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QUESTION ONE Hisa Company Ltd. was incorporated in 1988 with an issued share capital of 2,500,000 ordinary shares of Sh.10 each and 1,000,000 8% cumulative participating preference shares of Sh.10 each. All the shares were paid for in full. In 1992, the company issued 2,500 10% debentures of Sh.1000 each. The terms of issue stipulate that each debenture is convertible into 75 ordinary shares of Sh.10 each on 31 December 2003 and those not converted will be redeemed at par on 31 December 2008. On 1 March 1998, the company granted its directors options to take up 500,000 ordinary shares at a price of Sh.12 per share. On 1 April 1999, the ordinary shares were split into shares of Sh.2.50 each and on 1 December 1999 a further 3,000,000 ordinary shares were issued at fair value to satisfy the purchase of certain business rights acquired. On 2 December 1999, 200,000 of the above options were taken up when the fair value of the shares was Sh.6 each. The average fair value of the shares during the year was, Sh.5 each. The following information has been extracted from the consolidated income statements for the years ended 31 March 1999 and 31 March 2000. Net operating income Income from investments Net income before taxation and extraordinary items Taxation Net income after taxation Less: Minority interest Profit attributable to members of the group Extraordinary items Profit after tax and extraordinary items Dividends (Note 1) Retained profits for the year Retained profit brought forward Retained profit carried forward Note Dividends paid 31 March: On ordinary shares On preference shares 2000 Sh. '000' 19,800 420 20,220 1999 Sh. '000' 18,410 360 18,770 (7,630) 12,590 (1,270) 11,320 (2,000) 9,320 (4,000) 5,320 18,530 23,850 (6,920) 11,850 (1,440) 10,410 (1,500) 8,910 (3,200) 5,710 12,820 18,530 3,200 800 4,000 2,400 800 3,200 Required: (a) (b) (c) Calculate the basic earnings per share figure to be disclosed in the published accounts of Hisa Company Ltd. for the years ended 31 March 1999 and 31 March 2000. (12 marks) Calculate the diluted earnings per share figure to be disclosed in the published accounts of Hisa Company Ltd. for the year ended 31 March 2000. Assume a tax rate of 32.5% (10 marks) Discuss the usefulness of the earnings per share figure. (3 marks) (Total: 25 marks) QUESTION TWO Mifupa Ltd. offered to acquire 75% of the issued share capital of Nyama ltd. on 1 April 1999. The offer became final on 1 May 1999. The total coat of acquisition was Sh.177,000,000. The net assets of Nyama Ltd. as at 1 April 1999 and 1 May 1999 were Sh.130,590,000 and Sh.137,560,000 respectively. Mifupa Ltd. had acquired 25% of Mshipa Ltd. many years ago. On 1 September 1999 it acquired the remainder of the share capital, the consideration of which was Sh.112,000,000. The net assets of Mshipa Ltd. as at that date was Sh.74,000,000. Mshipa Ltd. on 2 September 1999 acquired 40% of Ngozi Ltd. The consideration paid was Sh.28,980,000. The net assets of Ngozi Ltd. as at 1 January 1999 were Sh.55,500,000. The income statements of the four companies for the year ended 31 December 1999 were as follows: Turnover Cost of sales Gross profit Expenses Operating profit Dividend income Interest income Profit before tax Taxation Profit after taxation Dividends Ordinary Interim Final Preference Retained profit for the year Mifupa Ltd. Sh. '000' 3,237,840 2,238,624 999,216 248,736 750,480 1,440 4,800 756,720 269,600 487,120 Nyama Ltd. Sh. '000' 687,760 489,312 198,448 54,368 144,080 2,000 146,080 61,000 85,080 Mshipa Ltd. Sh. '000' 136,800 92,160 44,640 10,240 34,400 34,400 15,600 18,800 Ngozi Ltd. Sh. '000' 102,600 69,120 33,480 7,680 25,800 25,800 11,700 14,100 (22,000) (2,000) (480) 462,640 (960) (480) 83,640 (480) (240) 18,080 (270) (270) 13,560 Additional information: 1. Interim dividends were paid by all companies on 1 July 1999. 