CA Sri Lanka Corporate Level 2019 December Exam Pre Seen Analysis (KC 01 to KC 04)

Introduction to the CA Sri Lanka Corporate Level Examination

Before everything I want to remind you one thing. 

This is the last examination available for you to become a Corporate Level passed student under 2015 CA Sri Lanka Curriculum.

So December 2019 CA examination will be very important for you all.

Now CA Sri Lanka has already released the Pre Seen document which will be used as the base for KC1 to KC4 examinations.

Before going to the pre seen analysis, You should keep in mind about your paper structure. Every corporate level examination (i.e from KC1 to KC 4) will have two parts named as Part A and Part B.

Part A will have two questions carrying 25 marks each. Part B will carry 50 marks. Most important thing is this pre seen analysis will help you to score for above Part B. Thus how much you studies about this pre seen will only give you 50 marks.

Keep it in your mind. I am repeating. Studying and analysing the pre seen will only give you 50 marks.

Hey.. That is not all I wanted to say… Does not matter how many times you have gone through this pre seen. Don’t forget there is a  unseen part coming in the exam.Your answers should include the facts from unseen also. Other wise you will miss so many marks.

Thus my dear friend don’t waste your time too much on this.Examiner will test anything out side the pre seen and within the syllabus in Part A, which also carries 50 Marks.

There are so many strategies you have to follow during this short period to make sure you are getting through the exam this time. Those strategies include Time Management and Work Load Planning.

This will be covered in a separate article which will be published very soon. 

So guys please be with us. Visit AccountingKuppiya.com daily for newest articles.

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Objective of this article

Many of our friends requested from Accountingkuppiya team to come up with an analysis of important areas and possible questions for the corporate level pre seen. So we thought to provide you a in-depth analysis on the corporate level pre seen which covers KC1 ,KC2 , KC3 and KC4.

However I want to tell you one thing first. We provide all these lessons and articles 100% free of charge. 

Everyone who work with me write these articles for a fee of many smiles in your faces since we believe what we gain in our lives is what we give.

So guys take the best out of Accountingkuppiya.com. If these articles help you in your exams, please leave a comment here .It might be Positive or Negative ,does not matter we will be better then.

Last but not the least , Following analysis is done by myself with the intension of helping fellow brothers and sisters. This analysis might not be the most comprehensive one . You guys might come up with  better points. That is the beauty of case study exams. When you read it again and again you will come up with new ideas where you missed last time.

Please leave a comment if this article found helpful in you studies.

General information about the industry

CA Srilanka has chosen a fictitious company operates in the Plantation industry for the common pre seen for 2019 December corporate level examination.

So what are the main facts you want to be aware about this industry.

1. There are huge number of plantations companies in Sri Lanka and they play a major role in export income of the country. 
2. Large percentage out of the total market share of the plantation industry is dominated by the Plantation Giants (Big companies who are listed or Unlisted).
3. However in terms of no of plantations, small plantation factories are much higher than so called plantation giants. ( We call them as “proprietary” planters)
4. Plantation companies in Sri Lanka cultivating various crops such as;
• Tea
• Rubber
• Farm oil
• coffee
• Cinnamon 
• Pepper etc.
5. Out of above various crops , Tea and Rubber plays a major role in terms of revenue and exports.
6. Most of the crops are grown with export oriented.
7. Plantation industry’s Revenue and Crop ( Harvest) highly sensitive to the Ecological Environment ( Natural Environment).
8. All most all the lands where cultivations are being carried out are owned by the government and those are leased under operating leases to Plantation companies. (other than small planters who cultivate in their own lands)
9. Plantation industry is a labour incentive industry. ( This industry gives a very high contribution to the national Employment).
10. There are lot of Government subsidies and grants available for plantation companies since the government tries to promote the industry.
11. Taxes are relatively favourable compared to other industries.
12. Lack of enough information and lack of skilled labour is the main difficulty faced by financial reporting in this industry.
13. Frauds are a common thing you can expect due to difficulty of management.
14. Plantation companies are very asset rich due to the high investment in biological assets and other fixed assets.

I think above list will be more than enough to have a idea on the plantation industry. CA doesn’t expect to be a planter.Hee 

Don't worry. 

We will analyse the pre seen entirely and will tell you important points you have to be mindful in your studies. 

I mean you have to have a very good knowledge on those areas to face the exam with confidence.

There is a big section giving information about the Industry and Prices at the end of the pre seen . Read and take a understanding about the industry. But don’t waste too much there this is not a 100% case study examination.

