GRANDE FINALE PROBLEM-SOLVING SESSION

FINANCIAL REPORTING (B2)

FOR NOV 2024 EXAMS

&

SET 2
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 FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2024 (SET 2)

QUESTION 3
Answer
Kihimbi

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 FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2024 (SET 2)

QUESTION 4
ANSWER

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 FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2024 (SET 2)

QUESTION 5
ANSWER

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 FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2024 (SET 2)

QUESTION 6
ANSWER
Balila Mokiri
Return On Capital Employed (ROCE) 15% 5%
Return on asset (ROA) 9.4% 8%
Gross profit as a percentage of sales (Margin) 23.93% 28.2%
Net profit as a percentage of sales 12% 6%
Current ratio 1.17:1 1.5:1
Quick ratio (acid-test ratio) 0.8:1 0.7:1
Accounts receivable collection period 22days 28 days
Accounts payable payment period 39days 35 days
Inventory turnover (times) 9.5times 5 times
a) Both Balila’s ROCE and ROA are now higher than the industry average. The higher the return the more efficiently
the capital is being employed within the business and assets are efficiently utilized in generation of business profit.
This indicate that Balila’s Business has performed better than Mokiri Business, that is for each shs 100 invested
in Balila return is shs10, while for each shs 100 invested in Mokiri return is sh5

b) The main causes for better performance seems to be the following

Balila’s Gross profit ratio however, is considerably lower than Mokiri’s gross profit ratio, this suggests that, may
be Balila has reduced its selling price, which has attracted many buyers to purchase the product (i.e sales
maximization strategy).

Balila’s net profit ratio is higher than Mokiri’s net profit, this indicates that operating expenses in Balila’s business
are being controlled well than in Mokiri’s Business.

The current ratio and quick ratio in Balila’s business is higher than in Mokiri business. The quick ratio for both
businesses are below 1 (satisfactory), this suggests that both business have short term liquidity problems and
should have difficulty in paying its debts as they become due.

Balila’s Receivable as a proportion of sales is lower than in Mokiri’s business. This may indicate that the Balila’s
credit control policy is being applied more effectively than in Mokiri’s business. Balila collects debts faster so that
cash become available sooner.

Balila’s period of credit taken from suppliers is much higher than Mokiri business. i.e. Balila is given longer time
to pay his debts and has more time to make use of his creditors cash.

Balila’s Inventory turnover is higher than in the Mokiri’s Business, this may indicate increase in demand due to
improved efficiency of business activity, and decrease in selling price. Balila sells his goods faster and should
therefore make his profit faster than Mokiri.

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 FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2024 (SET 2)

QUESTION 7
ANSWER
Statement of comprehensive income for the year ended 31st March 2024
$
Sales 240,000
Cost of sales (180,000)
Gross profit 60,000
Operating expenses (38,400)
Profit 21,600

Statement of financial position as at 31st March 2024

ASSETS $
Non-current Assets 108,000

Current assets
inventory 15,000
Trade receivables 24,000
Bank 9,000
Total current assets 48,000
Total Assets 156,000

Equity and liabilities

Equity
Opening capital 122,400
Add: Net Profit 21,600
Total Equity 144,000
Current liabilities: Trade payable 12,000
Total equity plus liabilities 156,000

Workings
Opening inventory $21,000
Closing inventory (21,000-6,000) $15,000

Inventory turnover = cost of sales

Average inventory
10 = cost of sales
(21,000+15,000)/2
10 = cost of sales
18,000
Cost of sales = $180,000

Margin = 25%
Mark-up = 25 =1
100-25 3

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 FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2024 (SET 2)

Mark-up = Gross Profit

Cost of sales
1 = gross profit
3 180,000

Gross profit = $60,000

Gross profit = sales – cost of sales

60,000 = sales – 180,000
Sales = $240,000

Profit as percentage of sales = profit

Sales
9 = profit
100 240,000
Profit = $21,600

Net profit = gross profit – expenses

21,600 = 60,000 – expenses
Expenses = $38,400

non-current assets to Sales = non-current assets

sales
0.45 = non-current assets
240,000

Non-current assets = $108,000

ROCE = PROFIT
CAPITAL EMPLOYED

0.15 = 21,600
CAPITAL EMPLOYED

CAPITAL EMPLOYED = $144,000

CAPITAL EMPLOYED = OWNERS EQUITY + NON-CURRENT LIABILITIES

Total capital was brought by the owner. i.e. no non-current liabilities
CAPITAL EMPLOYED = OWNERS EQUITY
OWNERS EQUITY = CAPITAL EMPLOYED
OWNERS EQUITY = 144,000
OWNERS EQUITY = OPENING CAPITAL + PROFIT – DRAWING
Owner did not make any drawing for his private use. i.e. no drawing
OWNERS EQUITY = OPENING CAPITAL + PROFIT
144,000 = OPENING CAPITAL + 21,600
Opening capital = 122,400

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 FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2024 (SET 2)

Receivables collection period = trade receivables x 365days

Credit sales
36.5 = trade receivables x 365days
240,000

Trade receivables = $24,000

Current ratio = current asset

Current liabilities
400 = CA
100 CL

4CL = CA (Equation 1)

ACID-TEST-RATIO = CA – INVENTORY
CL

275 = CA – 15,000
100 CL

2.75CL = CA – 15,000
2.75CL + 15,000 = CA (Equation 2)

2.75CL + 15,000 = 4CL

15,000 = 4CL – 2.75CL
1.25CL = 15,000
CL = $12,000 (TRADE PAYABLES)

CA = 4CL
CA = 4 x 12,000
CA = $48,000

CA = INVENTORY + TRADE RECEIVABLES + BANK

48,000 = 15,000 + 24,000 + BANK
BANK = $9,000

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 FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2024 (SET 2)

