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ASSOCIATION OF ACCOUNTING TECHNICIANS OF SRI LANKA

LEVEL III EXAMINATION - JANUARY 2024
(301) FINANCIAL REPORTING
10-02-2024
 Instructions to candidates (Please Read Carefully): Morning
[08.45 – 12.00]
(1) Time Allowed: Reading : 15 minutes
Writing : 03 hours No. of Pages : 11
No. of Questions : 10
(2) All questions should be answered.
(3) Answers should be in one language, in the medium applied for, in the booklets provided.
(4) Submit all workings and calculations. State clearly assumptions made by you, if any.
(5) Use of Non-programmable calculators is only permitted.
(6) Action Verb Check List with definitions is attached. Each question will begin with an action verb.
Candidates should answer the questions based on the definition of the verb given in the Action
Verb Check List.
(7) 100 Marks.

SECTION A
(Total 20 marks)

Question 01

(a) The objective of general purpose financial statements is to provide financial information
about the reporting entity that is useful for stakeholders in making decisions relating to
providing resources to the entity. There are qualitative characteristics that enhance the
usefulness of financial information.

You are required to:

Explain two(02) qualitative characteristics that enhance the usefulness of financial

information. (03 marks)

(b) The selection of appropriate concept of capital by entity should be based on the needs of
the users of its financial statements.

You are required to:

State the two(02) primary types of capital maintenance. (02 marks)

(Total 05 marks)
 Question 02
Sri Lanka Accounting and Auditing Standards Monitoring Board and Securities and Exchange
Commission were established to monitor the activities of Specified Business Entities.
You are required to:
(a) State two(02) powers of the Sri Lanka Accounting and Auditing Standards Monitoring
Board. (02 marks)

(b) State three(03) functions of Securities and Exchange Commission of Sri Lanka. (03 marks)
(Total 05 marks)

Question 03
In the current business world, the financial information as well as non-financial information are
crucial in evaluating the decisions by its stakeholders. Risks & opportunities and strategy &
resource allocation are two key elements which are essential in sustaining the business
continuity and it is required to disclose in integrated reporting.
You are required to:
(a) Identify two(02) non-financial reports which are included in the Annual Report of a listed
entity. (02 marks)

(b) State three(03) key areas to be included under the strategy & resource allocation in the
Integrated Report. (03 marks)
(Total 05 marks)

Question 04
(a) An intangible asset arising from development shall be recognized, if and only an entity can
demonstrate the stipulated conditions.
You are required to:
State two(02) conditions which should be satisfied in order to capitalize development cost
as an intangible asset as per LKAS 38 - Intangible Assets. (02 marks)

(b) Enrich Ltd. has developed a new instant beverage to the local market during the year
ended 31st March 2023 and started commercial operation in April 2023. Cost incurred for
the new product during the year 2022/23 were as follows:
(1) A market research was conducted for the new product and incurred an amount of
Rs.500,000/-.
(2) The company obtained the patent right for the new product during the year by
incurring Rs.300,000/-.
(3) Costs of Rs.300,000/- for TV commercials were spent on the new product.
You are required to:
Explain whether each of the above costs could be recognized as intangible assets as per
LKAS 38 - Intangible Assets. (03 marks)
End of Section A (Total 05 marks)
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 SECTION B
(Total 30 marks)

Question 05
The Statements of Financial Position of Vinco (Pvt) Ltd. as at 31st March 2023 and 31st March
2022 are given below:
Vinco (Pvt) Ltd.
Statements of Financial Position (Rs.'000)
As at 31st March 2023 2022
Non-Current Assets:
Property, Plant and Equipment 8,500 6,500
Less: Accumulated Depreciation (1,300) (1,000)
Carrying Value 7,200 5,500
Current Assets:
Inventories 1,950 2,300
Trade and Other Receivables 2,090 1,680
Cash and Cash Equivalents 2,115 1,680
6,155 5,660
Total Assets 13,355 11,160
Equity and Liabilities:
Equity:
Stated Capital (80,000 Ordinary Shares) 8,000 8,000
Retained Earnings 935 560
8,935 8,560
Non-Current Liabilities:
Long-Term Loans 900 780
Employee Benefits (Provision for Gratuity) 490 420
1,390 1,200
Current Liabilities:
Trade Payables 2,530 1,010
Short-Term Loans 180 180
Income Tax Payable 320 210
3,030 1,400
Total Equity and Liabilities 13,355 11,160

The following additional information is also provided:

(1) Income tax expenses for the year ended 31st March 2023 was Rs.230,000/-.
(2) The company has disposed one of its motor vehicles costing Rs.1,200,000/- on 01st April
2022 for Rs.600,000/-. The accumulated depreciation as at the date of disposal was
Rs.500,000/-. In addition to this transaction, the difference in Property, Plant and
Equipment represents the acquisition of a land during the year ended 31st March 2023.
(3) Interest expense on loans for the year was Rs.250,000/- and it was paid during the year.
(4) During the year, the company paid final dividend of Rs.160,000/- to its ordinary
shareholders.
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(5) On 31st March 2023, ABC Bank has given a long term loan of Rs.500,000/- to the company.
(6) No gratuity payments were made during the year.