Information about the entity

Name and Ownership

Name of the company : Upcountry Estates (Pvt) Ltd (UEL)

Owners of the company :

*Jerad De Silva and His son Gayan (Majority Stake )

* Mahen Zoysa            

Type of the company : Family owned business
Company acquired the estates were privatised by the government

Key Management Personnel
Chairman & MD : Jerad De Silva
Sales Director : Gayan

Extent of the Cultivations
Company owns tea and rubber estates in the Nuwara Eliya and Ratnapura districts.

Future expansion Goals
Listing in the Diri Savi Board of Colombo Stock Exchange

Human Resources
Work Force – 9000
Management Staff – 70 Staff
Having low retention rates

Company has entered an agreement with the Workers Union to increase the salaries in 

Second half of 2018. Salary increment is 7% of the total wage.

Latest news about the industry

SL government banned the Farm Oil Cultivations , It seems to be the company is not engaged with Farm oil. But be careful in the exam with pre seen.

If you want to refer some of the best annual reports of award winning companies. Just refer following company's annual reports by visiting CSE.

I selected these companies based on CA Srilanka 54th Annual report Awards results.

1. Watawala Plantation PLC
2. Kelani Valley Plantation PLC
3. Talawakelle Tea Estates PLC

Analysis of the Common Pre Seen

Important points for KC 01 Students
1. Company is planning to go Public (List its share in the Colombo stock Exchange under Diri Savi Board) in the near future.

• There are specific criteria mentioned in the Listing rules which need to qualify to get its shares listed in CSE. ( Requirements change according to the desired board such as Main board , Diri Savi Board , Empowerment Board).
• Those criteria includes showing continues profits etc. Thus company will try to show bogus revenue to increase its profitability and will show high amount of assets.
• Thus they might test concepts such as Window Dressing , Creative Accounting Etc.

2. If you analyse the shareholding % table given , there is 10% to Secretary to the Treasury Shares. We call them as “Golden Shares”

Simply they are like avengers among ordinary people. They have lot of power compared to ordinary shareholders such as the company need to get their consent before doing major changes to their leased lands. And they can appoint persons to inspect accounts and attendants to AGMs etc.

3. Following is the analysis of the Financial statements and their relevant accounting standards.

Accounting Standards	Relevant Financial Statement Caption of the company
LKAS 41	Biological assets ( Consumable Biological Assets and Bearer Plants) Fair value gain/(loss) on consumable biological assets
SLFRS 16	Leasehold right to bare land of JEDB/SLSPC estates Immovable leased assets of JEDB/SLSPC estates (other than bare land) Net obligation to lessor of JEDB/SLSPC
SLFRS 15	Revenue
SLFRS 09	Financial Assets Financial assets at Amortised Cost Trade and other receivables Amounts due from related parties Cash and cash equivalents Financial Liabilities Interest bearing borrowings Trade and other payables Amounts due to related parties Bank overdraft Interest income and expenses Net finance costs
LKAS 38	Intangible Assets
LKAS 16	Tangible assets (other than mature/immature plantations)
LKAS 28	Investments in subsidiaries
LKAS 02	Inventory
LKAS 20	Grants and subsidies

4. There are specific accounting standards relevant to the plantation industry. Thus questions from following IFRSs can be highly predictable.

LKAS 41 – Accounting for Biological Assets ( Specially Bearer Plants)

Eg : There is are norm in the industry relating to how many years will it take a tea plant and a rubber plant to become mature and How many years you can get the Crops once matured etc. These are very important since they will be the judgmental areas where you will start to amortization or depreciation of such bearer plants.

LKAS 20 – Accounting issues dealing with government grants ( Accounting Treatment of Grants related to Income and Grants related to Assets need to be clearly understood).

SLFRS 16 – Since in most of the time the plantation companies are not the owners of their lands which they cultivate, they have rented them from Government (JEDB/SLSPC). Though these are accounted as Operating leases under LKAS 17, you will have to assess these under SLFRS 16 and most probably there will be a ROU asset coming in to balance sheet and respective lessor liability also will amend accordingly.

IFRS 15 – Revenue related questions will come.

Eg : The company is having income from other sources such as subleasing Towers , Selling of Timber from fallen trees . You might have to determine whether these are recognized under the scope of SLFRS 15 or not.

LKAS 23 – Borrowing cost is a very important standard for a plantation company since they take huge loans to fund their projects. Thus as per LKAS 23 they will capitalize the interest to their PPE and Bearer Plants if the assets are qualified assets as per LKAS 23.

5.  Company’s Crop has reduced compared to last year due to lower worker outturn, worker strikes and adverse weather.

Rubber

Rubber production -  2.71 Mn  in 2018/19 compared to 3.15 Mn in 2017/18. (14% Decline)

Rubber Market Prices – Market Prices of Ribbed Smoked Sheets (RSS) declined by approximately 15% compared to the previous year.

