SUGGESTED SOLUTIONS

C1 – CORPORATE REPORTING
MAY 2023

ANSWER 1

RUBONDO GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31ST MAY 2022
ASSETS TZS. MILLION
Non-Current Assets
Property, plant and equipment: 112 + 60 + 26 + 24 (W8) + 3.6 (W9) +
6.12 (W10) – 2.59 (W11) + 12 (W13) 241.13
Goodwill: 5 (W2) + 1 (W3) 6
Financial assets: 9 + 6 + 14 29
Jointly controlled operation: 6 – 6 (W10) -
276.13
Current Assets: 5 + 7 + + 12 + 8 (W10) + 4 (W12) 36
Total Assets 312.13
EQUITY AND LIABILITIES
Ordinary shares capital 25
Other components of equity (W4) 2
Retained earnings (W5) 81.45
108.45
Non-controlling interests (W6) 27.64
136.09
Non-current liabilities: 53 + 20 + 21 + 0.84 (W10) 94.84
Current liabilities: 47 + 6 + 2 + 6.6 (W10) + 3.6 (W12) + 16 (W13) 81.2
Total Equity and Liabilities 312.13

WORKINGS
1. Group Structure

1 June 20 Rubondo 1 June 19 1 Dec 21

80% (Sub) 5% (IEI) + 55% = 60%
Pre-acquisition TZS.16 mill Pre- N/A TZS.15 mil
retained acquisition
earnings retained
earnings

Hai Zanka

Questions & Answers May 2023 Page 15 of 107

2. Goodwill (Hai)
TZS. million
The consideration transferred 50*
Non-controlling interest (fair value per question) 15
FV of identifiable net assets at acq’n (60)
5

*Note. Hai is valued at TZS 55m as at 31st May 2022, so there is a revaluation gain of
TZS.55m – TZS 50m = TZS 5m which needs to be reversed out in the calculation of
consolidated other components of equity (W4).

3. Goodwill (Zanka)
TZS. Million
Consideration transferred – for 55% 16
Non-controlling interest at fair value (per question) 9
Fair value of previously held interest (for 5% at 1 December 2021) 5*
FV of identifiable net assets at acq’n (29)
1

*Note: There will be a revaluation gain on the previously held interest, calculated as follows:

TZS. Million
Fair value of 5% at date control achieved (1 December 2021) 5
Fair value of 5% per SOFP, i.e. at 31st May 2021: TZS.19m per
Rubondo’s SOFP, less TZS.16m consideration for 55% (3)
Fair value of Revaluation gain (1st June 2021 to 1st December 2021) 2

This gain on revaluation of the previously held interest is taken to profit or loss for the year,
and hence to retained earnings (W5).

4. Other components of equity

TZS. Million
Rubondo (per question) 11.00
Dividend income from Hai transferred to retained earnings (W7) (2.00)
Reserve transfer on property, plant and equipment (W11) (0.11)
Impairment loss on property, plant and equipment (W11) (1.89)
Revaluation gain on investment in Hai (W2) (5.00)
Pre-acquisition (W1) 2.000

Questions & Answers May 2023 Page 16 of 107

5. Retained earnings
Rubondo Hai Zanka
TZS.million TZS.million TZS.million
Per question 70.00 27.00 19.0
Gain on revaluation of 5% investment in Zanka (W3) 2.00
Dividend income from Hai (W7) 2.00
Fair value depreciation (W9) - (0.4)
Profit from joint operation (W10) 0.68
Reserve transfer on PPE (W11) 0.11
Factoring trade receivable 0.4
Impairment loss on PPE (W11) (0.70)
Reverse gain on sale and repurchase (W13) (4.00)
Pre-acquisition (W1) (16.0) (15.0)
70.49 11.0 3.6

Group Retained earnings:

Rubondo 70.49
Hai: 11 x 80% 8.80
Zanka: 3.6 x 60% 2.16
81.45

6. Non-controlling interests
Hai Zanka
TZS.million TZS.million
At acquisition (w2/W3) 15.0 9.00
Post-acquisition share of retained earnings
Hai: 11 (W5) x 20% 2.2
Zanka: 3.6 (W5) x 40% 1.44
17.2 10.44
27.64

7. Dividend
The TZS.2m dividend income has been incorrectly recorded in other comprehensive income for
the year, and therefore in other components of equity. It should have been recorded in profit or
loss for the year, and therefore in retained earnings.

