IFRS 11: ACCOUNTING FOR JOINT VENTURES (50%)

A joint venture is a contractual arrangement whereby 2 or more partners

undertake economic activity which is subject to joint control.

IFRS 11 (Joint Arrangements) Supersedes IAS 31.

Types of joint ventures

i) Jointly controlled operations
ii) Jointly controlled assets.
iii) Jointly controlled entities.

Jointly controlled operations

This type of joint ventures where there’s a separate entity set to deal with
the operation of joint ventures. Each venturer bear with his own cost and
takes a share of the profits.

A venturer recognizes the following in the financial statements.

a) The assets it controls and the liabilities it incurred
b) The expenses incurred and the income earned.

Jointly controlled Assets

In this type of venture, the venturer has joint control and joint ownership of
some or all of the assets in the joint venture. These assets may have been
contributed in the venture or purchased by the venturers.

Joint controlled entity

An entity in which two co venturers have interest in is formed through a
contractual arrangement. Each co venturer contributes cash and resources
towards the venture.

This type of joint of venture involves the setting of a company or a

partnership or other entity. It operates in the same way like other
enterprises except that the venture has a contractual arrangement the
joint control of the economic activity.

IFRS 11 requires each venturer to include in financial statement the

following.
a) The share of jointly controlled assets classified as Property, Plant
and Equipment (PPE-IAS 16)
b) Any liability incurred in financial the share of the asset.

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 c) Its share of any liability incurred jointly with the other ventures which
relate to the joint venture
d) Any income from the sale or use of asset together with a share of
expenses incurred.
e) Any expenses which the venturer has incurred in respect of its
interest in the venture.
IFRS 11 requires that’s cash and other resources contributed by each
venturer be recognized in financial statements as follow.

Dr. Investment in joint venture xxx

Cr. Cash xxx

NB

1. In the CBS, the assets are apportioned as per the percentage of

holding (50%).
2. The financial statements are prepared using line by line format or
separate line items format. This is demonstrated in the illustration
below.

Illustration
A Venturer acquired 50% of equity capital of joint venture on 1 st January 2021 where
the joint venture Company reserves stood at sh. 40,000,000.

The Summarized financial statements are as follows:

Balance sheet as at 31st December 2021

Million (Sh)
Details Venturer Joint venture
PPE 220 170
Investment in joint venture 75 -
Loan to joint venture 20 -
Net current assets 100 50
415 220

Ordinary share capital 250 100

Revenue reserves 165 100
Loan from venture company - 20
415 220
Required
Prepare consolidated balance sheet
a) Line by line format
b) Separate line format

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CONSOLIDATED PROFIT AND LOSS (CP& L)

In consolidated profit and loss, the subsidiary results are included from
turnover to the profits after tax without distinguishing the share of the
holding company with that of the minority interest. An adjustment is then
made to deduct the minority interest share of the profit after tax.

The following must be eliminated when preparing consolidated profit and

loss:
(a) Inter group sales and purchases
(b) Unrealized profit on sales and purchase of fixed assets
(c) Unrealized profit on stock
(d) Inter group interest received and paid
(e) Inter group dividend paid and received

Computation of minority interest

MI will share only two things in the CP&L id est the share of preference
dividends and share of profit after tax and preference dividend of the
subsidiary company

Percentage share of preference dividend xxx

Percentage share of profit after tax and preference dividend
of the subsidiary xxx
MI xxx

The figure for MI is subtracted from profit after tax in the CP&L.

STATEMENT OF RETAINED EARNINGS

This statement is prepared to show the movement of earnings (profits)
during the financial year. It shows how much earnings a company has
accumulated and kept in the company since inception.

Retained earnings brought down (holding company) xxx

Profit for the year (holding company) xxx
Percentage share of preference dividend xxx
Percentage share of ordinary dividend xxx
Percentage share of subsidiary profit after tax and dividends xxx
(Both preference and ordinary) ___
Retained profit carried down (Goes to CBS) xxx

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Illustration One
H limited has 100,000 8% sh.100 preference shares and 100,000 sh.100
ordinary shares. On 1 July 2021, H. limited acquired 30,000 of the
preference shares and 75,000 of the ordinary shares of Company S. The
profit and loss accounts of the two companies for the year ended 30 June
2022 are as follows:

Details Company H Company

Sh. ‘000’ S
Sh. ‘000’
Turnover 200,000 98,000
Cost of sales (90,000) (40,000)
Gross profit 110,000 58,000
Administration expenses (35,000) (19,000)
Net profit before tax 75,000 39,000
Tax (23,000) (18,000)
Net profit after tax 52,000 21,000
Proposed dividend:
Preference ___ (600)
Ordinary (14,000) (2,000)
Retained earnings for the year 38,000 18,400
Retained earnings b/d 79,000 23,000
Retained earnings c/d 117,000 41,400

Required:
Consolidated profit and loss account and a statement of retained earnings
for the year ended 30th June 2022.