QUESTION 8
The following is an extract of Avraji’s ltd financial statements (final accounts) for the year ended 30 April 2019.
Income statement for the year ended 30 April 2010
TAS’Million TAS’Million
Sales 4,000
Less: cost of sales
Inventory at 1st May 2009 120
Add: Purchases 2,748
Cost of goods available for sale 2,868
Less: Closing inventory 368 2,500
Gross profit 1,500
Operating expenses (500)
Profit before interest and tax 1,000
Interest (195)
Profit before tax 805
Income tax expenses (300)
Profit for the year 505

TAS TAS
Assets
Non-current(fixed) assets 5,829
Current assets
Inventory (stock) 368
Trade receivables(debtors) 192
Cash and bank 88 648
Total assets 6,477

Equity and liabilities

Equity:
Ordinary Share Capital 3,000
Share premium 500
Retained earnings 756 4,256

Non-current liabilities
Long-term loan 1,950

Current liabilities
Trade payables (creditors) 271
Total equity plus liabilities 6,477

REQUIRED
a. Compute for the year ended 31st December 2007
1. Return on capital employed (ROCE)
2. Return On Assets
3. Gross profit as a percentage of sales
4. Profit as a percentage of sales
5. Return on Equity
6. Current ratio
7. Quick ratio
8. Inventory turnover
9. Trade receivables collection period (days)
10. Trade payables payment period (days)
11. Assets turnover

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 FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2024 (SET 2)

12. Debt to equity ratio

13. Gearing ratio
14. Debt ratio
15. Interest coverage ratio

b. The following ratios are those calculated for AVRAJ, based on its final accounts for the previous year, and also the latest
industry average ratios:
Avraj Business Industry average
31December 2006 31December 2007
PROFITABILITY RATIOS
Return On Capital Employed (ROCE) 14.30% 14.50%
Return on asset (ROA) 13.34% 14.21%
Gross profit as a percentage of sales (Margin) 40.00% 38.25%
Return on sales 20.23% 15.73%
Return on equity(ROE) 9.21% 9.53%
LIQUIDITY RATIOS
Current ratio 1.92:1 1.90:1
Quick ratio (acid-test ratio) 0.95:1 0.97:1
ACTIVITY/EFFICIENCY RATIOS
Inventory turnover (times) 3.98times 4.23times
Accounts receivable collection period 24days 26 days
Accounts payable payment period 43days 49 days
Asset turnover 0.31times 0.42times
CAPITAL STRUCTURE AND GEARING RATIO
Debt to equity 40.12% 50.12%
Gearing ratio 29.23% 45.34%
Debt ratio 31.25 46.89%
Interest coverage ratio 3.23times 3.67times
Required

Write a report to the director analyzing the performance of Avraj business, comparing the results against the previous year and
against the industry average.

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 FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2024 (SET 2)

SOLUTION

Computation of Avraj’s ratios for the year ended 31st December 2007
Avraj Avraj Industry
Business Business average
31December 31December 31December
2006 2007 2007
PROFITABILITY RATIOS
ROCE =PBIT/Capital employed 14.30% 16,11% 14.50%
=1000/6,206 x 100

ROA = PBIT/Total assets 13.34% 15.44% 14.21%

= 1,000/6,477 x 100

Gross profit as a percentage of sales = gross profit/sales 40.00% 37.75% 38.25%

=1,500/4,000

Return on sales = PBIT/Sales 20.23% 25% 15.73%

= 1,000/4000 x 100

Return on equity (ROE) = PAIT/Equity 9.21% 11.87% 9.53%

= 505/4,256 x 100

LIQUIDITY RATIOS
Current ratio = CA/CL 1.92:1 2.39:1 1.90:1
= (88+192+368)/271
= 648/271

Quick ratio (acid-test ratio) = (CA-Inventory)/CL 0.95:1 1.03:1 0.97:1

= (648-368)/271

ACTIVITY/EFFICIENCY RATIOS
Inventory turnover (times) = cost of sales/average inventory 3.98times 5.84times 4.23times
= 2,500/428

Accounts receivable collection period = receivables/credit sales x365 24days 19days 26 days
= 192/3,600 x 365

Accounts payable payment period = payables/credit purchases x 365 43days 36days 49 days
= 271/2,748 x 365

Asset turnover = sales/total assets 0.31times 0.62times 0.42times

= 4,000/6,477

CAPITAL STRUCTURE AND GEARING RATIO

Debt to equity = non-current liabilities/ equity x 100 40.12% 45.82% 50.12%
= 1,950/4,256 x 100

Gearing ratio = non-current liabilities/capital employed 29.23% 31.42% 45.34%

= 1,950/6,206 x 100
Debt ratio = total liabilities / total assets 31.25 34.29% 46.89%
=( 271+1,950)/6,477 x 100
Interest coverage ratio = PBIT/ Interest 3.23times 5.13times 3.67times
= 1,000/195
Note
Capital employed = equity + non-current liabilities
= 4,256 + 1,950
= 6,206/=

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 FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2024 (SET 2)

REPORT
To: Board of directors
From: Accountant
Subject: Analysis of performance of AVRAJ Business
This report should be read in conjunction with appendix attached which shows the relevant ratios (from part (a)).
• Profitability ratio
Both ROCE and ROA improved considerably between 2006 and 2007 and are now higher than the industry average. The higher the
return the more efficiently the capital is being employed within the business and assets are efficiently utilized in generation
of business profit. This indicate that Avraj Business has performed better than previous year and industry average that is
for each shs 100 invested return is shs16.11
The following may be the main causes for better performance of
• Gross profit ratio however, is considerably lower than in the previous year and is now lower than the industry average this
suggests that may be there has been decrease in selling price in order to maximize sales. There is supporting evidence for this in
that the average Inventory turnover (5.84) has increased and is above the industry average, increases of inventory turnover
may indicate improved efficiency
• But the net profit ratio has improved noticeably between the years and is now higher than the industry average, this indicates
that operating expenses are being controlled well than the industry average.
• ROE has improved considerably between 2006 and 2007 and are now higher than the industry average. This suggests that there
is increase in shareholders return, the higher the return indicates that the management is working to maximize shareholders
wealth.