You are required to:

Prepare the Statement of Cash Flows for Vinco (Pvt) Ltd. for the year ended 31st March 2023
using indirect method. (10 marks)

Question 06
(a) Sunshine Ltd. purchased a motor vehicle at a cost of Rs.8 million on 01st April 2022 paying
an advance amount of Rs.3 million and obtained a finance leasing facility for the balance
amount from ABC Bank on the same day. You are provided the following information with
reference to the finance lease:
Lease Term 4 years
Implicit Interest Rate 18% per annum
Annual Lease Installment Rs.1,858,736/-

Lease installment is paid at the end of each year and ownership of the asset is transferred
to Sunshine Ltd. at the end of lease term. First installment of the lease was paid by the
company on 31st March 2023. Useful life of the motor vehicle is 4 years.

You are required to:

Prepare the extracts of Statement of Comprehensive Income for the year ended 31st March
2023 and the Statement of Financial Position as at 31st March 2023 with reference to this
lease. (06 marks)

(b) Space Air Ltd. is a newly established airline company and bought a passenger air craft for
its commercial operation. The cost of the air craft purchased on 01st April 2022 was
Rs.1,200 million. The air craft consists of 03 main parts namely Engines, Landing Gear and
Airframe.
The cost, residual value at the end of useful life and the useful life of each part are as
follows:
Residual Value Useful Life
Component % of Total Cost
(Rs. million) (Years)
Engines 50% 100 10
Landing Gear 20% 40 5
Airframe 30% 60 20

You are required to:

Calculate the annual depreciation charge for the year ended 31st March 2023 of the air
craft. (04 marks)
(Total 10 marks)

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 Question 07

(a) Sino Ltd. is a mineral extraction company. The accountant of Sino Ltd. has found the
following incidents occurred during the year ended 31st March 2023 and these were not
considered in the financial statements prepared for the year ended 31st March 2023:

(1) An employee of the company was injured while at work in May 2022 due to a failure
in an equipment. He sued the company claiming compensation of Rs.5 million for the
damage caused to him. The lawyers of the company were in the view that there is a
high probability that the company will be found liable to pay compensation in full.
Finally the court ordered to pay Rs. 3 million on 31st May 2023.

(2) At the same time, Sino Ltd. has sued against the equipment supplier to claim Rs. 9
million as compensation. The company lawyers believe that there is a high
probability to succeed and receive Rs.9 million as compensation. Final decision was
not given by the court till 15th June 2023.

(3) At the end of March 2023, Sino Ltd. has started operations at a new mineral site. As
part of obtaining permission to start the operation, the company has a legal
obligation to remove the site preparations and landfilling of extracted area. This
obligation has a present value of Rs.100 million.

Assuming that the Financial Statements are authorized on 15th June 2023;

You are required to:

Explain the impact of the above scenarios on the financial statements for the year ended
31st March 2023 of Sino Ltd. as per LKAS 37 – Provisions, Contingent Liabilities and
Contingent Assets. (05 marks)

(b) Identify the steps in the five steps model that should be followed in recognizing revenue as
per SLFRS 15- Revenue from Contracts with Customers. (05 marks)
(Total 10 marks)

End of Section B

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 SECTION C
(Total 50 marks)

Question 08
The following trial balance was extracted from the books of accounts of Global PLC as at 31st
March 2023:
Global PLC
Trial Balance as at 31st March 2023 (Rs.'000)
Dr. Cr.
Property, Plant and Equipment at Cost / Revalued Amount:
Land at Revalued amount (cost - Rs.35 million) 40,000
Building 55,000
Machinery 28,000
Capital Work-In-Progress 14,000
Accumulated Depreciation as at 01st April 2022:
Building 14,000
Machinery 12,000
Inventory as at 31st March 2023 at Cost 24,000
Trade Receivables / Trade Payables 10,250 6,500
Cash in Hand and at Banks 16,150
Allowance for Trade Receivables as at 01st April 2022 2,900
Employee Benefits (Gratuity Provision) 8,500
Accrued Expenses 8,000
Income Tax Paid 12,400
Cost of Sales / Sales 116,000 206,000
Other Income 6,400
Income Tax Payable as at 31st March 2022 8,100
Bank Loan 9,000
Administration Expenses 40,000
Distribution Expenses 37,000
Finance Expenses 1,100
Stated Capital (10,000,000 Ordinary Shares) 95,000
Revaluation Surplus 5,000
Retained Earnings as at 01st April 2022 12,500
393,900 393,900