ACQUISITION OF A SUBSIDIARY AT MID-YEAR

When subsidiary is acquired at the middle of the year, it is necessary to
apportion profits between pre and post acquisition period. The entire profit
and loss of the subsidiary is split between pre and post acquisition period.

Only post acquisition results of the subsidiary are

included in consolidated profit and loss account.

Illustration Two
Assuming the facts of the previous example, prepare consolidated profit and
loss account and a statement of retained earnings if H. limited acquired the
shares of S. limited on 1st April 2022.

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Illustration Three
Assuming the facts of illustration one, prepare consolidated profit and loss
account and a statement of retained earnings if H. limited acquired the
shares of S. limited on 1st November 2021.

INCORPORATING NON-SUBSIDIARY IN THE CONSOLIDATED PROFIT

AND LOSS ACCOUNT

1) ASSOCIATE
The associate is accounted for using the equity method recommended by lAS
28.

There are only two items of the associate incorporated in the consolidated
profit and loss account:

a) Percentage share of associate profit before tax

b) Percentage share of associate tax

NB: The sales cost of sales and expenses of the associate are not included in
the consolidated profit and loss account and ARE TO BE IGNORED.

2) INVESTMENT
Dividend receivable from investment is the only item included in the
consolidated profit and loss account.

NB: The sales cost of sales and expenses of the investment company are not
included in the consolidated profit and loss account and ARE TO BE
IGNORED.

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 CASH FLOW STATEMENTS – IAS 7
Learning outcomes
By the end of this Chapter, the learner should be able to:
1. Define a cash flow statement
2. Explain terms as defined by IAS 7
3. Classify cash flows into 3 categories
4. Explain the reasons for the differences between cash and profits.
5. Prepare a cash flow statement.

Introduction
A Cash flow statement is a detailed statement prepared by the management
to indicate the cash inflows and cash outflows of the organization.
Definitions as per IAS 7
1. Cash – Comprises cash on hand and demand deposits.
2. Cash equivalents – Short term highly liquid investments that are
readily convertible to known amounts of cash and are subjected to
insignificant risks.
3. Cash flows – Are inflows and outflows of cash and cash equivalents.
4. Operating activities – Are the principle revenue producing activities
of an enterprise.
5. Investing activities – Are the acquisitions and disposals of long term
assets and other investments not included in the cash equivalents.
6. Financing activities – Are activities that result in charges in size and
composition of the equity capital and borrowings of an enterprise.

Users of cash flow statement

1. The management for decision making
2. Shareholders – they are interested to know about the payment of
dividends.
3. Investors – to find out whether the company is viable and evaluate
the company’s ability to generate sufficient cash resources.
4. Lenders – to evaluate the financial ability of a company to repay the
loan granted.
5. Financial analyst- uses the cash flow to compare the performance of
various companies.

Benefits of cash flow statements

1. Enables management to control cash by analyzing the major outflows
and inflows generated.
2. Useful in forecasting purposes for example comparing the past and
the present.
3. Gives additional information to that provided by the profit and loss
account and the statement of financial position.
4. Gives information on which are the major cash sources available to
the organization.
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5. Useful in obtaining loans, advances and credit facilities.
6. Survival in business depends on the ability to generate Cash flow
accounting directs attention towards this critical issue.

7. Cash flow is more comprehensive than 'profit' which is dependent on

accounting conventions and concepts.

8. Creditors and lenders are more interested in an entity's ability to

repay them than in its profitability. Whereas 'profits' might indicate
that cash is likely to be available, cash flow accounting is more direct
with its message.

9. Cash flow reporting provides a better means of comparing the results

of different companies than traditional profit reporting.

10. Cash flow reporting satisfies the needs of all users better.

11. Forecasts can subsequently be monitored by the publication of

variance statements which compare actual cash flows against the
forecast.

Limitations of the cash flow statements

1. Depends on the accuracy of the profit and loss account and statement
of financial position from which it is prepared.
2. Only analyses cash and cash equivalents and ignores other assets.
3. Gives information for only one year which may not be adequate.
4. The past cannot be a precise focus for the future.

Reasons for the differences in cash and profits

1. Credit transactions – sales on credit are indicated as revenue in the
profit and loss without any cash being realized.
2. Purchase and sale of fixed assets – this involves cash inflows and
outflows but they are not shown in the profit and loss account.
3. Loans acquired and repaid – they are not profit generating
transactions i.e. they don’t appear anywhere in the profit and loss
account although cash flows in and out.
4. Issue & redemption of securities – not shown in the profit and loss
account because it is a capital receipt and payment respectively
although they involve cash inflows and outflows.
5. Accruals and prepayments – accrued expenses are charged to the
profit and loss account although no cash payment have been made
and prepayments are not shown in the profit and loss account
although recorded in the cash book.

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 6. Non-cash expenses – for example depreciation, amortization,
impairment discounts, among others do not involve cash outflow or
inflows.

