumption for public listing.

(9 marks)

Required:

Provide the explanation, accounting treatment and advice in each of the above cases (a) - (c) with reference to relevant financial reporting standards.

(Total 25 marks)

Question 3

1. (a)Brados Ltd (Brados), which was incorporated in Uganda with a 31 March reporting date, bought equipment for Shs 200 million and depreciates it on straight line basis over its expected useful life of 5 years. For tax purposes, the equipment is depreciated at 20% per annum on declining balance basis. Tax losses are carried forward against taxable profits of subsequent years. In year 1 Brados' accounting profit was Shs 100 million and is expected to grow at 5% per annum. The tax rate throughout the period is expected to be 30%. Brados will recover the carrying amount of the equipment through using it to manufacture goods for sale. Brados recognises the deferred tax asset and liability and the deferred tax income and expense. You are the accountant of Brados and the finance director has asked you to use the information given to compute the current tax, deferred tax and income tax charge for each of the years 1 to 5 to help him make justifications during a meeting to evaluate the expenditure budgets.
2. (9 marks)
3. (b)Brados owned a chain of outlets from which it raised finance. Brados sold the outlets for Shs 350 million to a distribution company on 1 April, 2017 when the carrying amount of the outlets was Shs 315 million. The same outlets were leased back from the buyer for a period of 20 years being the majority of the economic useful life of the outlets. The lease rentals are Shs 39.69 million payable annually in arrears. The interest rate implicit in the lease is 7%. The present value of the minimum lease payments is the same as the sale proceeds. The finance director has asked you to prepare workings to demonstrate the presentation and disclosure of the above transactions in the financial statements for the year ended 31 March, 2018.
4. (8 marks)
5. (c)The Board of Brados is also enquiring into the practice of measuring assets and liabilities at estimates of their current value (fair value accounting) as

opposed to historical cost. This arose out of the recognition that the stable measurement unit assumption of the historical cost model is misleading, especially for the real estate. The finance director has also asked you to discuss the view that fair value is a more relevant measure to use in corporate reporting than historical cost.

(8 marks)

Required:

Advise Brados on the accounting treatment in each of the above cases (a) - (c) with reference to relevant financial reporting standards.

(Total 25 marks)

Question 4

Corporate Interventions Limited (CIL), was incorporated in Uganda and prepares its financial statements in accordance with international financial reporting standards (IFRS). The directors of CIL have been reviewing the following article which appeared on the Accountants website:

'Over the last four decades, financial statements, which ought to provide useful information about the reporting entity to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity, hardly capture valuable information such as intellectual capital, environmental protection or stewardship for long-term success yet these are increasingly becoming important'.

Hence, there has been an increasing pressure from consumers, employers, governments and local communities the world over for entities to provide information beyond just the financial statements since non-financial information can also be important to difference users. Accountants have an important role to play in helping companies to incorporate sustainability into their corporate strategies, and to address all stakeholders in one report. However, the directors are unsure as to the interaction between sustainability reporting and integrated reporting and have sought your advice.

Required:

(a) (i) Write report to the board of CIL on the relationship between sustainability reporting and integrated reporting.

(10 marks)

(ii) Discuss the role of accountants in the efforts to change the company's view on stewardship beyond financial performance to include natural and intellectual capital of the business entity.

(5 marks)

(b) The directors of CIL consequently reviewed the speech of the IASB Chairman during the release if IFRS 16: Leases, where he indicated that under the current accounting requirements, over 85% of the leases are labelled as operating leases and are not disclosed on the balance sheet of the lessee. He further noted that these leases cause real liabilities of up to 66 times greater than the reported debt. He noted that some companies structure their lease obligations so that they remain off-balance sheet, probably to look better in the eyes of the unwitting investor. The directors would like you to clarify on the substance over form and off balance sheet problems.

Required:

Question 5

Punta Limited (Punta) operates in the construction industry and prepares financial statements to 31 March each year complying with international financial reporting standards. The financial statements for the year ended 31 March, 2018 are due for audit and the financial controller has tasked you to perform a year-end review of the transactions and balances before producing the draft financial statements for statutory audit. The following issues have come to your attention and need to be addressed:

(a) Punta regularly purchases steel bars from a foreign supplier and designates a future purchase of steel bars as a hedged item in a cash flow hedge. Some steel bars were purchased on 1 April, 2017 and at that date, a cumulative gain on the hedging instrument of Shs 15 million was credited to other comprehensive income. On 31 March, 2018 the carrying amount of the steel bars was Shs 50 million and their net realisable value was Shs 44 million. The steel bars were sold on 20 April, 2018 for Shs 48 million. You also noted that there had been no physical stock counting at year-end or any time during the year. You are aware that the valuation of steel bars provides opportunities for subjectivity and creative accounting.

Required:

Demonstrate how the above transactions would be reported in the financial statements of Punta according to the relevant standards and discuss the various methods of creative accounting that could be used in the valuation of steel bars.

(8 marks)

Write memo to the board of directors of CIL explaining the concept of substance over form and off balance sheet problems.

(10 marks) (Total 25 marks)

1. (b)Punta agreed to finance a management buyout of Tamu Limited (Tamu), situated in the eastern region. Punta has equity holding of 40% in Tamu and one of Punta's directors is also a director of Tamu. On 1 April, 2017 Punta sold Bata Limited (Bata), a wholly owned subsidiary situated in the central region to Kitara Limited. During the year ended 31 March, 2018 Punta supplied Bata with steel bars at a selling price of Shs 60 million. All the above transactions were contracted at market rates.
2. Required:
3. Discuss the presentation of the transactions in the financial statements of Punta in accordance with the relevant standards.
4. (8 marks)
5. (c)The Board of Punta is contemplating using leasing arrangements to enable the company use property, plant and equipment without having to incur a large initial cash outflow. They are aware that the International Accounting Standards Board issued IFRS 16: Leases that will replace IAS 17: Leases. IFRS 16 becomes effective for reporting periods beginning on or after 1 January, 2019 for financial statements prepared under the international financial reporting standards.

Required:

Comment on the need to replace IAS 17 with IFRS 16.