2. Nyama Ltd. had sold to Mifupa Ltd. in the post-acquisition period, machinery at Sh. 1,260,000. The machinery had coat Nyama Ltd. Sh.1,500,000 on 1 January 1997. It is the group's policy to provide a full year's depreciation on machinery at the rate of 10% on cost in the year of purchase but not in the year of sale, and to carry group assets at their original cost to any number of the group. Any gain or loss on the sale of machinery was adjusted against expenses. 3. Profits are to be assumed to have accrued evenly throughout the year. Required: The consolidated income statement of the Mifupa group for the year ended 31 December 1999. A reconciliation schedule is required. (Total: 20 marks) QUESTION THREE (a) IAS 12 (revised) \"Income Taxes\" requires an enterprise to provide for deferred tax in full for all deferred tax liabilities with only limited expectations. The original IAS 12, and the equivalent Kenyan Accounting Standard, allowed an enterprise not to recognize deferred tax assets and liabilities where there was reasonable evidence that timing differences would not reverse for some considerable period ahead; this was known as the partial provision method. The original IAS 12 did not refer explicitly to fair value adjustments made on a business combination and did not require an enterprise to recognize a deferred tax liability in respect of asset revaluations. The revised IAS 12 now requires deferred tax adjustments for these items and classifies them as temporary differences. Required: (i) Explain why the IASC decided to require recognition of the deferred tax liability for all temporary differences (with certain exceptions) rather than allowing the partial provision method. (5 marks) (ii) (b) Discuss the reasons why IAS 12 (revised) requires enterprises to provide for deferred taxation on revaluations of assets and fair value adjustments on business combination. (5 marks) K Limited has the following balance sheet and tax bases at 30 June 2000, before providing for any deferred tax in the year to 30 June 2000. Non-current assets Buildings (Factory) Plant and equipment Investment in M Ltd.: cost Long-term quoted investments Carrying values Sh. Sh. '000' '000' Tax bases Sh. Sh. '000' '000' 100,500 156,000 1,977 22,500 39,000 1,977 198,000 198,00 0 456,477 Current Assets Current liabilities. Trade payables Provision for repairs 45,000 45,000 (40,50 0) (900) (41,40 0) (40,500 ) (Nil) 3,600 460,077 Capital and reserves. Equity capital Revaluation reserve Retained profit Shareholders' funds Non-current liabilities Long-term loan Deferred tax (bal. b/l) Deferred income: Grant from World Bank 30,000 73,500 298,047 401,547 30,000 27,030 30,000 33,000 27,030 57,030 1,500 460,077 1. K Limited acquired 100% of the ordinary share capital of M limited on 30 June 2000. The net assets of M limited as on this day were as follows: Buildings (Factory) Plant and equipment Inventory Trade receivables Current liabilities 2. 3. 4. 5. 6. 7. Fair value Sh. '000' 1,500 120 372 330 (495) 1,827 Carrying value Sh. '000' 900 90 342 330 (495) 1,167 Tax value Sh. '000' 300 45 342 330 (315) 702 M limited does not carry a deferred tax liability in its K Limited's accounts. director decided to revalue K Limited's buildings at Sh.150 million and the plant and equipment to Sh.180 million, investments were not to be revalued. K Limited's buildings had cost Sh.135 million and the plant and machinery Sh.210 million. The tax rate had changed from 35% to 30% in the current year. During the year, the directors agreed to provide Sh.900,000 for future repairs to the buildings. The expense is allowable for tax when it is paid. The grant from the World Bank is included as deferred income in the balance sheet and is not taxable. Goodwill arising on acquisition is not an allowable expense for tax purposes. Since the subsidiary was acquired on 30 June 2000, no amortisation has been charged in the financial statements. K Limited raised a long-term loan of Sh.33,000,000 during the year and recorded it net of transaction costs. The transaction costs of Sh.3,000,000 are allowable for tax in the year ended 30 June 2000. Required: Calculate the deferred tax expense for K Limited which would appear in the group financial statements under IAS 12 (revised) \"Income Taxes\" for the year ended 30 June 2000. (10 marks) (Total: 20 marks)