• Liquidity ratio
The current ratio has improved slightly over the year and is marginally higher than the industry average. The quick ratio has increased
but is higher than the industry average. This suggests that Avraj has no short term liquidity problems and should have no difficulty in
paying its debts as they become due.

• Efficiency ratio
Receivable as a proportion of sales has decreased and is are considerably lower than industry average. This may indicate that the
credit control policy is being applied more effectively than industry, The quicker the debtors pay their accounts the better
is. But this may results to customers going elsewhere, because the industry offer long credit period for them, Consequently,
this indicate there may be pressure in the future from customers to increase the period of credit given.
The period of credit taken from suppliers has fallen from 43 days purchases to 36 days and is much lower than the industry.
This indicates that the business is paying creditors more quickly, this increase trust with suppliers, also a business get advantage of
cash discount for early payments.

Inventory turnover has increased and is higher than the industry average, this may indicate increase in demand due to improved
efficiency of business activity, and decrease in selling price.

The other component of ROCE is asset utilization as indicated by Assets turnover, the asset turnover has increased between the periods
and the 2007 figure is higher than the industry average. The increase might indicate efficiency use of assets or it might indicate that
the assets acquired in 2007 have fully contributed to business.

• Capital structure and Gearing ratios

The debt to equity ratio has increased slightly over the year and is marginally lower than the industry average. This suggests that
although the business has increased its long-term liabilities but still it has enough ability to cover that with its equity
The level of gearing has increased only slightly over the year and is below the industry average. Since it is below 50% then the business
is not at a risk of being liquidated by the loan providers. This indicates that the profitability is likely to be increased by a modest
increase in the level of gearing (this means shareholders are benefiting from the borrowing).
The debt ratio has improved slightly over the year and is lower than the industry average. This suggests that more than 50% of the
business assets are owned by the shareholders (owners).
The interest coverage ratio has improved slightly over the year and is marginally higher than the industry average. This suggests that
the business is in good position to meet its interest using the profit earned, this increase trust with loan providers.

Signed: Accountant

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 FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2024 (SET 2)

QUESTION 9
PART A
a) Define the term “borrowing costs” and explain the accounting treatment of such costs which is
required by international Accounting Standard IAS23.
b) Define the term Qualifying Asset
c) According to the IAS 23 – Borrowing Costs, explain the following
i) Borrowing costs eligible for capitalization
ii) Commencement of capitalization
iii) Suspension of capitalization
iv) Cessation of capitalization
v) Funds borrowed specifically for a qualifying asset:
vi) Funds borrowed generally

Solution
a) Define the term “borrowing costs” and explain the accounting treatment of such costs which is
required by international Accounting Standard IAS23.
Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing
of funds. “Borrowing costs comprise:
• Interest on bank overdrafts and on short-term and long-term borrowing
• Discount and premium related to borrowings
• Ancillary costs incurred in connection with the arrangement of the borrowings
• Finance charges in respect of finance leases

IAS 23 requires that borrowing costs that are directly attributable to the acquisition, construction
or production of a qualifying asset should be capitalized as part of the cost of that asset. Other
borrowing costs should be recognized as an expense in the period in which they are incurred.
b) Define the term Qualifying Asset
• Qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its
intended use or sale. Depending on the circumstances, any of the following may be qualifying
assets:
- Inventories that requires a substantial period of time to bring them to a saleable
condition
- Manufacturing plants
- Power generating facilities
- Investment properties
• Note: inventories produced over a short period of time are not qualifying assets. Nor assets which
are ready for their intended use or sale as soon as they are acquired.

c) According to the IAS 23 – Borrowing Costs, explain the following

(i) Borrowing costs eligible for capitalization
• Those borrowing costs that are directly attributable to the acquisition, construction or production
of a qualifying asset are those borrowing costs which would be avoided if the expenditure on the
asset had not occurred
• Identifying these costs is straight forward if funds are borrowed specifically for this purpose. In
these circumstances, the borrowing costs eligible for capitalization in an accounting period are
the actual borrowing costs incurred on the borrowed funds during the period, less any

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 FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2024 (SET 2)

investment income arising if these funds are temporarily invested before being spent on the
qualifying asset.
• If a qualifying asset is funded out of a pool of general borrowings, the borrowing costs that may
be capitalized are calculated by applying a capitalization rate to the expenditure on the asset. The
capitalization rate is the weighted average of the borrowing costs that are applicable to the
general borrowings outstanding during the period

(ii) Commencement of capitalization

Three events or transactions must be taking place for capitalization of borrowing costs to
be started
1. Expenditure on asset is being incurred
2. Borrowing costs are being incurred
3. Activities are in progress that are necessary to prepare the asset for its intended use or
sale

(iii) Suspension of capitalization

• If active development is interrupted for any extended periods, capitalization of borrowing costs
should be suspended for those periods.
• Suspension of capitalization of borrowing costs is not necessary for temporary delays or for
periods when substantial technical or administrative work is taking place.

(iv) Cessation of capitalization

• Once substantially all activities necessary to prepare the qualifying asset for its intended use or
sale are complete, then capitalization of borrowing costs should cease. This will normally be when
physical construction of the asset is completed, although minor modifications may still be
outstanding. The asset may be completed in parts or stages, where each part can be used while
construction is still taking place on the other parts. Capitalization of borrowing costs should cease
for each part as it is completed. The example given by the standard is a business park consisting
of several buildings.
(v) Funds borrowed specifically for a qualifying asset:
Once the relevant borrowings are identified, which relate to a specific asset, then the amount of
borrowing costs available for capitalisation will be the actual borrowing costs incurred on those
borrowings during the period, less any investment income on the temporary investment of those
borrowings.