A cash flow statement may easily be understood as a summary of the

cashbook – set out using standard formats. The standard formats require
the cash movements as per cashbook to be summarized in the cash flow
statement in 3 categories:
1) Operating activities
2) Investing activities
3) Financing activities

Operating activities
The amount of cash flows arising from operating activities is a key indicator
of the extent to which the operations of the enterprise have generated
sufficient cash flows to repay loans, maintain the operating capability of the
enterprise, pay dividends and make new investments without recourse to
external sources of financing. Information about the specific components of
historical operating cash flows is useful, in conjunction with other
information, in forecasting future operating cash flows.
Cash flows from operating activities are primarily derived from the principal
revenue-producing activities of the enterprise. Therefore, they generally
result from the transactions and other events that enter into the
determination of net profit or loss. Examples of cash flows from operating
activities are:
(a) Cash receipts from the sale of goods and the rendering of services;
(b) Cash receipts from royalties, fees, commissions and other revenue;
(c) Cash payments to suppliers for goods and services;
(d) Cash payments to and on behalf of employees;
(e) Cash receipts and cash payments of an insurance enterprise for
premiums and claims, annuities and other policy benefits;
(f) Cash payments or refunds of income taxes unless they can be
specifically identified with financing and investing activities; and
(g) Cash receipts and payments from contracts held for dealing or trading
purposes.
Some transactions, such as the sale of an item of plant, may give rise to a
gain or loss which is included in the determination of net profit or loss.
However, the cash flows relating to such transactions are cash flows from
investing activities.

An enterprise may hold securities and loans for dealing or trading purposes,
in which case they are similar to inventory acquired specifically for resale.
Therefore, cash flows arising from the purchase and sale of dealing or
trading securities are classified as operating activities. Similarly, cash
advances and loans made by financial institutions are usually classified as
operating activities since they relate to the main revenue-producing activity
of that enterprise.

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Investing Activities
The separate disclosure of cash flows arising from investing activities is
important because the cash flows represent the extent to which
expenditures have been made for resources intended to generate future
income and cash flows. Examples of cash flows arising from investing
activities are:
(a) Cash payments to acquire property, plant and equipment, intangibles
and other long-term assets. These payments include those relating to
capitalized development costs and self-constructed property, plant
and equipment;
(b) Cash receipts from sales of property, plant and equipment, tangibles
and other long-term assets;
(c) Cash payments to acquire equity or debt instruments of other
enterprises and interests in joint ventures (other than payments for
those instruments considered to be cash equivalents and those held
for dealing or trading purposes);
(d) Cash receipts from sales of equity or debt instruments of other
enterprises and interests in joint ventures (other than receipts for
those instruments considered to be cash equivalents and those held
for dealing or trading purposes);
(e) Cash advances and loans made to other parties (other than advance
and loans made by a financial institution);
(f) cash receipts from the repayment of advances and loans made to
other parties (other than advances and loans of a financial
institution);
(g) Cash payments for future contracts, forward contracts, option
contracts and swap contracts except when the contracts are held for
dealing or trading purposes, or the payments are classified as
financing activities; and
(h) Cash receipts from future contracts, forward contracts, option
contracts and swap contracts except when the contracts are held for
dealing or trading purposes, or the receipts are classified as financing
activities.
When a contract is accounted for as a hedge of an identifiable position,
the cash flows of the contracts are classified in the same manner as the
cash flows of the position being hedged.
Financing Activities
The separate disclosure of cash flows arising from financing activities is
important because it is useful in predicting claims on future cash flows by
providers of capital to the enterprise. Examples of cash flows arising from
financing activities are;
(a) Cash proceeds from issuing shares or other equity instruments;
(b) Cash payments to owners to acquire or redeem the enterprise’s shares
(c) Cash proceeds from issuing debentures, loans, notes, bonds
mortgages and other short or long-term borrowings;
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 (d) Cash repayments of amounts borrowed; and
(e) Cash payments by a lessee for the reduction of the outstanding
liability relating to a finance lease.

Criticism of IAS 7
The inclusion of cash equivalents has been criticized because it does not
reflect the way in which businesses are managed: in particular, the
requirement that to be a cash equivalent an investment has to be within
three months of maturity is considered unrealistic. The management of
assets similar to cash (i.e. 'cash equivalents') is not distinguished from other
investment decisions.

Format of a cash flow statement

There two approached of preparing a cash flow statement. These approaches
are the indirect and direct method.

Indirect Method

Net profit before tax xxx

Adjustment
Depreciation xxx
Goodwill impairment xxx
Loss on sale of fixed assets xxx
Profit on sale of fixed assets (xxx)
Foreign exchange loss xxx
Foreign exchange gain (xxx)
Interest Expense xxx
Interest income (xxx) xxx
xxx
OPERATING ACTIVITIES
Increase in current Assets (xxx)
Decrease in current Assets xxx
Increase in current liabilities xxx
Decrease in current liabilities (xxx)
Less: taxation (xxx)
Net cash inflows/outflows from
Operating activities xxx

INVESTING ACTIVITIES
Purchase of fixed assets and (xxx)
intangible assets
Sale of fixed assets and intangible
assets xxx
Dividend received from associates xxx
Interest received xxx
Other divided received xxx
Net cash inflows/outflows from xxx
investing activities