The following additional information is also provided:

(1) The physical inventory count at the year-end revealed that the year-end inventory included
slow moving inventories costing of Rs.1,200,000/-. This inventory was sold for
Rs.800,000/- to a customer on 12th April 2023.

(2) Property, Plant and Equipment are to be depreciated on the straight-line basis at cost. The
useful life of the assets are as follows:
Building : 50 years
Machinery : 05 years

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(3) On 31st March 2023, the company carried out an impairment test for machinery and it was
found that value in use and the fair value less cost of disposal were Rs.8,400,000/- and
Rs.9,000,000/- respectively. There were no adjustments made in the books of accounts
regarding the impairment.

(4) The land was initially revalued during the year 2020/21 and it was revalued again to
Rs.43,000,000/- on 31st March 2023 by the company. But this was not recorded in the
books of accounts.

(5) On 01st June 2022, the company obtained a bank loan of Rs.9,000,000/- at an interest rate
of 8% per annum for construction of food processing factory. Construction of the factory
was started on 01st July 2022 and it was progress as at 31st March 2023. Cost incurred
during the year on construction was recorded under capital working progress account.
Interest on loan for the year was recorded under finance expenses. The bank has given
2 years grace period to settle the capital repayments.

(6) During the year, the company recovered a bad debt of Rs.600,000/- which was previously
written off to distribution expenses in March 2021. The amount received has been credited
to Trade Receivables Account. Another customer of the company has gone into liquidation
and the company decided to write-off Rs.250,000/- receivable from him as bad debt. But it
was not recorded in the books of accounts. Further, it was also decided by the management
to maintain the allowance for trade receivables at 5% of the balance trade receivables as at
31st March 2023.

(7) Investment income of Rs.1,200,000/- which was received during the year 2022/23 was
recorded under other income. Investment income relevant for the month of March 2023 of
Rs.400,000/- was received in April 2023 and it was not recorded in the books of accounts.

(8) Accrued income tax liability as at 31st March 2022 was Rs.8,100,000/- and the total income
tax liability for the year of assessment 2022/23 is estimated to be Rs.9,250,000/-. Income
tax payments made during the year ended 31st March 2023 was charged to “Income Tax
Paid” account.

(9) The board of directors of the company approved the financial statements for issue on
31st May 2023.

You are required to:

Prepare the following, for Global PLC in a form suitable for publication:

(a) Statement of Profit or Loss and Other Comprehensive Income (Comprehensive Income
Statement) for the year ended 31st March 2023. (10 marks)

(b) Statement of Financial Position as at 31st March 2023. (08 marks)

(c) Statement of Changes in Equity for the year ended 31st March 2023. (03 marks)

(d) Note to the Financial Statements showing movement of Property, Plant and Equipment for
the year ended 31st March 2023. (04 marks)
(Total 25 marks)

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 Question 09
Extract of Statements of Comprehensive Income of Jayalanka PLC for the years ended 31st
March 2023 and 31st March 2022 and extract of Statements of Financial Position as at 31st March
2023 and 31st March 2022 are as follows:
Jayalanka PLC
Extract from the Statements of Income (Rs.'000)
For the year ended 31st March 2023 2022
Turnover 683,700 487,900
Cost of Sales (321,800) (286,700)
Interest Expense (7,540) (6,280)
Income Tax for the Year (3,800) (4,250)
Profit After Tax 36,450 19,820

Jayalanka PLC
Extract from the Statements of Financial Position (Rs.'000)
As at 31st March 2023 2022
Trade Receivables 141,500 119,800
Trade Payables 45,720 110,910
Inventory 81,400 79,600

Weighted Average No. of shares in issue ('000) 8,500 8,500

Consider the following additional information:

(1) 60% of the total turnover is made of credit sales.

(2) 90% of the purchases are on credit terms.

(3) The market price per share is Rs.20/-.

You are required to:

(a) Calculate the following ratios based on the above information for the year ended / as at
31st March 2023:

(i) Net Profit Ratio.

(ii) Stock Residence Period.