(vi) Funds borrowed generally

In a situation where borrowings are obtained generally, but are applied in part to obtaining a
qualifying asset, then the amount of borrowing costs eligible for capitalisation is found by applying
the 'capitalisation rate' to the expenditure on the asset.

The capitalisation rate is the weighted average of the borrowing costs applicable to the entity's
borrowings that are outstanding during the period, excluding borrowings made specifically to obtain
a qualifying asset.

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 FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2024 (SET 2)

QUESTION 10
Adora is publicly listed supermarket chain. During the current year it started the building of new store. The directors are
aware that in accordance with IAS 23 Borrowing costs certain borrowing costs have to be capitalized
Details relating to the construction of Adora’s new store:
Adora issued a TAS10 million unsecured loan with a coupon (nominal) interest rate of 6% on 1 st April 2018. The loan
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 qualifying asset in IAS 23. Construction of
the store commenced on 1st May 2018 and it was completed and ready for use on 28 th February 2019, but did not open
for trading until 1st April 2019. During the year trading at Adora’s other stores was below expectations so Adora suspended
the construction of the new store for a two month period during July and August 2018. The proceeds of the loan were
temporarily invested for the month of April 2018 and earned interest of TAS40,000.
Required
Calculate the net borrowing cost that should be capitalized as part of the costs of the new store and the finance cost that should
be reported in the income statement for the year ended 31 st March 2019.

SOLN
The finance cost of the loan must be calculated using the effective rate of 7·5%, so the total finance cost for the year ended
31 March 2010 is $750,000 ($10 million x 7·5%). As the loan relates to a qualifying asset, the finance cost (or part of it in
this case) can be capitalised under IAS 23.
The Standard says that capitalisation commences from when expenditure is being incurred (1 May 2009) and must cease when
the asset is ready for its intendeduse (28 February 2010); in this case a 10-month period. However,interest cannot be capitalised
during a period where development activity is suspended; in this case the two months of July and August 2009. Thus only eight
months of the year’s finance cost can be capitalised = $500,000 ($750,000 x 8/12). The remaining four-months finance costs of
$250,000 must be expensed. IAS 23 also says that interest earned from the temporary investment of specific loans should be
deducted from the amount of finance costs that can be capitalised. However, in this case, the interest was earned during a period
in which the finance costs were NOT being capitalised, thus the interest received of $40,000 would be credited to the income
statement and not to the capitalised finance costs.
In summary: $
Income statement for the year ended 31 March 2010:
Finance cost (debit) (250,000)
Investment income (credit) 40,000
Statement of financial position as at 31 March 2010:
Property,plant and equipment (finance cost element only) 500,000

QUESTION 11
Mkaro Ltd started a construction of new building to be used as a store on 1 st April 2018. The following costs were incurred
on the construction:-
Tshs.”000”
Freehold land 4,500
Architect fees 620
Site preparation 1,650
Materials 7,800
Direct labor cost 11,200
Legal fees 2,400
General overheads 940
The store were completed on 1 st January 2019 and brought into use following its grand opening on the 1 st April 2014.
Mkaro ltd issued a tshs 25 million unsecured loan on 1st April 2018 to aid construction of the new store; this meets the
definition of qualifying asset as per IAS 23. The loan carried an interest rate of 8% per annum and is payable on 1 st
April 2021
Required
i) Calculate the total amount to be included as a property, plant and equipment in respect of the new store
ii) State what impact the above information would have on the statement of comprehensive income (if any) for the year
ended 31st March 2019

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 FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2024 (SET 2)

SOLN
(a) Cost of Property, Plant and equipment
• This is self-constructed asset, all cost to get the new store to its present location and condition for its
intended use should be capitalized. All of the expenditure listed in the question, with exception of
general overheads would qualify for capitalization.
• The interest on the loan should also be capitalized from 1 April 2013 as it meets the definition of IAS
23. The capitalization of the interest will cease when the asset is ready for use. The cost of PPE will
then be.
COST OF STORE
Tshs.”000”
Freehold land 4,500
Architect fees 620
Site preparation 1,650
Materials 7,800
Direct labor cost 11,200
Legal fees 2,400
Borrowing costs (25,000 x 8% x 9/12 1,500
Total costs 29,670

(b) Impact to income statement

Income statement should be charged with
(i) General overheads of 940,000 as expenses
(ii) Remaining interest for January – March which is now an expense 500,000 Tshs. (25,000,000 x 8% x 3/12)
(iii) Depreciation of the store – Although we cannot calculate by now since due to absence of the information
surrounding useful economic life of the store but IAS 16 states that depreciation of an asset begins when it is
available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the
manner intended by the management.

QUESTION 12
PART A
(a) The accounting treatment of investment properties is prescribed by IAS 40 Investment
Property.
Required:
(i) Define investment property under IAS 40 and explain why its accounting treatment is
different from that of owner-occupied property;
(ii) Explain how the treatment of an investment property carried under the fair value model
differs from an owner-occupied property carried under the revaluation model.

SOLN
(i) Define investment property under IAS 40 and explain why its accounting treatment is
different from that of owner-occupied property;
An investment property is land or buildings (or a part thereof) held by the owner to generate
rental income or for capital appreciation (or both) rather than for production or administrative
use. It would also include property held under a finance lease and may include property under
an operating lease, if used for the same purpose as other investment properties. Generally, non-
investment properties generate cash flows in combination with other assets, whereas a property
that meets the definition of an investment property means that it will generate cash flows that
are largely independent of the other assets held by an entity and, in that sense, such properties
do not form part of the entity’s normal operations.