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 FINANCIAL ACTIVITIES
Increase in share capital and share xxx
premium
Redemption of share capital and (xxx)
loans
Finance lease paid (xxx)
Dividend paid to group members (xxx)
Dividend paid to Minority Interest (xxx)
Net cash inflow/ outflow from xxx
financing activities
xxx
Add: cash and cash equivalents at xxx
start of the year end.
Cash and cash equivalent at year end xxx

Illustration 1

The following are extracts from the financial statements of Wazee Ltd as at
31 March.
2019 2018
KES KES KES KES
’000 ’000 ’000 ‘000
Fixed assets:
Goodwill 2,800 2,900
Land & building 16,800 12,000
Plant and machinery 5,860 6,350
Investment at cost 3,600 29,060 3,750 25,000
Current assets:
Inventory 10,050 8,700
Accounts receivable 6,140 7,800
Investments 1,710 840
Cash & bank 200 18,100 430 17,770
Current liabilities:
Bank overdraft (2,390) (6,540)
Accounts payable (5,850) (5,250)
Proposed dividends (450) (380)
Taxation (820) (9,510) (600) (12,770)
15% debentures (7,500) (9,000)
30,150 21,000
Capital and reserves:
Ord. shares KES10 18,000 15,000
Share premium 1,500 750
Revaluation reserve 4,500 -
Retained profit 6,150 5,250
30,150 21,000

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The profit and loss appropriation account for the year ended 31 March 2019
is given below:

KES’000’ KES’000’
Net profit before tax 2,400
Less: Corporation tax 900
Profit after tax 1,500
Dividends:
Interim (paid) 150
Proposed 450 600
900

The following additional information is provided:

1. Profit for the year is arrived at after charging:
KES’000’
2. Depreciation on plant and 1,150 During the
year, plant machinery with a net
book value Goodwill impairment 420 of KES
750,000 was sold for KES 1,470,000. The plant had originally cost KES
3,000,000.

3. The investments portfolio was reduced by selling one block of shares

at a profit of KES 160,000.

Required:
a) Briefly explain the objectives and scope of IAS 7 on Cash Flow
Statements.
b) Cash flow statement in accordance with IAS 7.
Solution
a) Objectives and scope of IAS 7 (cash flow statements)
Cash flow is useful in providing users with a basis of assessing the
ability of an enterprise to generate cash and cash equivalents. The
economic decisions taken by the users requires this evaluation of a
company’s ability to generate cash and cash equivalents. The objective
of this standard is to require the provision of information about the
historical changes in cash and cash equivalents by classifying such
changes into:
-operating activities
-investing activities
-financing activities

Scope of IAS7
1. An enterprise should prepare a cash flow statement in accordance to
the requirement of his standard.
2. This standard supersedes IAS 7 approved in July 1977.
3. IAS 7 requires all enterprises to present a cash flow statement.

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Illustration 2
a) A business entity may report profits in its financial statements, yet
experience declining balances of the cash at hand and at bank. Explain.

b) Set out below are the summarised statement of financial positions of

Jasho Ltd. For the years ended 31 December 2016 and 2017. And the
profit and loss account for the year ended 31 December 2004:

Statement of financial positions as at 31 December

2016 2017
KES KES KES KES
Equity & debt capital: ‘000 ‘000 ‘000 ‘000
Ordinary share capital 14,800 18,800
Revaluation reserve 2,500 6,500
Revenue reserves 21,120 27,780
Share premium 3,000 4,800
Loans 8,400 49,820 5,200 63,080
Current liabilities:
Accounts payable 3,040 2,820
Proposed dividends 2,800 3,400
Taxation 9,400 12,040
Bank overdraft - 15,240 15,320 33,580
65,060 96,660
Fixed assets:
Freehold land 18,000 22,000
Plant and machinery:
Cost 54,000 76,620
Acc. depreciation (14,960) 39,040 (22,500) 54,120
Current assets:
Stock 4,060 16,860
Debtors 2,940 3,680
Cash at bank 1,020 8,020 - 20,540
65,060 96,660

Profit and loss account for the year ended 31 December

2017:
KES ‘000’ KES ‘000’
Profit before tax 23,900
Corporation tax (12,040)
Profit after tax 11,860
Ordinary dividend:
Paid 1,800
Proposed 3,400 (5,200)
6,660

Additional information:

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1. During the year ended 31 December 2017, Jasho Ltd. obtained a five-
year bank loan amounting to KES 1,300,000.

2. Depreciation charged on plant and machinery during the year ended 31

December 2017 amounted to KES 8,020,000.

3. During the year ended 31 December 2017, plant which originally cost
KES 1,380,000 was disposed of for KES 820,000.

Required
Cash flow statement in compliance with IAS 7 (Cash Flow Statements). For the year
ended 31 December 2017.