To correct, the entries are:

DEBIT Other components of equity TZS.2 million

CREDIT Retained earnings TZS.2 million

Questions & Answers May 2023 Page 17 of 107

8. Fair value adjustment: Hai
Hai: At acqn 1 June 2020 Movement (2 years) At year end 31
May 2022
TZS. million TZS. million TZS. million
Land: 60 – (20 + 24 - 24
16)
Goodwill (FV of NA) Retained earnings PPE in year end

9. Fair value adjustment: Hai

Hai: At acqn 1 Dec 2021 Movement (6 years) At year end
31 May 2022
TZS. million TZS. million TZS. million
PPE: (26 + 3) - (10 + 15) 4 (0.4) 3.6
Goodwill (FV of Retained earnings PPE in year end
NA)

*Note: The fair value movement is the additional depreciation caused by the fair valuing for
consolidation purposes: TZS.4m x 1/5 x 6/12 = TZS 0.4m

10. Joint operation (in Rubondo’s books)

The treatment of the joint operation is set out in IFRS 11 Joint arrangements. Rubondo must
recognize on a line-by-line basis its assets, liabilities, revenues and expenses plus its share (40%)
of the joint assets, liabilities, revenue and expenses. The figures are calculated as follows:
Statement of financial position
TZS. Million
Property, plant and equipment: 6.00
1 June 2021 cost: gas station (15 x 40%)
Dismantling provision (2 x 40%) 0.80
6.80
Accumulated depreciation: 6.8/10 (0.68)
31 May 2022 NBV 6.12
Trade receivable (from another joint operator): 20 (revenue) x 40% 8.00
Trade payables (to another joint operator): (16 + 0.5 (costs)) x 40% 6.60
Dismantling provision:
At 1 June 2021 0.80
Finance cost (unwinding of discount): 0.8 x 5% 0.04
At 31 May 2022 0.84
Profit or loss for the year
TZS. Million
Revenue 20 x 40% 8.00
Cost of sales: 16 x 40% (6.40)
Operating costs: 0.5 x 40% (0.20)
Depreciation (0.68)
Finance cost (unwinding of discount) (0.04)
Profit from joint operation (to retained earnings (W10) 0.68
Rubondo has accounted only for its share of the construction cost of TZS.6m. The journals to
correct this are therefore as follows:
Questions & Answers May 2023 Page 18 of 107
 TZS. Million TZS. Million
DEBIT Property, plant and equipment 6.12
DEBIT Trade receivables 8.00
CREDIT Joint operation x 6.00
CREDIT Trade payables 6.60
CREDIT Provision 0.84
CREDIT Retained earnings (Rubondo) 0.68

11. Property, plant and equipment

Carrying Revaluation
amount surplus
TZS. Million TZS. Million
1 June 2019 Cost 10.00
Acc. Depreciation 2/20 x 10 (1.00)
9.00
Revaluation gain (bal. fig) 2.00 2.00
31 May 2021 Revalued PPE c/d 11.00
Depreciation for year 11 x 1/18 (0.61)
Transfer to retained earnings: 0.61 – (0.11)
0.50
31 May 2022 Balance 10.39 1.89
Impairment loss (bal.fig.) (2.59)
Recoverable amount 7.80

The impairment loss is charged to other comprehensive income and therefore to other
components of equity to the extent of the revaluation surplus. The remainder is taken to profit or
loss and therefore to retained earnings. Thus TZS.1.89 is taken to other components of equity
and TZS.2.59 – TZS.1.89 = TZS.0.7 to retained earnings.

Journals in Rubondo’s books

Reserve transfer:
DEBIT: Other components of equity TZS.0.11 million
CREDIT: Retained earnings TZS.0.11 million

Impairment loss:
DEBIT: Other components of equity TZS.1.89 million
DEBIT: Retained earnings TZS.0.70
CREDIT: Property, plant and equipment TZS.2.89 million

Questions & Answers May 2023 Page 19 of 107

12. Debit factoring
Rubondo should not have derecognized the receivables because the risks and rewards of
ownership have not been transferred. The receivables must therefore be reinstated and the loss
reversed:

DEBIT: Trade receivables TZS.4.0 million

CREDIT: Current liabilities TZS.3.6 million
CREDIT: Retained earnings (to reverse loss) TZS.0.4 million

13. Sales and repurchase of land

Rubondo should not have derecognized the land from the financial statements because the risks
and rewards of ownership have not been transferred. The substance of the transaction is a loan of
TZS.16m, and the 5% ‘premium’ on repurchase is effectively an interest payment. This is an
attempt to manipulate the financial statements in order to show a more favorable cash position.
The sale must be reversed and the land reinstated at its carrying amount before the transaction.
The repurchase, i.e. the repayment of the loan takes place one month after the year end, and so
this is a current liability:
DEBIT: Property, plant and equipment TZS.12 million
DEBIT: Retained earnings
(to reverse profit on disposal (16 – 12) TZS.4 million
CREDIT: Current liabilities TZS.16 million

This marking scheme is given as a guide in the context of the suggested answers. Scope should
give to markers to award marks for alternative approaches to a question, including relevant
comment, and where well-reasoned conclusions are provided. This is particularly the case for
written answers where there may be more than one acceptable solution.