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 FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2024 (SET 2)

(ii) Explain how the treatment of an investment property carried under the fair value model
differs from an owner-occupied property carried under the revaluation model.
Soln
Superficially, the revaluation model and fair value sound very similar; both require properties to
be valued at their fair value which is usually a market-based assessment (often by an independent
valuer). However, any gain (or loss) over a previous valuation is taken to profit or loss if it relates
to an investment property, whereas for an owner-occupied property, any gain is taken to a
revaluation reserve (via other comprehensive income and the statement of changes in equity). A
loss on the revaluation of an owner-occupied property is charged to profit or loss unless it has a
previous surplus in the revaluation reserve which can be used to offset the loss until it is
exhausted. A further difference is that owner-occupied property continues to be depreciated after
revaluation, whereas investment properties are not depreciated.

PART B
Speculate owns the following properties at 1 April 2012:
Property A: An office building used by Speculate for administrative purposes with a depreciated
historical cost of
$2 million. At 1 April 2012 it had a remaining life of 20 years. After a reorganisation on 1 October
2012, the property was let to a third party and reclassified as an investment property applying
Speculate’s policy of the fair value model. An independent valuer assessed the property to have a
fair value of $2·3 million at 1 October 2012, which had risen to $2·34 million at 31 March 2013.
Property B: Another office building sub-let to a subsidiary of Speculate. At 1 April 2012, it had
a fair value of $1·5 million which had risen to $1·65 million at 31 March 2013.
Required:
Prepare extracts from Speculate’s entity statement of profit or loss and other comprehensive income
and statement of financial position for the year ended 31 March 2013 in respect of the above
properties. In the case of property B only, state how it would be classified in Speculate’s
consolidated statement of financial position.
Note: Ignore deferred tax.

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 FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2024 (SET 2)

QUESTION 13 (NBAA Adapted)

(a) IAS 2: Inventories requires inventories of raw materials and finished goods to be valued in
financial statements at the lower of cost and net realizable value.
REQUIRED:
(i) Explain the rationale of the “lower of cost and net realizable value” principle. (4
marks)
(ii) Describe three methods of arriving at cost of inventories which are acceptable under
IAS 2 and explain how they are regarded as acceptable. (6 marks)

(b) SIMPLE is a manufacturer of garden furniture. The company has consistently used FIFO
method (first in first out) in valuing inventory, but it is interested to know the effect valuation
of using weighted average cost instead of FIFO on its inventory.
At 28th February 2013, the company had inventory of 4,000 standard plastic tables, and has computed its value
on each side of the two methods as:
Method Unit cost Total value (TZS.)
FIFO 16,000 64,000,000
Weighted average 13,000 52,000,000

During March 2013, the movements on the inventory of tables were as follows:
Received from factory:
Date Number of units Production cost per
unit (TZS.)
8th March 2013 3,800 15,000
22nd March 2013 6,000 18,000
Revenue/Sales
Date Number of units Price per unit

12th March 2013 5,000 30,000

18th March 2013 2,000 30,000
24 March 2013
th 3,000 32,000
28th March 2013 2,000 31,000
On FIFO basis the inventory on 31st March 2013 was TZS.32,400,000.
REQUIRED:
Compute the value of the inventory as at 31st March 2013 by using weighted average cost method.
(10 marks) (Total: 20 marks)
NB: In arriving at the total inventory value you should make calculations to two
decimal places (where necessary) and use the perpetual inventory system

ANSWER – Question One (NBAA Adapted November 2016)

(a) IAS 2 : Inventories requires inventories of raw materials and finished goods to be valued in financial statements
at the lower of cost and net realizable value.

(ii) Rationale of the “lower of cost and net realizable value”

The cost of inventories may not be recoverable if those inventories are damaged, if they have become
wholly or partially obsolete or if their selling prices have declined.

The cost of inventories may also not be recoverable if the estimated costs of completion or the estimated
costs to be incurred to make the sale have increased.

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 FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2024 (SET 2)

The lower of cost and net realisable value principle also considered the prudence concept that require
assets and income not to be overstated (but liabilities and expenses can be overstated).

It then follows that if the cost of inventories is less than their net realizable value, the inventories have
to be valued at cost. If the net realizable value is less than cost, then the inventories have to be valued
at net realizable value.

(iii) Three acceptable methods of arriving at the cost of inventories under IAS 2:

Unit Cost
Under this method, inventories are priced at the actual amount paid for each individual item of inventory
held regardless of whether the items have been purchased or produced. However, this method is
inappropriate for a large number of items which are ordinarily interchangeable.

First-In-First-Out (FIFO) – Inventory is assumed to be composed of the items most recently purchased,
regardless of whether this is actually the case. Inventory is therefore valued according to the price paid
for the most recent purchase. If this purchase is insufficient to cover the quantity in inventory, the price
of the next most recent purchase is taken as necessary.

Average Cost – Inventory is priced at the moving weighted average price at which each inventory line
was purchased during the accounting period, or brought forward from the previous period.

Computation of the value of inventory using the weighted average method:

SOLD BALANCE
Date Unit Unit at Total cost Units Unit cost Total cost Units Units cost Total cost
2013 TZS TZS TZS TZS TZS TZS
1/3 4,000 13,000 52,000,000
8/3 3,800 15,000 57,000 7,800 13,974.36 109,000,008
12/3 5,000 13,974.36 69,871,800 2,800 13,974.36 39,128,208
18/3 2,000 13,974.36 27,948,720 800 13,974.36 11,179,488
22/3 6,000 18,000 108,000 6,800 17,526.40 119,179,488
24/3 3,000 17,526.40 52,579,200 3,800 17,526.40 66,600,320
28/3 2,000 17,526.40 35,052,800 1,800 17,526.40 31,547,520
The value of inventory is TZS 31,547,520

QUESTION 14 (NBAA Adapted)

Mokiri Ltd. is involved in the building of commercial property and has asked you, a trainee financial
accountant, for advice on how to account for Property, Plant and Equipment.
PART A
Mokiri Ltd. purchased equipment on 1 July 2018 and had the following costs:
TSHS’000
List price 20,000
Trade discount (1,000)
Delivery costs 200
Set up costs incurred 800
Staff Training 1,000
Vat 2,000
Total 23,000

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 FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2024 (SET 2)

(i) Mokiri Ltd. is registered for vat and can recover vat on purchases.