Illustration 3
The financial statements of Meru Ltd for 2017 and 2018 are provided as
follows:
Statement of financial position
October October
31, 2018 31, 2017
KES ‘000 KES ‘000
Property plant and equipment (net) 165,000 147,500
Stock 30,000 25,000
Debtors 15,000 12,500
Prepayments 2,500 5,000
Cash 7,500 10,000
220,000 200,000
Creditors 10,000 12,500
Accrued expenses 7,500 5,000
Taxation 15,000 12,500
Issued share capital 120,000 110,000
Retained profits 67,500 60,000
220,000 200,000

Profit and loss account for the year ended October 31, 2018
KES ‘000
Sales 240,000
Cost of sales (165,000)
Gross profit 75,000
Operating expenses(including (37,500)
depreciation KES 5,000)
Net profit before tax 37,500
Taxation (17,500)
Profit after tax 20,000

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Required:
Prepare a cash flow statement

Illustration 4
Given below are the comparative statements of financial positions of Tausi
Ltd., a trading company, for the years ended 31 October 2017 and 2018:

2018 2017
Assets KES KES KES KES
’000 ’000 ’000 ’000
Non-current assets:
Goodwill 23,500 32,650
Premises 200,000 80,000
Plant and machinery 290,100 278,200
Office equipment 126,250 639,850 87,360 478,210
Current assets:
Stock 88,890 67,815
Accounts receivable 57,890 52,015
Bank 9,210 155,990 - 119,830
795,840 598,040
Capital and Liabilities:
Capital:
Ordinary shares 425,000 250,000
10% redeemable pref. shares 75,000 160,000
Share premium 33,000 -
Capital redemption reserve 30,000 -
General reserve 38,000 12,000
Profit and loss account 22,300 623,300 11,200 433,200
Non-current liability:
Bank loan 63,000 50,000
Current liabilities:
Accounts payable 49,840 40,290
Current tax 30,500 28,500
Proposed ord. dividends 26,000 18,000
Accruals 3,200 5,420
Bank overdraft - 109,540 22,630 114,840
795,840 598,040

The following additional information is provided:

1. Some of the redeemable preference shares which had been issued at
par, were redeemed at a premium of 2%. To finance the redemption
and comply with the Companies Act requirements, the company
simultaneously carried out the following:
(i) Issued 5,500,000 additional ordinary shares of KES10 at a total
premium of KES 34,700,000.

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 (ii) Transferred sufficient amounts to the capital redemption
reserve.
(iii) Financed the premium on redemption out of the premium
received on issue of the additional ordinary shares.

2. Preference dividends are paid at the end of each financial year on

shares outstanding then.
3. Part of plant and machinery which had cost KES 60,000,000 on
acquisition and on which KES42,000,000 accumulated depreciation
had been provided was sold for KES25,000,000 during the year.
4. Included in the depreciation charge for the year is KES 15,100,000 in
respect of plant and machinery.
5. New office equipment was purchased in the year for KES 55,000,000.
There was no disposal of office equipment during the year.
6. It is the company’s policy not to depreciate premises. The change in
the premises account balance was due to a revaluation of the asset.
7. The revaluation reserve arising in (6) above was all to finance the
issue of fully paid-up bonus shares of KES10 each to ordinary
shareholders.
8. A new bank loan of KES 25,000,000 was received in the year. Bank
interest of KES 8,000,000 was also paid in the year.
9. Current tax liability is in respect of the tax charge for the respective
year.
10. During the year ended 31 October 2018 an interim dividend of
KES 14,000,000 was paid.
Required:
Cash flow statement in accordance with IAS 7.

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CONSOLIDATED CASH FLOW STATEMENT (C.C.S)
Where a company has subsidiaries and associates a CCS should be prepared. The
same procedure is followed as that of individual companies. However the following
information must be considered.
1. Minority interest

The amount paid to the minority inform of dividends is shown as financing

activity in the consolidated cash flow statement.
2. Extra-ordinary item

These are item which occur on rare situations e.g. earthquake and
expropriation of assets.
Expropriation- forceful takeover of company assets by the government
Any cash flow arising from these items should be classified under investing
activities
3. Investment in associate

Divided receivable from associate should be classified under investigating

activities
4. Sale and purchase of subsidiaries

Sale proceeds as well as purchase cost of the subsidiary should be recorded

under investing activities.
Illustration 5

The voice of the Nation Limited is a Nairobi based media company. Its Consolidated Income
Statement for the year ended 30 April 2013, and its Consolidated Balance Sheets as at 30 April 2021
and 2022 are as follows:

Consolidated Income Consolidated 2022 2021

Statement for the year Balance Sheet Sh.mill Sh.millio
ended 30 April 2013 as at 30 April ion n
Sh.millio Non-current assets:
n
Sales 3,325
Cost of sales (1,935) Property, plant and equip.
Gross profit 1,390 (Cost or Valuation) 2,297 2,134
Distribution costs (225) Accumulated (931) (733)
Administrative expenses (790) Depreciation 1,366 1,401
Operating profit 375 Intangible asset: Goodwill 126 126
Finance costs: Int expense (8) impairment (30) (17)
Share of results of associate 50 96 109
Profit before tax 417 Investment in associate 263 246
Tax: Group companies (110) 1,725 1,756
Share of associate (15) (125) Current assets:
Profit before minority 292 Inventories 276 178
interest (28) Receivables and
Minority interest 264 prepayments 607 623
Profit after tax Cash and cash equivalents 93 71
976 872