ANSWER 2

(a)(i) JOURNAL ENTRIES TO RECOGNIZE IMPAIRMENT LOSS

Impairment loss (CGU)
= TZS.510,000,000 (carrying amount) – TZS.460,000,000 (recoverable amount)
= TZS.50,000,000
The TZS.50,000,000 impairment loss for the CGU allocated to its assets in the following order:
1. Reduce TZS.10,000,000 goodwill
2. Remaining impairment loss of TZS.40,000,000 allocated as follows:

Proportion Impairment loss

Building 300,000,000 60% 24,000,000
Equipment 200,000,000 40% 16,000,000
500,000,000 40,000,000

(BEFORE) Impairment Loss (AFTER)

Carrying amount Revised Carrying amount
(TZS) (TZS) (TZS)
Goodwill 10,000,000 (10,000,000) 0
Buildings (*) 300,000,000 (24,000,000) 276,000,000
Questions & Answers May 2023 Page 20 of 107
 Equipment 200,000,000 (16,000,000) 184,000,000
Total 510,000,000 (50,000,000 460,000,000
*Building – revised carrying amount should be the higher of TZS.276,000,000 (VIU) and
TZS.270,000,000 (FVLCS).

31st September 2021 Impairment Loss

Dr. Impairment Loss 50,000,000

Cr. Goodwill 10,000,000
Cr. Accumulated impairment loss – Building 24,000,000
Cr. Accumulated impairment loss – Equipment 16,000,000

(ii) JOURNAL ENTRIES TO PASS REVERSAL OF IMPAIRMENT LOSS

Determine reversal of impairment loss at 31st September 2022

Building
(BEFORE reversal of impairment) (Assuming No impairment)
Cost TZS.500,000,000 TZS.500,000,000
Acc. (200,000+30,000)=(230,000,000) 200,000+35,000=(235,000,000)
Depreciation
Acc. Impairment (24,000,000) -
Carrying amount TZS.246,000,000 TZS.265,000,000

Equipment
(BEFORE reversal of impairment) (Assuming No impairment)
Cost TZS.300,000,000 TZS.300,000,000
Acc. (100,000+22,000=(122,000,000) 100,000+28,000=(128,000,000)
Depreciation
Acc. Impairment (16,000,000) -
Carrying amount TZS.162,000,000 TZS.172,000,000

(BEFORE reversal) Reversal of (AFTER reversal)

Carrying amount impairment Revised Carrying amount
Building TZS.246,000,000 15,074,000 TZS.261,074,000
Equipment 162,000,000 9,926,000 171,926,000

Total TZS.408,000,000 TZS.25,000,000 TZS.433,000,000

31st December 2023 Reversal of Impairment Loss

Dr. Acc. Impairment Loss – Building 15,074,000
Dr. Acc. Impairment Loss – Equipment 9,926,000
Cr. Gain – Reversal of Impairment Loss 25,000,000

(iii) If the recoverable amount of the equipment at 31st September 2022 was TZS.168,000,000 the
answer in (b) above will change as follows:
Questions & Answers May 2023 Page 21 of 107
 Building TZS.246,000,000 19,000,000 TZS.265,000,000
Equipment 162,000,000 6,000,000 168,000,000

Total TZS.408,000,000 TZS.25,000,000 TZS.433,000,000

*Building still does not exceed the carrying amount if it had never been impaired as shown in
answer (a).
31st September 2022 Reversal of Impairment Loss
Dr. Acc. Impairment Loss – Building 19,000,000
Dr. Acc. Impairment Loss – Equipment 6,000,000
Cr. Gain – Reversal of Impairment Loss 25,000,000

(b)(i) Criteria which must be met for a contract with a customer to fall within the scope of IFRS 15.
A contract with a customer will be within the scope of IFRS 15 if all the following conditions are
met:
• The parties to the contract have approved the contract;
• Each party’s rights in relation to the goods or services to be transferred can be identified;
• The payment terms and conditions for the goods or services to be transferred can be
identified;
• The contract has commercial substance; and
• The collection of an amount of consideration to which the entity is entitled in exchange for
the goods or services is probable

(ii) Wajenzi
Statement of profits or losses
Building
1 2
TZS’million’ TZS’million’
Revenues 90 128
Costs 63 168
Profit/Loss 27 (40)

Statement of Financial Position as at 30th September 2022

Building
1 2
TZS’million’ TZS’million’
Current assets
Contract liability 27
Current liabilities
Contract liability - 40

Questions & Answers May 2023 Page 22 of 107

Workings
Step 1-Determine whether the contract outcome is profit or loss
BUILDING
1 2
TZS’million’ TZS’million’
Revenue 200 160
Costs(incurred to date +to complete) (140) (200)
Gross Profit/loss 60 (40)

Step 2-Determine the % of completion

BUIDING
CONTRACT 1 2
Estimate percentage of work completed 45% 80%

Step 3-Recognise Revenue, Costs and Profit/loss

1. Building 1
TZS’million
Revenues (45% x 200) 90
Expenses (45% x 140) (63)
Gross profit 27

2. Building 2
TZS’million’
Revenue (80% x 160) 128
Expenses (80% x 200) (160)
Provision costs (8)
Gross profit (40)

Step 3-Determination of contract asset/liabilities

Building 1 Building 2
TZS’million’ TZS’million’
Cost incurred to date 80 150
Profit/Loss recognised 27 (40)
107 110
Billings (31.2) (134)
75.8 (24)

ANSWER 3

Questions & Answers May 2023 Page 23 of 107

(a) The comments made by one of the directors of Bongo Limited suggest that he has not heard of
IFRS 8 ‘Operating Segments’. IFRS 8 defines an operating segment as a component of an entity:
• That engages in business activities from which it may earn revenues and incur expenses,

• Whose operating results are regularly reviewed by the entity’s chief operating decision
maker to make decisions about resources to be allocated to the segment and assess its
performance and

• For which discrete financial information is available.