(ii) The equipment has a useful life of ten years and a residual value of TSHS2,000,000.

(iii) Mokiri Ltd.’s depreciation policy is to charge a full year’s depreciation in the year of
purchase and none in the year of sale.
REQUIRED
The financial controller of Mokiri Ltd. has asked you to prepare a report which addresses the
following:

(a) Calculate the carrying value of the equipment as at 31 December 2018.

(b) In accordance with IAS 16 – Property, Plant & Equipment, describe the criteria for the
recognition of property, plant and equipment in the financial statements.

(c) Explain the accounting treatment allowed for the measurement of property, plant and
equipment:

(i) At recognition;
(ii) After recognition

PART B

Mokiri Ltd. purchased a property costing TSHS500,000 on 1 January 2010 with a useful life of fifty
years. It has a residual value of TSHS100,000. At 31 December 2016, the property was valued at
TSHS559,000 resulting in a revaluation gain of TSHS115,000. At this date, there was no change to
the useful life of the building but the estimated residual value was zero. On 31 December 2018, the
building was sold for TSHS600,000.
REQUIRED
Provide journal entries to show how the disposal on this revalued property should be treated in the
financial statements for the year-ended 31 December 2018.

SOLN

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 FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2024 (SET 2)

b) The recognition of property, plant and equipment depends on two criteria:

• It is probable that future economic benefits associated with the asset will flow to the
entity
• The cost of the asset to the entity can be measured reliably

c) i) Initial measurement
All items of property, plant and equipment are recognised at cost.

ii) Measurement subsequent to initial recognition

After recognition, property, plant and equipment can be recognised using either the cost
model or the revaluation model.

The Cost model is where PPE is carried at cost less accumulated depreciation and impairment
losses.

The Revaluation model is where PPE is carried at revalued amount with the revalued amount equal
to the fair value at date of revaluation less subsequent accumulated depreciation and impairment
losses.

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 FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2024 (SET 2)

QUESTION 15 (NBAA Adapted)

SHAMBANI Company Ltd had the following tangible non-current assets in its statement of financial position as at 31st
December 2014:

Cost Depreciation Carrying amount

TZS.‘000’ TZS.‘000’ TZS.‘000’
Land 1,000,000 - 1,000,000
Buildings 800,000 160,000 640,000
Plant and machinery 3,226,000 916,000 2,310,000
Fixture and fittings 780,000 280,000 500,000
Assets under construction 182,000 - 182,000
5,988,000 1,356,000 4,632,000
======= ======== =======
In the year ended 31st December 2015 the following transactions occurred.

(i) Further costs of TZS.106 million were incurred on building being constructed by the company. A building costing
TZS.200 million was completed during the year.
(ii) A deposit of TZS.40 million was paid for a new computer system which is undelivered at the year end.
(iii) Additions to plant were TZS.308 million.
(iv) Additions to fixtures, excluding the deposit on the new computer system, were TZS.80 million.
(v) The following assets were sold:
Depreciation
Cost Brought forward Proceeds
TZS.‘000’ TZS.‘000’ TZS.‘000’
Land 554,000 390,000 172,000
Fixture and fittings 82,000 62,000 4,000

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 FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2024 (SET 2)

(vi) Land and buildings were revalued at 1st January 2015 to TZS.3 billion of which land is worth TZS.1.8 billion. The
revaluation was performed by Garson & Co, Property Valuers, on the basis of existing use value on the open
market.
(vii) The useful economic life of the buildings is unchanged. The buildings were purchased 10 years before the
revaluation.
(viii) Depreciation is provided on all assets in use at the year end at the following rates:
Buildings 2% per year straight line
Plant 20% per year straight line
Fixtures 25% per year reducing balance.
REQUIRED:
By using the above information, show the disclosure under IAS 16 in relation to non-current assets in the notes to the
published accounts for the year ended 31st December 2015.

Solution question 2

IAS 16 requires the disclosures for each class of property, plant and equipment. Among others, the standard requires the
disclosure of:
(i) Measurement bases used for determining the gross carrying amount.
(ii) Depreciation methods used
(iii) Useful lives or the depreciation rates used
(iv) The gross carrying amount and the accumulated depreciation
(v) Reconciliation of the carrying amount at the beginning and the end of the period.
(vi) If items of property, plant and equipment are stated at revalued amounts, the following shall be disclosed in
addition to the disclosure required by IFRS 13:
(a) The effective date of the revaluation
(b) Whether an independent valuer was involved
(c) For each revalued class of property, plant and equipment, the carrying amount that would have been
recognise had the assets been carried under the cost model and
(d) The revaluation surplus, indicating the change for the period and any restriction on the distribution on
the balance to shareholder.

With reference to information provided for SHAMBANI Company Ltd, the following are the disclosures as required by
IAS 16:

I. Property, plant and equipments are stated by using cost model and revaluation model.
II. Depreciation is provided on all assets except for land. Depreciation is calculated by using, straight line method
for building & plant and diminishing/reducing method for fixtures.
III. Assets are depreciated at 2%, 20% and 25%, for buildings, plants and fixtures respectively.
IV. Land and buildings were revalued on 1 st January 2015. The exercise was conducted by Garson & Co. Property
Valuers on the basis of existing value on the open market.