Net Sales Average - Rs. 285 per kg during FY 2018/19 compared to Rs. 359 per kg in the previous year. This was due to the price reductions.

Cost of Production – Cost per KG increased by 6.67% ( in 2018/19 Rs.320 where in 2017/18 Rs.300). This was due to reduction in crops.

Tea

Tea production - 7.15 Mn in 2018/19 compared to 6.4 Mn in 2017/18. (growth of nearly 19% was seen in high grown tea and a decline of 14.95% was seen in low grown tea compared to the previous year)
Net Sales Average – Reduced by 2% for high Grown Tea and reduced by 5.9% for low grown tea.

Cost of Production – Cost per KG increased was somewhat stable ( in 2018/19 Rs.412 where in 2017/18 Rs.412).

6. Company has invested in a New planting project. These expenses might include land development expenses and investment on new biological plants. Thus be careful about the categorization of these.

7. The company is trying to Implement a ERP system. Thus there might be questions relating to;

- Advantages and disadvantages of implementing ERP for a Plantation company

- Challenges that might faced by the management

- Process of implementing an ERP System

- Factors to consider when choosing and ERP System

8. Business Ethics is a very important aspect where examiner is testing every time under both KC 01 and KC 04. Normally these questions will be relating to various ethical Dilemmas where you will need to apply ethical conflict resolution procedures. Further you will be required to link the answer with Code of Ethics introduced by CA Sri Lanka . Specially if the Accountant is a Chartered accountant.

9. Keep in mind that being a Plantation company it’s very important to adopt GRI G4 sustainability reporting and Integrated Reporting (IR). However this company has no such initiatives yet. Thus this is highly probable area to test. 

10. Performing a ration analysis is very important since examiner  tests this for at least 10 –15 marks every time. I will cover this in my next article. Have a visit in next week, there will be a article covering all the ratios of this company. 

11. Current Auditor is delaying the accounts and not finalised the implementation of SLFRS 15 and SLFRS 16 . Ha ha this is your chance my dear friends…. Be ready. 

Important points for KC 02 Students

1. Company is planning to go Public (List its share in the Colombo stock Exchange under Diri Savi Board) in the near future. Thus there might be questions related to;

1. Listing Process
2. Listing Options Available
3. How to decide a Share price to be listed
4. Advantages and Disadvantages of listing

2. The company is trying to Implement a ERP system. Thus there might be questions relating to;

- Changes required to Audit Plan when ERP System in implemented

- Involvement of  Experts to the Audit Engagement

- Can Auditors give a recommendation regarding selecting and ERP or can they involve in implementing ERP in the System

3. Examiner will test the possible ways of doing a Cost benefit analysis for Implementation of an ERP.

4.Examiner will test areas relating to Internal Controls and Risk management given that company has no proper Internal control system or a Risk management System.

Most probably this will be tested by linking with COSO framework for Risk management and COSO framework for Internal Controls.

5. Examiner has mentioned in the pre seen that Gayan is intending to sell his shares. Thus question may be there to value his shares to arrive at a reasonable Share price to offer. For this you might have to use;

1. Asset based valuation
2. Earning Multiples based valuation
3. Dividend based valuation
4. Cash Flow based valuation

6. Also note that when a company initially listing in CSE , they need to come up with a share price . Here also above methods can be used to value the company and arrive at a share price.

7. Gearing of the company seems to be not good . Thus be careful when proposing debt for future projects. ( I will calculate all the ratios under separate article)

8. Company is in the process of evaluation a Hydro power project. thus under KC2 examiner will ask questions related to.

Evaluation of financial feasibility – NPV , APV , Pay Back Period , ARR

Non financial Factors to consider 

WACC – De-Gearing and Re-gearing  , CAPM Model etc

Important points for KC 03 Students

Income tax

1. As per the old Inland Revenue act ( IRA No 10 of 2016) , Profit from agricultural businesses is taxed at 15%. Under previous act , whatever the income or profit earned under an agricultural activity defined in section 217 will be taxed at 15% where the remaining income is taxed at 28%.

However under new Inland revenue act story is different.

Corporate tax under New Inland Revenue Act

As per sec 195; Agriculture business is defined as follows;

Agricultural business - means the business of producing agricultural, horticultural or any animal produce and includes an undertaking for the purpose of rearing livestock or poultry;

Further there is a very important concept defined in Sec 195;

Non-traditional goods - means goods other than black tea not in packet or package form and each packet or package weighing not more than one kilogram, crepe rubber, sheet rubber, scrap rubber, latex or fresh coconuts, or agricultural, horticultural or dairy produce, includes and organic tea in bulk.

Thus our company’s products can be taken as Traditional Goods.

What is the Tax  rate applicable for the company

Under  new act , there is only one rate applicable for a company. No complications like previous act.