The two divisions meet the definition of an operating segment. They do generate revenue
and incur costs. Presumably, their performance is regularly assessed and financial
information can easily be made available.

IFRS 8 does provide for the criteria that must be met for an entity to report separate
information about each operating segment. These include the following:
(i) Meeting the definition of an operating segment. This has already been explained; and

(ii) Segment total is 10% or more of total:

• Revenue (internal and external), or

• All segments not reporting a loss (or all segments in loss if greater), or
• Assets further, at least 75% of total external revenue must be reported by operating
segments

The said criteria imply that Bongo Limited will have to calculate percentage contribution of
each division to Bongo Limited’s total revenue, profit or loss and assets to establish their
meeting of the second criterion. However, even if one of them does not meet the criterion,
the directors may still show it separately if they believe information about the segment may
be useful to users of financial information and that it only has two segments and only one
threshold has to be met.

Bongo Limited needs to disclose the following information about each operating segment in
accordance with IFRS 8:

• Operating segment profit or loss

• Segment assets

• Segment liabilities Bongo Limited will derive the following benefits from providing
information on each division;

• The entity’s past performance will be understood.

• The entity’s risks and returns may be better assessed.

• More informed judgements may be made about the entity as a whole.

Questions & Answers May 2023 Page 24 of 107

 However, Bongo Limited is a limited company owned and run by two directors, there may be no
need for it to disclose the performance of each division. Further, it may prove time-consuming
and costly to analyze the information and attribute it to each division. The company presumably
has a centralized purchasing system and may have one sales point for all its products.

(b)(i) Segment Profit or Loss

Furniture Stationery ICT Others Total
TZS”000” TZS”000” TZS”000” TZS”000” TZS”000”
External sales 800,000 500,000 400,000 100,000 1,800,000
Intersegment 200,000 150,000 50,000 - 400,000
sales
Total revenue 1,000,000 650,000 450,000 100,000 2,200,000
CoGS-External (600,000) (300,000) (240,000) (60,000) (1,200,000)
CoGS-Internal (120,000) (96,000) (24,000) - (240,000)
Gross profit 280,000 254,000 186,000 40,000 760,000
Distribution (100,000) (50,000) (40,000) (10,000) (200,000)
costs
Admin (50,000) (25,000) (20,000) (5,000) (100,000)
expenses
Finance cost (30,000) (15,000) (12,000) (3,000) (60,000)
Segment profit 100,000 164,000 144,000 22,000 400,000
or loss

(ii) Main disclosures for operating segments

Furniture Stationery ICT Others Total
TZS”000” TZS”000” TZS”000” TZS”000” TZS”000”
External sales 800,000 500,000 400,000 100,000 1,800,000
Intersegment sales 200,000 150,000 50,000 - 400,000
Profit or loss 100,000 164,000 114,000 22,000 400,000
Finance cost 30,000 15,000 12,000 3,000 60,000
Total assets 440,000 170,000 100,000 5,000 715,000
Total Liabilities 75,000 50,000 15,000 3,000 143,000

(iii) Reconciliation
TZS”000”
Sales of reportable segment 2,100,000
Sales of non-reportable segment 100,000
Elimination of intersegment sales (400,000)
Entity sales in the income statement 1,800,000

Profit or Loss:
Profit or loss of reportable segment 378,000
Profit or loss of non-reportable segment 22,000
Elimination of intersegment profit (160,000)
Share in profit or associate 10,000
Unallocated items:
Other income 60,000
Other expenses (50,000)
Questions & Answers May 2023 Page 25 of 107
 Income tax expenses (90,000)
Entity net income in income statement 170,000

Intersegment sales:
Intersegment sales 400,000
Cost of sales – intersegment sales (240,000)
Intersegment gross profit 160,000

Total assets:
Total assets of reportable segments 710,000
Total assets of non-reportable segments 5,000
Investment in associates 70,000
General Corporation assets 15,000
Entity total assets 800,000

Total Liabilities:
Total liabilities of reporting segment 140,000
Total liabilities of non-reporting segment 3,000
General corporation liabilities 7,000
Entities liabilities 150,000

ANSWER 4

(a) How the transactions will be reported in the financial statements of Bahari Co. over the period to
redemption
Firstly, we must establish at what amount the bond will be initially recognized in the statement of
financial position. The calculation set out below, also works out the total finance cost to be
charged to profits.
TZS TZS
Net proceeds
Face value 50,000,000
Less: 16% discount (8,000,000)
Less: Issue costs (2,000,000)
40,000,000

Repayments
Capital 50,000,000
Premium on redemption 4,611,548.9
Principal to redemption 54,611,548.9
Interest paid: TZS.50,000,000 x 5% x 12,500,000 67,111,548.9
5 years
Total finance cost 27,111,548.9