The corresponding historical Code information for land and building revalued is as follows:

Land and Building

TZS ‘000’
COST
Balance brought forward 1,800,000
Reclassification 200,000
Disposal of land (554,000)
Balance that would have been carried forward 1,446,000

DEPRECIATION
Brought forward 160,000
Depreciation that would have been charged for the year 16,000
Balance that would have been carried forward 176,000
CARRYING AMOUNT – that would have been recognized 1,270,000

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 FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2024 (SET 2)

V. Other disclosures are as shown below:

Land & Plant and Fixture and Payment on TOTAL
Building Equipment Fittings account and
assets in the
course of
TZS ‘000’ TZS ‘000’ TZS ‘000’ construction TZS ‘000’
TZS ‘000’
Cost/Valuation
Cost at 1st Jan 2015 1,800,000 3,226,000 780,000 182,000 5,988,000

Revaluation adjustment 1,200,000 - - - 1,200,000

Additions 308,000 80,000 146,000(w1) 534,000

Transfers 200,000 - - (200,000) -

Disposals (554,000) - (82,000)

Cost/at valuation 31st Dec 2015 2,646,000 3,534,000 778,000 128,000 7,086,000

DEPRECIATION
Acc. Depr. At 1st Jan 2015 160,000 916,000 280,000 - 1,356,000

Revaluation adjustment (160,000) - - - (160,000)

Disposal - - (62,000) 62,000

Provision for the year(w2)
34,000 706,800 140,000 - 880,800
Accumulated dep at 31 Dec 2015
34,000 1,622,800 358,000 - 2,014,800
CARRYING AMOUNT
At 31st December 2015
2,612,200 1,911,200 420,000 128,000 5,071,200
At 1st January 2015
1,640,000 2,310,000 500,000 182,000 4,632,000
Workings:
W1: Total additions for payments on account and assets in the course of construction.
TZS ‘000’
Addition to assets under construction 106,000
Deposit on computer 40,000
146,000
W2: Depreciation allowance for the year ended 31st December 2015
TZS ‘000’
(a) Building [(1,200,000 x 1/40) + (200,000 x 2%)] 34,000
NOTE: 2% Straightline depreciation is equivalent to 50 years
Useful life; because the building is 10 years old, its
Remaining useful life is therefore 40 years.

(b) Plants [(3,226,000 + 308,000) x 20%] 706,800

(c) Fixtures [(780,000 + 80,000 – 82,000 – 280,000 + 62,000)x25%] 140,000

Total Depreciation 880,800

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 FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2024 (SET 2)

QUESTION 16
PART A
The main objectives of IAS 36 Impairment of Assets, is to prescribe the procedures that should ensure that the
entity’s assets are carried at no more than their recoverable amounts.
Required
a) Define carrying amount
b) Define asset's fair value less costs of disposal
c) Define value in use
d) Explain how the recoverable amount of an asset is determined.
e) Define the term “impairment loss”.
f) List the main indications which would suggest that an asset might be impaired
g) Identify the two types of asset which must always be tested for impairment, even if there is no indication
that that impairment has occurred.
h) Define a cash generating unit [CGU]
i) Explain the circumstances in which a CGU should be tested for impairment
j) Explain the order in which impairment loss should be allocated between the assets in cash
generating unit
SOLUTION
a) carrying amount
This is the amount at which an asset is recognized in the statement of financial position, after deducting any
accumulated depreciation and impairment loss.

b) An asset's fair value less costs of disposal

is the price that would be received to sell the asset in an orderly transaction between market participants at the
measurement date, less direct disposal costs, such as legal expenses.

c) value in use
Is the present value of future cash flows expected to arise from the asset over its remaining life and from its
disposal.

d) Explain how the recoverable amount of an asset is determined.

Recoverable amount is the higher of Net fair value and value in use
The asset's fair value less costs of disposal
Is the price that would be received to sell the asset in an orderly transaction between market participants at the
measurement date, less direct disposal costs, such as legal expenses.
Value in use-Is the present value of future cash flows expected to arise from the asset over its remaining life and
from its disposal.

e) Define the term “impairment loss”.

IAS 36 defines an impairment loss as “the amount by which the carrying amount of an asset or cash generating
unit exceeds its recoverable amount

f) List the main indications which would suggest that an asset might be impaired
i] Internal Indicators of impairment
• Significant change in the manner in which the asset is used
• obsolescence or physical damage
• plan to restructure or discontinue the operations for which an asset is used
• worse economic performance than expected. This may be indicated by low operating profit or operating losses
for a part of the business
• Projections demonstrating continuing losses associated with an asset
ii] External indicators of impairment
• Unexpected significant decline in the asset’s market value
• Changes in technology, markets, business climate, economy, or laws/legal factors in which an asset operates

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 FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2024 (SET 2)

• Increases in market interest rates. These will reduce the present value (VIU) of an asset’s future cash flows, and
may in turn reduce its recoverable amount.
• company stock price is below book value

g) Identify the two types of asset which must always be tested for impairment, even if there is no indication that
impairment has occurred.
• The two types of asset which must always be tested for impairment are intangible assets which have indefinite
useful life (or which are not yet available for use for impairment annually by comparing its carrying amount with
its recoverable amount.) and goodwill acquired in a business combination. This impairment test may be performed
at any time during an annual period, provided it is performed at the same time every year. However, if such an
intangible asset was initially recognized during the current annual period, that intangible asset shall be tested for
impairment before the end of the current annual period.
• For tangible assets and intangible assets with finite useful lives an entity shall assess at the end of each reporting
period whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall
estimate the recoverable amount of the asset.

h) Define a cash generating unit [CGU]

▪ A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of cash
inflows generated by other assets or group of assets
i) Explain the circumstances in which a CGU should be tested for impairment
A CGU should be tested for impairment if there are indications that an asset which belong to the CGU is impaired or
that the CGU as a whole is impaired. A CGU to which goodwill has been allocated should be tested for impairment
every year regardless of whether or not there are any indications of impairment.

j) Explain the order in which impairment loss should be allocated between the assets in cash generating unit
An impairment loss should be recognised for a cash - generating unit if (and only if) the recoverable amount
for the cash- generating unit is less than the carrying amount in the statement of financial position for all the
assets in the unit. When an impairment loss is recognised for a cash- generating unit, the loss should be
allocated between the assets in the unit in the following order.
(a) First, to any assets that are obviously damaged or destroyed
(b) Next, to the goodwill allocated to the cash generating unit
(c) Then to all other assets in the cash-generating unit, on a pro rata basis

QUESTION 17
Fariji PLC has 800 hectares of agricultural land amongst its fixed assets at cost of TZS 440,000,000
as at 31 December 2008. The required rate of return is 7%. Due to the state of the agricultural
sector the directors wish to check whether the value of the land has been impaired. The land has
been rented out at an annual rent of TZS 400,000 per hectare with five yearly rental reviews.
The rent recently has been renegotiated at an annual rent of TZS 35,000 per hectare for the five
years commencing 1 January 2009. Valuers recently estimate that the land would fetch TZS
400,000 per hectare on a sale at 1 January 2009.

