Question 1

IFRS 13: Fair Value Measurement framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements).

The asset's or liability's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

The following is a description of financial instruments and their levels in the fair value hierarchy of Kaboga Ltd:

1. Debt securities issued by banks with a fair value of Shs 6.5 billion for which there is currently no active market. An observable, recent transaction took place in this particular instrument. This was sufficiently close to the reporting date that no adjustments were deemed necessary to determine the fair value.

2. Other debt securities with a fair value of Shs 5.5 billion for which there is currently no active market. An observable recent transaction took place in this particular instrument. Because of events between the date of the transaction and the reporting date, adjustments are necessary to determine the fair value. The adjustments are considered not to be significant.

3. Loans and advances with a fair value of Shs 4.321985 billion for which there is currently no active market. An observable recent transaction took place in this particular instrument. Because of events between the date of the transaction and the reporting date, adjustments are necessary to determine the fair value. The adjustments are considered to be significant.

4. Equities with a fair value of Shs 7.890567 billion for which there is currently no active market. An observable transaction took place on the reporting date in a similar instrument. Although the instrument is similar, it is not the same. Therefore, adjustments are necessary to determine the fair value. The adjustments are considered not to be significant.

5. Government debt securities whose fair value is Shs 9.868659 billion for which there is currently no active market. An observable transaction took place on the reporting date in a similar instrument. Although the instrument is similar, it is not the same. Therefore, adjustments are necessary to determine the fair value. The adjustments are considered to be significant.

6. Other financial instruments whose fair value is Shs 2.745678 billion traded in an active market for which one or more market participants provide a binding price quotation on the reporting date.

7. Quoted investments whose fair value is Shs 5.7896 billion for which there is currently no active market. The entity uses a valuation model that is accepted in the market/ industry. A significant input to the model is a credit spread based on historical default statistics and the credit rating assigned by an agency to the instrument.

8. A debt security with a fair value of Shs 9.6785 billion for which there is currently no active market. The entity uses a valuation model which is accepted in the market/ industry based on a price/earnings ratio for similar entities. No statistical technique is used to corroborate.

9. Structured loan notes with a fair value of Shs 11.906789 billion for which no active market exists. The company recently entered into an off-setting transaction with a third party.

10. There are government debt securities for which a model is applied to determine fair value of Shs 3.960644 billion. For one input variable, the company interpolates between two observable variables to determine the variable to include in the model for this particular instrument.

Required:

(a) Prepare schedule classifying the above transactions under each level of input as per IFRS 13, giving considerations upon which classification has been made.

Hint: present your answer in the following format.

(5 marks)

(b) Prepare Kaboga Ltd's illustrative financial statements showing the hierarchical classification of financial assets and liabilities measured at fair value.

(10 marks)

(c) Kaboga Ltd owns land and uses the revaluation model to measure the subsequent fair value of this land. The market value of the land is assumed to represent the fair value given the existing use. It was determined that the frequency of valuation of the land based on the volatility of its fair value should be three year interval. You are also informed that this is the only land owned by Kaboga Ltd. You are given the following additional information:

Financial Reporting - Paper 8

Instrument characteristic

Considerations

Conclusion (level)

Cost of the land 1 January, 2011 Revaluation amount 1 January, 2014 Revaluation amount 1 January, 2017

Required:

Shs '000' 112,500 135,000 100,000

Show the adjustments in the land account, revaluation surplus account and the profit or loss account for Kaboga Ltd from 1 January, 2011 through 1 January, 2017.

Question 2

(a) Genge Ltd is an asset-based lucrative business located in Kamanve industrial park. The company deals in the manufacture of a range of items that are consumed locally and in the export markets.

The tax authorities require a review of the computations of the current tax and the deferred tax for the last three years. You have been contacted by the management of Genge Ltd to assist with the tax computations. During the initial discussion, you were requested to provide an explanation of particular terms that appeared in the tax authorities' letter to Genge Ltd.

Required:

Discuss the terms 'current tax' and 'deferred tax' in accordance with IAS12: Income Taxes.

(4 marks)

(b) The treasurer of Genge Ltd has further provided you with the following information:

On 1 April, 2016 the management of Genge Ltd decided to revalue its land for the first time. A qualified property valuer reported that the market value of the land on that date was Shs 800 million. The land was purchased six years ago for Shs 650 million.

The required provision for income tax for the year ended 31 March, 2017 is Shs 194 milion. The difference between the carrying amounts of the net assets and their (lower) tax base as at 31 March, 2017 is Shs 270 million. The opening balance on the deferred tax account was Shs 26 million. Genge Ltd's rate of income tax is 30%.

Required:

Prepare extracts of the financial statements to show the effect of the above transactions.

(12 marks)

(c) The legal advisor of Genge Ltd has informed you that a sister company is undergoing a winding up process and has asked you to explain the consequences of winding up to the treasurer of Genge Ltd.

Required:

Advise the treasurer on any four consequences of winding up.