17
 Current Liabilities:
Payables and accrued
expenses 615 484
Additional information: Current tax 22 16
1. The holding company, the subsidiary and Borrowings: bank 8 188
the associate had all paid dividends overdraft 645 688
during the year. 331 331
Net current assets 2,056 1,940
2.A class of assets in the subsidiary had
been revalued during the year. Capital and reserves:
Depreciation of Sh.20 million had been 500 500
written back on the revaluation. The Share capital 260 188
transfer to the revaluation surplus Revaluation reserve 839 725
account in the subsidiary was Sh.120 Retained earnings 1,599 1,413
million. The minority interest owns 40% Shareholders’ funds 240 204
of the share capital of the subsidiary. Minority interest
Non-current liabilities:
3.Property, plant and equipment which Borrowings: commercial 110 200
had cost Sh.100 million and on which paper 107 123
accumulated depreciation stood at Sh.47 Deferred tax 217 323
million at 30 April 2021 was sold for 2,056 1,940
Sh.70 million in the year.

4.The group classifies interest paid as an

operating cash flow, there were no
accruals at the beginning or at the end of
the year in respect of this item. It
classifies dividends received as an
investing activity and any dividends paid
as an investing activity. The bank
overdraft is classified as a component of
cash and cash equivalent.

Required:
Prepare the Consolidated Cash flow Statement for the year ended 30 April 2022 for the group using
the indirect method. (Total: 20 marks)

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IFRS 3: BUSINESS COMBINATIONS

This is the bringing together of two different enterprises into one company or
entity. One enterprise obtains control over the net assets of the other. It can
occur in two ways:

I. Acquisition
2. Uniting of interest (Merger)

ACQUISITION
This is a business combination where one of the companies (Acquirer)
obtains control over the net assets and operations of another company
(Acquiree)

UNITING OF INTEREST (MERGER)

This is a business combination where the shareholders of combining
enterprises combine control of the net assets and operations to achieve
mutual sharing of risks and benefits in respect of the lieu entity.

There are two accounting approaches applied in business combinations:

1. Merger/Pooling of interest / Uniting of Interest
Under this approach neither of the Companies can be identified as the
acquirer or Acquiree.

Features
1. Shareholders of the enterprises must achieve a continuing mutual
sharing
2. The basis of the transaction must be principle exchange of shares
3. Net assets of the two companies are combined into one entity
4. The combination should result from an offer to the holder of voting shares
which are not already held by the offeror company.
5. At least 90% of the consideration must be in shares issued by the offeror
6. The fair value of the net assets of the merging companies is almost equal
i.e. no revaluation of assets is done

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Consolidation procedure

Merger a/c
Cost of investment xxx %holding * offeree shares xxx
(investment is recorded at par)
Merger reserve(Bal figure) xx
xxx xxx

NB
The merger reserve is not impaired.
Group Reserves Account
The account is prepared without distinguishing the pre- and post
acquisition reserves
Minority Interest
The account is prepared in the same manner but minority interest must be
10% or less.

Assets & Liabilities

Individual assets and liabilities are added in the consolidated balance sheet

2 Acquisition
This is the opposite of merger and has the following features.
a) Revaluation of as assets is done

b) Transact ion are recorded at their fair value

c) Cost of control account is prepared

Cost of control Account

Cost of investment xxx % share of acquire shares xxx
(investment recorded at market % share of pre-acquisition profits xxx
value)
Good will xxx
(Balance figure )
xxx

d. Group reserves must be distinguished as either post or pre acquisition

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Differences between merger and acquisition

Merger Acquisition
1. Larger part of consideration is 1. Consideration can be in shares
in shares or cash
2. No valuation of assets 2. Valuation of assets is done
3. Shares issued to the offeree 3. Shares are recorded at market
company are value
4. Recorded at par 4.
5. No acquirer no Acquiree 5. There is acquirer and Acquiree
6. All reserves are recorded as 6. Reserves are either pre or post
post acquisition reserves
7. No good will is computed 7. Good will is computed
8. No share premium is 8. Share premium is recognized
recognized

QUESTION ONE
Aberdare Horticulture (AHL) and Naivasha Fresh-Fruit Limited (NFL) are
exporters of horticultural and tropical fruits. Both Companies are owned by
small number of shareholders. These shareholders have decided to
amalgamate the two companies with effect from January 2021, by means of
a share exchange, all the shareholders in NFL, with the exception of the
production director who owns 5% of the shares of the company (and who
will retain his shareholding in NFL) have exchanged each of their Sh 20
shares in NFL for 2 Sh 10 share in AHL. However the exchange of shares
has not yet been recorded in the books of either company. Financial
consultants had valued the shares in NFL at Sh. 40 each and those in AHL
at Sh. 17.50 each.