Required:
Advise the directors if impairment has occurred and, if so, provide the accounting entry required
to reflect the impairment in the Financial Statements for the year to 31 December 2008

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 FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2024 (SET 2)

Solution
The carrying amount of the Land must be compared to its recoverable amount. The recoverable
amount is the higher of:
– (a) The land's fair value less costs of disposal: 400,000 x 800= TZS320,000,000
– (b) Its value in use: (TZS35,000x800)/0.07 = TZS400,000,000
• Therefore the recoverable amount is TZS400,000,000.
• The carrying amount of the Land is therefore greater than its recoverable amount, so the
machinery is impaired.
• The impairment loss is:
– TZS440,000,000- TZS400,000,000 = TZS40,000,000.
Accounting entry
Debit Credit
Impairment loss 40,000,000
Land 40,000,000
Profit and loss 40,000,000
Impairment loss 40,000,000

Statement of profit or loss (extract) for the year ended 31st December 2008
Expenses
Impairment loss 40,000,000

Statement of financial position (extract) as at 31st December 2008

Non-current Assets
Land 440,000,000
Accumulated impairment loss (40,000,000)
400,000,000

QUESTION 18
Shayo plc owns and operates an item of plant and equipment that cost TAS640,000,000 and had accumulated depreciation of TAS400,000,000
st st
at 1 October 2009. It is being depreciated at 12.5% on cost. On 1 April 2010 (exactly half way through the year) the plant was damaged
when the factory vehicle collided into it. Due to 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 TAS150,000,000. The plant has a current disposal value of
TAS20,000,000 (which will be nil in two years‟ time). But Shayo has been offered a trade in value of TAS180,000,000 against a replacement
machine which has a cost of TAS1 billion (there would be no disposal costs for the replaced plant). Shayo is reluctant to replace the plant
as it is worried about the long-term demand for the product produced by the plant. The trade in value is only available if the plant is
replaced.
Required
a) Define an impairment loss explaining the relevance of fair value less costs to sell and value in use. State how frequently assets
should be tested for impairment.
b) Explain how impairment loss is accounted for after it has been calculated
c) Prepare extract from the financial statements of Shayo in respect of the plant for the year ended 30 September 2010. Your
answer should explain how you arrived at your figures.

SOLN
c)The carrying amount of plant at the date impairment review was conducted is as follows
Cost of plant shs640,000,000
Accumulated depreciation up to 31st October 2009 (shs400,000,000)
Depreciation from 1st October 2009 to 1st April 2010 640,000,000x12.5%x6/12 (shs40,000,000)
Carrying amount on 1st April 2010 shs200,000,000

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 FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2024 (SET 2)

The carrying amount of the machinery must be compared to its recoverable amount. The recoverable amount is the higher of value in
use and fair value less costs of disposal
(a) if shayo trades in the plant it will receive shs180,000,000 but Shayo is reluctant to do this. Therefore a better estimate of
the fair value less costs to sell is tshs20,000,000
(b) Its value in use: TZS150,000,000
Therefore the recoverable amount is TZS150,000,000.
The carrying amount of the plant is therefore greater than its recoverable amount, so the plant is impaired.
The impairment loss is:
TZS200,000,000- TZS150,000,000 = TZS50,000,000

Since the remaining useful life of the plant is only two years (from the date of impairment) the depreciation charge for the six months
of the year (i.e. from 1st April 2010 to 30th September 2010) is 150,000,000/2 x 6/12 = 37,500,000
The financial statements for the year to 30th September 2010

Statement of profit or loss for the year ended 30th September 2010
Plant Depreciation (40,000,000 + 37,500,000) 77,500,000
Plant impairment loss 50,000,000

Statement of financial position as at 30September 2010

Plant 150,000,000
Accumulated depreciation (37,500,000)
112,500,000
soln
a) IAS 36 defines an impairment loss as “the amount by which the carrying amount of an asset or cash generating unit exceeds its
recoverable amount. Recoverable amount is the higher of An asset's fair value less costs of disposal and value in use
An asset's fair value less costs of disposal
is the price that would be received to sell the asset in an orderly transaction between market participants at the measurement date,
less direct disposal costs, such as legal expenses.
value in use
Is the present value of future cash flows expected to arise from the asset over its remaining life and from its disposal.
Many assets do not produce independent cash flows, so it may be necessary to consider the value in use and asset’s fair value less
costs of disposal of cash generate unit (CGU) to which asset belong
Frequency of testing for impairment
The two types of asset which must always be tested for impairment every year are intangible assets which have indefinite
useful life and goodwill acquired in a business combination. This is also the case for any intangible asset that has not yet
been brought into use. Other assets are tested for impairment only if there is an indication that impairment may have
occurred.
b) An impairment loss is subtracted from the carrying amount of the asset concerned. Future depreciation charges will be based upon
the reduced carrying amount. An impairment loss is actually accounted for as an expense. But if the asset has previously been
revalued upwards, the loss should first be deducted from the revaluation surplus. An impairment loss relating to a CGU is used to
eliminate any goodwill in the CGU and is then allocated to the other assets in proportion to their carrying amounts. However, an
asset other than goodwill should not be reduced to less than the higher of its fair value less costs to sell and its value in use.

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 FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2024 (SET 2)

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