Questions & Answers May 2023 Page 26 of 107

 Secondly, we set up a table (similar to that used for compound instruments) to work out the
balance of the loan at the end of each period.
Year Opening Effect interest rate Payments 5% Closing balance
balance 12%
TZS TZS TZS TZS
2023 40,000,000 4,800,000 (2,500,000) 42,300,000
2024 42,300,000 5,076,000 (2,500,000) 44,876,000
2025 44,876,000 5,385,120 (2,500,000) 47,761,120
2026 47,761,120 5,731,334.4 (2,500,000) 50,992,454.4
2027 50,992,454.4 6,119,094.5 (2,500,000) 54,611,548.9
27,111,548.9 (12,500)
To: Income To: Statement of To: Statement of
statement cash flows financial position

The finance charge taken to the income statement is greater than the actual interest paid, and so
the balance shown as a liability increases over the life of the instrument until it equals the
redemption value at the end of its term.

In years 1 to 4 the balance shown as a liability is less than the amount that will be payable on
redemption. Therefore, the full amount payable must be disclosed in the notes to the account.

(b)(i) Initial carrying amount of lease liability and right of use asset and double entries to record the
transactions. The lease term is three years. This is because the option to extend the lease is
reasonably certain to be exercised.

(i) Initial value of the lease liability calculated as the PV of lease payments as follows:

Date Cash Flow (TZS) PV factor @ 5% Present value

31/12/2019 10,000,000 0.9524 9,524,000
31/12/2020 10,000,000 0.9070 9,070,000
31/12/2020 15,000,000 0.8638 12,957,000
31,551,000

The initial value of the right-of-use asset is calculated at cost made of:-
TZS
Initial liability value 31,551,000
Direct costs 3,000,000
Reimbursement (1,000,000)
33,551,000

Journal Entry
Description DR CR
Right-of-use asset 33,551,000
Lease liability 31,551,000
Cash (Direct costs less re-imbursement) 2,000,000

Questions & Answers May 2023 Page 27 of 107

 (ii) Subsequently
• The right-of-use asset is depreciated over the three-year lease term, because it is
shorter than the useful economic life. This gives a charge ofTZS.11,183,667
(TZS.33,551,000/3 years).

For the year ended 31/12/2023

Dr. Depreciation (P/L) TZS.11,183,667

CR. Right-of-use asset TZS.11,183,677

The carrying amount of the right-of-use asset will be reduced to TZS.22,367,333 at

31/12/2023 (TZS.33,551,000 – TZS.11,183,667).

• Lease liability is subsequently measured at amortised cost, using the rate of interest
implicit in the lease or incremental borrowing rate as the effective interest rate.

Lease liability table

Year Opening Interest at Payments Closing
balance 5% balance
TZS. TZS. TZS. TZS.
31/12/2023 31,551,000 1,577,550 (10,000,000) 23,128,550
31/12/2024 23,128,550 1,156,428 (10,000,000) 14,284,978

For the year ended 31st December 2023

Interest of TZS.1,577,550 is charged on the lease liability.
Dr Finance costs (P/L) TZS.1,577,550
Cr Lease liability TZS.1,577,550

The cash payment reduces the liability.

Dr Lease Liability TZS.10,000,000

Cr Cash TZS.10,000,000

(iii) Figures which will be shown in the financial statements for the year ending
31st December 2023

Extract – Statement of profit or loss and OCI for the year ended 31st December 2023

• Finance costs (1,577,550)

• Depreciation (11,183,667)

Extract – Statement of financial position as at 31st December 2023

Questions & Answers May 2023 Page 28 of 107

 Assets
Non-current assets
Right of use assets (TZS.33,551,000 – TZS.11,183,667) 22,367,333

Non-current liability
Lease liability 14,284,978

Current Liability
Lease liability (23,128,550-14,284,978) 8,843,572

(c) Answers to the questions raised by the Managing Director

It is not true that given the existence of IAS 41 – Agriculture – other IFRSs do not apply to
farming companies. The general presentation requirements of IAS 1 – Presentation of Financial
Statements, together with the specific recognition and measurement requirements of other IFRSs,
apply to farming companies just as much as others.

IAS 41 deals with agricultural activity. Two key definitions given in IAS 41 are biological assets
and agricultural produce.

A biological asset is a living animal or plant. Examples of biological assets would be sheep and
fruit trees. The criteria for the recognition of biological assets are basically consistent with other
IFRSs and are based on the Framework definition of an asset.

A key issue dealt with in IAS 41 is that of the measurement of biological assets. Given their
nature (e.g., lambs born to sheep which are existing assets, the use of cost as a measurement
basis is impracticable.

The IAS 41 requirement for biological assets is to measure them at fair value less costs to sell.
Changes in fair value less costs to sell from one period to another are recognized in profit or loss.
Agricultural produce is the harvested produce of a biological asset. Examples would be wool
(from sheep) or fruit (from fruit trees). The issue of measuring ‘cost’ of such assets is similar to
that for biological assets. IAS 41 therefore requires that ‘cost’ should be fair value less costs to
sell at the point of harvesting. This figure is then the deemed ‘cost’ for the purposes of IAS 2 –
Inventories.