The trial balances of the two companies at 30 April 2021 were as follows:

AHL NFL
Sh. Sh. Sh. Sh.
‘000’ ‘000’ ‘000’ ‘000’
Administrative expenses 36,940 30,900
Cash at bank Bank 5,750
overdraft – Secured on 3,350
land & building
Creditors 19,100 8,550
Debtors 31,150 25,800
Distribution expenses 55,410 46,350
Dividends: interim paid 3,000 4,000

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Freehold land and 21,250 8,500 18,900 7,560
buildings:
cost/accumulated
depreciation
Motor vehicles: 6,600 3,300 5,200 2,600
cost/accumulated
depreciation
Cost of sales 186,650 208,500
Plant and machinery:
cost/accumulated 36,000 14,400 40,000 16,000
depreciation
Deferred taxation 3,720 4,460
Profit and loss account 17,680 22,560
Sales 293,300 300,000
Share capital: Issued and
fully paid shares of Sh. 30,000 40,000
10/Sh.20
Stock 12,100 12,000
Taxation: Installment tax 4,250 4,330
paid
393,350 393,350 401,730 401,730

Additional information:
1. The sales and expenses of both companies occurred evenly over the year
to 30 April 2021. The rates of gross profit for both companies are
constant throughout the year.
2. The self assessment tax returns have not yet been field, but will indicate
corporation tax liabilities of Sh. 4,680,000 and Sh. 4,755,000 for AHL
and NFL respectively. Of these two amounts, Sh. 390,000 and Sh.
480,000, respectively of the liabilities are included in the deferred tax
balances brought forward included in the trial balances above.

3. The directors of AHL, who comprise the three former directors of the
company and three of the four directors of NFL have proposed that AHL
and NFL would pay final dividends of Sh. 8,500,000 and 5,000,000
respectively.

Required:
The consolidated profit and loss account for the years ended 30 th April 2021
and the consolidated balance sheet as at 30 April 2021 using both the
acquisition and the pooling of interests methods in both cases the fair
values of the identifiable net assets approximate the book values. Any
goodwill that rises should be impaired on the straight line basis over 60
months and the impairment should be shown as a separate line item in the

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consolidated profit and loss account. Produce also the statement of changes
of equity for the year. Show the proposed dividends as current liabilities.
Round all figures to the nearest Sh. 1,000
BENEFITS OF CONSOLIDATED FINANCIAL REPORTS

1. Complete Overview

Consolidated statements allow investors, financial analysts, business

owners and other interested parties to get a complete overview of the parent
company. At a glance, they can view the overall health of the business and
how each subsidiary impacts the parent company.

2. Reducing Paperwork

With consolidated financial statements, there is also less paperwork

involved. If the parent company owns nine subsidiaries, there are 40
separate standalone financial reports to view i.e. the four basic financial
statements for each subsidiary plus the parent company. Not only would it
be hard to track down all these records, it would be extremely difficult to
look over each of them and try to get an overall view of how the business is
performing. Consolidated financial statements cut this pile of reports down
to just four consolidated reports. This results in less paperwork and less
effort being expended to assess a parent company’s financial health.

3. Simplification

Consolidation software cuts out all transactions that occur between

subsidiaries and the parent company since, in the grand scheme of the
business, these things cancel each other out. Eliminating these transactions
gives a simplified view of business performance.

4. Updates to Consolidated Financial Statements

Over time, consolidated financial statements will continue to evolve to make

the process of evaluating a parent company even more transparent. One of
the reasons for this is that in the past some companies have used
consolidated reports to hide losses and liabilities in special subsidiaries that
were created specifically for hiding these financial problems. The Financial
Accounting Standards Board and the International Accounting Standards
Board regularly revisit the definitions and requirements for consolidated
statements in order to make them more reliable and easier to use.

5. Information about overall profitability

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There can be some mutual indebtedness in holding and its subsidiaries.
Profitability of holding and all its subsidiaries can be determined by
consolidation. Here internal and external users of financial information can
make their judgement about the company that they should invest or not.
Easy to know the financial position of holding and its subsidiaries
True financial position of holding and each of its subsidiaries can be
determined with consolidation of financial statement.

6. Evaluation of efficiency
Efficiency of holding and its subsidiaries can be evaluated with the help of
consolidation of financial statements. Investors can use these information to
know the past trend and future trends.

7. Easy to find the intrinsic value of shares

Intrinsic value (true worth) of shares of holding company can be found by
the consolidated financial statements.

8. Easy to know minority Interest

Minority Interest of outsider shareholders of subsidiaries can be found by
the consolidated financial statements.

9. Ensures compliance with company Act, IAS and IFRS

DISADVANTAGES OF CONSOLIDATED FINANCIAL STATEMENTS

1. Confusion about true financial position of subsidiaries

After consolidation, the assets and liability are shown in single entity. So
here it is difficult to know the true financial position of subsidiaries of a
holding company.