As per the first schedule – Tax rates , The company’s taxable income of a should be taxed at 14% only if  the company predominantly conducting agriculture business.

So what is this concept “ Predominantly”

Predominantly means means 80% or more calculated based on gross income.

Thus if you have a look at the Revenue composition and Other income amount. This company’s revenue from agricultural businesses is more than 80% and thus tax rate of 14% can be applied.

2. There is a very important section in the Inland revenue act for a plantation company.

Section 15 - Research and development expenses and agricultural start up expenses

As per Sec 15 ;

R&D expenses and Startup expenses relating to agricultural activities which meets the requirements of Subsection 01 of Section 11, can be deducted irrespective of Capital nature or not.

As per the section Agricultural Start up expenses means;

a) Opening up any land for cultivation or for animal husbandry

b) cultivating land referred to in paragraph (a) with plants;
c) the purchase of livestock or poultry to be reared on land referred to in paragraph (a); or
d) maintaining tanks or ponds or the clearing or preparation of any inland waters for the rearing of fish and the purchase of fish to be reared in such tank, pond or inland waters, as the case may be;

I will update the article with the Analysis of Other Taxes also . Please check the website later.

Important points for KC 04 Students

1. Company is planning to go Public (List its share in the Colombo stock Exchange under Diri Savi Board) in the near future.

• There are specific criteria mentioned in the Listing rules which need to qualify to get its shares listed in CSE. ( Requirements change according to the desired board such as Main board , Diri Savi Board , Empowerment Board).
• Those criteria includes showing continues profits etc. Thus company will try to show bogus revenue to increase its profitability and will show high amount of assets.

2. Thus due to their intention to list, there is a Fraud Risk from Pressure or Motive. Possible questions from this areas will be;

1. What are the Responses in the audit plan for the identified Fraud risk
2. Special Procures which can be suggested to mitigate or identify material misstatements.

3. There is a high possibility of testing Corporate governance Requirements and Listing Rule Requirements in an initial listing.

4. Company’s Crop has reduced compared to last year due to lower worker outturn, worker strikes and adverse weather.

- There is a high risk of manipulating results to show a better picture in terms of financial reporting. (Real case might be worse than they have given in the case)

5.There is a huge investment in fixed assets during the year. A question is highly probable to test procedures to cover Fixed assets ( Both TOC and Substantive procedures)

6. Given that this company is a Family owned business , if company proceed with listing in CSE. Examiner will test Corporate Governance issues in the company.

In the pre seen there are number of governance issues the examiner has already mentioned;

- No clear division between the owners and the management

- Company does not have clear governance policies and procedures

- Management of the company is resisting to change

- Lack of experience at board level on risk management, including IT and treasury management, which lead to poor investment decisions ( This will highlight the importance of having a Audit committee and a Risk management Committee)

- Lack of proper deliberations at board level on key decisions.

-No independent directors.

- Inordinate dependence on a few senior staff.

- Lack of a succession plan. ( This will highlight the importance of having a nomination committee)

Thus there will be questions such as ;

- What is the importance of having a sound corporate governance in the company

- What will be the challenges faced by the company and how to mitigate those

- Main requirements of CSE listing rules relating to corporate governance

- Importance of Audit Committee , Related Party Transaction Review Committee , Nomination Committee , Risk Committee , Remuneration Committee

7. Examiner will test areas relating to Internal Controls and Risk management given that company has no proper Internal control system or a Risk management System.

Most probably this will be tested by linking with COSO framework for Risk management and COSO framework for Internal Controls.

8. Not having a Proper Compliance Department is a crucial thing which will have a impact to the going concern of the company. There might be legal consequences and undue costs.

In the audit plan this must be a focused area.

9. Note than Inventory Procedures is very important since a plantation company has several estates and count need to be carried out in all the estates. Thus please refer the procedures in the Study Text given by CA Sri Lanka. ( Procedures to do Before , During and after a stock count)

10. Some estates of the Company prepares accounts in the excel , there is a significant risk due to both error and fraud due to this.

11. There is a para in the pre seen mentioning all the deficiencies relating to the Financial Reporting System of the company. You need to aware about each very well before going to the exam. 

12. As per the pre seen Internal Audit is inefficient, Thus examiner will test the potential problems due to this and how to make it efficient.

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References and Sources used to Write the Article
CA Sri Lanka Coperate Level Pre Seen December 2019

Inland Revenue Act , Sri Lanka
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Article Written By : H.Harshana Sameeraka (Bsc Accounting (Special) First Class (Gold Medal Winner- Higest GPA), CA Passed Finalist with pending Viva (Prize Winner), CIMA SCS, Audit Supervisor KPMG)
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