A consequence of the above treatment is that government grants receivable in respect of

biological assets are not treated in the way prescribed by IAS 20 – Government Grants. Where
such a grant is unconditional, it should be recognized in profit or loss when it becomes
receivable. If conditions attach to the grant, it should be recognized in profit or loss only when
the conditions have been met The IAS 20 treatment of grants is to recognize them in profit or loss
as the expenditure to which they relate is recognized. This means that recognition of grants
relating to property, plant and equipment takes place over the life of the asset rather than when
the relevant conditions are satisfied.

Questions & Answers May 2023 Page 29 of 107

(d)
(i) Adjusting events and non-adjusting events, Meaning and Examples.

Adjusting events.
Adjusting events are events that provide further evidence of conditions that existed at the
reporting date.
Examples of adjusting events include:
1. The subsequent determination of the purchase price or of the proceeds of sale of non-current
assets purchased or sold before the year end.

2. The renegotiation of amounts owing by customers or the insolvency of a customer.

3. Amounts received or receivable in respect of insurance or the insolvency of a customer.

4. The settlement after the reporting date of a court case that confirms that the entity had a
present obligation at the reporting date.

5. The receipt of the information after the reporting date indicating that an asset was impaired at
the reporting date.

6. The discovery of fraud or errors that show that the financial statements are incorrect.

Non-adjusting events:
Non-adjusting events are indicative of conditions that arose subsequent to the reporting date.

Examples of non-adjusting events might be:

1. Losses of non-current assets or inventories as a result of a catastrophe such as fire or flood.
2. Closing a significant part of the trading activities if this was not begun before the year-end.
3. The value of an investment falls between the reporting date and the accounts authorized.
4. Announcement of dividend after year-end.

(ii)
1. The conditions attached to the sale give rise to a constructive obligation on the reporting
date. A provision for the sales return should be recognized for 5% of June 2023 sales. The
related cost should also be reversed.

2. Since the law suit was already in progress at year-end and the amount of compensation can
also be estimated, it is an adjusting event. A provision of TZS.40,000,000 should be made.

3. There is no obligating event at the year-end either for the costs of fitting the smoke
detectors of for fines under the legislation. No provision should be recognized in this
regard.

4. The obligating event is the communication of decision to the customers and employees,
which gives rise to a constructive obligation from that date, because it creates a valid
expectation that the division will be closed. Since no communication has yet been made,
no provision is required in this regard.
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 5. The obligating event is the signing of the lease contract, which gives rise to a legal
obligation. A provision is required for the unavoidable rent payments.
6. Since the declaration was announced after year-end, there are no past event and no
obligation at year-end and is therefore non-adjusting event. Details of the dividend
declaration must, however, be disclosed.

ANSWER 5
(a) Modifications to reduce the burden of reporting for SMEs

The IFRS for SMEs has simplifications that reflect the needs of users of SMEs’ financial
statements and cost-benefit considerations. It is designed to facilitate financial reporting by
small and medium-sized entities in a number of ways:

(i) It provides significantly less guidance than full IFRS. A great deal of the guidance in
full IFRS would not be relevant to the needs of smaller entities.
(ii) Many of the principles for recognizing and measuring assets, liabilities, income and
expenses in full IFRSs are simplified. For example, goodwill and intangibles are
always amortized over their estimated useful life (or ten years if it cannot be estimated).
Research and development costs must be expensed. With defined benefit pension plans,
all actuarial gains and losses are to be recognized immediately in other comprehensive
income. All past service costs are to be recognized immediately in profit or loss. To
measure the defined benefit obligation, the projected unit credit method must be used.

(iii) Where full IFRSs allow accounting policy choices, the IFRS for SMEs allow only the
easier option. Examples of alternatives not allowed I the IFRS for SMEs include:
revaluation model for intangible assets and property, plant and equipment, proportionate
consolidation for investments in jointly-controlled entities and choice between cost and
fair value models for investment property (measurement depends on the circumstances).
(iv) Topics not relevant to SMEs are omitted: earnings per share, interim financial reporting,
segment reporting, insurance and assets held for sale.
(v) Significantly fewer disclosures are required.
(vi) The standard has been written in clear language that can easily be translated.
The above represents a considerable reduction I reporting requirements – perhaps as
much as 90% - compared with listed entities. Entities will naturally wish to use the
IFRS for SMEs if they can, but its use is restricted.
The restrictions are not related to size. There are several disadvantages of basing the
definition on size limits alone. Size limits are arbitrary and different limits are likely to
be appropriate in different countries. Most people believe that SMEs are not simply
smaller versions of listed entities, but differ from them in more fundamental ways.
The most important way in which SMEs differ from other entities is that they are not
usually publicly accountable. Accordingly, there are no quantitative thresholds for
qualification as a SME; instead, the scope of the IFRS is determined by a test of public
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 accountability. The IFRS is suitable for all entities except those whose securities are
publicly traded and financial institutions such as banks and insurance companies.
Another way in which the use of the IFRS for SMEs is restricted is that users cannot
cherry pick from this IFRS and full IFRS. If an entity adopts the IFRS for SMEs, it
must adopt it in its entirety.
(b)(i) Business combination
IFRS 3 Business Combinations allows an entity to adopt the full or partial goodwill method in its
consolidated financial statements. The IFRS for SMEs only allows the partial goodwill method.
This avoids the need for SMEs to determine the fair value of the non-controlling interests not
purchased when undertaking a business combination.
In addition, IFRS 3 requires goodwill to be tested annually for impairment. The IFRS for SMEs
requires goodwill to be amortized instead. This is a much simpler approach and the IFRS for
SMEs specifies that if an entity is unable to make a reliable estimate of the useful life, it is
presumed to be ten years, simplifying things even further.