(iii) Debtors' Collection Period.

(iv) Creditors’ Settlement Period.

(v) Earnings Per Share.

(vi) Price Earning Ratio. (06 marks)

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(b) Following are the industry averages of the sector where Jayalanka PLC operates in:
Net Profit Ratio 10%
Inventory Residence Period 90 Days
Debtors' Collection Period 65 Days
Creditors’ Settlement Period 73 Days
Earnings Per Share Rs.7.50
Price Earnings Ratio 2.67 Times

Prepare a summary report comparing above ratios of Jayalanka PLC with the industry
averages while explaining the possible reasons for the variances. (06 marks)
(Total 12 marks)

Question 10

Thomas PLC acquired 80% of the ordinary share capital of Gomes PLC on 01st April 2022 for
Rs.350 million.
The Statements of Financial Position of Thomas PLC and Gomes PLC as at 31st March 2023
were as follows:
Statements of Financial Position (Rs.'000)
Thomas PLC Gomes PLC
Non-Current Assets:
Property, Plant and Equipment at Carrying Value 540,000 240,000
Investment in Gomes PLC 350,000 -
Investment in Debentures of Gomes PLC 40,000 -
Current Assets:
Inventories 117,000 150,000
Trade and Other Receivables 180,000 90,000
Cash and Cash Equivalents 18,000 90,000
Total Assets 1,245,000 570,000
Equity and Liabilities:
Equity:
Stated Capital 700,000 300,000
Retained Earnings 225,000 90,000
Non-Current Liabilities:
Bank Loan 125,000 44,000
Debentures - 100,000
Current Liabilities:
Trade and Other Payables 135,000 25,200
Bank Overdrafts 60,000 10,800
Total Equity and Liabilities 1,245,000 570,000

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The following additional information is also provided:

(1) At the date of acquisition, the book value of net assets except the land of Gomes PLC
was reflected at fair value. Fair value of the land was higher by Rs.5,000,000/- than its
carrying amount.

(2) At the date of acquisition, the fair value of the Non-Controlling Interest (NCI) was
Rs.100 million and the retained earnings of Gomes PLC was stood at Rs.75,000,000/-.

(3) During the year ended 31st March 2023, Gomes PLC purchased Rs.9,000,000/- worth
of goods from Thomas PLC. Out of these goods, one third (1/3) of them remained
unsold in the premises of Gomes PLC as at 31st March 2023. The sales policy of
Thomas PLC is to keep 20% profit on cost.

(4) Investment in debentures by Thomas PLC includes the debentures issued by Gomes
PLC.

(5) Impairment test carried out on 31st March 2023 revealed that the Goodwill on
acquisition of Gomes PLC has been impaired by Rs. 10 million.

You are required to:

(a) Calculate the goodwill on acquisition of Gomes PLC. (04 marks)

(b) Prepare the Consolidated Statement of Financial Position as at 31st March 2023.
(09 marks)
(Total 13 marks)

End of Section C

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 ACTION VERBS CHECK LIST
Level of
Description Action Verbs Verb Definitions
Competency
Draw Produce a picture or diagram.
Relate Establish logical or causal connections.
Recall Facts
Knowledge (1)
and Basic State Express details definitely or clearly.
Concepts.
Identify Recognize, establish or select after consideration.
List Write the connected items.

Level of
Description Action Verbs Verb Definitions
Competency
Show validity or otherwise, using knowledge or
Recognize
contextual experience.
Explain &
Comprehension Elucidates Interpret Translate into understandable or familiar terms.
(2) Ideas and Describe Write and communicate the key features.
Information.
Explain Make a clear description in detail using relevant facts.
Define Give the exact nature, scope or meaning.

Level of
Description Action Verbs Verb Definitions
Competency
Reconcile Make consistent / compatible with another.
Graph Represent by graphs.
Assess Determine the value, nature, ability or quality.
Use and Adapt
Application (3) Solve Find solutions through calculations and/or explanation.
Knowledge in
New Prepare Make or get ready for a particular purpose.
Situations.
Demonstrate Prove or exhibit with examples.
Calculate Ascertain or reckon with mathematical computation.
Apply Put to practical use.

Level of
Description Action Verbs Verb Definitions
Competency
Communicate Share or exchange information.
Outline Make a summary of significant features.
Draw Contrast Examine to show differences.
Analysis (4) Connections
Among Ideas Compare Examine to discover similarities.
and Solve
Problems. Discuss Examine in detail by arguments.
Differentiate Constitute a difference that distinguishes something.
Analyze Examine in details to find the solution or outcome.

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