2. Concealment of financial information

For the growth and to reduce the risk of holding company after aggregation
of financial statement of holding and its subsidiaries may conceal some
important financial information from investors.

3. Chances of fraud by Holding company

Sometimes the holding company doesn’t disclose the true financial position,
it can mislead the users.

4. Recording assets in the balance sheet not owned by the holding

company

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 Since assets in the CBS are not apportioned as per the percentage of
holding, the holding company includes assets it does not own.

5. Consolidated financial statements do not disclose the performance of

an individual company in the group
6. These accounts are redundant to creditors of individual companies
7. There is very high chance of impairment of information where the
group members are involved in different activities, different accounting
policies and different financial periods

CIRCUMSTANCES WHEN SUBSIDIARY COMPANY IS EXCLUDED FROM

GROUP ACCOUNTS

Under IAS 27 a parent need not present consolidation financial

statements if and only if
(i). The present itself is of wholly owned subsidiary
(ii). The present debts of equity instruments are not traded in a stock
exchange.
(iii). The parent is in a group in which it is a subsidiary and the
ultimate parent in that group prepares consolidated financial
statements that conforms with IFRSs.
(iv) The parent has not filed nor is not in the process of filing its
financial statements with of regulatory organization in the purpose
of issuing any class of instruments.

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 VALUE ADDED STATEMENTS
Value added is the difference between the value of the goods or services
produced (i.e. sales revenue) and the value of goods and services purchased
from outsiders (i.e. the cost of brought-in material and services). Value
added therefore represents the increase in value attached to purchased
inputs and application of knowledge and human skills to create a finished
product or service of greater value.

The value added statement is normally in two parts; the first shows the
value added by the team whilst the second shows how that value added has
been divided between the team members (i.e. those contributing to its
creation). These are:
 Employees
 Providers of capital, and
 The government

The government contribution is presumably the provision of a stable

environment in which the company’s activities can take place.

Advantages of value added statements

a) The statement is a means of showing how the wealth created by the

organization is distributed
b) The emphasis in the statement is on all members of the team whilst
profit and loss account emphasizes the wealth accrued to shareholders
c) The term ‘profit’ is an unpopular word. It is associated with exploitation.
It is hoped that the term ‘value added’ will be more popular.
d) The statement reflects the employee participation in added value
e) The amount of the government interest is more clearly shown
f) The amount by which the resources of the company increase which
includes the depreciation charge is shown
g) The statement can provide a new insight into a company’s performance
and can be the basis for calculating a number of useful ratios, hence it
can be used as a tool for decision making
h) It usefully elaborates on productivity and helps towards a productivity
scheme

Productivity is increased when the same or better outputs are produced with
a reduction in the resources consumed. Such a change will always be
reflected in the level of value added and this provides better means of
measuring productivity.

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Disadvantages

a) The meaning attached to the term ‘value added’ is not the same as the
economists ‘value added’ or that used for value added taxation. This may
cause confusion.
b) The team in a wider sense also includes suppliers of goods and services
but they do not participate in added value.
c) Value added, as generally disclosed, will be increased if fixed assets are
bought rather than rented, employees engaged rather than using
subcontracting.

Most of the items in the illustrative statement can be presented in more

than one way. The following are the alternative treatment.

Turnover

The statement can show sales net of VAT/sales tax on the grounds that the
company is in this case a collecting agent for the government. An alternative
is the presentation of gross sales (inclusive of VAT/sales tax) with the
amount of VAT/sales tax also shown as part of the government’s share of
the value added. This alternative is adopted on the grounds that the
generation of VAT/sales tax is part of the value added by the operations of
the company.

Bought in materials and services

Some authorities advocate for the inclusion of depreciation as a deduction in

arriving at value added on the grounds that the purchase of a fixed asset
from a non-team member is a bought in item and it is only the fact that it
has a long life that necessitates the charging of depreciation. Others are of
the opinion that depreciation is a non cash expense and the funds
representing it are available for investment in new capital assets thus it
should be regarded as part of the provision for maintenance of capital.

Payment to employees
This is that gross pay of employees, which is regarded as their
remuneration. It is possible to include pay net of PAYE under this heading,
showing the PAYE deduction as part of the government share.

Payment to government

This is where there is a lot of variety in practice. Some companies merely

show ‘ Corporation tax payable’. Others show all taxes paid to the
government. In this case the heading ‘To pay government’ might include:

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 a) Corporation tax
b) Employees PAYE
c) Taxation deducted from interest payable
d) VAT
e) Local rates
f) Motor vehicle licence fees
g) Customs and exercise duties

There seems to be arguments in favour of both treatments. To include just

the figures for corporation tax avoids the need for arbitrary distinctions and
time consuming analysis of the accounts to ascertain the totals of the
various taxes. It also has the advantage of agreement with profit and loss
account figure.

On the other hand, inclusion of all taxes shows more clearly the total ‘take’
by the government and possibly facilitates international comparison.

Non trading items

Where a company has a non-trading item, an example of which is

investment income it is preferably included in the first part of the statement.

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