Goodwill on Mayamaya Co’s acquisition of close will be calculated as follows:

TZS.”000”
Consideration transferred 5,700
Non-controlling interest: 10% x TZS.6m 600
6,300
Less fair value of identifiable net assets acquired (6,000)
Goodwill 300

This goodwill of TZS.0.3million will be amortized over ten years that is TZS.30,000 per annum.

(ii) Research and Development Expenditure

The IFRS for SMEs requires all internally generated research and development expenditure
to be expensed through profit or loss. This is simpler than full IFRS – IAS 38 Intangible
Assets required internally generated assets to be capitalized if certain criteria (providing
future economic benefits) are met, and it is often difficult to determine whether or not they
have been met. Mayamaya Co’s total expenditure on research (TZS.0.5m) and
development (TZS.1m) must be written off to profit or loss for the year, giving a charge of
TZS.1.5m.

(iii) Investment property

Investment properties must be held at fair value through profit or loss under the IFRS for
SMEs where their fair value can be measured without undue cost or effort, which appears
to be the case here, given that an estate agent valuation is available. Consequently, a gain
of TZS.0.2m (TZS.1.9m – TZS.1.7m) will be reported in Mayamaya Co’s profit or loss for
the year.

(iv) Intangible Asset

IAS 36 Impairment of assets requires annual impairment tests for indefinite life
intangibles, intangibles not yet available for use and goodwill. This is a complex, time-
consuming and expensive test.

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 The IFRS for SMEs only requires impairment tests where there are indicators of
impairment. In the case of Mayamaya Co’s intangible, here are no indicators of
impairment, and so an impairment test is not required.

In addition, IAS 38 Intangible Assets does not require intangible assets with an indefinite
useful life to be amortized. In contrast, under the IFRS for SMEs, all intangible assets
must be amortized. If the useful like cannot be established reliably, it must not exceed ten
years.

(c) There are several ethical issues arising in the above scenario:
Lack of proactive action:
The financial controller, Denzel, is aware that customers have overpaid and he has not taken
any proactive measures to rectify the situation. He is unwilling to issue a credit note or make a
repayment unless prompted by the customer. This raises concerns about ethical behavior and
the responsibility to act in the best interests of the company and its customers.

Lack of transparency:
Rubymax Ltd does not send statements to customers but only provides a list of outstanding
invoices. This lack of transparency may contribute to the customers' confusion and the
possibility of them making duplicate payments. By not providing clear and detailed statements,
Rubymax Ltd may be inadvertently contributing to the problem.

Blaming the customers:

Denzel's attitude towards the customers who made duplicate payments is dismissive and places
blame on them, referring to them as "idiots" and suggesting they should employ better finance
personnel. This attitude is disrespectful and fails to acknowledge Rubymax Ltd's role in the
situation. Blaming the customers instead of taking responsibility for the company's processes
and controls is not an ethical approach.

Neglecting fiduciary duty:

As the financial controller, there is a fiduciary duty to act in the best interests of the company
and its stakeholders. Denzel's decision not to take immediate action to rectify the
overpayments, such as issuing a credit note or making a repayment, may be a violation of this
duty. It is important to ensure that customer transactions are handled ethically and that any
overpayments are promptly addressed.

Failure to maintain professional standards:

Denzel's comment about auditors being watchdogs, not bloodhounds, suggests a lack of
understanding of the role and responsibilities of auditors. Auditors are expected to be diligent
and thorough in their examination of financial records, and their findings should prompt
appropriate actions. Denzel's dismissive attitude towards the financial controller's concerns
about the overpayments reflects a lack of appreciation for professional standards and due
diligence.

Conflict of Interest:
Denzel's statement, "Rubymax did not ask to be paid twice," implies a lack of concern for the
customers' interests and a potential conflict of interest. The company should prioritize
maintaining a good relationship with its customers and act in their best interests. Denzel's
reluctance to issue a credit note or make a repayment, despite the customer's overpayment,
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 raises questions about the company's commitment to customer satisfaction and fair business
practices

In summary, the ethical issues in the scenario include a lack of proactive action, lack of
transparency, blaming the customers, neglecting fiduciary duty, and a failure to maintain
professional standards. It is essential for the financial controller to address these issues and
ensure that ethical practices are upheld in the company's financial operations.

ANSWER 6

(a)(i) The requirements of IAS 16: Property, Plant and Equipment may, in part, offer a solution to
the director’s concerns. IAS 16 allows (but does not require) entities to revalue their property,
plant and equipment to fair value; however, it imposes conditions where an entity chooses to
do this.

• Where an item of property, plant and equipment is revalued under the revaluation model
of IAS 16, the whole class of assets to which it belongs must also be revalued. This is
to prevent what is known as ‘selected picking’ where an entity might only wish to
revalue items which have increased in value and leave other items at their (depreciated)
cost.

• Where an item of property, plant and equipment has been revalued, its valuation (fair
value) must be kept up to date. In practice, this means that, where the carrying amount
of the asset differs significantly from its fair value, a (new) revaluation should be carried
out.

• The market value of land and building usually represents fair value, assuming existing
use and line of business, such valuation is usually carried out by a professional valuer.
In the case of plant and equipment, the fair value can be taken as market value. Where a
market value is not available, hover, depreciated replacement cost should be used.
• The frequency of valuation depends on the volatility of the fair value of individual items
of PPE. The more volatile the fair value, the more frequently revaluation should be
carried out.

• All the items within the class of PPE should be revalued at the same time to prevent
selective revaluation of certain assets and to avoid disclosing a mixture of costs ad
values from different dates in the financial statements.

• A revaluation surplus (gain) should be credited to a revaluation surplus (reserve), via

other comprehensive income, whereas a revaluation deficit (loss) should be expensed
immediately assuming, in both cases, no previous revaluation of the asset has taken
place. A surplus on one class of asset cannot be used to offset a deficit on a different
class of asset.

• Subsequent to a revaluation, the asset should be depreciated based on its revalued

amount (less any estimated residual value) over its estimated remaining useful life,
which should be reviewed annually irrespective of whether it has been revalued.

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 An entity may choose to transfer annually an amount of the revaluation surplus relating to a
revalued asset to retained earnings corresponding to the ‘excess’ depreciation caused by an
upwards revaluation. Alternatively, it may transfer all of the relevant surplus at the time of the
asst’s disposal. The effect of this, on Makambo Bilao Ltd’s financial statements, is that its
statement of financial position will be strengthened by reflecting the fair value of its property,
plant and equipment.

However, the downside from the director’s perspective is that the depreciation charge will
actually increase as it will be based on the higher fair value and profits will be lower than using
the cost model. Although the director may not be happy with the higher depreciation, it is
conceptually financial position as non-current assets held for sale at the lower of their carrying
amount (the factory) or fair value less cost to sell (the plant).
The director has misunderstood the purpose of depreciation; it is not meant to reflect the change
increase in this case in the value of an asset, but rather the cost of using up part of the asset’s
remaining life.

(ii) In accordance with IAS 20, government grants related to non-current assets should be credited
to the statement of profit or loss over the life of the asset to which they relate, not in accordance
with the schedule of any potential repayment. The directors’ proposed treatment is implying
that the government grant is a liability which decreases over four years. This is not correct as
there would only be a liability if the directors intend to sell the related plant. Therefore, in the
year ended 30th June 2022, TZS.4,000,000 (TZS.40 million/10 years) should be credited to the
statement of profit or loss and TZS.36 million (TZS.40,000,000 million – TZS.4,000,000)
should be shown as deferred income (TZS.4 million as current liability and TZS.36 million as
non-current liability) in the statement of financial position.

If the Directors opt to sell the asset before 2025, the amount outstanding on the deferred grant
would be reversed. This is affected by debiting the deferred credit and crediting Bank/Cash
account. If the amount payable/ refundable is higher than the balance on the deferred credit, the
difference is charged to the statement of profit or loss (by debiting the SPL and crediting
Bank/Cash.

(iii) Changing the classification of an item of expense is an example of a change in accounting

policy, in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and
Errors. Such a change should only be made where it is required by an IFRS or where it would
lead to the information in the financial statements being more reliable and relevant. It may be
that this change does represent an example of the latter, although it is arguable that amortised
development costs should continue to be included in cost of sales as amortization only occurs
when the benefits from the related project(s) come on-stream. If it is accepted that his change
does constitute a change of accounting policy, then the proposed treatment by the directors is
acceptable; however, the comparative results for the year ended 30th June 2021 must be restated
as if the new policy had always been applied (referred to as retrospective application).

(b) A board decision on its own to close the factory is not sufficient to justify the creation of a
provision under IAS 37 Provisions, Contingent Liabilities and Contingent Assets. However, by
formulating a plan and informing interested parties (employees, customers and suppliers in this
case), this is likely to constitute a constructive obligation for a restructuring provision by
raising a valid expectation of the closure. The amounts that should be provided for at 30 th April
2022 are:
Questions & Answers May 2023 Page 35 of 107
 TZS. Million
Redundancy (200 employees x TZS.1,200,000) 240
Impairment loss on plant (TZS.12.8 – (TZS.6 – TZS.0.4) 7.2
Onerous contract (lower amount) 4.4
Penalty payments 1.0
252.6

The TZS.252.6 million should be charged to the statement of profit or loss for the year ended
30th April 2022 and the same amount reported in the statement of financial position as at 30 th
April 2022 as a current liability/plant impairment assuming all parts of the factory closure will
be completed within the next 12 months.

____________  ______________

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